Asahi Snags Urquell

In the wee hours US time, Asahi announced it had picked up one of the jewels of the brewing world:

HONG KONG — Asahi Group, the Japanese beer giant, said on Tuesday that it would pay $7.8 billion to buy a group of Central and Eastern European beer brands from Anheuser-Busch InBev, in the latest brand shuffle for the rapidly consolidating brewing business.... The latest agreement, which is expected to close in the first half of next year, would give Asahi control of operations that were previously owned by SABMiller in five countries, including Pilsner Urquell, Kozel, Tyskie and other brands.

Asahi is an interesting company. It was the first brewery to introduce "dry beer" back in 1987, and Asahi Super Dry became an influential hit in Japan. That allowed the company to grow, and it began doing all those things we expect from big breweries: entering in agreements with other bigs (Miller, 1995), expanding into other markets (five breweries in China opened by 1999), adding liquor to its portfolio (early '00s), and finally adding food products a couple years later. In the last decade, they began picking up stakes in foreign breweries and then this year really made a move by purchasing some very high-profile European brands outright; in addition to Urquell, they acquired Peroni and Grolsch earlier this year (and were the subject of rumors involving acquisitions of other breweries in Europe and North America).

Asahi has managed to move into Europe thanks to the massive ABI-SABMiller deal, which was approved contingent on those companies dumping some of their assets to preserve competition. It reminds me a bit of a blockbuster sports trade, when other teams are brought in to help move superstars between two principal teams in the deal; in order to make the deals work, they need to move role-players around, too, often to teams not involved in the central deal.

If you're a fan of Urquell (or Grolsh or Peroni), this is probably good news. In making the announcement, Asahi said in a statement that the newly-acquired breweries were “highly compatible with our existing business in Western Europe and will strengthen our business platform, allowing Asahi to grow sustainably across Europe.”

SABMiller has owned Pilsner Urquell since 1999, and their approach hasn't always been clear. To their credit, they've maintained the grounds Urquell owns, which are honestly an international treasure, and have kept the brewing onsite in the more inefficient plant with all its oddities (decoction brewing, onsite maltings). But they've also periodically tried to Heineken-ize the brand, making it a more industrial and generic product in order to turn it into an international brand. Those two impulses were in conflict, and the brand suffered. SABMiller seemed to abandon the generic-and-big strategy in the last couple years, though, and had gone back to accentuating its heritage and unique and unusual flavor palate.

I'll be honest; if I were a billionaire, I'd have tried to buy Urquell myself. It is without question the most influential brewery in world history. The brewery itself is a treasure with its miles of cellars, those maltings, and gracious (and spacious) campus. Going there is like visiting a beery Vatican City. The value of the beer and brand seem enormously under-utilized right now, and I can imagine that in the hands of the right company it might well rejoin the ranks of the world's most-respected breweries. SABMiller has let it languish.

It is not the kind of workhorse that will deliver 30 million barrels of sales (if memory serves, they actually brew around a couple million). But, in the post-craft world, where brewing quirks, heritage, and localness are valuable assets, few breweries have as much upside as Pilsner Urquell. Asahi may not be assembling a portfolio of the biggest players, but they have found some excellent smaller breweries. It's an unusual approach that uses a different logic than ABI, and I'll be watching closely to see how it continues and how it pans out.

Belgian Family Brewers Needs to Update Their Member List

Bosteels down.

I am generally sanguine about the creative destruction in the beer industry that leads to acquisitions and buy-outs--but this sent a pang through my heart:

Anheuser-Busch InBev reportedly has agreed to buy Belgian brewer Bosteels, maker of Tripel Karmeliet, Kwak and other specialty beers. A-B InBev, also based in Belgium, agreed to buy Bosteels from the family that founded the brewery over 200 years ago, according to TheStreet. Financial terms weren't disclosed but Belgian news sources estimate the deal's value at 200 million euros ($225.4 million), according to the report. Antoine Bosteels will continue to run the brewery as part of A-B InBev's craft and specialty division. 

It wasn't surprising. A week ago, reports surfaced that Heineken and Duvel Moortgat were also in the hunt. The brewery makes three pretty impressive beers, and represented a prize to any brewery. Tripel Karmeliet sells very well and has a (largely bogus) connection to an old Carmelite monastery that Bosteels has long trumpeted. Kwak has long been one of the most famous Belgian brands, thanks partly to its funny glass. And Deus is perhaps the most well-known champagne-style Belgian beer. All three of these can reach different markets and have wholly distinctive personalities, and that must have been quite alluring to the perspective buyers. The price tag looks pretty high for a brewery that makes just 120,000 barrels, but consider the per-bottle price these beers command, and it makes more sense. ABI should be able to do with these brands what they've done with Leffe and Hoegaarden and make them super-premium international brands. Look for them at a grocery store near you.

I will say this: ABI's international craft-brewery division (called, unironically, the Global Disruption Group), is acquiring some primo breweries. Last year they picked up Camden Town, and earlier this year they snatched up Birra Del Borgo--two of the crown jewels in their respective countries. Jerome Pellaud heads up the team that acquires these breweries, and he's doing an impressive job--particularly since there was a bidding war here.

For Belgium, where fewer and fewer venerable family brands survive, this must be considered a pretty hard blow. But $225m is a lot of Benjamins, and it would be hard for any family to turn their back on a pile of cash that large. As Vonnegut would have said, "and so it goes..."

Ready-to-Sell Brewery Bought, Surprising None

Note: Post cleaned up for some egregious (Hop Valley is two hours from Portland, not two miles) and small-and-sloppy mistakes ("big" for "bit," etc). 

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The consummately generic Oregon brewery Hop Valley was the latest to join MillerCoors' growing portfolio. I swear to all that is holy that I'll quit posting every time this happens, but in this case I'll make an exception--since it's a local brewery, I'll tell you a bit about its reputation on background. It's original location was in Springfield, which is fused St. Paul-style onto Eugene, two miles hours south of Portland. You could pop into the brewery in a strip mall just off I-5 if you're headed south.

If that makes it sound like a bit of a generic place, you're on the right track. They made one stand-out beer some time ago, Czech Your Head, a really credible Czechish lager. Mostly, though, they fall into that anonymous middle band of breweries you see at the grocery store but which fail to register. The beer is perfectly serviceable, but forgettable.  I described it yesterday on Facebook as the kind of brand, with the kind of name, you'd see as the supermarket brand for a chain like Safeway. Aside from a scandal about a beer named "Mouth Raper" a few years back, they have maintained a low profile in the state. Here in Oregon, no one is gnashing her teeth and lamenting the loss of an important node of unique local culture.

If ever there was a brewery purpose-built to be acquired, Hop Valley is that brewery. You may safely ignore the sale and the brand henceforth.

By coincidence, I am headed down that way today, but I'll be going to Agrarian Ales, which is as close to the perfect opposite of Hop Valley as you can find.

The DOJ Clips AB InBev's Wings in Merger

I'm really getting tired of business news, aren't you? I'm going to try to talk about it less in the future. But when a $107 billion merger of the two largest beer companies in the world is approved by the US Department of Justice, clearing a path for a titan that will control a third of the world's beer production, I should at least acknowledge it in passing. And the news is actually good.

In its approval, the DOJ did two things that will ensure ABI's position in the US doesn't improve much. I was really dreading this merger, and I still think it's going to have malign effects on the world market. But in the US? Not so much. There were two issues here, control of the US market and distribution, and the DOJ addressed both (the full ruling is here).

Spin-Off MillerCoors
As expected, ABI has to spin off MillerCoors as a part of the deal. DOJ: "The settlement requires ABI to divest SABMiller’s entire U.S. business – including SABMiller’s ownership interest in MillerCoors, the right to brew and sell certain SABMiller beers in the United States and the worldwide Miller beer brand rights." This is not unexpected, and has been an acknowledged assumption about what it would take to get the deal past US regulators.

Restrictions on Distribution
More importantly, the DOJ puts strict limits on what ABI can direct its distributors/wholesalers to do, and how many distributor/wholesalers they may own. The press release doesn't detail these, so I'll turn directly to the ruling for the language. Here is the DOJ on the amount of the wholesale market ABI can directly control. "Defendant ABI shall not acquire any equity interests in, or any ownership or control of the assets of, a Distributor if (i) such acquisition would transform said Distributor into  an ABI-Owned Distributor, and (ii) as measured  on the day of entering into an agreement for  such acquisition more than ten percent (10%), by volume."

And here they are on the question of whether ABI can demand certain measures of loyalty from their independent wholesalers. "Defendant ABI shall not unilaterally, or pursuant to the terms of any contract or agreement, provide any reward or penalty to, or in any other way condition its relationship with, an Independent Distributor or any employees or  agents of that Independent Distributor based  upon the amount of sales the Independent Distributor makes of a Third-Party Brewer’s Beer or the marketing, advertising, promotion, or retail placement of such Beer."

The second condition is especially important. Recently ABI had instituted the Voluntary Anheuser-Busch Incentive for Performance Program (VAIP), which incentivized loyalty among its independent distributors. (Why they rolled that out when the merger was pending is anyone's guess. Seems hopelessly clueless to me.)

The DOJ's stipulations were stringent enough that even the Brewers Association, the trade organization that represents small breweries, gave it a qualified thumbs up. All of which means you can safely return to ignoring this issue and just enjoy your fine pint of ale.

One last note. Interestingly, despite having made it over this regulatory hurdle, the merger may not go forward after all--in part thanks to the Brexit.

The takeover of the London-listed brewer has come under scrutiny in recent weeks as a drop in the British currency has reduced the relative attractiveness of the all-cash offer aimed at most SAB shareholders. A source familiar with the matter told Reuters on Wednesday that the company’s board was weighing the terms of AB InBev’s offer, amid rising shareholder disquiet.

Stay tuned.

Fill in the Blanks

Introducing the Buy-out
[ _______________ ] announced today an agreement to acquire a majority interest in
[ ________ ]-based [ __________ ] Brewing Company.

Expression of Delight in Finding the Perfect Buyer
“Bringing  [ __________ ] on  allowed us to get to know each other better and realize the incredible potential of becoming a majority-owned partner with  [ __________ ] ,” said  [ __________ ] ,  co-founder and vice president of brewing development. “With  [ __________ ] 's dedication to helping us grow and their passion for creating high-quality craft beers, we knew it would be the perfect partnership. We look forward to continuing to create innovative beers to share with beer lovers nationwide.”

Anodyne History of the Acquired Brewery
[ ________ ] founders Buckowski and John Cochran set out in 2002 to craft beers unlike any that were available in the [ ________ ] at the time, choosing [ ________ ] as home base because of its distinctive culture and shared appreciation for music. The 84,000-square-foot brewery and 100-barrel brew house creates year-round and seasonal beers including [ ________ ], [ ________ ], and [ ________ ].

Expression of Delight in Finding Perfect Craft Brewery to Buy
 “The team at  [ ________ ] is so passionate and committed to brewing such terrific beers that we are thrilled to welcome them deeper into the  [ ________ ] family,” said Scott Whitley, president and CEO of  [ ________ ] . “As owners, our job is to work collaboratively with their team to support their continued success with their innovative, award-winning beers that complement our portfolio perfectly.”

Concluding Corporate Statements
[ ________ ]  Company joins other leading crafts in the [ ________ ] portfolio, including [ ________ ] Brewing Company, [ ________ ] Brewing Company and [ ________ ] Brewing Company. For more information on [ ________ ] Company and its portfolio of brands, visit [ ________ ] .com.   The transaction is expected to complete in August 2016. The terms of the transaction were not disclosed.

________________

This was the actual press release of an actual sale that took place today, though the form is so predictable it is 100% interchangeable with any recent or future acquisition. In this case, the acquired brewery was Georgia's Terrapin, and the acquirer was MillerCoors (which had already owned a minority stake).

Carry on.

The Brewers Association Wrestles with Buy-Outs

If I could have teleported into Philadelphia for just one event in the Craft Brewers Conference (CBC), it would have been the one where the Brewers Association (BA) addressed the wave of buyouts over the past two years. It sounds like it was every bit as fascinating as I'd hoped. The situation, as you all know, is that the largest and most successful American breweries are ripe for acquisition by bigger international players. And that has happened in dramatic fashion, with nearly 30 sales in the past year and a half. The BA is a trade organization, and was set up to advocate for small brewers. As the most influential members of that organization leave--to the very competition BA has protected its members from--it represents a serious crisis for the organization.

Brewers Association Director Paul Gatza addressed the CBC on Thursday. He did the only thing he can do--parse between the deals that are bad for his membership and those that are (at least for now) relatively benign. Chris Funari:

“Private equity investments are different,” he said. “The company doesn’t get the market access benefits or the ingredient access benefits. It feels like it is more a form of banking.”

source

As more money pours into the space and as savvy business-minded investors become craft brewery operators, the deep passion for brewing — which has long been a cornerstone of craft and a major reason for the category’s impressive growth spurt in recent years — is becoming less of a focus, Gatza argued. “It feels like its differing and it feels like we’re losing some of that,” he said.

And it views even small labels owned by bigger companies as a threat on a different scale than that presented by private equity. Even knowing that private equity’s passion might lie more closely to business than to brewing, the BA still regards investments from that sector as potentially less harmful to the overall craft universe, however.

Although this seems awkwardly legalistic, it's fundamentally accurate. The BA wandered into the weeds when it tried to clothe itself in the language of heroism (craft beer as a revolutionary social change). But its role as a protector of the little guy is critical for an open, healthy market. And in this regard, BA really does travel with the angels. Here's what at stake:

Part of the reason these acquisitions are such a threat is their impact on access to raw ingredients and distribution networks. As the largest brewer in the world, ABI can buy ingredients in much larger quantities (for much cheaper prices) causing availability issues for small craft brewers. In addition, ABI owns a significant portion of the American distribution network, outright owning distributors in 10 states and having significant influence over their distributor network nationwide.

“What is needed is a truly independent beer distribution system” said Pease. “Anheuser-Busch InBev has rolled out an incentive program… that basically aligns their distributors not to sell brands that are over 15,000 barrels in their house. We have no problem with Anheuser-Busch InBev incentivizing their distributors to sell more of their own product, but for them to incentivize distributors not to sell other products is something we want to see remedied.”

Consolidation does pose real dangers, and in the coming years, the Brewers Association is going to be the blade edge leading the fight. They were caught flat-footed by the recent buyouts (which were entirely predictable), but now they have become a given. The BA's going to have to give up being a champion for that nebulous concept of "craft beer" and retrench for the fight for small beer. That's the battleground of the future.

Devils Backbone (VA) to AB InBev

Update/Upon Further Consideration (10:48 am)
The one category of interest that these acquisitions bring to mind has to do with strategy, future acquisitions, and timelines. How many breweries does ABI need to complete their "High End" portfolio? What do they plan to do with these beers? How will the US strategy unfold as ABI pairs the High End brands with the flagship mass market lagers? All interesting stuff. We have begun to suspect that ABI is looking to knit together a portfolio of regional breweries, so looking at the map might suggest where they're headed next. We know that they tend not to purchase very large breweries--50,000 to 100,000 seems to be the range.

Another piece I'd add to the calculation is flagship brands. Devil's Backbone is known for lagers and their flagship is the Vienna Lager. They've been buying a lot of breweries that are known for IPAs, and that causes a logjam stylistically; Devil's Backbone doesn't compete with them. I'd bet this is more than a passing consideration for ABI moving forward.

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This is getting to be a boring novel in which all the chapters repeat. There's nothing to say that hasn't been said in the earlier chapters (see: 10 Barrel, Breckenridge, Four Peaks, Elysian), but if you want details, go here for the press release. Funari reports that they brewed 95,000 62,000 barrels last year [with projections for 95k in 2016], which puts them in that ABI sweet spot.

But the news does give me the opportunity to post my updated map of ABI holdings. So there's that.

Consolidating Continues Apace -or- Mind Your SKUs

The indefatigable Chris Funari reports this morning that Cigar City has gone the way of private equity.

Cigar City, a leading independent brewery based in Tampa, Fla., has agreed to sell controlling interest to Boston-based private equity firm Fireman Capital Partners, which already owns majority stakes in Oskar Blues, Perrin Brewing and the Utah Brewers Cooperative outfit that includes the Wasatch and Squatters brands.

Together, the five craft breweries make up what the firm calls United Craft Brews LLC., a separate holding company and special purpose fund set up specifically for craft brewery acquisitions.... Collectively, all five companies produced more than 320,000 barrels in 2015 and ranked as a top-15 craft producer. In addition to its presence in Utah, the group has beachheads in the major craft markets of Colorado, North Carolina, Michigan and Texas.

The whole article is worth a read--though at this very late date, there's not a lot to add. I did find it to be satisfyingly congruent with another bit of reportage that came out today from Jason Notte. (It's listed as "opinion," but it's more heavily reported than anything I ever do.) In that piece, Notte describes the glut of SKUs and the potential challenges they pose. (An SKU or "stock keeping unit," is a product's identifier on store shelves; for example, Deschutes might have five SKUs at a grocery store for Mirror Pond, Black Butte Porter, Obsidian Stout, Fresh Squeezed IPA, and "seasonal." That seasonal SKU would rotate throughout the year, so you'd see eight Deschutes products at that grocery store over the year--even though there are just five SKUs.)

Bump Williams Consulting has made a living providing analytics to the beer, wine and spirits industries since 2008. In that time, it’s watched the number of beer SKUs rise from 4,843 to 11,833. Craft beer SKUs alone have soared from 2,274 in 2008 to a whopping 7,400 last year, more than tripling the amount of products that the industry sent into the marketplace.

All of that variety is great for consumers, but it acts as a spur to larger companies who want prominent placement so they can cut through the chaos and get a sizable chunk of the whole. There are a number of players now grabbing for that market, and they know there's not room for very many winners. More Notte:

According to data from IRI, a Chicago-based market research firm, 48.85% of all craft beer sales came from the top 10 brands alone: Samuel Adams, Sierra Nevada, New Belgium, Shiner, Lagunitas, Small Town (Not Your Father’s brands), Deschutes, Stone, Goose Island and Bells. A whopping 62% come from the top 20. 

The reason there's so much consolidation happening right now is because each passing week makes it harder to enter that top high-selling tier. Gaining national distribution is hugely expensive, and hanging onto it will require substantial funds. Small brands have the appeal and market experience, and big beer companies have the money. With ABI money, Goose Island managed to push their 20-year-old IPA into the country's top five. That's what this combination can do for brands. But, if you're a regional brand selling 50,000 barrels, the opportunity to grow 20x and become a national player is starting to sunset. And big beer knows it only needs a few horses to ride, so the scramble is on.

A Holiday-Buying Spree

Wow. The world's largest brewery has, in just five days, added three new breweries to its craft portfolio. Last Friday it was Arizona's Four Peaks. Yesterday we learned that AB InBev had snapped up London's Camden Town Brewery. Today it was Colorado's Breckenridge:

Anheuser-Busch has made a play for a piece of Colorado's craft brew market, snapping up Breckenridge Brewery for an undisclosed sum, officials announced Tuesday.

Breckenridge, which sells its beers to 35 states, is on track to produce 70,000 barrels of beer in 2015. Earlier this year, Breckenridge departed its downtown-area Denver digs for a 12-acre brewery and restaurant in Littleton. The 25-year-old company is Colorado's sixth largest craft brewer by barrels produced, according to The Brewers Association data.

We were playing a little game on Facebook of trying to guess which brewery would go next. It's possible someone might have rung in with Breckenridge (one commenter was on the right track with Avery and Great Divide), but the damn thing happened too fast for a robust sample to gather. I will leave you with the newly-updated map of the Little Buds and their national distribution:

Various comments/questions. (1) Interesting that ABI seems to be focused on blue states (a fact made more obvious by my use of an electoral college calculator to generate these maps)--does this mean North Carolina or Florida is more likely to be the first southern state than, say, Georgia? (2) Some enterprising young journalist (Bryan Roth?) should look to see what the distribution ramifications are in these states. I continue to believe that's a huge part of this equation. (3) Which brewery is next, and (4) how many breweries do you expect ABI to buy stateside before it feels it has collected enough to make a big push into the craft segment?

SABMiller Taking a Page out of AB InBev's Playbook in London

This caught me by surprise:

LONDON: SABMiller is buying Britain's Meantime Brewing Company, swallowing up one of the pioneers of the country's craft brewing movement to give the owner of big brands such as Peroni and Grolsh exposure to a fast-growing part of the drinks market.  

Meantime was a plumb target because...

Sales volumes of Meantime's beers including London Pale Ale and London Lager soared 58 percent in 2014, compared with a 1 percent rise in Britain's beer market as a whole. The more richly flavoured craft beer also sells at a premium to standard lager, another draw for SABMiller.

Read more at:
http://economictimes.indiatimes.com/articleshow/47297986.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Sales volumes of Meantime's beers including London Pale Ale and London Lager soared 58 percent in 2014, compared with a 1 percent rise in Britain's beer market as a whole. The more richly flavoured craft beer also sells at a premium to standard lager, another draw for SABMiller.

Read more at:
http://economictimes.indiatimes.com/articleshow/47297986.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Sales volumes of Meantime's beers including London Pale Ale and London Lager soared 58 percent in 2014, compared with a 1 percent rise in Britain's beer market as a whole. The more richly flavoured craft beer also sells at a premium to standard lager, another draw for SABMiller.  

I don't have a ton to add here. I toured Meantime when I was researching the Beer Bible, and enjoyed speaking with founder/brewer Alastair Hook. (I wrote about his interesting thoughts here.) I even happened to see him at the Craft Brewers Conference--no doubt he was smiling to himself knowing what was in the works. At this point, there's not a lot to say--we've been down this road often enough that we've already said it all. (Though if you're dying for analysis, Pete Brown has some.)

Hook plans to stay at Meantime, which should assuage fears any fans have, at least over the short term. It's a sign of times.

Alastair Hook