The Craft Brewing Industry

Wicked Weeds, Why Did You Sell Out When You Could Have Sold In???

"HOW DARE WICKED WEED AND LAGUNITAS SELL OUT TO THE MACROS! THIS IS A BETRAYAL OF THEIR LOYAL CUSTOMERS AND THE CRAFT INDUSTRY!!” This seems to be the overwhelming theme of any article, Blog, Podcast or social media post I have seen over the last 2 weeks. Lets take a moment to look at the why and what potentially could have been done differently. The craft brewing and distilling business has exploded over the last decade due in part to the relaxation of many states liquor laws combined with the growing support for buying local. Yet the trend that is developing is that craft brewers find themselves in need of capital for expansion, distributions to original equity investors,
or liquidity for minority shareholders or key employees. For all the wrong reasons this is resulting in the increase in regional craft brewers selling out to the large national and international breweries. This is being done with the hope of maintaining their independence and control of the product only to find out early on, they maintain minimal to no control of decision making. Brewers, like private equity firms look at return on capital, return on investment, market share, shelf space and ultimately revenue growth. They identify ways early in the ownership game to eliminate costs and increase net income even at the expense of employee termination and public backlash. For them, it’s not about good will, friendships, camaraderie, product integrity; it’s only about financial significance and market capitalization. The conflict that this creates for the owners of these business is growing a brand based on quality product (there has never been more competition) from a consumer base that feels like they are part of the companies “family” versus monetizing the business that they have poured their heart, souls, money and time into. No one should ever hold it against an owner who has the opportunity to monetize or expand their business through partial or total sale to a third party, yet with in the craft brewing industry we are seeing an increased backlash towards brands that choose to select one of the Macro-brew conglomerates as their partner. This has never been more apparent than with the consumer and craft community backlash towards Wicked Weed over the last two weeks, which has almost completely overshadowed Lagunitas selling their remaining 50% to Heineken. So this raises the question of what could have allowed this to play out differently. 1. The craft industry is a more open and sharing industry than most. If craft brewers and distillers start to join executive groups with other owners it will offer insight into collaboration as well as best business practices and financial benchmarking. Many of the larger craft brewers have taken financial stakes in smaller operations. This creates a conduit to roll up opportunities to assist in distribution, financing and outside investment opportunities. Executive groups also allow for discussion of tax-advantaged alternative exit strategies such as selling your company to your employees through an ESOP plan (Employee Stock Ownership Plan) like Harpoon, New Belgium and 12% of the 50 largest domestic brewers.
2.
Learn how to run your business as a business early on. As David Walker of Firestone Walker Brewing Company recently said at the Brewers of PA event The Meeting of the Malts; “A reckoning is coming and if you’re not running a real business your f***ed!” Many craft brewers and distillers are getting into the industry because of a remarkable passion for the art of making the product. This passion and talent for creating a product and brand does not mean you will be able to successfully run a profitable business. This can and will create pressure from outside investors who are looking to recoup their investment. It also potentially makes you a target for Private Equity/ Macro – Brew / Roll-up operations who know how to run a company. They are going to quickly realize that they can acquire you for a deep discount because of what they view as “simple operational fixes” that will increase margins and
profitability.
3. Public Relations - Let’s assume for a variety of reasons selling to the “enemy” was still the best decision for the owners. Now it comes down to messaging. There should be no shame in saying “it was an offer that we would have been fools to say no to”. This is the definition of the American dream. While some customers may still have felt betrayed, they would not have felt lied to. This seems to be the underlying theme of the recent transactions. The craft industry fans and owners seem to feel that these deals were simply maximizing sale price. But the press releases and official statements allude to this being “ good for the brand” or “good for the craft industry”. Again, because of the nature of the brands and what their customers believed they stood for, saying that this was about anything other than the money feels like a lie. This is another place that lack of business acumen or access to peers for advice has a reputation cost.

There are tremendous challenges faced by the craft industry.
These can be identified as the continued boom in new breweries, the 3 tier distribution system which can make fighting for shelf space difficult, the increased difficulty in sourcing quality ingredients and the contraction of the beer market share to spirits (great for craft distillers). Expanded collaboration can and will help with some of these challenges. At the same time it is sad to see what has been happening to the craft industry. Breweries and distilleries open and gain traction among a small but loyal group of customers who share in the vision of what the brewer or distiller is trying to accomplish. As the word of mouth grows, product penetration grows and the macro conglomerates are opening up their wallets in the hopes of gobbling up the smaller boutique labels. Some companies in the craft industry are looking for ways of preserving the company’s integrity, brand loyalty and employee and brand satisfaction while still rewarding the founders. Creating strategies to financially divest the founders who took financial risk in setting up the company and deserve to mitigate their ongoing risk and create some liquidity diversification is a struggle that is not unique to the craft industry. These solutions can be accomplished provided the owners have access to the intellectual capital that is available within the industry and through its partners in adjacent
industries. About the Authors Brian Murray is the Director of Wealth Structuring for Quadrant Business Advisory Services and Peer Executive Groups. He serves business owners through aligning them with the correct Peer Groups, consulting on business development and growth, and transition planning. Quadrant Peer Executive Groups is a member of Brewers of PA. www.peerexecutivegroups.com [e-mail] Rick Jaye and Dan Zugell are Senior Vice Presidents for Business Transition Advisors. BTA is a national leader in the ESOP market place helping company’s transition to employee owned tax advantaged entities. Www.esopguy.com