Tuesday, 10 December 2019

Buy in haste, repent at leisure

Last week, it was reported that US drinks conglomerate Constellation Brands was selling craft brewer Ballast Point, which it had bought for a jaw-dropping $1 billion in 2015. The buyer was the much smaller Illinois firm Kings & Convicts Brewing, and it was rumoured that the sale price could have been as little as $75 million. That would represent a staggering loss of value in only four years.

It brought to mind this blogpost from 2017, in which I made the point that much of the brewing industry seemed to be in the grip of “craft paranoia”, where they were frightened that the rise of craft beer posed an existential threat to their business, and they were flailing about in all directions trying to counter the trend. One aspect of this was established major companies paying what even at the time seemed inflated sums for up-and-coming craft brewers.

Two and a half years later, things look very different. There’s plenty of evidence that the seemingly inexorable rise of craft has peaked, and it’s also something that has been very much driven by novelty and innovation, and isn’t amenable to the tried and tested business strategy of building strong brands. While these deals might have provided bumper paydays for the founders of the acquired businesses, many big companies have been left feeling that they have burned their fingers, and are having to write down the value of their investments.

Brewing seems to be one of the few markets where a substantial number of customers really do put a value on the independent status of producers, and it could be argued that a large chunk of value was lost on the actual day the company was sold.

Of course the British market is very different from the American one, and it would be wrong to read the lessons across too closely. But you do have to wonder whether the big companies that have acquired stakes in British craft breweries are wondering just how far they can take the brands, and worrying that the initial spark has vanished.

One response of established British brewers to the craft trend has been to establish craft sub-brands and bring out products that ape the style of well-known craft beers. However, all too often this comes across as “dad dancing”, with the beers themselves being pale imitations, and drinkers easily able to see through it. Maybe a better response would be to play to their strengths and bring out speciality beers that build on their own heritage, such as Fuller’s Past Masters series, Greene King’s Chevallier beers and Marston’s Horninglow Street range.

6 comments:

  1. I agree that recent purchases are examples of a mania which the purchaser develops and which is caused by a fear of missing out. However,I believe that craft beer brands can develop into strong brands for example Punk IPA,Beavertown Gamma Ray and Camden Helles.

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  2. The craft bubble pop is going to reveal a number of case studies for MBA students to consider the destruction of shareholder value.

    But it does, if you care to look, reveal what "craft" actually means to those that buy into it and pay for it, which is the only meaning that counts. It's an intangible. An idea, a principle. You can create a new brewery, believe it to be craft and assist others to believe and your beer is worth £8 a third in trendy city centre bars. You sell out and it's no longer craft. The beer isn't sold in those outlets no more. That supply chain and customer base is no longer interested.

    It's worth less as the faux craft option in the fridge of mainstream outlets of the parent company. Even if the product is identical. The margin is the value in the brand. The price above commodity. That makes one brewery worth millions more than another.

    That's what craft is. It's an idea sold to people who are willing to pay top dollar to buy that idea. It isn't a product, process, company or anything tangible.

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    Replies
    1. You really do talk sense sometimes, you know, Cookie. Sometimes, it's bollocks, but that nails it, mostly. Brewdog seem to be surviving the mainstream, though.

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    2. Depends whether he has his sensible head or his troll head on. I do actually know this chap IRL ;-)

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    3. A while ago a craft brewer sold out and I remember bottle shops complaining that stock was immediately unsellable. That they had been stuck with bottles they could neither sell at a profit or return. In addition Brewdog was removing those bottles from their bars.

      A bottle of beer on a shelf, in a fridge, deemed craft, lost status & value the minute its producer announced a change to its capital structure. A bottle of beer made before that announcement was no longer craft overnight.

      Unless the high volume lower margin sales in the mainstream market can be calculated to make up for the loss of low volume high margin sales in the niche market, any value placed on that company would be little more than a guess.

      If the value of a company is calculated by what is known as discounted future cash flow based on the expectations from historical trading, or "Ben Graham", then such an alteration in status negates all the historical trading information. Any valuation is nothing other than a guess. It's a punt in the dark that may or may not work out.

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