CBA Executives Disappointed With 2013 Gross Margins Despite Record Depletion Growth

Andy Thomas speaks at the Brewbound Session in Boston

Despite posting record depletion growth of 11 percent and net sale growth of 6 percent last year, Craft Brew Alliance (CBA) said it was unhappy with its gross margin performance, which declined 150 basis points in 2013.

“We are wholly committed to applying the same level of resolve and discipline towards improving our bottom line that led to our strong top-line growth last year,” said newly minted CEO, Andy Thomas. “With our expanded brewing footprint in the Southeast, continued support for our brands, and targeted programs to optimize our supply chain, we are confident in our ability to continue delivering strong top-line results while accelerating our bottom-line growth in 2014 and beyond.”

During the company’s earnings call, held earlier today, Thomas explained how CBA plans to expand its gross margin rate by upwards of 700 basis points over the next five years.

“We break down gross margin initiatives into three buckets — portfolio, brewing operations and supply chain,” he said. “We’ll look at the drivers in each portfolio and focus on the brands that will matter the most on the bottom line.”

From there, CBA — which owns breweries in Portland, Ore., Seattle, Portsmouth, N.H., and Hawaii — plans to optimize its operational infrastructure and determine the most efficient way to brew its seven focus brands: Redhook Longhammer IPA and Audible Ale; Kona Big Wave Golden Ale and Longboard Lager; Widmer Alchemy Ale and Upheaval IPA and the Omission portfolio.

Additionally, the company said it has reduced its SKUs by 25 percent.

But with 50 percent of CBA’s growth is coming from Southeastern U.S. markets and because the company’s primary brewing facilities are located in the Pacific Northwest and the Northeast, supply chain optimization has become a challenge. That’s why CBA will begin brewing under an alternating proprietorship agreement with Blues City Brewing in Memphis, Tenn. midway through 2014.

“As we start to get our arms wrapped around the brewing footprint, we can flex our supply chain and begin to optimize shipments, freight and shipment strategy,” said Thomas.

This three-pronged approach to improving the bottom line will begin to take shape in 2014, but Thomas said he wants to remain cautious and execute methodically.

“There is a sequential aspect to being able to approach this in a sustainable way,” he told Brewbound. “It’s not like we will do all of this in one year. This is about fundamentally fixing some of the challenges we have, so that we are not only reporting double-digit depletion growth but improved an improved bottom-line.”

So in 2014, CBA estimates depletion growth between 7—11 percent, price increased between 1-2 percent and an improved gross margin rate of 30.5 percent.

“It’s a little but of a rubik’s cube,” Thomas told Brebwound. “All of these pieces should work together and they shouldn’t fight against each other.”

CBA said it hopes to continue building on its strong 2013 performance, a year in which the company shipped more than 756,000 barrels of beer.

Additional 2013 highlights include:

  • Revenue growth of 6 percent.
  • EBITDA declined 3 percent to $12 million.
  • Spending, general and administrative spending increased $1.6 million.
  • Shipments-to-retailers (STR) for Redhook increased 15 percent driven by Longhammer IPA, sales for which were up 13 percent.
  • Kona STRs grew 23 percent. Longboard Lager and Big Wave Golden Ale now comprise 70 percent of portfolio volume.
  • Widmer STRs were down -3 percent.
  • Omission is now 31 percent of the ‘gluten-free’ market in just second year, per IRI.
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