Jason Notte

Forecast for 2017: Craft Beer Turf Wars

The number of craft breweries continues to grow rapidly, while the growth of the craft sector is slowing. Which means something has to give.

Jason Notte of Marketwatch.com predicts that 2017 will be the year of the turf war; there will be less mergers-and-acquisitions activity and more competition among breweries to claim shelf space.

This could be the year that craft breweries lay off workers and make other cuts in an effort to trim costs. Industry leader Boston Beer Company has been hit hard by shrinking sales of Samuel Adams Boston Lager; the company’s shares have tumbled 50 percent from their 2015 high.

We’re also likely to see more breweries bring in private-equity firms. Already this year, Victory Brewing Company and Southern Tier Brewing Company have formed such partnerships with such firms.

And we’re likely to see smaller brewers focus on taproom traffic and food sales and avoid the battle to get their products on store shelves and on bar and restaurant menus.

Notte believes that Oskar Blues is the brewery to watch because it has been the craft sector’s trend-setter for years. The brewery was the first to can its beers and the first to build a second facility in the eastern United States. Two years ago, it kicked off the private-equity trend when it sold a majority interest to Fireman Capital. It then used some of that money to acquire craft breweries in Michigan, Florida, and Texas; the latter two states are considered underserved beer markets. Oskar Blues also borrowed from the big national brewers’ playbook. It rolled out more mainstream beers, sponsored sporting events, and put an emphasis on brand recognition.

Notte concludes, “Whether drinkers benefit from [this] turf war or become victims of it remains to be seen.”

Pabst’s Unusual Business Model

Pabst Brewing Company has 2 percent of the American beer market, which puts it in a class with Boston Beer Company and D.G. Yuengling & Son. But under Eugene Kashper, Pabst’s busimess model is much different than that of Boston Beer and Yuengling.

Jason Notte of Forbes magazine, who recently interviewed Kashper, writes that Pabst’s CEO is “also digging into corners of the beer industry where the competition hadn’t tread and using its strengths in marketing, production and scale to take on the big brewers on a much smaller budget”.

Kashper told Notte that his portfolio was “kind of in a sweet spot between big beer and craft” because his legacy brands not only have a following, but also own a library of recipes for craft-like beers that he can sell for less than the going price of craft. Kashper’s success stories include Stroh’s Bohemian, Old Style Oktoberfest, and Rainier Mountain Ale, all of which have strong regional ties.

In addition, Pabst has entered into partnerships with craft and import brewers to enable it to penetrate those segments of the market. Those partnerships emphasize the strength of Pabst’s distribution and grassroots marketing, which Kashper hopes will give it a fighting chance against brewing giants Anheuser-Busch and MillerCoors.

Craft Brewing’s Growing Pains

In the last couple of months, MarketWatch.com’s Jason Notte has seen disquieting trends in the craft beer industry:

  • Craft Brew Alliance’s Redhook brand announced layoffs at its Woodinville, Washington, brewery. The Woodinville plant is contract-brewing for Pabst Brewing Company, but the Pabst business accounts for only 30 percent of its capacity.
  • Stone Brewing Company, headed by fiercely independent CEO Greg Koch, admitted that it had received $90 million in private equity financing and would lend the Stone name to a hotel. It, too, is cutting jobs.
  • And homebrew supply retailer Northern Brewer has agreed to be acquired by than Anheuser-Busch InBev.
  • Notte doesn’t think these developments mean the craft beer bubble has burst. He writes:

    “If anything, it all begrudgingly recognizes that the players in all tiers of the beer industry have found themselves in the same predicament: Running a business in an environment where constant growth isn’t a given and where big decisions are often followed by unintended fallout.”

    The Significance of Snoop Dogg v. Pabst

    The legal battle between rapper Snoop Dogg and Pabst Brewing Company might sound like tabloid material, but the case is putting the spotlight on financing deals that have become increasingly common in the craft beer industry.

    Snoop Dogg contends that his agreement to promote Colt .45 contained a “phantom equity” clause: if Colt .45 were sold, he’d become a 10-percent owner of the brand. Pabst, which owns Colt .45 and numerous other brands, was sold last year. Pabst’s new owners told the judge that the sale changed “control” of Colt .45, but not its ownership—which was, and still is, Pabst. The case will be tried before a jury this fall.

    Marketwatch.com’s Jason Notte urges would-be buyers of craft breweries to do their homework or else face the possibility of a similar lawsuit. He points out that a number of craft breweries, some of them worth hundreds of millions of dollars, have legal obligations to meet in the event of a sale. For example, employees own a substantial number of shares of New Belgium Brewing Company, whose estimated valuation well over $1 billion. If New Belgium is ever sold, its employees are in line for a big payday.

    At least New Belgium’s ownership structure is straightforward. That isn’t the case of some other craft breweries, which are part of larger holding companies, controlled by private equity funds, or both. If those breweries have outstanding agreements like the Snoop Dogg contract, there are tricky questions as to what transactions would trigger the obligation to pay—and who actually has to write the check—after a sale occurs.

    Which brings us back to Snoop Dogg. Notte observes, “Snoop’s case against Pabst could set a precedent for how breweries in those umbrella portfolios are treated, and how they can treat their employees, investors and contractors, in the future.”

    Big Wins for Small Brewers

    As expected, the U.S. Justice Department has approved the merger between Anheuser-Busch InBev and SAB Miller. However, MarketWatch.com’s Jason Notte reports that the Brewers Association, which represents craft brewers, won major concessions from the government:

    • A-B, which sells 10 percent of beer through company-owned distributors, can’t acquire any more distributors.
    • A-B  can’t require independent distributors to drop competing brands, and can’t offer incentives that would reward distributors for giving A-B brands preferential.
    • Any future craft brewery acquisitions by A-B must first receive Justice Department approval.

    Notte attributes the craft brewers’ win to the Brewers Association’s paying more attention to government relations. The BA has hired a full-time lobbyist in Washington; and, earlier this year, it flew craft brewery executives to the capital to ask members of Congress for tax relief.

    According to Notte, state capitals will become the next battleground, now that states–even thouse as small as North Dakota–have enough craft brewers to form a trade association. Some of the issues these associations will raise include bars selling tap handles to the highest bidders, supermarkets putting distributors in charge of choosing their inventory, and limits on the number of liquor licenses.

    The Friday Mash (PG-13 Edition)

    On this day in 1984, the Motion Picture Association of America added “PG-13” to its film rating system. The new rating was created after parents and advocacy groups complained about the amount of violence in some PG-rated films.

    And now…The Mash!

    We begin in South Carolina, where a 20-year-old law forbids breweries to donate beer to non-profit organizations. This law—which state liquor agents are aggressively enforcing—effectively prevents small breweries from taking part in festivals.

    In Las Vegas, Pub 365 plans to offer a rotating selection of 365 craft beers, including beer cocktails and a rare beer menu called the Unicorn List. Seasonals will make up one-fifth of the selection.

    Market Watch’s Jason Notte writes that craft breweries are resorting to a tactic they once despised: establishing sub-brands for beers that may not fit the character of the brewery’s core business.

    Starting next year, beer bikes will be banned from Amsterdam’s city center. Locals complained that the bikes, packed with bachelor partiers, have turned downtown into a drunken theme park.

    The Washington Post’s Fritz Hahn has noticed a trend: the 16-ounce shaker pint is giving way to smaller glassware. It’s makes craft beer appear cheape, and it’s a more responsible way to serve high-gravity styles.

    Thieves made off with two refrigerated trailers packed with 78,500 bottles of SweetWater Brewing Company’s beer. Police recovered some of the beer in a nearby warehouse—which, ironically, was a shooting location for the 1977 bootleg beer classic, Smokey and the Bandit.

    Finally, Untappd, Inc., now offers “Untapped For Business”, which allows retailers to publish beer lists, share their menus with consumers, and notify customers that rare or sought-after beers are going to appear on store shelves.

    Freshness Counts for Breweries, Too

    The onslaught of new craft breweries has made it increasingly difficult for existing ones to stand out. To keep up with the competition, older breweries have shaken up their flagship beers, diversified into niche styles, and especially, given their products’ look and feel a makeover.

    One brewery that was forced to reinvent itself was the Fort Collins Brewery in Colorado. Tom and Jan Peters took control of it from its original owners in 2004, and ran it as a traditional, German-style brewery. However, the Peterses saw their market share shrink in the face of competitors with more distinctive beers and contemporary label art. In 2014, they rebooted Fort Collins, overhauling its product, refocusing on the local market, and opening an on-premises tavern. The couple also put their daughter, Tina, in charge of the brewery.

    Jason Notte of MarketWatch.com sat down with Tina. Among other things she talked about her first beer, moving beyond traditional German styles, and how she coordinated the brewery’s look and feel with its new lineup of beers.

    Goose Island and the Domino Effect

    Five years ago, Goose Island Beer Company announced that it would be acquired by Anheuser-Busch InBev. John Hall, Goose Island’s founder, stayed on as an A-B InBev employee. He was put in charge of the company’s craft and import division. That division, now called High End, followed the Goose Island precedent and began buying craft breweries. There are now eight in High End’s portfolio.

    There was another member of the Hall family to Goose Island: John Hall’s son, Greg. He left Goose Island after the sale and opened Virtue Cider on a farm in Michigan. Demand for the cider overwhelmed Virtue’s inefficient packaging equipment. Greg Hall wound up selling a controlling stake in Virtue to A-B InBev. The deal also allows Virtue to save on capital expenses; it uses Goose Island’s bottling and kegging operation in Chicago and thus doesn’t have to buy its own equipment.

    Jason Notte of Marketwatch.com recently spoke with the Halls just a few weeks before the fifth anniversary of the Goose Island sale and discussed “life afterward, the changes that have occurred in both the craft beer and cider markets since and what the sale meant to Virtue Cider and other A-B InBev High End offerings”. The interview is on the lengthy side, but definitely worth reading

    Journalist Scolds Battling Craft Brewers

    The trademark dispute between Bell’s Brewing and Innovation Brewing has exhausted the patience of business writer Jason Notte. In article posted on MarketWatch.com, Notte told the battling breweries to stop acting like children. Notte took particular offense to both breweries’ resorting to social media to air a dispute that ought to be decided by the U.S. Patent and Trademark Office. He went on to say:

    By trying this matter in the court of public opinion instead of, you know, the federal trademark office, both breweries succeeded only in airing some procedural dirty laundry that in no way helps beer drinkers or buyers. By opening those screeds with pap like “To Our Wonderful Craft Beer Community” and “To Bell’s customers and the passionate craft beer community,” each tried to play to what they clearly believe is craft beer fans’ inflated sense of justice and moral clarity. Never mind that the customers of each brewery are members of that same community, or that this whole thing could have been resolved behind closed doors if Bell’s just kept its mouth shut and Innovation had the good sense to, you know, bring a lawyer to the U.S. Patent and Trademark Office to defend its trademark application.

    Notte calls this dispute a wasted opportunity: it could have been a lesson to other breweries about how to prepare for a trademark proceeding, and how to properly research a brand name before attempting to trademark it. Instead, Bell’s and Innovation aired one another’s dirty laundry—a tactic that does nothing to help either craft brewers or people who like their product.

    The Friday Mash (Summer Solstice Edition)

    Throughout North America, today is the summer solstice. This means you’ll have more hours of daylight than any other day in the year. Since it’s Friday, Ludwig highly recommends that you celebrate summer with a beer…or two.

    And now….The Mash!

    We begin on Memory Lane, with a Forbes magazine story from 1994 about America’s changing beer industry. Much attention is paid to Coors Brewing Company’s new product, Zima.

    Brauerei Beck & Co. is celebrating its 140th anniversary with beer bottles that can play music. They’re “Edison cylinders,” which played recorded sound before the modern platter-style disc arrived.

    Is beer really cheaper than gasoline? According to Keg Works, that’s true for home-brewed beer, which costs $2.50 a gallon, but not for store-bought beer until unleaded regular tops $5 a gallon.

    Ever wonder what it’s like to practice beer law?. Marcus Reed of Cosgrave Vergeer Kester LLP in–where else?–Portland, Oregon, explains what his line of work entails.

    Hamm’s, which brewed its last beer in 1997, is coming back to life. Flat Earth Brewing Company will move its operations into two vacant buildings in the Hamm’s Minneapolis complex.

    Airline miles burning a hole in your pocket? Spend them on summer beer travel. Jason Notte of TheStreet.com recommends five “hidden beer destinations.”

    Finally, if PBR has gotten too expensive at your local bar, Jesse Tigges of ColumbusAlive.com recommends five cheap alternatives. He points out that much-maligned Schlitz has gone back to its classic recipe.

    Powered by WordPress