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Monday, August 29, 2016

Liquid Aloha to the Craft Brew Alliance

Last week was a good one for the Craft Brew Alliance. The company's stock price reached an all-time high of over $20 per share on Friday. Two days earlier, the CBA released details of an agreement that puts in motion its sale to Anheuser-Busch. Those details are most certainly related.

Back in June, I wrote a piece predicting an imminent buyout. The deal announced this week isn't quite that; it isn't final and there are still details to be worked out. But the arrangement is the precursor to a completed deal, make no mistake.

The fact is, now is not a great moment for a buyout. In approving its merger with SABMiller, the Department of Justice nullified certain AB practices and told them future acquisitions would receive careful scrutiny. Now is a good time for Anheuser-Busch to keep a low profile.

Anyway, the CBA and Anheuser-Busch have been virtually joined at the hip for about 20 years. As one industry publication noted, "it seems AB and the CBA are engaged to be married, after having shacked up for a while." A buyout is imminent unless something strange happens, including the possibility that DOJ could block it.

"Collaborative independence" is the phrase both AB and the CBA are using to describe their relationship for now. In this scenario, there are three areas of commitment in place, all of which serve the interests of the CBA. It's quite bizarre, really.

Master Distributor Agreement
Anheuser-Busch will continue as the CBA's master distributor through 2028. Fees remain at 25 cents per case. That's good news for the CBA, which was bracing for a tripling of fees when the old deal expired in 2018. If volumes exceed today's 11 million cases, the CBA will save an estimated $6 million per year starting in 2019, escalating with growth over the contract term.

Contract Brewing
The CBA will have the opportunity to brew up to 300,000 barrels (more than a third of its 2015 output) within AB's network at a cost savings of $10 or more per barrel compared to their current cost. Transitioning those barrels to AB's factory breweries will take a couple of years, after which the cost benefits will gradually be realized.

You will recall that the CBA brewery in Woodinville, Wash. is currently leased to Pabst, which has an option to buy it within three years. The CBA brewery in Portsmouth, N.H., might meet a similar fate. Or the CBA could use it to build partnerships with smaller craft breweries, whose beer would be contract brewed in Portsmouth and distributed via the AB network. There are some significant financial windfalls here, regardless of which way things go.

International Distribution
The CBA awarded AB exclusive rights to distribute its beer in countries not covered by existing agreements. Starting in 2019, AB will pay a royalty of $30-$40 per barrel, pay production and material costs and reimburse the CBA for out of pocket shipping costs.

Until 2019, AB will make fixed international payments of $3 million in 2016, $5 million in 2017 and $6 million in 2018. As an incentive for "international volume development," AB will pay an additional $20 million in 2019. What's $20 million between friends, huh?

Stuck With Me
Of course, there's more. Anheuser-Busch is obligated to carry out all elements of the new agreement unless it makes a "qualifying offer" to purchase the CBA and the CBA rejects it. At that point, AB could reconsider any or all of the agreement. What's a qualifying offer? I'll get to that. Just remember AB's only way out is if the CBA turns down an offer or shifts control to someone else. Fat chance of that happening given the pork in this deal.

Okay, qualifying offer. It's an offer to acquire CBA for a minimum of $22 per share during the first year of the agreement. The minimum bumps up to $23.25 a share in the second year and to $24.50 a share in the third year. The stock price was hovering around $14 before the new deal was announced, but finished the week above $20. Wall Street loves this deal.

Timelines and Plotlines
It's clear AB and the CBA have established a framework for a delayed buyout. That scenario seems well-suited to both parties. What's the timeline? The way the agreement is structured and the way certain internal CBA details line up, the pressure to acquire the CBA increases in each of the next three years. A finalized deal is likely by 2019, if not sooner.

The elephant in the living room is this: Why did Anheuser-Busch agree to terms that are slanted so wildly in favor of the CBA? These are not reckless business people. They are accustomed to acquiring brands, squashing competition and winning. They like getting their way. Why so many concessions to the CBA?

The answer is Kona. AB wants it and the CBA has it. In fact, Kona is the only CBA brand with broad potential. It will be the biggest fish in AB's kettle of craft fish due to its national and international appeal. The big shots in St Louis and Brazil intend to market Kona against arch-rival Constellation's trio of Corona, Modelo and Ballast Point. For starters.

The rest of the CBA portfolio is junk, by comparison, likely to be sold piece-by-piece once a buyout is finalized. Redhook, relegated to discount status, likely ends up with Pabst. What happens to Widmer? That's an open question. It might be reformed as a boutique brand known for unique and innovative beers. That can't happen under the current regime of corporate profiteers, but it might happen if AB sells the brand to the right person or group.

What's the impact of the impending deal? Obviously, executives and big shareholders are going to rake in some serious cash. Past and present employees with stock or stock options will make some money. Some jobs will be lost after AB takes over and implements the cost-cutting initiatives it's famous for. But, then, you can't make an omelet without smashing a few eggs.

The official passing of the CBA torch to Anheuser-Busch will have no significant or lasting impact among consumers. The CBA may or may not cease to exist. It won't matter since most knew it only vaguely via the brands it represented, brands that will henceforth be owned by big beer.

Liquid aloha, folks.

Thursday, August 25, 2016

Belmont Station to Host Ballast Point's 20th

Sometimes you have to wonder about equity in the beer industry. Large, well-funded breweries have significant advantages over their smaller counterparts. Besides efficiencies in production and distribution, they have the means to launch big promotional events, for example.

Such is the case tonight, when Ballast Point celebrates 20 years with a tap takeover at Belmont Station. This is no ordinary tap takeover. The folks from San Diego will be occupying 15 of the Station's 23 taps. A normal tap takeover would typically consume 4-7 taps.

"You can't celebrate a milestone like this one with just a few beers," says Lisa Morrison, Belmont Station owner. "So we'll have 15 across a pretty good range of styles. There will be something for everyone."

You may know Ballast Point is one of fastest growing, most vibrant brands in the land. They've only been in Oregon for a few years, but their growth has been off the hook here and elsewhere. That growth trajectory leapt upward last year when the company was acquired by Constellation Brands for a cool billion bucks.

They've mostly gotten a pass from the same craft beer community that crucified 10 Barrel, Elysian and others that have sold out to big beer. Part of that is timing. Ballast Point sold in late 2015, a time when the craft beer community was feeling numb due to prior acquisitions. There's also the fact that Constellation, which owns and markets Corona, Pacifico and Modelo, doesn't own distributors, as is the case with Anheuser-Busch.

Whatever differences of opinion exist regarding Constellation and Ballast Point, they haven't mattered in the least. At a time when the overall growth in craft beer volume is slowing nationally, Ballast Point has been hitting it out of the park. Sculpin IPA is one of the hottest brands in industry growth stats and several others are also doing well.

Even in Oregon, Ballast Point has done well. It's hard to figure. They came late to one of the most competitive craft beer markets in the country with products that are, frankly, overpriced. Yep. In case you don't know, a six-pack of Sculpin will set you back $15. The other brands in their portfolio are similarly overpriced. But it hasn't mattered. The stuff sells. And sells.

Part of that is the beers. They're solid. And not just Sculpin, which is so popular it has spawned a brand family with different fruit twists. Ballast Point also has a strong brand identity, leaning on its connection to Southern California beaches and sunshine. Constellation paid big bucks for Ballast Point because it understands the value of place in a brand's identity. See Corona.

The list for tonight's party includes some of the better-known Ballast Point beers, as well as some that are rarely (or perhaps never) seen here. Take a look:
  • Sculpin IPA
  • California Amber
  • California Kolsch
  • Grunion Pale Ale
  • Pineapple Sculpin IPA
  • Mango Even Keel Session IPA
  • Watermelon Dorado DIPA
  • Grapefruit Sculpin IPA
  • Calm Before the Storm Cream Ale with Coffee & Vanilla
  • The Commodore Stout
  • R & D Coral Wheat Ale with Hibiscus, Pomegranate & Cherries
  • R & D La Premiere de Garde Bier de Garde Ale
  • R & D Schwarzbier
  • R & D Trident Belgian Tripel
  • R & D Double IPA
The party is the only one of it's kind in Oregon, Morrison says. "We were honored when they asked us to host because their beers have done well and we like them." The official celebration runs 5-7 p.m., but many of the beers are on now and some will be on after the event. Should be fun.

Thursday, August 18, 2016

Washington Beer Reinforces the Nature of Beer Industry

History is bunk. Admit it. That's why hardly anyone bothers reading up on the brewing histories of towns, cities and states. There are Pokemon to be caught and Twitter threads to be launched and followed. Who has time to read?

Nonetheless, chump that I am, I bought a copy of Michael Rizzo's book, Washington Beer: A Heady History of Evergreen State Brewing. The book was published earlier this year by The History Press, the same outfit that published Portland Beer in 2013.

For the record, I've never met Rizzo, who lives in the Seattle area. He and his wife, Michelle, host Northwest Beer Talk, a weekly podcast covering craft beer. According to the book, he's worked as an historian, lecturer, school bus driver, tour guide and network administrator.

Relax. I'm not here to review the book. That's not something I do here. I made an exception when Jon Abernathy's book on Bend was published a couple of years back. I did so because I know Jon and because Bend and Portland are invariably linked.

The Washington book is not like mine. Due to the sheer number of breweries Rizzo had to cover, a book similar to mine covering the state of Washington would have consumed 300 or 400 pages. And the publisher does not want books of that length and depth. Why? Because almost no one reads crap like that.

Because I was only dealing with Portland, and also because much of our history is dominated by Henry Weinhard (Blitz-Weinhard, if you prefer), I got to spend a lot of words addressing why things happened as they did. There's a lot of storytelling and historical perspective in my book.

Not so in Rizzo's case. With so many breweries past and present to talk about, he focuses mostly on when, where and who founded and operated the state's breweries. There are only occasional snippets providing perspective on why things happened the way they did.

I'm not a fan of this approach. I understand why it was necessary. But dates, names and places offer only a partial story. Perspective and background are needed. Limiting the scope of the book to Seattle or the Puget Sound area might have been a more reasonable approach, given the required word and page count parameters.

But never mind. The book is what it is and it's definitely worth a read if you're interested in Washington's brewing history and don't mind wading through a lot of facts that are often, though not always, disconnected. You might not mind.

What really jumps off the pages is the predatory nature of the industry. Washington's brewing history is dominated by consolidation in its various forms. Breweries and brands have been bought, sold and otherwise transferred routinely. Iconic brands like Rainier and Olympia are prime examples, but they are nothing more than examples.

This isn't shocking or surprising. A primary feature of the beer industry is that it's a giant pyramid scheme. Brewers are driven to dominate markets and expand into others. Sales growth and improved cost efficiencies lead to acquisition and consolidation. It's the nature of the beast.

Today, acquisitions are in the news. Anheuser-Busch and MillerCoors are buying craft breweries. Many are alarmed. But, really, what we're seeing today isn't new. It's been part of this industry for a more than a century. Washington's history illuminates and reinforces that reality nicely.

Wednesday, August 10, 2016

Merchandising and Modern Craft Beer

As we make our way through summer and (soon enough) into early fall, I see breweries prepping for fresh hop and pumpkin beers. The industry has become all too predictable as it swings from one season to the next, with no one wanting to be left behind in the rush for seasonal beers.

One thing I rarely hear people talking about is merchandising. Craft beer merchandising is exploding. People who drink craft beer (and some who don't) clamor to get their mitts on hats, shirts and a variety of other trinkets sold at breweries, taprooms and stores.

The merchandising concept stared me in the face on a recent trip to Sunriver. During an afternoon in Bend, I watched patrons spend more money on shirts, hats and trinkets than they spent on beer. These were mostly tourists, who have absolutely overrun Central Oregon. Still, I was astonished.

Look, I'm well aware that merchandising has been a part of the craft beer movement since the early days. I have ancient hats and shirts from the Lucky Lab, Bridgeport and the Oregon Brewers Festival, among others. Craft brewers didn't just recently discover they could make money on this junk. But they're tapping into the growing demand with gusto.

The reality is simple. Folks want to identify with their favorite craft brands in basically the same way they identify with bands and sports teams. That means buying logo gear in a variety of forms. And brewers are getting more and more creative about what they offer and how much they charge for the stuff. It's big business.

What this trend has done is put increasing importance on brand identity. If you're a brewer, you want your identity to be more than just unique; you want it to be appealing and trendy. You want something beer fans will want to wear around or show off in other ways. If you can get it into their hands early on when you're new and few are wearing it, so much the better.

Talking with a fellow writer and blogger friend about this, we laughed about the current reality. A lot of new breweries develop their branding well in advance and start selling shirts, hats and such before they even open. He suggested we might be able to create a cool logo and backstory for a fake brewery and make money selling logo items. Such is the insatiable demand for the stuff.

What does it mean? Maybe nothing. But probably it means craft beer has attained a cultural relevance nearly on par with sports and music. Having reached that place, we see a growing emphasis on being the first to wear schwag from breweries that are newer or yet to open. It's similar to being among to first to wear a shirt advertising a hot new band or sports team that's doing well.

This is all fine and dandy, right? Except that it works to the advantage of newer places that may not be all that great, aside from a spify logo, and to the distinct disadvantage of established places that may not be seen as cool, trendy or relevant at this point.

But all's fair in love and beer. And that's the state of modern craft beer. Take it or leave it.

Monday, August 8, 2016

News Register Publishing Acquires the Oregon Beer Growler

Gone for a week of Labrador chaperoning in Central Oregon, I managed to mostly stay away from beer destinations in the area. Not such a bad thing, honestly. Each day my email inbox filled with messages deserving comment. But I had no time. Until now.

You certainly know of the Oregon Beer Growler, the beer-centric publication founded in 2012 that covers our beer scene. Last week came news that the OBG has been acquired by News Register Publishing of McMinnville, a family-owned firm with roots in the area dating to 1866.

In a press release sent to "past and prospective clients and distribution points," president and publisher, Jeb Bladine, announced acquisition of the Beer Growler's name and publishing rights from founder Gail Oberst and owner Will Oberst (Gail's son).

I do not know the circumstances surrounding the sale of the Beer Growler. Was it sold because it was doing well or because it wasn't? Inquiring minds wonder, but that's not the sort of information you're apt to find in a press release happily announcing an acquisition. Particularly if the news is bad.

Bladine said they hope to retain the services of some of the OBG's "favorite contributors." Continuity is a good strategy, for sure, and it will be a neat trick to swing given the Growler hasn't been paying staff or freelance contributors in recent times. Perhaps things were not going so well.

I've discussed the reality of beer writing here in the past. My experience is that beer-centric publications are slow to pay. I've had national magazines fail to pay for articles for months after publication. I suspect there's such a large pool of competing writers that publishers aren't worried about timely payment. It's a good reason to avoid this type of work as a vocation.

You might say the Beer Growler took the slow pay thinking to a new level by not paying at all. They did so without notice. I know because I wrote an article for a recent issue. There typically aren't contracts with this kind of writing. You pitch an article and an editor accepts (or rejects) it at an agreed upon rate, which is pretty low in the case of the Growler. In this case, I later learned they weren't paying right now. Other contributors confirmed they were months behind.

Word is, the News Register folks are assuming no responsibility for the debt of the previous owners. Which means Mr. Oberst is stuck with past bills. Regular contributors and staff who continue on with the magazine will probably be compensated for past work. Others may well be out of luck, although there's been no formal announcement along those lines.

My own view is the Beer Growler has evolved and is better today than it was four years ago. Editor Andi Prewitt does a nice job procuring and managing good content. I know she's excited to work with the News Register folks, who have prior experience in this area, having produced the Oregon Wine Press for the past decade.

I'm not sure we need more beer publications here. Virtually every print outlet in the area has jumped on the craft beer bandwagon, often with less than stellar competence. But I hope things work out for the new Beer Growler, that they continue to evolve and improve. Paying contributors and staff in a timely manner would be a nice start.