The changing flavour of craft-beer M&A
Following a glut of big-money acquisitions in the mid-2010s, craft beer breweries aren’t quite the holy grail they used to be. What do a spate of M&A deals this year say about the state of the category? James Beeson reports.
Searching for a metaphor for craft beer’s changing fortunes in the US, it’s hard to find a better one than the sorry tale of Ballast Point.
At its heady peak, the San Diego-based company was one of the fastest-growing breweries in the country, racking up sales of US$115m and posting 100% year-on-year volume growth in 2015. At the time, the category was reaching its apex, and subsequently everybody – from Heineken to Anheuser-Busch InBev and Mahou San Miguel wanted a piece of the action. Nevertheless, eyebrows were raised when Constellation Brands agreed to pay $1bn to acquire Ballast Point, a sum more than nine times the craft brewer’s annual revenue.
Based on Ballast Point’s 2015 volumes, the valuation meant Constellation paid the equivalent of $3,600 for every US barrel (1.19hl) the Sculpin IPA brewer produced that year (for comparison, The Boston Beer Co.’s $300m merger with Dogfish Head in 2019 worked out at around $1,000 per barrel). Ballast Point was – in 2015 at least – US craft beer’s crowning jewel and Constellation, bloated from the cash it was raking in from a 2013 agreement to control the sale of the Corona, Modelo and Pacifico brands in the US – was prepared to pay through the nose to get the brewer.
The deal – at the time – felt like a pivotal moment in the history of craft beer; the segment’s first billion-dollar deal and a statement signing by one of US alcohol’s biggest players. Fast-forward four years, however, and it’s safe to say things didn’t turn out quite as the Corona brewer, or anyone else, envisaged.
By the time Constellation offloaded Ballast Point to Kings & Convicts with a whimper in 2019, it had already recorded around $200m in impairment charges on the brewery, having written off a chunk of the purchase price due to unrecoverable losses. The rumoured selling price was $100m, or less than a tenth of what it had paid four years earlier.
In the announcement of the sale of Ballast Point, Constellation CEO Bill Newlands noted craft beer trends had “shifted dramatically” since 2015, adding the sale would allow the company “to focus more fully on maximising growth for our high-performing import portfolio and upcoming new product introductions, including Corona Hard Seltzer”.
Ballast Point’s journey from being big beer’s shiny new toy to being cast aside in favour of hard seltzer is reflective wider consumption trends in the US, which have seen beer haemorrhage market share to wine, spirits, RTDs and seltzers.
Since 2015, beer sales volumes in the country have remained relatively stagnant at around 23bn litres annually, according to GlobalData, Just Drinks’ parent. By contrast, in the same period, spirits’ volumes have grown from 3bn litres in 2015 to 6.7bn litres in 2022 (and are predicted to continue to climb). Flavoured Alcoholic Beverages (FABs), which include spirits-based RTDs and seltzers, meanwhile, have accelerated from a low base of 1.1bn litres in 2015 to 4.4bn litres in 2022. The segment is predicted to have a ten-year CAGR of 13.2% from 2017 to 2026. As US consumers continue to turn away from beer to flavoured-malt beverages (FMBs), as well as spirits, cocktails and other RTDs, craft brewers have become a much less attractive proposition to would-be multinational buyers.
Speaking in February of this year Boston Beer Co. CEO Jim Koch laid bare the struggles facing craft brewers when he declared traditional beer was unlikely “to grow again in our lifetimes”. To combat declining demand for its Samuel Adams beers, Boston Beer Co. has bet heavily on hard seltzer and, more recently spirits; through its 2019 merger with Dogfish Head (the Delaware brewery also owns its own distillery) and a partnership with Beam Suntory to develop new products in the ‘beyond beer’ space including RTDs and spirits.
The pandemic and ensuing supply-chain disruption have also played a part in US craft beer’s woes. Lacking the size and buying clout of multinational brewers, smaller indie brewers have found themselves at the back of the queue for key supplies and ingredients. These same brewers are also more likely to be impacted by rising raw material costs, as they do not have the cash reserves to buy in bulk or negotiate multi-year deals at a fixed price. All of this makes it more challenging for a craft brewer to kick on, boost market share, and (if they so desire) catch the eye of any potential suitors.
Recent M&A activity in the segment reflects the increasingly challenging environment in which smaller US brewers operate. According to figures from GlobalData, the number of M&A deals in the overall US beer market topped out at 41 in 2016, falling to a low of 16 in 2021. This year, San Diego’s Modern Times found itself at the centre of a highly-publicised sell-off after running into financial difficulties, eventually being purchased by fellow craft brewer Maui Brewing Co. for the cut-price sum of $15.3m, a far cry from the $264m valuation the brewery gave itself as part of a crowdfunding drive in 2019.
That’s not to say that there haven’t been (relatively) large-scale M&A deals in US craft beer this year – Sapporo’s $165m purchase of Stone Brewing and Monster Beverage Corp.’s $330m deal for Canarchy being the most high-profile examples. Under closer scrutiny, however, the rationale behind these transactions reflects the more nuanced nature of craft beer’s appeal in 2022.
In the case of Sapporo and Stone, for example, the Japanese major has already indicated it saw the San Diego brewery’s bi-coastal production capacity as a key attraction. Sapporo views the US and North America as somewhere it can make further inroads with its brands (many of which are stagnant in Japan’s declining beer market) and plans to use Stone’s breweries in California and Virginia to manufacture these products. Stone as a brand – while still an attractive proposition as the ninth-largest US craft brewery – was not the determining factor in the Anchor brand owner’s decision to complete the deal.
Likewise, Monster’s January acquisition of Canarchy could be viewed similarly, with the craft brewery collective likely to be used as a hot-bed for innovation and experimentation in FMBs. Monster has seen PepsiCo enter into a deal with Boston Beer Co. to produce its Hard Mtn Dew FMB and looks set to do similar by taking advantage of Canarchy’s seven manufacturing facilities to make its own alcoholic Monster Energy extension(s) from January.
It feels, then, as if we are entering an era in which craft breweries become viewed as attractive acquisition prospects not just – if at all – by virtue of their brand equity and potential but by a broader perspective of the assets they bring to the table for multinational players. Consequently, speculative punts on future growth prospects feel far less likely, with the sums involved now set to better reflect the craft brewers’ ‘true’ value.
So where does that leave first- and second-wave craft brewery owners (many of whom are now approaching retirement age) looking to make an exit? The pool of prospective buyers is undeniably smaller than in years gone by. Most of the major alcohol players – Asahi aside – already have one or more ‘craft’ breweries in their portfolio in the US, and – given the current direction of travel – it’s doubtful they’ll be rushing to add to their stable. One buyer that remains active is Kirin (via its Lion subsidiary) but, having already splashed the cash on New Belgium in 2019 and Bells Brewing in 2021, further deals (beyond the odd-bolt on facilitated through those two entities) feel unlikely.
It’s probable, therefore, that we’ll see more market consolidation, with craft brewers in the ‘squeezed’ middle most likely to act. Expect more canny deals like the merger between Boston Beer Co. and Dogfish Head, and less like Constellation’s big Ballast Point blunder.