CBA Executives Explain Disappointing Quarter

CBA_970

Shares of Craft Brew Alliance (BREW) plunged today following yesterday’s after-hours release of weaker than expected second quarter earnings.

During a quarterly earnings call, CEO Andy Thomas tried his best to reassure investors that the company’s performance in home markets, and its continued investment against a long-term strategy of improving gross margins, were bright spots in an otherwise disappointing three-month period.

To soften the blow, Thomas began the call by offering perspective on the company’s lackluster performance in Q2.

“Our quarterly earnings call provides an opportunity to not only comment on the results of our operations for the quarter, but also to context those results within our view of the market and against a backdrop of our strategy,” he said, adding that the quarter “delivered continued improvement in the core health of [our] business model, success in actualizing partnerships that expand [our] home market base, but disappointing top line expansion burdened by concentrated geographic softness, specifically in California.”

As Brewbound reported yesterday, CBA recorded second quarter net sales of $58.5 million, a 3 percent increase over the second quarter of 2014. Shipments actually increased 2 percent during the quarter, to 239,000 barrels. Nevertheless, total shipments have decreased 3 percent through the first six months of the year, the company said.

And while depletions collectively grew 7 percent in CBA’s home markets of Oregon, Washington and Hawaii, total depletions were up just 1 percent, something Thomas chalked up to tougher comps against last year’s “record quarter.”

But the bigger issue facing CBA – which produces and markets the Widmer Brothers, Redhook, Kona, Omission, KCCO and Square Mile brands – is a rapidly evolving beer market that, while “consistent with its expectations,” is changing much faster than company executives expected.

“Firstly, we continue to see brand relevance, not just style relevance, becoming a bigger factor in the craft beer space, with local becoming a bigger attribute of consumer choice,” Thomas said. “Secondly, we continue to see an acceleration in new entrants across multiple geographies and channels, adding an unprecedented level of competition in virtually every corner of the beer market — a level of competition that is raising the stakes with respect to resources and spend.”

So what’s it all mean for CBA, currently the 15th largest malt beverage supplier, according to IRI, and 5th largest regional brewing company?

Thomas admitted that the “unprecedented acceleration of new entrants” has exposed some of the company’s shortcomings.

“The vulnerability is not because we lack system strength, but because the onslaught of local brands and category adjacent innovations, in flavored malt beverages, results in a fierce competition, not only for growing distribution but for simply maintaining distribution and shelf space,” he said.

The Redhook and Widmer brands both experienced significant declines in a “hyper competitive” California market, Thomas said.

Total Redhook volumes fell 14 percent during the quarter (12 percent YTD) and, in an effort to combat the declines, the company said it plans to shift marketing strategy to begin emphasizing the brand’s “pioneering craft roots.”

AMB_Blonde

Overall Widmer depletions were down 7 percent in the quarter, but up 7 percent in Oregon. For Kona, depletions were up 12 percent during the quarter and up 22 percent in Hawaii. That brand now represents 42 percent of the company’s overall business.

But back to the declines: How does CBA plan to address a growing need to be “local” and stave off increasing pressure from new category entrants?

The company’s strategic partnership with Appalachian Mountain Brewery showed “tangible signs of progress” in the second quarter as CBA transitioned the brand into its wholesaler network. That’s given the company increased confidence to continue, “planting seeds” with other emerging craft brands.

“We will build more home markets, by partnering with authentically local brands in key geographies that represent both sizeable beer market growth opportunities and markets where we can leverage our existing CBA infrastructure and relationships — be that brewing and operations infrastructure, sales and distribution infrastructure or retail relationships,” Thomas said.

The company said it is “actively engaged” in conversations with other craft breweries and placing greater emphasis on its recently launched emerging brands division.

A focus on acquisitions and unique partnerships, coupled with a renewed effort (and investment) on home market performance will be a top priority in the back half of the year, the company said.