Analyst says there are 'too many' specialty brewers.
He says there is now "severe overcrowding" in the marketplace, and says that "most, or all, craft brewers have suffered from the seemingly limitless new competition."
He believes that the public companies, especially the large national specialty beer marketers (Pete's, Redhook, Boston, etc.) have borne the brant of this trend.
With shipments down and prices dropping, he notes that marketing expenses have been on the rise as a percentage of net sales. In his words, this has led to, "An almost universal collapse in operating margins that pushed operating income into the red for two of the three public companies we cover."
To recapture the health of the segment, Goldman prescribes "a period of strategic consolidation."
"We think the root cause of the category's problems is the group's own inability to limit the number of new entrants," Goldman wrote in his March 17th Industry Focus circular on craft brewing. "Many new entrants are poorly capitalized, and many offer a product of questionable quality, in our opinion."
In this circular, Goldman also published information gleaned from the operating statistics for the largest four public craft brewers. Using this data, Goldman generated some interesting numbers on the performance of these companies, and perhaps, by extension, the segment as a whole.
In September 1995, price per barrel was $174.53, gross profit margin 44.1%, operating margin 13.4% and operating income per barrel 24.16. A year later, in September 1996, price per barrel was $169.04, gross profit margin was 44.5%, operating margin was 9.2% and operating income per barrel was 15.80. A few short months later, in December 1996, price per barrel was $168.24, gross profit margin was 38.9%, operating margin was 0.2% and operating income per barrel was (0.59).
Gross profit margin has declined for brewery operators and contract brewers alike: In September 1995, it was 37.9% for brewery operators and 50.3% for contract brewers. In December 1996, it was 28.1% for brewery operators and 49.8% for contract brewers.
"It appears that the net selling prices per barrel have slipped in every quarter since the third quarter of 1995," Goldman writes, "the sole exception being 1996's third quarter." However, he notes that the revenue per barrel figures may be flawed, causing anomalies.
He tracked slippage in gross profit margins, noting "brewery operators show very poor trends in gross profit margins relative to the contract brewers" and said this decline has been accompanied by an even sharper fall in operating income.
"The good news for investors is possibly the worst possible news for the craft brewers," Goldman writes. "The category's growth rate appears to be slowing at the same time its dedicated capacity is expanding. We see the possibility for a whiplash correction of the category."
Goldman posits that the proliferation of brewers and brands has been partially a result of over-allocation of shelf space by grocers. And, as retailers note the slowed growth of the segment, they will reallocate space. Goldman says it may cause distributors to devote less track space to specialty brews.
"We think this sequence of events will continue until the supply chain snaps at its weakest link, the smaller and relatively undercapitalized regional craft brewer," Goldman says. "As painful as this may be for the industry, we think this may be a boon for investors. An accelerated failure rate among micros would likely lead to improved sales for the nationally distributed craft brands, which are in fact primarily public vehicles."
Goldman says that his "chain of events" theory is more than just speculation, citing the slowed growth of the segment and the failure of some weaker companies.
Goldman says that investors would probably like to see public companies become stronger by merging with other competitors.
"The public window now appears closed, in our opinion, at least for the time being, for all but the largest and most powerful of the regional producers," he writes in his circular. "We think underwriters should rest while the merger and acquisition specialists do their work."
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|Title Annotation:||beer industry analyst David Goldman speculates on future of specialty beer manufacturers|
|Publication:||Modern Brewery Age|
|Date:||Apr 7, 1997|
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