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Monday, April 22, 2019

Constellation's Billion Dollar Boondoggle

A lot of eyebrows were raised in 2015, when Constellation Brands ponied up a $1 billion to buy Ballast Point. The price amounted to $3,500 per finished barrel, about $2,000 per barrel more than other buyouts of that era.

Still, the craft beer world had a heady mindset in 2015. Volume had grown steadily from 6 percent in 2008 to 18 percent in 2014. The industry was on a roll with no apparent end in sight. Ballast Point had itself been growing nicely and expected more of the same.

The thinking at Constellation was that craft beer's 11 percent share of the overall beer market would expand further as mass market lagers lost market share. They wanted a piece of the craft market, feared not having one, in fact. Ballast Point, which possessed a broad portfolio, was distributed in more than 30 states and had a small number of pubs, looked like a perfect partner.

Of course, we now know it was all a big miscalculation. Constellation last week announced that it will close two Ballast Point facilities in Southern California and drop a plan to open a brewpub in San Francisco's Mission Bay neighborhood, where the Golden State Warriors will soon have a venue. Sales positions in the South and Midwest will be eliminated, apparently.

In fact, things had been going poorly for a while. Production (which was approximately 280,000 barrels when Ballast Point was sold in 2015) peaked at about 403,000 barrels in 2016, then dropped to 377,000 in 2017. Off-premise sales declined 3.4 percent in 2018, according to IRI data published in Brewbound.

There's more. Constellation recorded an $87 million impairment charge to the Ballast Point brand in June 2017, effectively admitting it overpaid. It recorded an additional $108 million impairment charge just two weeks ago, more evidence that the Ballast Point purchase price was a major boner.

Never say never, but there appears to be little possibility that the Ballast Point experiment will ever pan out, though Constellation continues to push forward. Craft beer volume growth slowed to 12 percent in 2015 and has continued a downward slide since. Growth dipped to 4 percent in 2017 and 2018, representing the lowest rate in 20 years.

Where that growth is occurring is a major harbinger of concern for the likes of Ballast Point. The Brewers Association recently reported that more than 50 percent of craft volume growth in 2018 belonged to breweries that opened within the last three years. Breweries that opened in 2014 or earlier (Ballast Point dates to 1996) accounted for less than 1 percent of growth. Yikes.

The operative question, given the obvious realities, is this: How did Constellation, a successful organization that markets Corona, Modelo and Pacifico, flub so badly in the case of Ballast Point?

The answer, it seems to me, is they assumed large craft breweries would be the main beneficiary of the collapse of mass market lagers. They wanted to be positioned to take advantage of that scenario. Half of what they expected to happen actually has happened...mass market lagers have continued their decline.

What they did not predict, what has been a thorn in the side of Ballast Point and virtually every big craft brand, is the extent to which several thousand new, small, local breweries would attain a position of power in the market. But that's what happened. Craft beer, to a large degree, has become a local commodity, as opposed to a regional or national one.

Plenty of people will happily tell you they knew Constellation overpaid for Ballast Point. Fine. But I wonder how many of those folks believed the explosion of small, local breweries would wind up being a crucial factor. Few saw that coming, I think.

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