Scale or Stale - M&A options for craft brewers looking to grow their business - Industry Comment

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Craft beer has become the fastest-growing - and the most competitive - segment of the global beer market. With more than 1,700 craft breweries in the UK and over 5,200 in the US, the sector has a 12.3% market share of the total beer category and is starting to present a challenge to the growth of large breweries.

Craft beer companies have to choose between three paths to growth

Craft beer companies have to choose between three paths to growth

One way mass beer producers have fought against the bubbling competition spilling over from craft brewers is to acquire them. Anheuser-Busch InBev, MillerCoors, Constellation Brands and Heineken - which together control 81% of the US market – have all expanded their portfolios through buying smaller craft beer brands. Most recently, AB InBev purchased Wicked Weed in May while, in the same month, Heineken acquired full control of Lagunitas Brewing Co.

With the global craft beer market expected to grow sales from the current US$85bn per year to a forecast $503bn by 2025, craft breweries have three options to consider should they wish to truly scale their business: Merge with another craft brewer, sell a stake to private equity or sell out to a multi-national.

Moderating craft beer sales still leaves the sector looking attractive

The craft beer market seems to have become a victim of its own success. Niche craft beer brands have won over loyal consumers by offering more variety and flavours, which led to years of market growth and in turn made the market highly attractive to big beer brands. Crowdfunding is the first step many brewers, including BrewDog, Wild Beer Co and Wildcraft Brewery, have taken to accelerate their growth and further build brand awareness. Yet, as the brands themselves get bigger, multi-nationals who want a slice of the action have started to acquire craft breweries, which some would argue, no longer makes them a craft beer brand.

When a craft player is acquired by a large brewery, their volume of sales is no longer included in the craft beer sales recorded by the sector. This may be why the American Brewers Association, which covers the craft beer sector, has recorded only 6% growth in 2016, a marked slowdown from the growth seen in 2015 at 13% and 18% in the preceding two years.

The absolute number of craft breweries, meanwhile, continues to grow - by 8% in the UK last year and by 16.6% in the US. By 2020, the Brewer's Association forecasts, craft beer will account for 20% of the US beer market. As the surge in craft's popularity continues, this niche remains a prime target for M&A activity, with craft breweries hoping to achieve economies of scale, private equity houses looking to invest in the sector and multi-nationals seeking a foothold in the market.

Merge with other craft breweries

Merging with a brewer of a similar size and ethos may be the most palatable way for craft brewers to achieve strong growth and benefit from economies of scale, yet maintain their independence. This enables owners to remain within the business and helps to retain a loyal customer base, using the combined marketing and distribution functions to reach out further to consumers. Last year, Krebs Brewing Co purchased Prairie Artisan Ale as the latter faced ongoing growth and distribution challenges.

Engage in partial private equity deals

Craft brewers often favour private equity (PE) investment as it secures growth capital without necessarily changing the business' strategy, day-to-day operations and, most importantly, the brand's identity. PE houses ultimately seek a return on their investment, however, and the next step may well be a sale to a larger PE house or a large multi-national. Co-founder of BrewDog, James Watt, once stated that raising venture capital was akin to "selling your soul to the devil", preferring initially to go down the crowdfunding route. Yet, the firm has done just this, following the US$264m investment secured in April from TSG Consumer Partners, in order to "to take our business, and our community's investment in BrewDog, to the next level." Other recent PE deals include LNK acquiring a 15% stake in Dogfish Head Brewery, without the owners relinquishing control.

Sell to a multi-national

The option that tends to be least welcomed by customers is to sell to a big brewer to benefit from its distribution and marketing capabilities. Yet, for small beer makers achieving regional success, penetrating new and bigger markets can be difficult. Working with a multi-national can help overcome this. Larger sales and marketing teams, more sophisticated brewing equipment, economies of scale and access to higher quality ingredients are reasons cited as the benefits of being owned by a large multi-national. 

The attraction of smaller craft breweries is clear to multi-nationals: The craft sector's strong growth has come largely at the expense of the big brewers' mass production offerings, such as the Budweiser and Miller brands. One of the most particularly acquisitive companies is AB InBev, which after purchasing Chicago's Goose Island in 2011 snapped up another 11 craft brewers, including Blue Point in New York, Elysian Brewing Co on the west coast in Seattle, and Camden Town Brewery in the UK. Such shopping sprees ensure that the big players are able to both continue to benefit from its traditional markets, with the economies of scale and solid customer base that comes with it, while taking a step into the more dynamic and innovative, high-growth craft segment.

Delicate balance of fostering growth but retaining brand identity

This is a Catch-22 situation: Craft brewers initially strive to become independent producers of artisan products, yet to truly scale their business, partnering with a private equity house or selling to a multi-national are the most viable options. This may leave consumers confused as to what the brand stands for, however, and could result in previously loyal consumers abandoning the brand in protest that it has 'sold-out' to a corporate. This is one of the key challenges for craft brewers to overcome, with some deciding just to take a sip into a merger while others down the whole pint and join the ranks of big beer.

Hopefully, neither course will produce a hangover and both routes help craft brewers maintain the party spirit and continue their much-admired growth.

Jonathan Buxton is a partner and head of consumer & retail at Cavendish Corporate Finance.

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