Craft Brew Alliance Plans to Increase Spending on Kona, Eyes Top Line Acceleration

Following the release of Craft Brew Alliance’s second-quarter results on Wednesday, CEO Andy Thomas hailed his company’s financial performance as the “strongest validation” yet that CBA is a “company transformed.”

As Brewbound reported yesterday, CBA posted 2 percent revenue growth and overall gross margin expansion of 550 basis points (bps), driven by a 640 bps expansion in beer gross margins, which Thomas called “never before seen levels for CBA.”

Much of the positive results were attributed to the acceleration of the Kona brand, with Q2 depletions growing 7 percent. However, CBA’s portfolio-wide depletions (-2 percent) and shipments (-0.4 percent) were both down in the quarter, in large part due to continued declines on the Redhook and Widmer Brothers side of the business.

During a call with analysts and investors today, Thomas said CBA is now in its “strongest operational and strategic position” company history, which he attributed to the growth of the Kona brand, a reshaped CBA portfolio that now includes three smaller craft partners, a rationalized brewery footprint, improved gross margin, and a “far more profitable business model.”

The company, he said, has “a clean balance sheet with solid cash flow and generous financing capacity and a stronger talent base.”

Moving forward, Thomas said CBA would now look to accelerate its topline growth via a three-pronged strategy.

  • CBA will launch “heavy-up spending programs” for Kona and its other brands. Thomas said the company plans to spend at least seven-figures on the Kona brand, which “continues to crave additional spend.” Historically, he said, the company wasn’t in a financial position to make those investments, but the Kona brand now has the scale and distribution to feed that craving and return on the investment.
  • CBA’s new Innovation Team has launched the “pH experiment,” in which focus group participants will be given experimental beverages in exchange for answering questions about the types of alcohol they purchase, their favorite producers, and the places where they like to consume beer, wine, and spirits. They will also be asked to give feedback on CBA innovation products. Thomas said the purpose of the Innovation Team is “to get out there and fail famously, but fail small and fail fast and fail relatively cheap.”
  • CBA is also making a “significant” investment into a pair of research projects with the Yale School of Management’s Center for Consumer Insights, and growth consultancy Prophet, in order to gain insights into the marketplace and consumer behavior.

The three initiatives will inform the development of CBA’s plans and help drive “stronger execution” of its Kona-plus strategy in the future, Thomas said. However, he cautioned that the benefits wouldn’t likely impact the company’s topline until 2019.

Asked about the path to stabilization for the Redhook and Widmer Brothers brands, Thomas said the company doesn’t see declines subsiding over the next two quarters.

Nevertheless, Thomas said to expect more emphasis on Widmer’s Hefe brand, which accounts for 70 percent of the brewery’s sales.

“We think Widmer Brothers is a better value proposition,” he said. “We’re able to price more effectively, and we’re able to drive volume on the Hefe brand, while we’re trying to infuse some equity back into the brand as it fights all of these third generation and fourth generation crafts here in Oregon.”

However, Thomas said the “jury is still out on Redhook in terms of volume versus value.” The brand has seen a “rejuvenation” in its home market after the opening of Brewlab for new products, like Big Ballard IPA, Bicoastal IPA and Peaches for Me IPA.

“When Redhook goes back home and lives in Capitol Hill and lives among all of these cool hipsters, Redhook actually starts to act like Redhook acted 32 years ago, 35 years ago,” he said.

Thomas also addressed what he called the “elephant in the room” — the possibility that Anheuser-Busch InBev, which owns a 31.4 percent stake in CBA, will make a qualifying offer to purchase the company (or pay a $20 million fee) by August 2019. He said the company has “more certainty” in its partnership with A-B, a deal that has opened more doors for CBA brands with wholesalers. He added that there is no tension or awkwardness between the two companies, calling their relationship “outstanding.”

“There are some unknowns out there around the qualified offer, but in the process, I don’t worry about doing things that would be different if A-B were to or weren’t to [make an offer],” he said. “That’s up to A-B. What I worry about is trying to grow as much value as I can in our Kona-plus strategy and our people to make sure CBA continues to be a great performing company with outstanding brands, outstanding talent and really well-functioning breweries.”

Other notes from the call:

  • CBA is now producing A-B’s Virtue Cider products at its brewery in Portland, Oregon.
  • The company will commission a search for a new chief financial officer following the departure of Joseph Vanderstelt, who left the company in mid-July.
  • CBA is installing a new canning line at its Portland, Oregon, brewery, which is slated come online by the end of the year. “We’re under indexed on cans,” CBA chief operating officer Scott Mennen said. “You’ll begin to see that change a we move forward with new packages and our improved capabilities. So we’ll have more beer in cans as a percentage of our overall volume, which will improve our overall cost structure because cans are cheaper than bottles.”
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