Emerging Practices: Breweries/Distilleries Mike McCann 816.292.8110 mmccann@spencerfane.com
Industry Perspective
Craft Industry Evolution Although showing signs of slowing growth, craft beer continues to outpace overall beer industry growth and should capture up to 30% of the overall beer industry in the long term CRAFT BREWING INDUSTRY EVOLUTION Emerging stage Growth stage Mature stage GROWTH DRIVERS ~ 12-15% market share 2015 ~20-30% market share Strong track record of growth over the economic cycle Low barriers to entry Local purchasing movement has moved to mainstream Demographic changes: Millennials identify with craft beer category Three tier distribution system provides support to smaller players Remains very underdeveloped in some of the largest volume channels (c-store and supermarkets) and some of the largest markets Craft beer volume Entrepreneurial players exploiting market niche Small scale players and small volumes Primarily local competition ~ 1% market share 1970 s 1980 s 1990 s 2000 s Source: Brewers Association, Nomura Category achieves critical mass Increasing divergence of scale between players Competition on a regional basis Financial resources increasingly important First signs of M&A activity Long term Competition on a national level Benefits of scale identified, however market likely to remain relatively fragmented given low barriers to entry and consumer receptiveness to new brands M&A increasingly important to support growth RISKS? Rapid expansion in the number of breweries? Ability of existing wholesalers to provide support for additional brands? SKU proliferation? Increasing competition as larger brewers explore more premium categories (e.g. Blue Moon, Shock Top, Goose Island) and attempt to gain greater control over distributors? Continued ability to finance capacity expansion
Industry Growth Total craft volume continues to grow but growth rates are slowing significantly as the category shows signs of maturing CRAFT VOLUME (M BBLS) CRAFT GROWTH 35.0 30.0 25.0 20.0 15.0 10.0 5.0-30.3 27.8 24.2 5.8 21.4 5.7 15.6 18.5 8.2 8.6 7.0 5.5 22.1 24.5 15.6 10.1 11.5 13.2 2010 2011 2012 2013 2014 2015 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2010 2011 2012 2013 2014 2015 YTD 2016 BA Craft Non-BA Craft BA Craft Volume Growth Total Craft Volume Growth BA definitional change in 2014 which moved ~3m bbls from non- BA to BA defined volume Source: Brewers Association, Beer Marketers Insights, IRI, First Beverage estimates
Industry Growth (continued) Both brewery count growth and volume growth slowing as brewery/sku proliferation continues to increase at distribution and retail 30% 25% 20% 15% 10% 5% 0% CRAFT BREWERY VS VOLUME GROWTH 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Brewery Growth Volume Growth 1,200 1,000 800 600 400 200 - BEER DISTRIBUTOR SKU GROWTH 2003 2007 2009 2011 2013 2015 Avg SKU's per Distributor SKU CAGR since 1996 Beer Volume CAGR since 1996 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Almost 400% growth in SKU s since 2003 Source: Brewer s Association, NBWA
Industry Growth (continued) Total craft volume continues to grow but growth rates are slowing as the category shows signs of maturing and not all participants are experiencing the same trends 25.0 24.5 24.0 23.5 23.0 22.5 22.0 21.5 21.0 20.5 20.0 2015 GROWTH COMPONENTS (M BBLS) 1.3 1.0 24.5 22.2 2014 Top 100 Non-Top 100 2015
Industry Dynamics The craft beer industry is changing rapidly at all tiers and these changes will influence the strategic decisions, and ultimately the fates, of craft brewers large and small Investor / Buyer Tier More buyers (particularly international strategics) entering the space, however: Domestic strategics likely to get their fill of M&A in near to mid term New strategics cautious and generally slow to pull the trigger on acquisitions Some buyers rethinking investment strategy or waiting for market contraction to buy distressed brewers for reduced multiples Brewery Tier Double digit growth ending in favor of single digit growth or contraction Increased volatility and more rapid brand rotation through distribution and retail (on-premise and off-premise) leading to greater forecasting difficulty Where possible, breweries looking to add more taprooms for revenue insurance some opting for more creative ideas designed to localize their brewery Geographic expansion becoming more difficult as distributors and retailers become more selective and demanding The importance of good brands and strong marketing is both manifest and increasingly difficult
Industry Dynamics Distributor Tier Consolidation picking up Becoming far more selective when adding and/or promoting breweries Actually releasing breweries in some large markets Strategics with significant distributor influence will put pressure on distributors to focus on their craft brands at the expense of independent craft brands in the same houses Retailer Tier On premise: still under cash pressure: over tap change-out, rep sales calls, and higher pricing / slowing velocity of craft Off premise: not much new craft space coming, and what is out there is consolidating to the power brands Surprisingly, not seeing much pricing degradation yet Consumers Still passionate about craft beer, but: Growing weary of choices and just defaulting to the stuff they know? Is the pendulum shift toward session beers driving people to the drinkability of premiums/sub-premium lagers? Or are consumers replacing mainstream lagers with session craft in their repertoire?
Growth Trends
Beer Growth Trends While total US beer consumption has declined since 2006 (and per capita consumption has declined for over 30 years), consumers are increasingly preferring more flavorful craft, imports and flavored malt beverages (FMB s) over mainstream domestic beer brand TOTAL US BEER VOLUME AND LDA PER CAPITA CONSUMPTION SEGMENT SHARE Cases (m) 3,500 Per Capita Consumption (gal/person) 40.0 100% 90% No-Alcohol 3,000 35.0 80% Malt Liquor 2,500 30.0 70% FMB 2,000 25.0 60% Superpremium 20.0 50% 1,500 15.0 40% Craft 1,000 10.0 30% Imports 500 5.0 20% Subpremium 0 0.0 10% Premium 0% Cases Shipped 21+ Per Capita Consumption Source: Brewers Association, Beer Marketers Insights, First Beverage estimates
Craft Growth and Fragmentation While total craft volume continues to grow, the larger craft players growth lags the overall market as smaller players and new entrants grow more rapidly and consumer preference favors new and local over established breweries Barrels (m) 30 25 20 15 10-5 29% 35% 40% 39% 45% 58% LONG TERM GROWTH 26% 2% 7% 8% 5% 2% 2% 1% 1% 1% 12% 12% 6% 7% Source: Brewers Association, Beer Marketers Insights, First Beverage estimates 11% 18% 19% 15% 14% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Annual growth Volume Growth 11% 70% 60% 50% 40% 30% 20% 10% 0% 2015 MARKET SHARE OF TOP CRAFTS 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% CRAFT GROWTH PROFILE 18.9% 13.9% 10.1% Other 59% 21.9% 21.8% 21.3% 19.0% 15.4% 16.0% 8.0% 8.4% Yuengling 11% Stone 1% Boston 10% Sierra Nevada 5% Minhas 1% 15.7% New Belgium 4% Lagunitas 3% Gambrinus 3% Bell's 2% Deschutes 1% 19.1% 12.9% 4.6% 2011 2012 2013 2014 2015 Total Top 10 Brewers All Other Brewers
Craft Brewery Growth With over 4,000 BA-defined breweries operating as of 2015, much of the growth in the craft beer segment has come from the growth in the number of breweries, which has even outpaced volume growth 6,000 ACTIVE PERMITTED BREWERIES 2015 MARKET CONCENTRATION BY BREWERY TYPE (VOLUME) 5,000 4,000 3,000 Regional 78% Microbrewe ry 16% Brewpub 5% Contract 1% 2,000 1,000 0 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 Source: Brewers Association, Beer Institute Total Number of Operators (2015) Brewpubs 1,650 Microbreweries 2,397 Regional Breweries 178 Large Breweries 44 Total Operating 4,269 In-Planning 1,300+
Regulation
Three-Tier System / Distribution Considerations THREE-TIER SYSTEM Alcoholic beverages are sold in the US through a three-tier system (suppliers, distributors and retailers) The three tiers are separated to prevent excessive vertical integration and overly aggressive sales and marketing efforts, which were two of the major issues with alcoholic beverage sales prior to Prohibition The laws dictating the degree of separation between the tiers vary by state but every state mandates some level of independence between the tiers Such laws can cause issues for private equity firms which own interests in restaurants, bars or other retail establishments that sell alcoholic beverages (of if their LPs have investments in such businesses) Exceptions are generally made in state laws for brewery tasting rooms, brewpubs, etc. but are not allowed in every state Brewer Distributor Retailer DISTRIBUTION NETWORK Craft brewers can sell their products through a variety of distribution network options (beer distributors aligned with the major US domestic brands (Anheuser-Busch or MillerCoors), independent or craft/importonly beer distributors, wine/spirits distributors and others), each with their strengths and weaknesses Once a distributor is selected for a particular geography, franchise laws in each state dictate if the brand can be moved to a different distributor in the future and at what cost If a PE buyer desires an exit to a major strategic buyer, the distribution network can be a primary concern as most or all brewers with a large presence in the US do not wish to acquire brands with poor distribution network overlap with their own distributors as they often cannot move brands into their network due to state franchise laws
Franchise Laws: A High-Level Visual Navigating franchise laws is one of many nuances surrounding the craft brewing industry. A small, but growing number of states provide different carve-outs to protect small breweries and foster their growth, while other states have varying levels of franchise legislation. Washington: Certain brewers producing <200k bbls are exempt from franchise laws California: Supplier may not terminate a wholesaler solely for wholesaler s failure to meet a sales goal or quota that is not commercially reasonable under prevailing market conditions. Manufacturer that unreasonably withholds consent to transfer can be liable for damages and brands can be moved from one wholesaler to another for Fair Market Value. AK WA OR CA NV HI Missouri: Termination only for good cause. Termination upon 90 days notice. Immediate termination upon criminal misconduct, fraud, abandonment, insolvency, or issuing an NSF check. Complete defense if termination done in good faith and for good cause. Good cause includes failure to comply substantially with essential and reasonable terms of the parties contract, bad faith, or wholesaler s loss of license for more than 31 days. ID UT AZ MT Kansas: Termination only for reasonable cause. Termination upon 30 days notice. WY CO NM ND SD NE Texas: Termination only for good cause. Termination upon 90 days notice, with wholesaler having 90 days to cure any deficiencies. Immediate termination permitted upon a wholesaler s insolvency, conviction of a serious crime, loss of license for 30 days or more, or failure to pay money when due. KS KS TX OK MN IA MO MO AR LA WI IL IN MS AL MI TN KY Ohio: Termination upon 60 days notice. Termination without notice upon wholesaler s insolvency or loss of license for more than 30 days. Termination must be in good faith and for just cause, but brands can be moved when suppliers consolidate. VT GA OH WV FL SC NC PA VA NY NH MA CT RI NJ Example Lenient State Example Moderate State Example Restrictive State States with Carve-Out Laws ME DE MD New York: Small brewers < 300k bbls and sales to wholesaler <3% of wholesaler s annual business may terminate an agreement without good cause upon payment of fair compensation to the wholesaler
Self-Distribution Distribution rights is another industry-specific topic with complicated, variable laws. While the majority of states allow varying degrees of self-distribution rights, some states maintain strict regulations prohibiting self-distribution altogether. Knowing the implications of a brewer s distribution platforms and geographies is crucial. WA OR CA NV ID UT Kansas: Self-distribution is not allowed; however, there is an exception for microbreweries who manufacture less than 60,000 barrels of beer per year. A microbrewery may sell its beer on the premises for consumption off the premises. It may also sell beer for consumption on the premises if it is also licensed as a club, caterer, ND or drinking establishment. MT WY CO SD NE KS MN IA MO MO WI IL IN MI KY OH WV PA VA NY DE MD VT NH MA CT RI NJ ME AZ NM TX OK AR LA MS AL TN GA SC NC Self-Distribution Allowed Self-Distribution Not Allowed AK FL HI Missouri: Self-distribution is not allowed; however there is an exception for microbreweries who manufacture 10,000 barrels or less of beer per year. A microbrewery may sell its beer for consumption on the premises or in close proximity to the premises if it is also licensed to sell intoxicating liquor by the drink.
State Excise Tax Rates In addition to Federal excise tax, breweries must pay state excise taxes on the volume they produce in a state and those rates vary widely Kansas: $5.58/ barrel WA MT ND MN ME OR CA NV ID UT WY CO SD NE KS IA MO MO WI IL MI IN OH WV KY PA VA NY VT NH MA CT RI NJ DE MD AZ NM TX OK AR LA MS AL TN GA SC NC AK FL $0-5 per bbl $6-15 per bbl HI Missouri: $1.86/ barrel $16+ per bbl
Tasting Room Laws Regulations regarding on-site sales have loosened significantly in recent years and most states now allow at least certain types of brewery and brewpub licensees to sell beer for on and off-premise consumption WA OR CA NV ID UT Kansas: On-premises sales not allowed, except microbreweries who manufacturer less than 60,000 barrels of beer per year may sell beer for consumption off the premises and may also sell on premise if they are also licensed as a club, caterer, or drinking establishment. Samples permitted. MT WY CO ND SD NE KS MN IA MO MO WI IL IN MI KY OH WV PA VA NY VT NH MA CT RI NJ DE MD ME AZ NM TX OK AR LA MS AL TN GA SC NC AK FL Off-premise sales only On-premise sales only On and off-premise sales HI Missouri: Microbreweries may sell their beer for consumption off the premises and may sell for consumption on the premises or in close proximity to the premises if they are also licensed to sell intoxicating liquor by the drink. Samples permitted.
Certain slides were prepared by First Beverage Group and are being used with the permission of First Beverage. First Beverage Group is a full-service financial services firm dedicated exclusively to the beverage industry. First Beverage provides a comprehensive range of products, including investment banking and investment funds for growth capital to leading beverage entrepreneurs and operators. Headquartered in Los Angeles with offices in Boston and New York, the First Beverage team is made up of senior executives with over 200 years of beverage industry experience. For more information, please visit the company s website, www.firstbeveragegroup.com.