M&A Market Background 

In 2020 and 2021, there was a flurry of M&A activity in the spirits category, resulting from the category’s consistently increasing market share over the last decade and the low-interest rate environment. Strategic acquirers made up the bulk of these deals with four that crossed the billion-dollar mark in that period. 

“People became at-home bartenders and what that really drove was, realizing the markup on cocktails was so significant, them buying higher-end premium liquor. So for a lot of the larger suppliers, if they didn’t have a brand that was in that price category it became pretty attractive for them,” said Kevin O’Brien during a recent Park Street University hosted panel during the American Craft Spirits Association convention.

“If you had a product that was in bottles or cans positioned in retail or off-premise you had a boost when the on-premise shut down. This drove a lot of innovation and new brand launches and subsequently drove investments due to the changing retail landscape,” added Ryan Lake, Managing Director of Arlington Capital Advisors

In 2022, beverage-alcohol M&A kept pace and performed relatively well in a year that saw the broader M&A sectors undergo a decline. It was a period that brought investments from non-traditional beverage players like Coca-Cola and Monster Beverage, as well as a number of private equity firms. 

But 2023 saw a clear shift in the M&A environment, with some of the large trend swings brought on by COVID-19 beginning to moderate and the industry entering a difficult inflationary environment with high interest rates; the result of which was that funding was often hard to come by. 

“Consumers were cutting back on discretionary spending and [2023] was a perfect storm from a finance perspective. For industry folks, a lot of people were saying ‘Well we have to figure out internally what’s going on.’ If your sales are slowing down as a larger supplier, you’re not going to get the board’s approval for an acquisition unless it’s really necessary,” O’Brien reflected. 

The downturn in 2023 was also in part due to the boom from the previous two years. Strategics which made a number of significant acquisitions in 2021 and 2022 needed time to digest and fully integrate them.

A Case Study in Investment/Divestment  

Jason Barrett made the case that strategic acquirers are now also evaluating case volumes differently. “The case volume for brands where they (investors) want to do those acquisitions is rising. I think if you go back for five years there was a thought that a 30,000 or 40,000 case brand could be integrated successfully on a nationwide platform and now it’s really starting to sound like that number is above 100,000 cases per year.” 

Barrett also shed some insight on Black Button’s minority share acquisition by Constellation Brands and its subsequent divestment. He echoed that the deal was largely relationship-driven, with the brand having had a previous relationship with Constellation in a city where the companies were both headquartered. Black Button produced a product that made up 75% of their overall sales and regionally outsold another product in the same category owned by a major competitor of Constellation, making it an attractive grab for the supplier. 

On the divestment side, Barrett explained how shifting executive roles within Constellation and a key realignment with the strategic’s major distributors meant that the supplier’s core strategy ultimately shifted away from Black Button. Jason ended up reacquiring his shares in the company in 2023 as a part of a recent trend of seeing founders buy back their companies from large suppliers. 

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How Brands Should Position Themselves

What does this mean for independent brands positioning for a sale or investment? For founders looking at this landscape, striking the right balance between long-term growth and short-term profitability is critical. “Growth is something that most folks want to see happen, but it’s not growth at all costs,” said O’Brien.

Many brands begin engaging in M&A conversations before they have the KPIs in place to sustain interest from acquirers.

One of the key performance indicators that acquirers want to see a brand have in place is strong velocity. Their focus is often the pull-off-the-shelf. Having a product that is frequently ordered, is a better positive indicator than high placement rates and a presence in multiple markets

“Something we told people even before 2023 was to go deep not wide. In this environment now, boots on the ground, distributors are mostly moving boxes, not really selling for you. So not having the ability to fund salespeople in those markets makes it really challenging,” noted O’Brien. 

O’Brien wants brands to take a hyper-specific approach, focusing resources behind a few high-performing SKUs as opposed to casting a wide net of trying to appeal to many demographics with many products. “You should focus on what you do well,” he said.  

 Lake added that investors are often buying brands based on their potential to leverage geographic whitespace or markets that the brand doesn’t presently exist in, but have a high potential for future traction. 

Current Market & Beyond

So what categories are driving M&A investments in 2024? Lake reiterated the importance of RTDs to investors and the weight they carry on the market. “Spirits as a macro category is the place to be right now and there are subcategories within that. In general, people still want whiskey, tequila, and cognac, despite the latter two having their own issues.”

There seems to be a great variety of types of deals coming down the M&A pipeline. Companies that traditionally cater to beer and wine have started to branch out and look for opportunities within spirits. Spirits-based RTDs are bringing beer companies into traditional spirits.

Speaking on the road ahead, O’Brien noted that he thought “when you look to 2024 and beyond you’ll have a diversification of the buyer pool. There are wine companies that we’re very close with that are saying ‘Are we missing the boat here?’ because there are a lot of synergies that we can do (in spirits).”

O’Brien raised the idea that Molson Coors making a play into the spirits category, snapping up Blue Run Spirits in 2023, might not be an isolated incident. “These companies are trying to be proactive and meet consumers where they are. This blurring of the lines, I don’t see that stopping any time soon.”

Full Panel Recording


More Resources on Mergers & Acquisitions

A Rundown of Beverage Alcohol M&A in 2023

A Panel on Impact Investing and Brand Development

A Breakdown of Major M&A Deals from 2021-2022

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