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The changing American beer landscape: mergers, acquisitions, buyouts and partnerships.

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As the largest brewing industry deal in the world moves ahead, mergers and acquisition are making headlines. Beloved craft breweries are being sold, prompting either howls of outrage from their fans or cautious optimism, depending oil the identity of the buyer. Consumers wonder how their favorite brands might be affected, both in quality' and availability; brewers fret about relationships with distributors; and retailers scramble to handle proliferating brands and extensions.

The growth of craft beer is behind some, but not all, of these changes. To dispense with the biggest deal first, the Department of justice this summer has given its blessing to the S107-billion merger between Anheuser Busch InBev (ABI) and SABMiller, already the world's largest brewing companies, but with conditions. Significantly, the new mega company will have to dispose of its MillerCoors brands in the United States, w hich will come under the ownership of Molson Coors. This means that, for the consumer who prefers mainstream beers, there won't be much change: domestically, the beer shelves will continue to be dominated by brands from familiar rivals ABI and MolsonCoors.

Other conditions placed on the merger, however, are in place to address the concerns of smaller U.S. brewers and importers, alarmed in particular at ABI's power over the distribution network. The deal places some restraints on ABI's wholly owned distributorships and on incentives to independent distributors that might squeeze small brewers. ABI's acquisition of a number of craft breweries has sharpened the fear that small independents could lose out as former peers benefit from the efficiencies and clout of the ABI network.

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For all the notice these deals are receiving, however, they are more of a bellwether of potential change to come than a fundamental adjustment of the brewing world. "When you look at the total amount of breweries, the number that have been involved in these deals is pretty low," says Bart Watson, chief economist with the Brewers Association.

He estimates that a few dozen companies have been affected, out of more than 4,600 breweries in the country right now. However, he adds, "As a percentage of the overall breweries, it's not been particularly huge, but those are concentrated primarily in the top 50 breweries in the country, maybe the top 100, so it's a little more consequential in terms of the volume that it impacts."

THE GROWTH OF CRAFT AND THE PRESSURE TO EXPAND

With the number of breweries operating in the United States growing by double digits annually, increasing competition is inevitable. Dan Wandell, principle within the beverage alcohol practice area with IRI, recalls a recent presentation. "I described a more challenging market, not only for beer overall, but for even the craft segment. Within craft, there's a lot of talk right now about not only flagship fatigue, but even overall craft sales fatigue." He cites the first slowdown in the growth rate of the craft segment seen in over six years of available IRI data.

This loss in momentum, though slight, affects breweries of different sizes in different ways. The Brewers Association has reported for several years that larger regionals were experiencing lower rates of growth. However, the BA defines "regional brewery" as one "with an annual beer production of between 15,000 and 6,000,000 barrels"-a considerable range.

For a closer look, Wandel divided craft vendors down into four tiers based upon their volume sales as tracked by IRI in total U.S. supermarkets (IRI counts as craft vendors the large producers of craft-like styles, not all of which the BA would include as craft breweries).

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He found that Tier 1 brands (greater than 1 million cases sold), accounting for 59% of supermarket volume, lost 4.1% of total craft sales, which was gained almost equally by tier 2 (500k to 999k in cases sales) and tier 4 (less than 100k in cases sales).

For companies with the opportunity, one response to slowing growth has been an expansion of capacity, markets and territories--even the construction of second facilities closer to new markets. In some cases, this means some sort of association with one or more other brewing companies, through a variety of arrangements.

Firestone Walker Brewing Co. is the perfect example of Watson's description of breweries that have entered into new ownership arrangements: it was number 13 in the Brewers Association ranking of craft breweries, and had concentrated distribution in its home state of California since its founding twenty years ago.

In 2015, Firestone Walker announced it was joining forces with Belgian brewer Duvel Moortgat, where it joined two other U.S. craft producers, Ommegang and Boulevard. The three American companies were at different stages in their development, with Ommegang having had a long relationship with Duvel and Boulevard's founder ready to retire.

Firestone Walker was poised for expansion. Co-founder David Walker described a four-way partnership. "Considering they [Duvel] have a large brewery in Europe to tend to, they are not positioned to be an overbearing partner or wish to be so," he says. "This year we hope to be in the 350k barrel range and gasping for more capacity, which will come online in June of 2017. In the meantime we are using some of Boulevard's spare capacity in Kansas City to fill in the gaps when demand surges; a perfect example of how Duvel Moortgat can help us succeed."

The partnership has also led to creative synergies. "Boulevard and Ommegang are fabulous, helpful, intelligent members of the eclectic group of brewers that make up the family," he says, "and we are all sharing wisdom, resources and observations when and where it makes sense. Collaborations are happening as we speak."

FLYING SOLO

It's useful to compare Firestone Walker's family of allied brewing companies with others in the top fifty, including Ninkasi (36 ranked) in Oregon, which remains independently-owned and Colorado's Breckenridge (47), which was purchased by ABI last year.

Ninkasi's co-founder, Nikos Ridge, considers his company, with production of around 100,000 barrels, to be a "medium-range regional." Only ten years old, the brewery has already expanded four times to keep up with markets in 14 states and two Canadian provinces.

He sees the recent Firestone Walker alliance as one of many possible models for cooperation between brewing companies. "There are so many that are emerging-things like Duvel and Firestone, True Craft [an investment consortium pioneered this year by Stone Brewing Co.], the different private equity aggregations-a lot of those work to combine mutual strengths," he says. "It's too early to say yet which of those models are most effective in the long term."

Ridge brought up the craft industry's reputation for collaboration. "There are collaborations that are less formal, in terms of combined purchasing power and shared best practices-a lot of that is still going happening, so we partner in a lot of arenas with other craft brewers, finding advantages in working as a team," he says.

These more local collaborations have seen one small brewery buy another. "Sometimes this is for business reasons, sometimes it's for regulatory and licensing reasons," Watson says. "You buy a brewery that already has a taproom, for example, and you can expand and use that taproom."

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THE BIG BREWERS MAKE THEIR MOVE

It is the more ambitious acquisitions, not the partnerships between relative equals, that make independent craft brewers leery.

Craft breweries have for years enjoyed growth that the big brewers, with their flat volumes, could only envy-despite the vast difference in scale. The big players have evidently decided in this decade that, after trying to ignore craft styles, elbow them off the shelves or create them in-house, their strategy will be to buy the producers outright.

After purchasing Chicago's Goose Island Brewing Company in 2011, ABI has picked up seven craft brewing companies since 2014. MillerCoors, while generally choosing to run its craft-styled brands through its Tenth and Blake specialty division, has picked up two craft companies in the past year, while Heineken acquired half of fast-growing Lagunitas and Constellation bought Ballast Point for $1 billion.

The BA's Watson explains, "It's something that small brewers are certainly worried about, especially in conjunction with some of the incentive programs that AB has been rolling out at the distributor tier. It's certainly part of a coordinated strategy where they're looking to build a portfolio of brands and become a one-stop-shop for their distributor. That concerns small brewers, who would prefer to see consumer pull prevail over supplier push."

Ridge described it from the independent brewery's perspective. "The biggest disruptions have been in the major strategic buyers, primarily Anheuser-Busch, purchasing both craft brewers regionally, as well as wholesalers," he says. "As an independent competitor now going up against the world's largest brewer, with regional craft brewers as well as wholesalers in our region, it's a different dynamic than when we started ten years ago, when it was all independent breweries competing on the same playing field."

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But to the small breweries that are thus acquired, the relationship with the larger partner means efficiencies of scale, cost advantages, logistics, marketing muscle and access to the finest distribution network. Denver's 25 year-old Breckenridge Brewery is only months into its new relationship with ABI. Having found a home in The High End, ABI's specialty division, Breckenridge will soon have a new brewery with a capacity fifty percent larger than its old facility.

EFFECTS FURTHER DOWN THE CHAIN

With the proliferation in brands, analysts didn't foresee that consolidations would have much effect on consumer choice. But Watson predicted that distributors would feel the effects. "Distributors have a lot of brands, and it doesn't take much shift in focus to create real market challenges for small brewers," he says. "This isn't just about the AB side; it's also about the MillerCoors side. If suddenly the AB distribution network is locked for small brewers, that means a more crowded MillerCoors distributor network where each brand gets less focus."

Ridge, whose Ninkasi brands are distributed in some areas by the local ABI house, notes, "When AB buys a local California craft brand, there's going to be more pressure within those distribution houses to put more focus on that brand. That's just good business from their end, but it does kind of disrupt our position within their portfolio when those things happen." But, he stresses, "It's all about the relationship."

It may be the retailer who is caught at the sharp end, pulled between customers who demand novelty and variety, and suppliers with mixed agendas. "Now that the source of the beer and the motivation is getting a little less obvious, it's especially important for the retail tier to question the recommendations of folks who may have their own interests above the retailer or consumer in mind, pushing the brands that they own into retail sort of irrationally," Ridge says. "That's where retailers are going to be able to understand what their customers want, and not just what is recommended to them to carry."

NOTABLE MERGERS, ACQUISITIONS AND PARTNERSHIPS SINCE 2010 INVOLVING U.S. CRAFT BREWERIES

ANHEUSER-BUSCH INBEV

2016: Devil's Backbone Brewing

2015: Elysian, Golden Road Brewing, Breckenridge Brewing and Four Peaks Brewing

2014: Blue Point Brewing and 10 Barrel Brewing

2011: Goose Island

MILLERCOORS

2016: Terrapin Beer Co. (majority interest) and Revolver Brewing

2015: Saint Archer

CONSTELLATION

2015: Ballast Point

HEINEKEN

2015: Lagunitas (50% share)

CARIBBEAN--ANSA MCAL

2016: Florida Beer Co.

DUVEL MORTGAT

2015: Firestone Walker

2013: Boulevard

ARTISANAL BREWING VENTURES

2016 Merger: Southern Tier and Victory Brewing

FIREMAN CAPITAL PARTNERS VENTURE, 2016

2016: Oskar Blues, Cigar City, Squatters, Wasatch and Perrin Brewing

NORTH AMERICAN BREWERIES

2010: Pyramid and Magic Hat

JULIE JOHNSON was for many years the co-owner and editor of All About Beer Magazine. She has been writing about craft beer for over twenty years. She lives in North Carolina, where she was instrumental in the Pop the Cap campaign that modernized the state's beer laws.

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LEADING BRANDS OF AMERICAN BEER, 2014-2015
(000 2.25-gallon cases)

                                                               14/'15
BRAND                  SUPPLIER             2014       2015p    % CHG

Bud Light              AB InBev          510,526     501,250    -1.8%
Coors Light            MillerCoors       240,688     235,613    -2.1%
Budweiser              AB InBev          205,606     201,800    -1.9%
Miller Light           MillerCoors       183,619     181,332    -1.2%
Natural Light          AB InBev           98,697      93,663    -5.1%
Busch Light            AB InBev           88,493      88,139    -0.4%
Michelob Ultra         AB InBev           59,331      69,655    17.4%
Busch Light            AB InBev           69,664      66,110    -5.1%
Keystone Light         MillerCoors        49,755      48,950    -1.6%
Miller High Life       MillerCoors        47,775      47,375    -0.8%
Yuengling              Yuengling          39,549      38,725    -2.1%
                         Brewery
Natural Ice            AB InBev           39,206      38,598    -1.6%
Pabst Blue Ribbon      Pabst Brewing      37,235      37,975     2.0%
                         Company
Blue Moon              MillerCoors        29,110      31,651     8.7%
Total Leading                          1,699,254   1,680,836    -1.1%
  Brands
Total American Beer                    2,443,540   2,420,111    -1.0%

Source: The Beverage Information & Insights Group.
For more data, visit www.albevresearch.com.
(p) Preliminary
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Title Annotation:AMERICAN MADE
Author:Johnson, Julie
Publication:Beverage Dynamics
Date:Sep 1, 2016
Words:2180
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