Beer Executives Share Growing Concerns Over Wine & Spirits, Private Equity Investments at Brewbound Session

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Craft Brew Alliance CEO Andy Thomas

Editor’s note: This article appeared in the July issue of BevNET Magazine

Here’s a full stein of reality, courtesy of Craft Brew Alliance’s chief executive, Andy Thomas.

“If we become irrelevant to consumers, we’re all doomed,” he told a crowd of 250 beer business executives and entrepreneurs who attended the June 9 Brewbound Session conference in Brooklyn.

Speaking alongside panelists New Belgium Brewing CEO Christine Perich, Alchemy & Science president Alan Newman and Brooklyn Brewery president Robin Ottaway, Thomas shared his thoughts on the evolution of the craft segment while simultaneously teasing the notion that small brewers are not doing enough to address what he feels is the beer category’s biggest long-term threat: wine and spirits.

“As we fight for consumer occasions, and for consumer share of mind and for the loyalty from consumers, we should be focused on that (wine & spirits) instead of the zero sum game of what we are focused on right now – tearing each other down,” he said.

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Since 1995, beer’s share of total U.S. alcohol shipments by serving size (5 oz. for wine, 1.5 oz. for spirits and 12 oz. for beer), has declined by 10.2 percent, to 50.6 percent in 2015, according to the Beer Institute. During that same period, however, U.S. wine shipments increased 5.4 percent (from 11.7 percent to 17.1 percent) and spirits shipments increased 4.8 percent (from 27.5 percent to 32.3 percent).

While craft beer has grown like gangbusters, the overall amount of beer consumed in the U.S. has dropped or stayed flat in recent years, while, total U.S. wine consumption has been on the rise: In 1991, Americans drank just 466 million total gallons of wine, according to the Wine Institute. Since, that amount has ballooned to more than 895 million gallons in 2014.

Americans are also drinking more distilled spirits. According to data from the Distilled Spirits Council of the United States, spirits volumes grew from about 150 million cases in 2000 to 215 million cases in 2015.

The beer industry, meanwhile, has surrendered sizeable chunks of volume to both categories since 2008, when total industry-wide volumes reached a peak of more than 213 million barrels, according to the Beer Institute. Last year, total industry volumes narrowly eclipsed 206 million barrels, and only 85 percent (175 million) of those barrels were produced domestically.

According to the Brewers Association, the trade group representing the interests of small and independent beer companies, approximately 24.5 million of the 175 million barrels made by U.S. producers in 2015 came from businesses defined by the organization as “craft brewers.” And that’s up from just 10 million barrels produced by those companies in 2010.

But while craft brewers have enjoyed tremendous growth in recent years, Thomas, and others on the panel, worry about losing drinking occasions to wine and spirits, especially as consumers continue to more evenly distribute their alcohol consumption across all three categories.

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“We need to be better about creating the right occasion for beer,” said Perich. “There are some very classic occasions for beer, but how do we take beer and put it into new occasions and drive new drinking opportunities? I think that is what is going to grow the overall industry.”

The remarks from both Thomas and Perich come at a time when large companies like Anheuser-Busch InBev and MillerCoors are losing millions of barrels to smaller players.

Since 2008, those two companies have lost a combined 23 million barrels, according to BA chief economist Bart Watson.

In response, A-B has purchased eight craft breweries – Goose Island, Elysian Brewing, 10 Barrel Brewing, Breckenridge Brewing, Blue Point Brewing, Devils Backbone Brewing, Four Peaks Brewing and Golden Road Brewing – while MillerCoors has purchased just one: San Diego’s Saint Archer Brewing Company.

But they aren’t the only large brewers cutting checks. 2015 was a banner year for craft brewery transactions, most notably Constellation’s $1 billion purchase of Ballast Point and Heineken International’s $500 million investment (in exchange for a 50 percent stake) in fast-growing Lagunitas Brewing Company.

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Alchemy & Science president Alan Newman

And private equity firms are making purchases too: Boston’s Fireman Capital has acquired stakes in Oskar Blues Brewing, Perrin Brewing and Cigar City Brewing, via its Oskar Blues Holding Company entity, while Friedman Fleischer & Lowe purchased Abita Brewing via its Enjoy Beer LLC investment vehicle.

That consolidation, as well as the increased push from private equity into the sector, was another concern mentioned by the panelists, who were wary of the aims of the investors.

“If you are not going to be able to beat the 25 percent IRR (internal rate of return), then eventually they are going to call you in because they don’t care about beer, they care about their money,” said Newman.

But for Perich, it isn’t necessarily the money pouring into the space that worries her; it’s how that capital is being deployed.

“Money doesn’t give you a strategy; money just gives you money,” she told the crowd. “So if you don’t know what you are going to do with that, sometimes you make really bad decisions.”

And when private equity firms want to cash in on their investments, “that will be disruptive to the industry,” she added.

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