As Brewbound reported yesterday, Craft Brew Alliance (CBA) suffered through a difficult first quarter, which ended on March 31, 2015. Net sales and total beer shipments decreased 5 percent and 8 percent respectively.
CBA CEO Andy Thomas summarized the quarter during an earnings call with investors and analysts on Thursday.
“I’ve remarked to many of you before that I look forward to the day when our numbers speak for themselves,” he said. “Well, Q1 2015 still isn’t that time.”
The dull quarter stands in stark contrast to that of that same period from one year ago, which Thomas called an “aberration” that saw net sales and shipments increase 20 percent and 17 percent respectively, leading the way for the company to close out 2014 up double digits in both areas.
An aberration notwithstanding, CBA has made plenty attempts in recent months to stoke portfolio-wide growth. In recent months, the company has added nine states to Kona’s distribution footprint and created additional capacity at Blues City Brewery in Memphis, where it contracts some production of its beer, to better serve the Southeast. That prompted at least one listener on the call to question how, despite higher-than-average sales during last year’s first quarter, shipments could still dip 8 percent in 2015.
“The nine final states that we rolled Kona out in, candidly, are relatively insignificant and small,” Thomas responded. “The key in moving them out and into the states isn’t necessarily the volume we’re going to generate in those nine states. It’s the fact that, that will enable us to actually start to service some national accounts that have coverage in those nine states. The benefit won’t be linear, I would say, and directly proportional.”
Ken Kunze, CBA’s chief marketing officer, spotlighted a few broader, industry-wide factors that contributed to the company’s lethargic quarter, including negative on-premise traffic, a 4 percent decline in beer industry tax paid shipments, and even California’s recent ban on scanbacks that hampered its ability to provide competitive prices in the company’s biggest volume state.
Kunze also offered additional insight on the company’s portfolio of brands. CBA’s gluten-reduced offering, Omission, was the big winner. Depletions were up 33 percent on the quarter, “achieving a 50 share of the gluten-free segment,” an increase of 11 share points over the year prior, said Kunze. Kona depletions were up 9 percent and the brand now controls 21 percent of the Hawaiian beer market. Widmer Brothers depletions were down 3 percent for the quarter, though off-premise sales were up 4 percent, driven primarily by its flagship Hefe and Upheaval IPA, he said.
Redhook, on the other hand, Kunze said, has been its least profitable in the brand family, with depletions down 10 percent.
“There are geographies where we sell a fair amount of volume but make very little gross margin in the process,” he said. “The challenge is to balance sourcing more Redhook volume in more profitable geographies while we transition less profitable geographies to other more profitable brands in the portfolio.”
That process will take a while, however, and Kunze expects Redhook to continue to suffer as a result.
Looking ahead, Scott Mennen, the company’s vice president of operations, detailed the four main priorities CBA has set for itself as it looks to expand gross margins ( between 30.5 percent and 31.5 percent in 2015).
According to Mennen, CBA must:
- “Deliver procurement savings through leveraging our scale.”
- “Unlock value engineering for both packaging and brewing materials.”
- “Sharpen our focus on efficient operations and reducing losses in our brewing operations.”
- “Continue to drive improvements in our logistics and freight operations as we look to rebuild supply chain infrastructure.”
The executives on the call, which, alongside Thomas, Kunze, and Mennen, included newly appointed CFO, Joe Vanderstelt, were also questioned about any lingering hangover from the 25 percent reduction in SKUs from 2014.
Mennen said to expect additional rationalization, noting that any further cuts would not be as dramatic. The continued reduction of struggling brands would be offset by the introduction of new items, naming Widmer’s Hefe Shandy as an example.
Though most of the call was devoted to explaining grim numbers, there were some bright spots discussed. In the company’s home markets of Oregon, Washington and Hawaii, depletion volume grew 8 percent, a credit to continued investment in the backyard.
“We’ve been explicit about our home market strategy,” added Thomas.
As Brewbound reported earlier this year, the company plans to invest a total of $25 million in expanding operations in Portland, Ore. ($10 million) and Hawaii ($15 million). All in, depletion volume grew 1 percent over the first quarter, the company said.