Whatever the business of craft beer was, it is not that anymore. There was a brief period when it was easy, but it will not be easy again. As our team works with a diversified group of craft breweries, I see some consistent – and concerning – patterns. Here are the top 5 observations and some suggestions:
1. Debt can create wealth. Debt can destroy wealth. Equity financed breweries are stronger businesses than debt financed breweries. This is common sense – the founders who raised equity may generally own a smaller share of the company, but the risk is less. These days, this is where you want to be. If you have more debt than equity on your balance sheet, we recommend you try to raise some capital and retire some of that debt. It was all OK a couple of years ago when sales were growing double digits. Now with little or no growth for most breweries, debt service consumes too much working capital, like when the barber ties that cloth too tight around your neck. If you can’t raise the equity you need, consider consolidating with another brewery…while your brewery still has value.
2. Having more than one? (Can you even say that anymore?) More brewers are coming out with lagers and pilsners, as consumer trends point to health, wellness and lower calorie preferences (in addition to the requisite awesome IPA). We recently tasted several lagers from leading brewers. Here the subtleties matter a lot and freshness is paramount. The consumer has to LOVE these beers and the margin for error is small, so taste test them relentlessly in real life conditions to be sure you have the best lager out there.
3. Your sales people each have to produce more than they cost, otherwise you can’t afford to keep them. This is unfortunately necessary for small business survival. Your distributor sales team is necessary but inefficient. Structuring compensation, KPIs and having the right people properly focused and motivated is the goal, and it’s a hard thing to get right. If you combine sales teams with another brewery you can improve the financial equation, as long as the distributor footprints match. I believe you can manage portfolios and wholesalers welcome suppliers who bring more volume and margin.
4. The top line is the hardest part – the rest is easy. You can control everything except how much beer your customers buy. You have to attract them with your beers, branding, community involvement, your story and your taproom. But you can’t make them buy it – they have to want to. Get that right, and the rest is simply business management. If you don’t get it right, nothing else you do will matter.
5. In order to sleep at night, you need peace of mind. We are all blessed to be in a fun business with the greatest people in our daily contacts. Every craft brewer needs to be sharp and get it right. There’s no room for error. Get good advice, survive and enjoy the good times that are coming after the shakeout.
There will be winners, losers and survivors. Play to win.
Brewers Advisory Group
Friends and Associates:
Brewers Advisory Group announced that it acted as advisor to Palmetto Brewing Company in its agreement to be acquired by Catawba Brewing Company. The transaction closed in late December.
Based in Charleston, South Carolina, Palmetto Brewery sold approximately 16,000 barrels in 2017, and has experienced rapid growth. Catawba Brewing sold about 17,500 barrels in 2017. The two companies are a natural fit with complementary skills in brewing, manufacturing and distributor management.
Larry Lipov, owner of Palmetto Brewery said, “Mike Mitaro, President of Brewers Advisory Group, was instrumental in helping us facilitate this deal and helping us understand how our company fits within the changing craft beer industry. We were introduced to people with similar values which made doing a business transaction easier. Mike’s relationships in the beer industry and experience with transactions like these helped us structure a deal that worked for both Palmetto and Catawba. His reassuring advice and professionalism helped smooth the path every step of the way.”
Billy Pyatt, owner of Catawba said, “Although Mike was representing the Palmetto Brewery, his knowledge of the industry as a former craft brewery owner himself really helped Catawba put this together. Further, he helped bridge us with Live Oak Bank, a leading craft beer lender, who provided the debt financing”.
Mike Mitaro said, “It was great to work with Larry and the Palmetto team to help them transition to a partner who shares their values and can position both breweries for continued long term growth. I’m excited for the future of the Palmetto Brewery with Billy Pyatt and the Catawba team.”
About Brewers Advisory Group
Brewers Advisory Group is a consulting team led by Mike Mitaro, a senior executive with entrepreneurial and corporate experience in the beer industry, both domestically and internationally. Mike has founded and sold several beer companies and has walked in the shoes of craft brewery owners. Brewers Advisory Group works with craft breweries to help them build successful companies, and if desired by the owners, helps facilitate the sale of the business. For more information, please visit www.brewersadvisorygroup.com.
About Catawba Brewing Co.
Founded by the western North Carolina’s Pyatt family in 1999, Catawba Brewing Co. operates their main production facility in downtown Morganton, NC; a small batch brewery and tasting room in downtown Asheville, NC; a tasting room in Asheville’s Biltmore Village; and a brewing/tasting room/event complex in Charlotte NC. Catawba beers are currently distributed in NC, SC, TN, AL, GA, and internationally.
About Palmetto Brewing Company
Palmetto Brewing of Charleston, founded in 1993, is SC’s first craft brewery. Owned by the Lipov family and deeply rooted into the Charleston community, they have experienced growth from 2000 barrels in 2012 to a forecasted 16,000 barrels in 2017. Palmetto beers are currently distributed in SC, NC, and parts of Georgia, and they operate a brewery/tasting room in Charleston, SC.
Leaving the Southern Brewers Conference in Nashville last week, I noted some common themes that haven’t been heard before:
Unlike other recent conferences, you could feel it in the air. There is a storm coming and most are not prepared. More breweries, too many skus, slower growth, rotating taps, consumer fatigue, big money entering the business.
A few years ago it was easy – demand was ahead of supply. There was experimentation and creativity and almost everything worked. Home brewers hung out a shingle and tried to keep up with demand. It was all new.
Today it’s a business; manufacturing, cost accounting, regulatory compliance, bank debt, selling in more distant markets, weekend events, late nights, travel, expenses.
My seminar was entitled “Winners, Losers and Survivors” – How To Recognize Where You Fit In and What To Do About it”. Two years ago I would not have been allowed to give that talk. Last week it was received with attentive ears.
It will be hard for a lot of breweries to survive the next three years. Most will make it through and be better for it and new ones will grow up tough. The breweries that had it too easy will whither if they don’t change. The margin for error is greatly reduced. Cash is the lifeblood of the business and breweries with positive cash flow will do well. Tap room revenue will be what keeps some afloat.
What to do? Every situation is different, but here are a few basic rules:
1. Conserve cash. Invest where you must but be careful. Manage costs because price increases will be harder to take in the face of more discounting by the big “craft” brands.
2. It sounds cliché, but QUALITY is a prerequisite to survival. That means good beer and fresh beer, always.
3. Listen to your consumers. What do they think of your brand? Why do they buy your beer? Why not?
4. Stay close to the market. Listen to your distributors and retailers. Adjust.
5. Stay creative. Keep your craft cred strong with new and different beers to keep your brand relevant
Some well-funded regional craft brewers that are still building breweries in distant markets are going to have real trouble. It has happened before, where sales begin to flatten out just when the new facility is built for growth. Past sales are not indicative of future sales.
Those who survive the storm and come out the other end will be leaner, meaner and better, and will form the long-term future of the craft brewing movement.
Good luck. We’re here to help if you need us.
A hundred years ago, there were over 1,800 automobile manufacturing companies in the United States. Click here to see the list of those who succeeded and who didn’t.
They were entrepreneurs with a dream, who risked everything. Most either sold their companies or went out of business the hard way. This list looks eerily like the list of craft breweries that is published by the BA. You can look at a lot of industries to see this pattern.
A lot of today’s craft breweries began with two friends who were enjoying a couple of beers and decided to start a craft brewery. They share a passion for making great beer, collaborating in a community of fellow brewers and creating exciting new beers. Being independent. Who wouldn’t want this? For most of the 4,200 craft breweries operating in 2016, it is all that.
More breweries competing for taps. More crowded retail shelves. More wannabes getting in for the wrong reasons. And more corporate money pouring in from the outside. Entrepreneurs cashing out with sales to big beer or to private equity, while private investor groups form to buy up craft breweries to combine them to be more competitive.
Whether we like it or not, more money, consolidation and competition are in the future of craft beer. This goes directly against the values that have made the movement so strong, but it is happening. AB InBev will continue to buy smaller regional breweries that are aligned with their distributor network. Once the new ownership structure at MillerCoors is in place, they will be more active in craft, as will Constellation. Plus, all those PE firms need growth to earn a financial return. Then look for downward pressure on pricing and less attention from your distributors.
So what is an independent brewery to do? As long as your sales are growing double digits and your core market is strong, and you are not over-extended, you can continue to be successful. But some breweries will not be able to meet their growth projections and will get into trouble. Disappointed investors and bankers are not fun to be with. If this happens to you, maybe you can sell the brewery or your brands for good money, possibly to a neighboring brewery. Or maybe that’s not an option if you don’t want to give up control, or even a lot of your equity. After all, this is your dream. More debt is dangerous and you probably have enough of that already. One solution is a “business combination”, otherwise known as a joint venture, or even a full merger.
Here’s why business combinations can work for craft brewers.
Align capacity – most breweries are either constrained by their capacity or have already expanded and need to fill it. To match needs, brewers will increasingly produce each other’s beers. This can be a simple license agreement or a deeper combination.
Common values – the passion to make great beer. To give back to the community. To promote the craft beer movement. To stay in it for the love of the game.
Synergies – why not share facilities? Sales people? Co-sponsor events? Admin, licensing, logistics, purchasing. All of a sudden you have all kinds of cost savings that you can reinvest into your business.
For this to work, the two breweries must be complementary in terms of geography, beer styles and branding. The strengths of one should compensate for the relative weaknesses of the other. That goes for the partners too. There are a lot of pitfalls, but if the due diligence is done properly and each partner gives more than they take, you have a better chance to be successful long term.
This outlook may seem premature. But look ahead a couple of years, and for some, this could be the ticket to survival.
Originally featured on The Brewing and Distilling Network
Mike Mitaro will be moderating the Mergers & Acquisitions Panel at the Craft Beer Finance & Investment Conference in San Diego on August 24-25, 2016. Learn more at www.brewdistill.com/craftbeerfinance
It’s not the most fun part of the business but it may be the most important. Every Fall, suppliers meet with the distributors to review the past year and get agreement on goals and plans for next year. The distributors are usually polite and let you leave feeling pretty good, but what value does that plan really have when next year comes around? Too often, the plan goes on the “shelf” (of course, business plans don’t go on the shelf anymore, they get buried in computer file labeled “plans to never look at again”) and then it is never looked at again.
To make an effective annual business plan (ABP) remember that you are somewhere in a procession of 35 suppliers all saying how great their brands are and showing way too much content. You only have their attention for about 20 minutes in the meeting so to make it count you have to view your company from the wholesaler’s perspective. Include a brief review of what went right, what went wrong last year, lessons learned and new strategies and programs for next year based on that. Get their input and listen, because they are your partners. Then make sure you get your slots on the wholesaler’s calendar. Lay out your calendar of seasonals, in detail, so they can focus on your Pumpkin Ale when it is introduced with all the others. Ask how your timing lines up with other craft seasonals. Lay out your calendar of festivals and events and your strategies for sampling and working the markets. Then summarize all you are bringing to the table.
End your ABP meeting with aggressive but achievable distribution and volume goals, and list key accounts that are most important for your brand. Get their agreement on the spot. Negotiate something you can all live with or it won’t mean anything. Don’t fall for “let me speak with my guys about these goals” because it will never happen. Once the goals are agreed in the meeting, immediately get to budgeting and their financial commitment to your company. Part of your ask is co-op spending. The wholesaler has a budget for your brand so make sure you use all of it. That budget can be the result of a negotiation or you can just take what they give you. Pricing, wholesaler co-op spending and margins are the subjects of future blog posts.
When you leave the meeting you have accomplished the first 10% of the process. The rest, like everything, is in the follow up, tracking, monitoring, correcting as you go through the year. This is where the plans die on the shelf. Don’t let that happen to you.
What competition will look like – is what competition has always looked like in the beer business. Doing whatever it takes to get your draught beer sold at the bar and keep it there. Stretching the rules to get some business. Discounting to fill capacity or move aging product. Here only the strong survive. It is our way of life and the natural order of things.
As a craft brewer, when sales are good, you are a genius. You feel good and everybody loves you. If you are in rhythm with the consumer and are ahead of the other breweries, your success will continue. But it can happen that sales slow down. You won’t know why at first but it begins in your best accounts; the ones you take for granted because they are loyal to your brand. You get more active but your consumers are onto something new. You adjust, but someone else is now the pretty girl at the dance. Then one day you show up at your favorite account to find your brand is gone.
Some more mature brands have undergone a facelift, or rebranding. Others continue to innovate — you may need to create the next watermelon seasonal sensation. Even a powerhouse like say, Oberon, has to be watchful of the warning signs of aging.
Innovating with interesting new beers, great packaging and then stepping up the intensity on the street, having the most committed sales people and earning the respect of your distributors compared to their other suppliers will all be necessary to stay in the game and prosper.
Brewers Advisory Group is a consulting group that specializes in helping craft brewers build value in their businesses. We have walked in your shoes and we’re here to help.
As seen in The Brewer Magazine, April 2015: http://thebrewermagazine.com/?p=1575