Creating National Sales Platform, Brooklyn Brewery Invests in 21st Amendment, Funkwerks

In an effort to compete more aggressively with large beer conglomerates and various private equity-backed brewing groups, three small brewers have joined forces to create a nationwide sales and distribution platform that will include more than 150 sales personnel and brand ambassadors covering 38 states.

Brooklyn Brewery, along with California’s 21st Amendment (21A) and Colorado’s Funkwerks today announced the establishment of a combined sales team, which will be led by Brooklyn vice president of business development Dave Duffy.

As part of the deal, Brooklyn Brewery said it would purchase undisclosed minority stakes in both breweries and receive a seat on each company’s board of directors.

First Beverage Group acted as the advisor to 21A and Funkwerks and specific financial terms were not disclosed. Brooklyn, which sold a 24.5 percent stake to Japan’s Kirin Brewery last October, will use proceeds from that transaction to finance its investments in the two breweries, according to Nicole Fry, a managing partner with First Beverage Group.

The creation of a combined sales force is aimed at strengthening the three companies’ positions within the U.S. craft brewing sector and giving each a better chance at securing valuable retail placements at a time when large beer companies such as Anheuser-Busch, MillerCoors and Constellation — which have more financial resources and clout with chain buyers — have made significant investments in the space.

“The craft world in the U.S. is changing, and the golden era of 20 percent growth when everyone was smart is over,” Brooklyn Brewery president Robin Ottaway told Brewbound. “We’re just adjusting to what’s going on out there and trying to run our business in smart ways and work with people who also feel the same way and want to stay independent and continue in this business.

In a conversation with Brewbound, 21A co-founder Nico Freccia said the tie-up would allow the three companies to “leverage inefficiencies and synergies,” and share “brainpower, resources and ideas.”

“We can’t compete with the craft breweries that have been bought out by the big guys,” he said. “We will continue to operate our breweries independently, but as one from a sales perspective.”

For his part, Ottaway said Brooklyn Brewery was looking to partner with brewery owners who wanted to remain involved in the business.

“We don’t want to run breweries,” he said. “We want people who want to fight and want to compete.”

Freccia said Brooklyn’s investment would enable 21A to pay down a significant amount of debt that was incurred in 2014 when the company announced plans to build a 95,000 sq. ft. brewing facility that ending up going over budget. By selling a minority stake, Freccia said 21A would also be able to restructure its term loan with Union Bank of California, which lent money to two other Bay Area breweries — Speakeasy Ales & Lagers and Magnolia Brewing Company — both of which ended up in distressed financial situations.

“Obviously, with some of their loans going south and with the slowdown in the industry that we saw last year, they [Union Bank] are concerned,” he said. “But our situation was different, and we have been very communicative throughout the entire process. They are thrilled about this deal.”

The deal will also allow 21A — which has 20 salespeople in 24 states and Washington, D.C. — and Funkwerks — which has two salespeople in Colorado and distribution in seven states — to tap into Brooklyn’s much larger sales force.

“Brooklyn has 15 salespeople in New York City alone,” he said. “We have one and New York is our second biggest market outside of California.”

Freccia said he would also use some of the proceeds from the sale to finance additional brewery expansion projects over the next 24 months, including a $1 – $2 million investment on “quality, efficiency and safety” projects as well as continued, multi-million dollar capacity additions.

Meanwhile, Funkwerks co-founder Brad Lincoln told Brewbound that he and partner Gordon Schuck began exploring options for ways to continue to grow their brewery about two years ago.

Despite receiving other offers that would have allowed them to cash out, the pair wanted to maintain their independence and control of the brewery — something Brooklyn brought to the table.

Lincoln also called Duffy a long-time friend, but said Brooklyn’s lack of interest in a path to control sealed the deal, which came together in April after about nine months of discussions. He has also been friends with First Beverage director J.B. Shireman since the brewery opened in 2010.

“It just felt right,” Lincoln said of selling a minority stake to Brooklyn. “The big advantage for us is that we now get access to a far stronger sales team than we could put together ourselves.”

Ottaway told Brewbound that the partnership with the two breweries had the right mix of geography, differentiated portfolios and the right people involved.

“We’ve carefully chosen this portfolio,” he said. “We think it’s important that when you go to your wholesalers and distributors that you present a portfolio of complementary brands with minimal overlap.”

Fry echoed those statements, and called the structure “unique” while comparing it to similar partnership arrangements executed by Craft Brew Alliance — which has inked deals with Appalachian Mountain Brewery, Cisco Brewers and Wynwood Brewing — and Pabst Brewing, which formed a similar sales and marketing agreement with New Holland last year.

“I think 2016 was probably the peak,” she said of more traditional strategic and private equity investments in craft breweries. She added that First Beverage expects to see more “craft on craft” deals emerge, and said Brooklyn would be in a position financial to capitalize on some of them.

“As the market has evolved, there are going to be more people raising their hands,” she said.

Ottaway added that the transactions with 21A and Funkwerks began as a way “to really secure our route to market” while also reaching efficiencies of scale.

“Distributors and retailers are making decisions about where to focus, whose SKUs to cut and it’s a much tougher environment out there,” he said. “The winners, I think, are going to be the ones who have good brands supported by a good organization with good people. So that’s what really drove this for us.”

Funkwerks, which produced 5,700 barrels last year and is projecting 7,000 barrels this year, will eventually grow into Brooklyn and 21st Amendment’s distribution network, Lincoln added, but he doesn’t envision entering markets major markets such as New York and California for at least six months and maybe longer.

“The idea of growing 100 percent again, even 70 percent to me, sounds really difficult,” Lincoln said. “I don’t want to bite off more than we can chew. We have to be very strategic on where we go and make sure that we’re not going too fast, too hard.”

With the infusion of cash, Lincoln said he envisions Funkwerks eventually maxing out its capacity at about 16,000 barrels by installing more fermentation tanks at its existing facility as well as investing in a bottling line.

For his part, Freccia said he expects 21A to produce about 105,000 barrels in 2017.

In a blog post announcing the transaction, Brooklyn teased that its flagship Brooklyn Lager could one day be sold on the West Coast.

“They are not interested in coming to the West Coast until they can brew their beer locally, and this is a way for them to do that,” Freccia said of the opportunity for Brooklyn to produce beer in a 21A facility that is capable of being scaled to 300,000 barrels.

Although there are no current plans to do so, Ottaway told Brewbound that the possibility of sharing brewing operations is “on the table.” But, for now, the brewery is focused on building the sales platform, which is expected to be in place by January 1, 2018.

“Being a single-brand supplier is much different than being a multi-brand supplier,” he said. “None of us have experience being a multi-brand supplier, obviously. We have a lot of work ahead of us, and we don’t take that combination lightly. That’s what we really want to focus on in the beginning.”

The move also completes a busy two-month stretch for Brooklyn Brewery, which announced three international joint ventures with Carlsberg in China (HK Yau), Lithuania (Svyturys Brewery) and the United Kingdom (London Fields Brewery). The two companies previously teamed up in Norway (E.C. Dahls Brewery) and Sweden (The New Carnegie Brewery). Brooklyn also operates Jeju Brewing Company in South Korea.

“We’re done,” Ottaway said. “This is the big one and we’re really excited and we can’t wait to get going.”

Chris Furnari contributed reporting to this story.

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