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 <1 million barrels produced annually. (2) Craft as defined as the Brewers Association definition + “Craft-positioned” brands excluded from the Brewers
Association definition because of corporate ownership. Note: In 2014, the Brewers Associated amended the Craft definition to include brewers utilizing certain adjuncts in the mash bill.
Note: Craft percentages based on volume.
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)
Craft’s 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 Today’s 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)
KFC’s
New Fast
Casual Concept
Taco Bell’s
New Fast
Casual Concept
Nashville’s
Authentic
Chicken
Restaurant
San Diego’s
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 Craft’s 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 <50,000 barrels.
$2,000
$8,000
$17,000
$45,000
EBITDA
Revenue
Limited Growth Equity options
Debt imposes growth covenants and
restrictions
Partial or full sale to a financial or
strategic buyer
Ample Cash Flow allows expansion
of existing facilities and / or new
geographies
Ability to arbitrage fading brand
capacity with Shock Top, Blue
Moon, etc.
Limited Growth Equity options
Debt imposes growth covenants and
restrictions
Partial or full sale to a financial or
strategic buyer
Limited Growth Equity options
Alignment with strategic partner
may be attractive, but difficult to
negotiate
Self-Fund
Growth Equity
Debt
Sale
Growth Equity
JV with Large Craft Brewers
Growth Equity
Debt
Sale
Self-Fund
$15
$100
$150
$800
EBITDA
Revenue
$ in Millions
11
Marc Levit Associate
Jeff Menashe Chief Executive Officer
www.demetergroup.net
Recommended
