The regulatory approval of the $107 billion merger of Anheuser-Busch InBev (NYSE: BUD) and SABMiller (OTC: SBMRY) certainly tightened up the big brewer space, giving the blended company control of more than 350 beer brands, 29 percent of the global market and roughly 75 percent of all the beer sold in America. Thing is, though, that sales of traditional beers like Budweiser and Miller are stagnating and have been for years now. AB InBev may command a large market share, but they’re challenged for growth. Wall Street seems to recognize this as measured by BUD barely rising in value since the Justice Department green-lighted the deal on July 20.
In order to sustain growth, majors – along with market participants – are looking to the most polarizing component of the industry, that of craft brewers. According to the Brewers Association, the overall beer sales of $105.9 billion in 2015 narrowly expanded 2014 sales. Craft brew sales, however, increased 16 percent in retail dollar value to $22.3 billion and 13 percent in volume to 24.5 million barrels.
It’s this growth that inspired Constellation Brands (NYSE: STZ) to shell out $1 billion for Ballast Point, MillerCoors to go on a craft brew buying bender recently, adding three growing brewers to its Tenth and Blake craft and import division in just three weeks and AB-InBev to acquire eight regional brewers for its portfolio, including three last December. AB-InBev also has a 31.7 percent stake in Craft Brew Alliance (NASDAQ: BREW).
American’s thirst for craft beers and steadily rising industry valuations are at the heart of Craft Brew Alliance appreciating in value by approximately 80 percent in 2016 and 136 percent from its January low at $6.80 per share to its 52-week high of $16.05 this month. Craft Brew Alliance’s brands include Redhook Ale Brewery, Widmer Brothers Brewing, Kona Brewing Company, Omission, Square Mile Cider Company and Resignation Brewery.
In the second quarter, ended June 30, 2016, Craft Brew Alliance, or CBA, posted the largest net sales, shipments and depletions in its history. Net sales improved 6.4% from the year prior quarter to $62.3 million, driven by a 3.9% increase in revenue per barrel and a 3% rise in shipments. Shipments of CBA-owned and partnered beers increased by 10,700 barrels, or 4.7% compared to Q2 2015, to 239,000 barrels.
Depletion volume rose by 3% from the year earlier quarter, bolstered by an 18% increase in depletions for Kona beers. Depletion is an industry supply chain term referring to the rate at which product already shipped from the beer maker to the distributor leaves the warehouse headed for the end user. Depletions for Kona in the first quarter increased a 19%, following stellar 27% growth in the fourth quarter of 2015.
Net income for the quarter was $2.3 million, or 12 cents per diluted share, up from $871,000, or 5 cents per share, in the second quarter of 2015.
The Kona brand is a clear outperformer for Craft Brew Alliance and the relationship with AB-InBev should keep sales surging. A key to this was the introduction of Kona to the nascent craft brew Brazilian markets in December. Based upon a CBA press release in January disclosing expansion of the distribution agreement, AB-InBev seems to be pushing hard to grow the Kona brand in Brazil on the heels of Constellation Brands introducing Ballast Point to the country. It’s interesting the In-Bev is leaning of Kona instead of its other stable of craft brews. Given that the Olympics attract visitors from around the world, the implications of bringing a new craft beer to the world’s third biggest beer market can be substantial, to say the least.
It’s also worth noting that, amongst other things, the DOJ required AB-InBev to terminate its incentive programs and cap its self-distribution volumes in order to be allowed to merge with SABMiller. BUD was already facing scrutiny for its extensive distribution network that could squash smaller brewers and independent distributors. These Justice Department stipulations curb the potential impact of the mega-merger on craft brewers and are favorable for CBA with its Kona and other brands.
While there is always speculation of a buyout because all the other industry M&A activity, Craft Brew Alliance is better positioned now than previously without any buyout speculation due to strategic partnerships. Granted, it’s undeniable that one feeds into the other.
In January, CBA penned an agreement with Pabst Brewing Company subsidiary Rainier Brewing Company. Pabst was acquired late in 2014 by private equity firm TSG Consumer Partners and Eugene Kashper for $700 million. Pabst doesn’t have any substantial craft brew market share, but looks to be interested in growing a footprint. TSG isn’t short on cash if it chooses to hit the accelerator, underscored by about $2.5 billion it has in cash available. Per the pact, Rainier began brewing some of its brands at CBA’s Redhook brewery in Woodinville, Washington in the spring. The agreement further provides Pabst the option to buy the facility at any time over the next three years.
The agreement is part of a broader strategy of CBA to align for future growth by optimizing production. To meet this goal, CBA is increasing capacity elsewhere, making it possible to pad their bank account by divesting the Redhook brewery. The plan includes boosting capacity at its Portland brewery to 750,000 barrels per years and constructing a new brewery in Hawaii with annual capacity of 100,000 barrels. Partnering with Blues City in Memphis, Tennessee to meet demand for Kona Big Wave Golden Ale and Redhook Long Hammer IPA opened up capacity at the CBA’s Portsmouth, New Hampshire brewery to expand production for other CBA partners Appalachian Mountain Brewery (OTC: HOPS) and Cisco Brewers.
Appalachian Mountain Brewery, or AMB, is the little known opportunity in the CBA equation. The company, which sports a market cap of only $13 million, has a growing portfolio of award-winning craft beers, while epitomizing the essence of craft brewers with its sustainability business practices. AMB utilizes environmentally friendly technologies, such as solar, a rain garden and a grain exchange, across all brewing, wide-fired food truck and cider operations.
Amongst other accolades, AMB was awarded a silver medal in the 2016 U.S. Open Beer Championship last month in Ohio for its “Spiced Edge of a Dream” in the experimental brew category. It marked the fourth straight year AMB has been recognized at the competition for one of its brews. In 2014, AMB was chosen as winner of Brewbound’s Start Up Brewery Challenge and ultimately won Startup Brewery of the Year at the “Start Up Brewery Challenge Boston.”
The relationship with CBA, defined through master distribution and alternating proprietorship agreements, has helped AMB develop more quickly than most upstarts in the craft brew space. In the partnership, not only does CBA open its Portsmouth brewery to AMB (which is 10x bigger than AMB’s current facility), but CBA has also begun slowly rolling out AMB beers through its nationwide distribution network, including AB-InBev distributors.
AMB is obviously a much younger and smaller player compared to CBA, but demonstrating significant growth in only a few years since incorporated. Barrels produced by AMB have risen from 580 in 2013 to 3,840 barrels in 2015. In the first half of 2016, the company said it exceeded production from the first three years combined by more than 30 percent, meaning that roughly 7,000 barrels were produced.
If AMB has a dark cloud over it, it is the company’s “OTC Pink” moniker, which it reportedly is working on rectifying with a move to the OTCQX marketplace, the highest tier of OTC Markets Group reserved for only the best of companies not trading on the NASDAQ or NYSE. In part, this means getting all past financials in order and disclosed. During the full year 2015, total revenue improved to $1.74 million, up 88% from the year earlier. In the quarter ended March 31, 2016, revenues increased to $511,743, up 47% from the year prior quarter.
Benefiting from increased distribution and better brand awareness across its home state at the hands of CBA distribution, sales greatly increased in the second quarter, as disclosed in a filing on OTCMarkets.com on Monday evening. Net revenue for the quarter rose to $1.12 million, up 134.8% from $478,572 in Q2 2015. Not surprisingly, the young company posted a small net loss of $26,560 for the quarter.
As evidenced by M&A activity at extravagant valuations, brewpubs popping-up coast-to-coast and industry data, the craft brew industry is thriving with no signs of peaking. Traditional beers like Budweiser aren’t going anywhere, but the younger generation of consumers has a different palate and mentality, creating growing demand for something different and interest in craft brews. To that point, the future remains bright for companies like Craft Brew Alliance and Appalachian Mountain Brewery who, realistically, have still only scratched the surface of the market.
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