Protecting Craft Against Pseudos

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The craft /crafty beer market split

Text of Protecting Craft Against Pseudos

  • Protecting Craft Against Pseudos

    June 2014

  • 2

    Craft to the Consumer is Broader than Industry Definition

    Brewers Association (Est. 2005) Dictionary(1) Craft to Consumer(2)

    Craft8%

    Non-Craft92%

    Craft2%

    Non-Craft98%

    Craft11%

    Non-Craft89%

    Merriam-Webster Dictionary: A specialty beer produced in

    limited quantities

    Oxford Dictionary: A beer made in a traditional or

    non-mechanized way by a small

    brewery

    Collins Dictionary: A specialized beer produced in

    limited quantities; a microbrew

    Small: Annual production of less than 6

    million barrels of beer

    Independent: >25% of the Craft Brewery cannot

    be owned or controlled by a

    beverage alcohol industry

    member that is not itself a Craft

    Brewer

    Traditional: Flavor derives from traditional or

    innovative brewing ingredients

    and their fermentation

    Perception of Small Batch

    Perception of Independence

    Distinct / Innovative Flavor(s)

    Regional

    Historic

    Premium

    (1) Craft as defined as brewers with

  • 24.2%25.4% 25.4% 25.4%

    26.7%

    39.2% 39.9%

    ShockTop

    Lagunitas Pyramid RedHook

    SierraNevada

    SamuelAdams

    BlueMoon

    3

    Consumers Do Not Differentiate Craft and Craft-Positioned Pseudos (Pseudos)(1)

    Consumer Survey(2) Defining Brands

    Source: Demeter Group-commissioned Google Consumer Survey. (1) Demeter Group defines Pseudos as Craft-positioned beer owned by non-Craft brewers. (2) Survey conducted via Google Consumer Surveys to 650 Males 4/29/2014 through 5/1/2014. None of the above results removed from the survey.

    Brewers

    Association Craft?

    Craft to

    Consumer?

    Dictionary

    Craft?

    Which of the following do you consider to be a "Craft" beer? (choose all that apply)

    Craft (BA Definition) Pseudos

    Blue

    Moon

    Samuel

    Adams

    Sierra

    Nevada

    Red

    Hook

    Pyramid

    Lagunitas

    Shock Top

    Average: 29.4%

  • 4

    Adding to the Confusion, Retailers Co-Mingle Craft and Pseudos

    Pseudos Imports

    Note: Craft vs. Pseudos as determined by Brewers Association definition.

  • $6.3 $6.6

    $7.6

    $8.7

    $10.2

    $1.6 $1.8

    $1.9

    $2.3

    $2.5

    $1.1 $1.2

    $1.5

    $1.7

    $2.1

    $0.2 $0.3

    $0.3

    $0.6

    $0.9

    $0.6 $0.6

    $0.7

    $0.8

    $0.8

    $9.9 $10.4

    $11.9

    $14.1

    $16.6

    9.8% 10.3% 11.8%14.7% 16.5%

    2008 2009 2010 2011 2012

    Craft (BA Definition) New Craft (Adjunts)

    Pseudos (MC) Pseudos (ABI)

    Pseudos (Other Ownership) % of Beer Market (Craft + Pseudos)

    Pseudos

    38%

    8.59.1

    10.1

    11.5

    13.2

    2.12.4

    2.5

    3.0

    3.3

    1.51.6

    2.0

    2.3

    2.7

    0.30.4

    0.4

    0.8

    1.2

    0.80.9

    0.9

    1.0

    1.1

    13.314.3

    15.9

    18.6

    21.5

    6.3% 7.0% 7.8% 9.3%10.6%

    2008 2009 2010 2011 2012

    Craft (BA Definition) New Craft (Adjunts)

    Pseudos (MC) Pseudos (ABI)

    Pseudos (Other Ownership) % of Beer Market (Craft + Pseudos)

    Crafts Market Size Potential is Much Larger from a Craft to Consumer Lens

    5

    Craft to Consumer Volume Craft to Consumer Retail $ Share

    (1) In 2014, the Brewers Associated amended the Craft definition to include brewers utilizing certain adjuncts in the mash bill.

    Source: Brewers Association and Demeter Group industry research.

    (Millions of Barrels) ($ in Billions)

    BA

    Craft

    62%

    (1) (1)

  • Craft to Consumer is 19% of Todays Beer Market & Could Reach 33% (Retail $)

    6

    Barrel Volume

    Retail $ Share

    Craft Forecast Assumptions

    Maintain 15% Craft and Craft to Consumer volume growth in 2014P

    and 2015P

    Grow Craft and Craft to Consumer volume 8% in 2016P 2020P

    Hold overall Beer category flat with 2013E

    Barrel Volume

    Retail $ Share

    Average retail price per barrel average of 2008 2013 average retail price(1)

    Retail $ share of the entire beer market increases 2%

    yearly

    (1) 2013 average retail price of $918 is $168 larger than the 2008 2012 average retail price per barrel. If 2013 retail price per Craft barrel maintains 2013 level, retail sales of Craft to the Consumer could reach 38%.

    9.8% 10.3%11.8%

    14.7%16.5%

    19.3%21.9%

    24.9%26.3%

    27.9%29.5%

    31.3%33.1%

    7.8% 8.3%9.4%

    11.5% 12.7%14.9%

    16.8%19.0% 20.1%

    21.3% 22.6%23.9%

    25.3%

    2008 2009 2010 2011 2012 2013E 2014P 2015P 2016P 2017P 2018P 2019P 2020P

    Craft to Consumer Craft (BA Definition)

    6.3% 7.0%7.8%

    9.3%10.6%

    12.3%14.2%

    16.4%17.7%

    19.1%20.7%

    22.3%24.1%

    5.0% 5.6% 6.2%7.2% 8.2%

    9.4%10.9%

    12.5% 13.5%14.6% 15.8%

    17.1%18.4%

    2008 2009 2010 2011 2012 2013E 2014P 2015P 2016P 2017P 2018P 2019P 2020P

    Craft to Consumer Craft (BA Definition)

  • 7

    In Other Categories, Pseudos have Captured a Large Portion of the Opportunity

    Personal

    Care

    Restaurants

    Natural / Authentic Pseudo Original

    Bread(1)

    KFCs New Fast

    Casual Concept

    Taco Bells New Fast

    Casual Concept

    Nashvilles Authentic

    Chicken

    Restaurant

    San Diegos Authentic

    Taco

    Restaurant

    (1) Bread segmented based on wheat-positioned breads being made of whole wheat flour vs. combinations of other flours (white bread in disguise).

  • 8

    Craft is More Authentically Positioned, but Pseudos will Intrude on Crafts Growth

    Craft Pseudos

    Select

    Brands

    Marketing

    Distribution

    Focus on Brew Pub as word of mouth and key marketing tool

    Packaging as cue to tell story and artisan positioning

    Utilize social media to broadcast production process and engage with consumers

    Appearance of artisan, small batch, and / or historic beer

    Leverage packaging to suggest artisan positioning

    Large national marketing budgets to drive mainstream advertising and social media

    Broad national distribution networks

    Piggybacking clout of parent company to rapidly achieve full national distribution

    Production /

    Scalability

    Evaluate a diversity of financing strategies to fund expansion

    Ability to scale to demand quickly via production arbitrage

    Focus on home markets with some developing a national presence

  • 16.5

    19.4

    22.0

    25.427.5

    29.7

    32.0

    34.6

    37.4

    25.9

    29.831.8

    34.235.6

    37.038.5

    40.041.6

    3.9

    2.0 2.4 1.4 1.4 1.5 1.5 1.6

    2012 2013 2014P 2015P 2016P 2017P 2018P 2019P 2020P

    Barrels Sold Potential Capacity Incremental Capacity

    Rapid Craft Facility Expansion ($1B+ by 2020P) Needed to Guard Against Pseudos

    9

    Production Expansion (Barrels) Cost of Expansion

    Assumptions:

    Median Cost of Expansion

    ($ in Thousands) (Barrels in Millions)

    $101

    $134

    $53 $57 $61 $65

    $70

    $201

    $234

    $153 $157 $161 $165

    $170

    2014P 2015P 2016P 2017P 2018P 2019P 2020P

    $151

    $184

    $103$107

    $111 $115$120

    Production grows at half the rate of Craft volume growth

    7% in 2014P, 8% in 2015P, and 4% in 2016P 2020P

    Sales volume reaches 90% of Craft beer production volume in 2020

    On average, each additional barrel of production capacity will cost $75

    Source: Brewers Association and Demeter Group industry research.

  • 10

    Access to Capital Needed to Quickly Expand Production

    Brewery Stage Cash Flow Assumption Funding Implication(s)

    Top 10 Craft

    Brewery

    Expansion Past

    100,000 Barrels

    Expansion Past

    50,000 Barrels

    Expansion Past

    25,000 Barrels

    Top 2 Brewery

    $3

    $20

    $7

    $35

    EBITDA

    Revenue

    $1

    $10

    $3

    $20

    EBITDA

    Revenue

    $0

    $2

    $2

    $10

    EBITDA

    Revenue

    Note: EBITDA margins assumed at 15% - 20%. Brewpub Revenue assumed at $5 million for over 50,000 barrels and $2 million for

  • 11

    Marc Levit Associate

    levit@demetergroup.net

    Jeff Menashe Chief Executive Officer

    menashe@demetergroup.net

    www.demetergroup.net