Craft brewers: This is how they grow
Colorado breweries need to focus on efficient distribution
With the craft beer industry continuing to grow, key players in the nearly $22 billion market are looking for ways to scale their businesses and meet increasing consumer demands. Colorado alone is home to 284 craft breweries, which make up 12 percent of the nation’s craft breweries, and the state is ranked first in the nation for output per capita.
With craft beer becoming available in more places -- from food trucks to fine dining restaurants -- brewers will want to invest in the infrastructure to deliver their products to retailers and consumers in an efficient manner. Here are practices and considerations for brewers should consider while expanding their distribution.
Local, Regional and National Brewers
Craft beer companies typically fit into three categories based on size: the small local brew pub, the regional brewer and the national (and super regional) production brewery. Each has unique needs when it comes to production and distribution expansion.
The local brewpub typically sells most of its beer on premise at the brewer’s restaurant/tap room and the remainder to select local bars and restaurants. This reduces the need for distribution and allows the brewpub to recognize profits quickly – but has limited growth potential. A regional brewer, on the other hand, might be selling out of a tasting room from one or multiple breweries, but most of their revenue and growth comes through selling their brews into other retail accounts, both on- and off-premise.
Between 2014 and 2015, regional craft breweries grew by nearly a third (31.9 percent). They are also selling into markets outside of their local city and state, requiring them to establish a distribution network with an independent beer wholesaler. At a much larger scale, a national production brewery may have several larger breweries and requires a more sophisticated and robust distribution system comprised of multiple beer wholesalers.
To Grow or Not to Grow
In today’s market, expansion is a matter of choice rather than survival. Each category of brewery has its advantages and drawbacks, and each has the ability to deliver a good profit pool for its owners. It’s important for investors and owners of breweries to be aligned in regards to their objectives when it comes to growth expectations, return of capital and appetite for reinvestment.
Once brewers and investors agree on business objectives, they can develop a strategy to determine how large a brewery to build, which markets to target and how much debt and equity capital will be required. As part of this evaluation process, brewers will also need to consider what the operational capital needs will be in order to maintain equipment, including maintenance and upgrades, expand sales force and what additional equipment will be needed to meet production growth (bottling line, tanks, IT systems, etc.). Depending on the brewer’s objectives, this may or may not require additional capital from banks or investors.
Assessing Where (and How) to Expand
Brewers also need to research and evaluate which markets and channels to expand into. Craft-centric regions, including Colorado, San Diego and the Pacific Northwest as well as the newer craft hubs of Austin, Atlanta, Chicago and Ashville, have turned into destinations for craft beer tourism with a high brewer per capita.
Before entering into a new market, a brewer needs to fully understand the beer market shares of not only the other craft brands, but of the global brewer brands as well. Another area of opportunity for the smaller brewer is expanding into the off-premise accounts, such as traditional grocers and convenience stores. For instance, Whole Foods now carries a selection of craft beers, including a locally brewed program, and some locations even have small pubs within the store.
A key partner for craft brewers is their independent beer wholesaler, who supports, sells and distributes their product. As the craft beer industry has continued to grow over the last decade, wholesalers have adjusted their business models from supporting just a few key suppliers (such as ABInBev or MillerCoors) to now having more than 30 breweries to support, sell and distribute. Wholesalers have also increased the training and size of staff, often deploying craft-only sales teams. Today, brewers have the opportunity to work with traditional large beer distributors as well as some craft-only distributors and wine and spirit wholesalers.
As a brewer enters into a new market, they need to find out which wholesaler will best support, sell and nurture their brand. Craft brewer’s continued growth will be in part due to the commitment and support of these innovative beer wholesalers. Ultimately, the enterprise value for a particular brewer is case dependent. Key factors that drive this value include financial elements (growth rate and profitability), intangible factors (brand awareness and image), competitive positioning and ability to sustain growth.
According to the National Brewers Association, approximately $106 billion in sales was generated from the craft beer market in 2015, an increase over past years. The beer business is booming, resulting in an industry that is increasingly competitive for the next generation of entrepreneurial brewers. Fortunately, their ability to secure capital, recruit talent and secure options for their future has never been better.
Brian Mulvaney is Senior Vice President, Beverage Group of Bank of America Merrill Lynch. Scott Vanderpool is Market Executive, Colorado Business Banking for Bank of America Merrill Lynch.