In the high stakes game of craft beer, who has the winning hand?

Around the turn of the century we witnessed the relentless and seemingly unstoppable shift to the globalisation – and homogenisation – of the beer industry. This was epitomised by massive consolidation of mid-sized regional beer companies into a few gargantuan multinational behemoths. This was the era of the global megabrand – think Budweiser, Heineken, Miller, Foster’s or Carlsberg, to name but a few – where a World Cup sponsorship, catchy commercial or celebrity endorsement could help sell billions of pints of beer (read lager) that, critically, tasted the same in Tokyo, Tallahassee or Timbuktu. It was a power game, where size mattered and a combination of distribution clout, marketing savvy and deep pockets was king.

Then along came little old craft. Initially seen by many as a fad or fly by night, it soon became abundantly clear that craft had changed the game. Craft was about local. Craft was about flavour and, above all, craft was about… duh – craftsmanship. Much of the discussion to date has been around craft exits or ‘sell-outs’ to Big Beer or, worse still, those greedy bankers.

What about these global beer companies – the ‘heavy rollers’, if you like? What do they really think of craft and how have they reacted to this seismic shift in the beer landscape? Did they assume ostrich mode and hope it was just a fad that would conveniently go away? Perhaps they went on the offensive and spent their way out of trouble, adhering to the old adage – if you can’t beat them, join them. Perhaps they developed their own rules in this multibillion dollar game.

One thing is for sure, the various strategy and M&A teams in Big Beer have been frantically dissecting and assessing the challenge/opportunity of the beer revolution that made a mockery of their carefully nurtured ‘big is best’ business plans. The good news for consumers is that the distribution clout of these players has helped make high-quality and carefully crafted beers available to the masses – way beyond their immediate vicinity.

Unlike other articles on craft, this piece looks squarely – and impartially – through the lens of the leading multinational beer players. At the high table of craft beer, did they buy, twist or stick?

AB INBEV

As an article on Big Beer's response to the craft revolution, there can only be one place to start – AB InBev. Per a recent IWSR feature, incredibly this one company now spits out more profit than the total profits generated by all of the other major quoted beverage companies in aggregate. Quite a feat, for a business that barely existed 30 years ago. When it comes to AB InBev’s game plan for craft, it has been swift, proactive and, some critics would contend, aggressive.

ABI's early forays into the craft sector can be traced back to as early as 1994, when as a dominant US player, Anheuser-Busch took a 25% stake in Red Hook. With Red Hook’s later merger with Widmer in 2008, creating the Craft Brewers Alliance and the subsequent acquisition of the Hawaii based Kona Brewing, AB was the first big player to truly show their hand. Look out for ABI exercising an option to expand its minority stake to take full ownership in the CBA. Kona is growing like a weed and has truly global potential – with its ‘spirit of Aloha’ – in 10 years time, this brand could be the global craft equivalent of Corona. The stakes were raised considerably with the deal that shook the industry in 2011, when AB InBev acquired Goose Island, the much-loved Chicago-based craft brewery. The price of $38m certainly raised a lot of eyebrows at the time as the brewery was still largely regional. To many it seemed like a hugely inflated price, but following the swift creation of a national footprint and the rapid global expansion of the Goose Island brand, that price now looks a complete steal. It was this deal that opened the floodgates to Big Beer gorging on – or perhaps partnering with – many of the leading pioneering craft breweries across the globe.

In an exclusive IWSR interview with Jerome Pellaud, VP global craft and specialties for AB InBev, Pellaud spells out the company’s approach to the craft beer category. Pellaud also took the opportunity to address some of the challenges that have been laid at AB InBev’s door around ‘predatory’ practices. He explained AB InBev’s strategy for craft succinctly: “We are excited by the boom of craft beer and it is really happening, literally all over the world. So the strategy is very simple – let us embrace it and make sure that we can offer our consumers what they are looking for, because now there really is a demand from many different types of consumers, not just the beer geeks.”

As for AB InBev’s rationale for acquiring new craft breweries, Pellaud talked about two overriding criteria. “We really want, first and foremost, amazing beer! Having the best possible beer is key. But then we also look for those great, great founders – people that have vision, passion and want to be leading the business for many years to come.”

Regarding Goose Island’s international go-to-market rationale, Pellaud explained that “we started to launch in different countries around the world, or should I say cities, because it’s very much an urban thing. For instance, we opened up in Seoul, Shanghai and São Paulo, and in 2015/16 we really started to get some traction with this approach”.

A key part of AB InBev’s international craft strategy has been embedding a Goose Island brewpub in the local market. This radical new approach has especially impressed Rabobank beverage analyst Ross Colbert, who likened this international brewpubs model to the secret sauce of the California wine industry – the ‘vineyard tour’. Parachuting in large-scale Goose Island Brew Pubs has proven to be a hugely effective way of “creating an all-important connection with the brand, as well as building a sense of place, authenticity and brand experience”.

As for the slew of recent international craft acquisitions – particularly Camden Town (UK), La Virgen (Spain) and 4 Pines (Australia) – Pellaud explained that stage one was “helping them to increase capacity in their brewery so that they can cope with the demand, which was really a limiting factor for them all. Most of Camden Town’s beer is sold within the M25 in London, so going internationally on day one is too premature. La Virgen is even more local, being sold solely around Madrid. And with 4 Pines, they are mostly in New South Wales – Australia is a lot bigger than NSW, right? So for all these international acquisitions there is a lot of room to grow nationally, before thinking of the complex logistics of international”.

Pellaud refuted the widespread criticism in the media and trade that AB InBev was trying to kill off craft to retain share in order to get its ailing US megabrands back into growth. “I think we can bring a lot of value to our partners. To believe that AB InBev is acquiring these breweries and they will destroy the quality – I mean name one example where that is true! Of course, it is not true! We are doing the exact opposite – we are helping them to grow by maintaining the quality – even increasing the quality – and expanding the brewery. So with Camden Town in London, we just gave them a few more resources so they could keep selling in London in the right places – as they used to do. At the end of the day they are the ones having the right discussions with the trade, they tell their story, organise tastings and present their portfolio.”

This begged the question, what about ‘in-house’ innovation in the craft category? Surely that was much cheaper than buying another expensive cult craft beer company? Pellaud says: “Yes, that is an interesting question. We could do this in terms of brewing; I don’t think there is anything we could not brew. I think that one example on the market is Shock Top in the US, that was created internally, but in the end for us what people are looking for now is really authenticity and to have a great founder or someone that is behind the brand who has a vision and passion – that is as important as any great beer.”

AB InBev Craft Game Plan: BUY

Play the leading role in the craft beer movement globally. Make Goose Island a major international global craft brand.

 HEINEKEN INTERNATIONAL

If AB InBev has spent much of the last decade or so buying craft breweries for fun, second-ranked multinational beer player Heineken International has had a much more considered and circumspect approach. Indeed, until it bought a 50% share in Lagunitas in 2015, Heineken – the premium beer company – had been notable for its absence in the premium craft beer space. Similar to Goose Island, Heineken invested in a highly successful semi-national craft brand – in this case Lagunitas from California – that was growing strongly domestically and had the inherent brand equity to resonate in all the important craft markets around the world. In a serious statement of intent earlier this year, Heineken acquired the remaining half of Lagunitas for an undisclosed price.

The strategy for Lagunitas is one of laser focus on the largest metros of the leading countries in the world. Each of them have a burgeoning local craft movement and Heineken wants Lagunitas to be the go-to international craft brand. They are well on their way.

Heineken Craft Game Plan: TWIST

Ruthless focus on scaling the Lagunitas brand globally.

CARLSBERG

Unlike AB InBev and Heineken, Carlsberg has been conspicuous for its prudence. Indeed, the only craft beer acquisition of note made by this global beer behemoth was the microbrewery London Fields for a relatively paltry figure of £4m.

Their most obvious strategic play has been in a highly successful international partnership with the first-class Brooklyn brand. Carlsberg took over the exclusive rights to distribute Brooklyn in the UK and over a dozen international markets. The two brewers have also cooperated to open two microbreweries in Sweden and, most recently, Norway.

However, it should be noted that it is Kirin — not Carlsberg — that has an actual ownership stake in Brooklyn, with its 24% equity purchase along with the Asian distribution rights. When asked to articulate his craft strategy at a recent investor conference, Cees ‘t Hart, Carlsberg CEO, had this to say: “With regard to craft, we have, in our view, a strong portfolio there with brands like Grimbergen, Brooklyn and 1664 Blanc, and these are like international craft brands which we want to further grow. Then we have some, what we call, line extensions of our power brands, local power brands. We call these ‘crafty’ extensions and these are successful as well. And then we see here and there that we need some very local-specific brands in our portfolio. But you should not expect from us a big effort in acquiring small craft breweries.”

This all seems eminently sensible, but begs the question, what happens if Kirin ups its stake in Brooklyn to more than 50% or, worse still, buys them outright? Then what’s the next move for Carlsberg?

Carlsberg Craft Game Plan: STICK

Focus on Brooklyn distribution and local in-house brands.

 MOLSON COORS

At Molson Coors’ recent Q3 earnings call, Mark Hunter, president and CEO, said: “Blue Moon continues to grow well. It’s one of the few large craft brands in the country that are growing. The Blue Moon and Leinie’s families accounted for 22% of the total craft beer volume growth year to date in the US. In regional craft, Terrapin, Hop Valley, Revolver, Colorado Native and Saint Archer are all growing at strong double-digit rates, well ahead of the overall craft segment, as we continue to integrate and expand geographically.”

One acquisition that has proved to be especially inspired for Molson Coors is Sharp’s Brewery in the UK. This little gem was acquired for just £20m in 2011 — interestingly, just a few weeks before the Goose Island acquisition by AB InBev. Volume has since spiked at Sharp’s Brewery, best known for its Doom Bar beer, with distribution increasing to more than 7,000 pubs across the UK.

The strategy is clearly paying off as the iconic Doom Bar brand is now the number one cask ale in the UK. Meanwhile, another European craft purchase of theirs, Franciscan Well, is the number one Irish craft brewer.

 Molson Coors Craft Strategy: BUY

Replicate success with European acquisitions in North America.

DIAGEO BEER

Diageo CEO Ivan Menezes, when speaking at the Capital Markets Day in May, framed up Diageo Beer’s unique approach to craft. He explained: “Guinness is a fabulous brand as it sits in the middle between Big Beer and craft. We are more famous and more widely distributed than craft, but we are also more different and flavourful than the big lager brands. To take advantage of this position, we started to rebuild our brewing credentials so that we are no longer seen just as a brand, but also a great brewer. One of the levers in how we are creating this shift is through our experimental brewery — The Open Gate Brewery in Dublin — for consumers and beer writers to come and taste what has been made that week, before it is launched anywhere else. It is working and we now plan to export these learnings to the US, where we have recently announced the opening of a new Guinness Brewery in Maryland.”

In a recent update Mark Sandys, head of Diageo Beer, put some more meat on the bones by highlighting that “we’ve had an experimental brewery on-site for 100 years, 57 years at its current location”. He explained that, during most of its life, the facility would have been used for testing things like “how to extend the shelf life of Guinness, rather than to create a substantially different beer”. Now it’s home to a group of brewers who produce around 25 different beers a year — some are just for visitors to the Open Gate, while others might go on to be new product launches.

Regarding their ground-up craft strategy, “we thought that we could do it ourselves,” says Sandys. “When you look at the success factors of other craft brewers — genuine stories, real people making the beer, quality ingredients, doing things in a small-batch way — we’re doing that already.”

The standout success has been Hop House 13. Menezes proudly stresses that “Hop House 13 is a premium lager from the house of Guinness, with more hops, more taste and more character. The brand continues to grow rapidly in the UK and Ireland and equity data shows we have built a brand with strong potential and we continue to invest behind it.” For Diageo, then, the creation of ‘craft’ beers in a small brewery represents an innovative new chapter in the history of the storied Guinness brand.

 Diageo Beer: Craft Game Plan: STICK

Create its own range of craft brands pivoting off the iconic Guinness brand.

 CONSTELLATION BRANDS

Although not a global player per se, Constellation Beer has been ripping up trees in the US market, largely benefiting from a heavy weighting in the fast-growing Mexican import market. Constellation has been far from shy in jumping into the craft fray, with two large recent acquisitions – namely Funky Buddha and Ballast Point. The latter was bought for an eye-popping $1bn. Recently however, Constellation announced an $86.8m impairment charge on the relatively new acquisition.

Colbert of Rabobank, along with other analysts, expressed concern that that Constellation Brands most likely overpaid for Ballast Point. He saw it as one of four “unicorn deals” this year in beverage – along with BrewDog (TSG 22% equity stake valued the Scottish brewery at over £1bn), Bai and Casamigos (George Clooney’s tequila brand bought by Diageo). According to Colbert, the “revenue multiples for these deals were insane”. So while Ballast Point may have grown solidly since the acquisition, “it has not seen the growth Constellation was expecting or needing to get the necessary return on such an expensive purchase”. Colbert feels it will be a “challenge for future craft acquisitions to be value accretive, unless it’s buying a truly exceptional company”.

This begs the question of why should Goose Island look such an excellent investment, while Ballast Point is potentially destroying value. The answer would appear to be two words — timing and reach. Timing is everything and AB InBev bought Goose Island at the bottom (2011), while Constellation bought Ballast Point at — or near to — the top of the market (2017). As for reach, Constellation’s network is primarily national, while AB InBev has been able to strategically lever Goose Island into its global distribution network, with the ensuing access, focus, funds and, of course, global sales.

 Constellation Craft Game Plan: BUY

Double down on recent big acquisitions to ensure a solid return on investment (ROI).

 DUVAL MOORTGAT

While much of this article has been about the scaling of US craft brands into national and ultimately international brands, one company is notable for its contrarian international approach – the Belgian brewer Duvel Moortgat. The company was an original investor in the Brewery Ommegang craft brewery founded in Cooperstown, New York, in the late 1990s. With its range of high-quality Belgian-inspired beers, Ommegang successfully straddled the divide between craft and import. In 2014, Duvel Moortgat doubled down on its US reverse invasion plans and acquired Boulevard Brewing Company, located in Kansas City, Missouri. However, its game changer was in 2015, when it was announced that it would acquire Paso Robles, California craft brewer Firestone Walker Brewing Company.

This will allow for production of Duvel’s three US brands – Firestone Walker, Boulevard and Ommegang – out of brewing facilities strategically based in California, Missouri and New York. This strategy serves as an example that may become a template for others looking to produce beer in multiple states and diversify their beer style and brand portfolio.

 Duvel Moortgat Craft Game Plan: TWIST

Take on the Americans at their own game — in their own backyard.

 LATE ENTRANTS

Not to be left entirely in the cold, late entrants to the party include Mahou San Miguel, who recently took a 30% stake in the much-loved Founders Brewery from Michigan. Not to be outdone, Coca-Cola Amatil, who just last month snapped up Australian craft favourite Feral Brewing. Finally, Sapporo, after waiting patiently to make its move, recently acquired Anchor Brewery, the grandfather of US craft. Anchor is an iconic craft brewery with about a century’s head start on young pretenders such as Lagunitas, Brooklyn, Goose Island or Ballast Point. We await to see Asahi's next move post Meantime.

THE LATEST STATE OF PLAY

There is no doubt that craft beer has changed the beer game forever. The strategies of the high rollers have varied markedly by company. The most active and aggressive strategy has not surprisingly been AB InBev, who of course has the most to lose. AB InBev has been buying craft brewers for fun and is now betting large on the global roll-out of Goose Island. Meanwhile, Heineken has doubled down on making Lagunitas the pre-eminent global craft brand, while Molson Coors has chosen more of a craft portfolio strategy. Two big questions remain: who will win the hand of Brooklyn — Carlsberg or Kirin? And how much did Constellation overpay for Ballast Point? Finally, kudos for betting against the bank goes to Duvel Moortgat for its US expansion plan, and to Diageo Beer for its in-house craft incubator.

Ultimately, I will leave you to judge for yourselves. In the game of craft beer, who do you think has played the winning hand and who is sitting on a busted flush? 

STOP PRESS... and the game heats up

In the 10 days since this article was completed, there have been no less than three significant craft plays by Big Beer:

1. Anheuser-Busch InBev purchased another craft brewery in Australia, Adelaide-based Pirate Life. The move follows September’s purchase of Sydney’s 4 Pines. Pirate Life co-founder Jack Cameron said the partnership would help them share their beer with more people.

2. Heineken purchased a 49% share in London-based craft brewer Brixton Brewery. Brixton Brewery launched in 2013 and said the partnership will allow it to expand. The move comes as the craft brewery prepares to move to a larger site.

3. Spanish beer market leader Mahou San Miguel added to its US craft brewing footprint with the acquisition of a holding in Colorado-based Avery Brewing. The Spanish group has taken a 30% stake in Avery, which was founded in 1993 by father and son Larry and Adam Avery. The purchase comes almost exactly three years after MSM bought a similar-sized interest in Michigan’s Founders Brewing.

Article by: James Fellowes. Global Beer Lead, The IWSR