A three-year will-they-or-won't-they dance is set to come to a conclusion this week, when Anheuser-Busch InBev will be required to make a decision in the potential acquisition of Craft Brew Alliance (CBA).
In 2016, the two companies set an August 24, 2019 deadline for AB InBev to take advantage of a predetermined stock buyout of CBA. The multinational already owns a touch over 31% of the Oregon-based company that is comprised of:
Hawaii's Kona Brewing Company;
Oregon's Widmer Brothers Brewing;
Washington's Redhook Brewery;
Florida's Wynwood Brewing Company;
Massachusetts' Cisco Brewers;
North Carolina's Appalachian Mountain Brewery;
Gluten-free producer Omission Brewing Company, Square Mile Cider Company, and the pH Experiment, a brand incubator for CBA.
But the relationship between the two companies isn’t just AB InBev’s minority ownership. CBA brands also have the benefit of access to ABI production facilities and its “red” network of distributors, an increasingly consolidated and important part of the industry in terms of getting brands to market.
For some time, CBA has followed its self-coined "Kona Plus" strategy, which minimized national focus on legacy, regional businesses like Widmer Brothers Brewing and Redhook Brewery, and placed more emphasis on the Hawaii-based Kona Brewing Company. From 2016–2018, Widmer (-33%) and Redhook (-44%) nosedived in overall production, while CBA's Hawaii brand has flourished under the Kona Plus strategy, adding nearly 60,000 barrels (+15%) at a time when national-brand peers struggled to stay flat.
As AB InBev recently paid an undisclosed price for Ohio's Platform Beer Company, the cost for CBA will undoubtedly be higher. Estimates based on the agreed-upon $24.50 per-share price from 2016 would scale up to a price tag in the hundreds of millions for the company (Brewbound originally reported the total at $420 million in 2016 and then $328 million in 2019, while other outlets have recently reported $475 million).
Working against that price is the current downtrend of CBA’s stock, which has hovered around annual lows this summer, going as far down as $12.78 per share. If AB InBev doesn’t buy CBA this week for its locked-in premium price, it’s required to pay a $20-million sum and still maintain distribution or contract brewing agreements.
Spending hundreds of millions is never easy, let alone for a multinational that is looking for ways to reduce a debt load of $100 billion and is eyeing a company whose share price is far below original estimates. Anyone who’s hawkish on the buyout, however, can point to CBA’s partial integration into AB InBev, and the potential consequences of failing to finalize the deal.
Letting a competitor buy CBA for a lower price (based on current stock) and absorb its network of breweries and brewpubs would be a gut-punch for AB InBev. It’s also unclear what would happen to ABI's minority stake should it pass on an offer and another company purchased CBA, creating a uniquely odd scenario where two multinational companies would own the same subsidiary.
Kona’s rapid rise hasn’t just been in the U.S., where its production levels have risen steadily (and where sales in chain grocery, convenience, and other stores have grown by 8.6% in the recent 52-week period as tracked by IRI, a market research firm that compiles scan data from chain stores). CBA has also shifted some international production to Ambev facilities in Brazil, which are part of the AB InBev conglomerate. Kona has received a heavy push in the country, with particular focus in Rio de Janeiro, and CBA plans on “leveraging the experience as a model for other key ABI markets.”
This strategy is pivotal, not only because it’s taking place in the home of AB InBev (Brazil’s AmBev merged with Belgium’s Interbrew in 2004), but because increased production of Big Wave Golden Ale fits within broader trends in the Brazilian market. According to an economic analysis, one-third of growth in Latin America is set to be in premium Lagers over the next few years, and Brazilians between the ages of 21–34 "are willing to pay a premium for what they perceived as a well-designed and a well-crafted beer" as the population is "increasingly trading up quality over quantity." Price will always be a factor, however, and thanks to the country's complicated tax system, price sensitivity may make a mass-produced—but still "craft"—brand an attractive option. That gives CBA a leg up against a growing collection of smaller producers as "consumers are still being rational in their purchasing decisions and constantly seek out the best offer."
What's more, as online shopping has become more prevalent, AB InBev's extensive digital retail operation, bolstered by investments from its ZX Ventures arm in Brazil, would make CBA brands a powerful player across points of price and distribution. AB InBev has already increased its push of Budweiser and Stella Artois brands in Brazil, both of which are included in the "high-end" bracket of beer in the country.
As of 2017, the most recent year of data available, AB InBev brands comprised two-thirds of the market share in Brazil, led by lower-cost brands like Skol, Brahma, and Antarctica, which have stayed flat or declined in recent years. The opportunity for premiumization, especially through a partnership that already exists, is a big one.
This valuable international market is worth eyeing, but there’s obviously plenty going on in the U.S., too. Kona has easily led the way across CBA brands, with Widmer (-17%) and Redhook (-21.6%) down hard in IRI-tracked stores in the 52-week period that ended in mid-July. Kona's Kanaha Blonde Ale (128.3%) and Big Wave Golden Ale (25.9%) have been stars during this period, but so, too, have smaller companies who were recently brought on board.
In the last three years, Cisco (105%), Appalachian Mountain (147%), and Wynwood (311%) have seen their IRI sales go through the roof, thanks to production assistance at CBA facilities and distribution networks supported by Anheuser-Busch houses. The trio became part of CBA in October 2018 as part of a $45-million spend by the company, which furthered Craft Brew Alliance’s long-term goal of creating a geographically-diverse portfolio of breweries that embrace localized success as a centerpiece to growth—a hallmark of how to succeed in today’s beer industry. Given AB InBev’s increased attention to a brewpub model for its craft companies—Golden Road Brewing and 10 Barrel Brewing Company being key examples of multiple restaurant/taproom locations—the own-premise advantage of bringing on five brewpubs currently owned by CBA should be attractive.
Appalachian Mountain (North Carolina) and Wynwood (Florida) offer two particularly appealing locations and portfolios, as both are predicted to fly past record sales in IRI chain stores in 2019. Following CBA's recent quarterly earnings report, CEO Andy Thomas told Brewbound that Wynwood's La Rubia Blonde Ale could be its own "standalone brand" that's "born out of a Caribbean Hispanic culture" and can appeal to a growing segment of non-white drinkers. When distribution of the beer expands into New York, Pennsylvania, Connecticut, and Massachusetts this fall, it'll focus on courting Hispanic drinkers, a move the company feels was supported by the brand’s success in Puerto Rico. La Rubia has already shown more than modest growth in its sales—IRI tracked the beer selling about 1,100 BBLs of beer through the end of July—and the brand has almost doubled its sales year-to-year for the last three years.
If that wasn’t enough, CBA is planning to increase its output in the hard seltzer space, which could be a $1-billion category by year’s end. Omission is planning 90-calorie, gluten-removed seltzers, and Kona is aiming to release its own version in its home state of Hawaii this fall.
Kona’s success, along with the smaller, regional breweries brought on board last year, already gives CBA an interesting domestic portfolio—but that’s not all that’s worth considering. Craft Brew Alliance’s pH Experiment, a product incubator arm of the company, hopes to meet a goal of $25 million in revenue by 2025. That’s a modest sum for the likes of AB InBev, but pH’s output is what matters. Created to be nimble and tasked with offering quarterly releases of new, on-trend products, pH is beginning to accomplish what ZX Ventures’ stated goal once was—to find the Next Big Thing and be there from the start. Those marching orders have since changed for ZX, but pH has already released PRE Aperitivo Spritz and Pacer, a “low-proof seltzer” at 2% ABV, two entries into a continually growing and evolving “better-for-you” market.
What’s more, CBA, by way of pH Experiment, is testing these brands through Amazon Go stores in Washington State and distributing through its Fresh and Prime delivery programs. Given the rapidly shifting tier of distribution—not to mention the potential of Amazon being in the middle of breaking it apart—this relationship would seem to be particularly fruitful for a company that has already worked the system in the U.K. and Brazil to gain better traction among wholesalers and customers.
If none of these factors are attractive enough, there’s always one last incentive for AB InBev to buy Craft Brew Alliance: if they don’t, someone else probably will.
“If that didn’t come to pass, depending on where the stock is, you look at what other alternatives would be accretive on a value basis for shareholders, and that could include … a ‘for sale’ sign,” CBA’s Andy Thomas told Brewbound. “Or in less crude terms, you could begin a process and take a look at whether there are other strategic suitors out there that would make sense for the company, or you could look at other capital structure and go it alone.”
That’s a serious rub, especially because he’s not wrong. CBA’s current price tag is far from Ballast Point’s record-setting $1-billion buyout by Constellation Brands in 2015, and it also comprises six breweries, a gluten-free product line, a cider maker, and a brand incubator. And within that list, there are multiple growth opportunities for brands or breweries ready to pounce with the right kind of backing.
With CEO Andy Thomas and Christine Perich, CBA’s chief financial and strategy officer and former New Belgium CEO, COO, and CFO, Craft Brew Alliance also offers two experienced C-suite leaders to guide any transition. Thomas, who has long been a proponent of the need to expand beer’s “occasions” against wine and spirits, and Perich, whose career also includes a stop as CEO of WTRMLN WTR cold-pressed juice, can both offer experienced and pragmatic viewpoints on the future of the company and industry at a time of rapid change. Perich’s contract with CBA runs through the end of 2020, and Thomas is signed through 2021.
As AB InBev’s decision to finally buy Craft Brew Alliance comes down to the wire, there are ample reasons for the multinational to pull the trigger (including CBA’s potential in international markets, growth in the U.S., or the simple chance to deny another company the advantage of scooping up what could be seen as CBA’s cache of riches). By the end of this week, we’ll know what becomes of the proposed union.
Words by Bryan Roth