Amid increasing competition from thousands of fast-growing startup breweries, Oregon’s Craft Brew Alliance — which makes and markets the Kona, Widmer, Redhook, Omission and Square Mile Cider brands — is fine-tuning its go-to market strategy.
Despite a somewhat lethargic 2015 where net sales increased just two percent, CEO Andy Thomas and other CBA executives who spoke to investors during last week’s earnings call, remained optimistic about the company’s position as it approaches the end of this year’s first quarter.
“While on the surface this growth may seem sluggish given how fast the consumer, the market, the competitive set and our strategy to win is changing, it was a strong accomplishment and in line with our overall strategy,” said chief marketing officer Ken Kunze.
Net sales across all CBA brands increased four percent, or $1.8 million, during the fourth quarter of 2015. Gross profits, meanwhile, grew by 13 percent, or $15.5 million, during the quarter due to increased pricing, lower material costs, and improvements to production management.
Nevertheless, CBA struggled to grow total shipments, down one percent on the year. And while Kona delivered impressive 17 percent shipment gains in 2015, sales of Redhook and Widmer languished as consumer preference for locally-made products surged.
“The consumer trends toward farm-to-table restaurants, buying local, both in terms of product and store — the desire to know both where ingredients come from and who made it are very real consumer dynamics,” Kunze said.
As a result, CBA said it plans to double-down on a portfolio strategy that prioritizes Kona as the company’s national play and its other brands — including recently established partnerships with Nantucket’s Cisco Brewers and North Carolina’s Appalachian Mountain Brewery (AMB) — as the focus in their respective home markets.
Kunze called it a “Kona-plus” approach.
“The clear number one focus for CBA is the Kona brand family,” he said. “Kona will be the marquee brand within the portfolio that plays to the largest audience across the largest geography both domestically as well as internationally.”
“The ‘plus’ in Kona-plus is a complementary portfolio of brands. Brands that complement Kona to make the portfolio stronger in a given geography,” he added.
Over the years, Kona has grown to become CBA’s top-selling brand, now representing nearly 45 percent of the company’s product mix. Depletions for the Hawaiian-based brand grew 27 percent last quarter.
As Kona mainstreams, Kunze said CBA would continue refocusing its sales and marketing efforts for the Widmer and Redhook brands in Pacific Northwest, a move which Thomas described as “proactive” rather than “reactive” to the current locavore trend.
“Our pioneering brands like Widmer Brothers are not hiding behind lifecycle issues, local brand clutter or the consequences of a national distribution strategy that’s now fully played out,” he said. “They’re doing something that none of those other mature crafts are doing, proving that you can go home, grow there and be vibrant once again.”
CBA still plans to fill gaps in its national footprint by investing in regional breweries, either through acquisition or through contract and distribution arrangements.
And in 2016, the company will continue its relentless pursuit of improving gross margins, a cornerstone issue Thomas has championed since taking over as CEO in 2014. The company hopes to increase gross margin by at least 50 basis points in 2016, to between 31 and 32.5 percent, primarily as a result of reduced packaging costs and improved supply chain management.
Chief financial officer Joe Vanderstelt also noted during the call that contract production agreements, including the company’s recent deal with Pabst to produce some Rainier brands, were also factored into its 2016 gross margin projections.
The company has also embraced international sales as an important part of its future growth, beginning with Kona’s launch in Brazil in January.
“International isn’t a curiosity anymore it’s something that we believe has fundamentals that suggest it can grow, can grow in a profitable and sustainable way and is something that we’re spending a lot of resource internally on,” Thomas said.
Despite the positive outlook, Thomas warned investors that first-half 2016 numbers could be skewed: shipments will take a short-term hit when the company halts production at its main brewing facility in Portland, Ore. to complete an expansion the will increase annual capacity to 750,000 barrels. Meanwhile, the company is working to integrate production of Cisco and AMB brand at its Portsmouth, N.H. facility, a move that could also temporarily disrupt operations, Thomas added.
“It’s gonna be lumpy again guys,” he said. “It’s gonna be really lumpy in Q1 because of that one-two punch of the Portland brewery shut down on our existing portfolio plus the mid-to-back half-year acceleration due to partner volumes coming online.”