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