Third and final craft deal in this issue alone: family behind longtime AB, craft, import and non-alc wholesaler in San Jose, CA has come back to beer, picking up a 15% stake in Gordon Biersch production brewery. Founders of ME Fox & Co embraced biz outside of core AB volume early on. Now those folks, Terence Fox (who also spent time as veep at NorCal distrib DBI Bev) and father Michael Fox Sr, led round of new capital-raise by Gordon Biersch. Terence to take active role on board, co announced, partnering with CEO and brewer Dan Gordon. Investment targeted at installing new 250-per-minute Krones can line, due to be commissioned this fall. Almost 90% of Gordon Biersch facility’s volume already in contract production and partners hope new high-end can line will help it become a go-to resource for additional craft beer and non-alc partners. “California’s craft beer segment has been held back by the high costs for expansion due to our State’s tough employment laws, real estate prices and labor costs,” Terence said in statement. “Our family recognized the emerging opportunity to invest in a great brewer like Dan Gordon and a brewery that has the ability to offer a cost effective, turn key solution to the beer industry on the West Coast.” Co looking to get Gordon Biersch “back to growth,” too.

Folks at Nielsen put finer point to supposition that craft segment as a whole has had a tougher time recruiting new drinkers over last year or two during BA Power Hour yesterday. When looking at the number of households buying craft, the frequency they’re buying it and how much they’re spending when they do, two of those numbers ticked up modestly last yr, Nielsen’s Caitlyn Battaglia shared. Craft households were “purchasing more frequently” with a “larger purchase size,” Nielsen found. But the number of households themselves? Stagnant.

Perhaps that’s why, in concluding the presentation, she offered that “one piece” of elevating the beer category in general will be “reaching new audiences.” Facing current beer (and craft) headwinds means brewers must look “beyond the communities you’re typically working with,” Caitlyn offered. That can be done especially effectively with events, creating “experiences” that “bring drinking to something that has the upside effect of...creating memories.”

This is particularly crucial at a time when a growing number of consumers “are making mindful decisions” about food and drink especially. About “two-thirds of consumers want to know everything that’s in their food,” senior veep of bev alc at Nielsen Danny Brager noted. Then too, almost 2/3 of 21-34 yr olds expressed “strong” or “moderate effort” to reduce their drinking, he shared, highlighting results of an early-2019 Harris Poll. That’s true for over half of all beer drinkers. (As always, surveys aren’t the best measure of how much people actually drink, just what they say they drink or say they plan to drink, as Danny reminded.)

Look to some on-premise stats for examples of how folks are perhaps accomplishing those goals. Just 30% of consumers say they’re headed out on a weekly basis to drink, according to a Nielsen CGA poll in fall of 2018, that outfit’s Matt Compton said. That’s down 4 points since the spring of 2016, while the portion of folks going out to eat weekly grew 4 pts from 67% to 71% over the same period. And notably, less than half of 21-24 yr olds now say they’re drinking out on a weekly basis, 12 pts lower than the 57% of 25-34 yr olds. The eating-out numbers are much closer at 79% vs 83%, Matt pointed out.

Biggest symbol of fortunes paid for some craft brewers just a few short yrs ago remains Ballast Point, which Constellation acquired for a whopping $1 bil in late 2015. But even while Constellation biggest winner overall in US beer, this acquisition hasn’t gone as planned. Constellation took a $108-mil “impairment charge” on Ballast Point, CFO David Klein said yesterday on its quarterly conference call. Again, that followed a previous $87-mil charge. So Ballast Point has taken almost $200 mil in impairment charges. That’s far more than vast majority of craft brewers who sold ever got for their business.

After strong growth in 2016, the first year after Constellation bought Ballast Point, it lost over a quarter of its volume last 2 yrs. Volume down 95K bbls, 26% from 2016 peak of 370K bbls. What’s more, Ballast Point $$ sales down 19% in IRI MULC yr-to-date thru 3/24. Constellation saw craft as important avenue of growth to supplement its Mexican import portfolio. But craft dynamics changed radically. And even with 2 additional smaller acquisitions, Funky Buddha and Four Corners, craft remains a tiny part of Constellation’s overall robust biz.

From Constellation’s perspective, the Ballast “investment has not met expectations as the craft marketplace has slowed since our acquisition,” David understated. But “it has increased our leadership position in the high-end of US beer, and provided us an innovation and operating platform in the craft and specialty category to contribute to future growth.”

Amidst deep dive in “surging” FMB growth today, Goldman Sachs analyst Judy Hong downgraded Boston Beer to “sell” position from “neutral.” She sees “headwinds in 2019 as competition intensifies and the company is unlikely to repeat its innovation success again this year.” Specifically, she projects Boston growth to slow to +6.6% in 2019, 6% in 2020, down from previous estimates of +8.2% and +6.7%. That reflects “slower growth from Twisted Tea and resumption of declines for Angry Orchard starting in” Q2 this yr.

While Judy negative on “core” beer prospects in US (continuing downtrend of 4% or so), and she expects craft segment to slow to 0.6% growth in 2019, she’s bullish as hell on FMBs. Judy pegs FMBs at 5 share now, after double-digit growth in 2018. Expects segment growth to accelerate to +18.5% in 2019, gaining another full share, 11.5% growth in 2020, with FMBs reaching 7 share by 2022. FMBs, she sez, “resonate well” with consumers given their interest in flavors, “health and wellness positioning” for some brands and convenience of cans. Distribs and retailers like FMB margins, given higher price points, and their higher velocity than leading craft brands, “a very favorable combination, in our view.”

Including cider with FMBs, Boston has 21 share of segment, she estimates, approx double ABI, near double MC. “SAM should still benefit from the strong growth of Truly in 2019 and 2020 (we estimate 106% growth in Truly for 2019 and 50% in 2020) but its overall FMB growth could slow,” given moderation in Twisted Tea trend, and Angry Orchard has “resumed its volume decline.” Net-net, while Boston expected to grow share of FMB/cider to 24 over next 3 yrs, “we expect FMB plus cider volume growth to slow to 16% this year, from 26% last year.” Boston prospects could brighten, in Judy’s eyes, if this yr’s innovations in hard kombucha and tea “gain significant traction,” beer trends improve or Truly growth better than expected.

Inventory build in Q1 could really boost Boston’s shipments, Judy points out, possibly to as much as +30%, but that will reverse later in yr. Boston suffered margin pressure last yr from big growth, Judy reminds. Some of that should “reverse” this yr as Boston brings more production in-house, but “slower volume growth may mean less gross margin upside,” and more Truly growth could push more production to 3d parties. So, she sees “only modest gross margin expansion of 20 bps in 2019.” And, while freight cost inflation likely to moderate this yr, Boston brand investments will rise. That will “limit” EBIT margin improvement. SAM stock price dipped 7% at presstime. Judy expects further contraction, with 12-mo price target of $245. It closed at $284 on Apr 4.

A large part of the growth in the beer category ain’t exactly comin’ from traditional beer, in case anyone’s just tuning in. Nielsen underscored that point several times during BA Power Hour yesterday. For instance: 8 of top-15 growth brands in Nielsen off-premise come from Flavored Malt Bev (FMB), hard seltzer, hard tea, cider or flavored beer (sub-) segments. Yet, these fast-growing styles still “pretty small,” Nielsen bev alc veep Danelle Kosmal said. Cider and hard seltzer each about 1.3 share of $$ off-premise last yr, with gluten-free beer and hard tea each a little smaller at about 1 share. Non-alc beer just a tiny 0.3 share, while alcoholic kombucha and hemp beer just 0.02 share of “beer” $$.

That hasn’t stopped umpteen more entrants in these and other spaces. “Beverages beyond beer are not to be underestimated,” Caitlyn Battaglia shared to sum up 2018 beer biz learnings. They’re a source of strong growth, but “more important, they’re a source of inspiration.” No wonder: the non-alc versions of these bevs made huge inroads in Nielsen off-premise scans over last 5 yrs. Non-alcs in general gained $7 bil in sales since 2014, bev alc sr veep Danny Brager pointed out, vs $3 bil for beer. Seltzers and sparkling waters up by over $1 bil in that time with compound annual growth rate (CAGR, basically avg growth per yr) of 11.7%. RTD coffee up not quite a billion in sales since 2014 with CAGR of +9%. Lactose-reduced/free milk averaging 12% gain in last few yrs, while kombucha and probiotic bevs got 35% CAGR, Danny showed. And as brewer after brewer points out when announcing explorations in these areas, interest in “health and wellness” is major driver of consumer trends here, he acknowledged. (See below.)

Folks at Nielsen’s bev alc practice didn’t shy away from sharing tuff trends for total beer biz and craft segment during Brewers Assn Power Hour presentation yesterday. Beer losing share to wine and spirits (and more), and total Nielsen craft finished calendar yr 2018 down just slightly by both $$ and volume, bev alc veep Danelle Kosmal shared. It “was the first year that we saw that broader definition of craft” decline. That said, BA-defined craft up just slightly.

Driving that growth: small and local. Just 2 of top-10 craft brands grew last yr in Nielsen off-premise data. Actually worse than total beer biz (3 of top-10 up). That’s Sam Seasonal (which recall had easy Spring comp), +2.7%, and Founders All Day IPA, +25.4%. Lagunitas IPA and Shiner Bock each off a couple points, but other craft flagships down steeper: Sierra Pale -6.7%, Boston Lager -18.8%, Fat Tire -14.7% in Nielsen off-premise.

But “local” is “outperforming,” Nielsen’s Caitlyn Battaglia pointed out. She separated out craft brands with “85% or more of their volume sold in their home state” or just one retailer. Those brands (comparatively) killin’ it. Collectively up 6.8% for 52 wks to March 9. Compare to 2.2% decline for rest of craft. That suggests this version of “local” only 10-11 share of craft $$ during this period.

Caitlyn also pointed out an “inflection point” near the end of 2016, when trends for BA-defined indie craft and total craft category, as Nielsen defines it, started to diverge on a rolling 52-wk basis. Those trends essentially identical between Nov 2015 and mid-Aug 2016. From then on, both sets of craft trends continued to slow, but total Nielsen craft slowed at steeper rate, and crossed into negative territory last Jan, while BA craft (again) stayed just positive. Recall, total Nielsen craft weighed down by declines for both Blue Moon, Shock Top and Leinenkugel shandies.

Folks looking for growth in craft should look to “the number of breweries and the small, service-focused portion of the craft segment,” Brewers Assn economist Bart Watson advised in latest members-only post. To whit, over 1,000 new breweries opened in the US in 2018, the BA counted. Second straight yr with at least that many openings, Bart pointed out. And at-the-brewery sales jumped another 400,000 bbls, about 15% to range of 3-3.1 mil bbls, Bart estimated. A precise number remains “tough to pin down,” he acknowledges, but a couple of different ways to go about it all point to similar 3.1-mil bbls figure for BA-defined craft. (So likely that total on-site brewery sales, including brewers that don’t fit BA craft def’n likely in range of 3.15-3.25 mil bbls, we estimate.)

Smallest BA craft brewers, microbreweries (under 15K bbls in 2018), getting big chunk of that growth and biggest chunk of BA craft volume growth overall. Micros got 80% of craft’s gain last yr. And whether under 1,000 bbls or over 5,000 bbls, more of their biz done directly on site in taprooms. Tracking share of production sold thru taprooms by brewery volume, on-site sales passed 60 share of volume produced by micros under 1,000 bbls in 2018. That’s up 6 pts from under 57% of their biz in 2016. At-the-brewery sales now over a quarter of volume for micros between 1K and 5K bbls last yr, up from just over 20% 2 yrs ago. And for “largest” micros, 5-15K bbls, just over 12% if their volume sold on site, up from 10% in 2016. All in, Bart counts over 4,500 microbreweries in US last yr, as this (often tiny) brewery model continues to gain steam and more brewery entrepreneurs carve out niches for this type of biz in more and more markets all over US.

Worth remembering, as always: “75 percent of the breweries in the country make less than 1,000 barrels,” Bart points out. (Maybe take a moment to just read that sentence again.) Recall, the BA tracked 7,346 operating US breweries last yr. So we’re talking over 5,500 breweries that at most produce a total of 5.5 mil bbls, but probably less than half that. That includes a good number of brewpubs too. BA counted near 2,600 brewpubs of all sizes last yr, collectively up about 13%, getting 20% of total craft growth. To reiterate points in lead article above, that leaves no growth for the largest craft brewers, regionals (>15K bbls), which were collectively flat last yr. Regionals over 60K bbls sold just over 1% of their volume at their taprooms last yr, Bart shares. That’s up slightly as a share of their biz, suggesting taprooms by and large healthier than 99% of the rest of their biz. Regionals 15-60K bbls (again, up 9% last yr), sold just over 7% of their volume at their breweries, up from just under 6% in each of last 2 yrs.

Here comes another craft coalition, hoping to pull together an array of breweries to share resources and strategy, better navigate complex times in the segment. PacNW’s Ninkasi is first brewery “hub” of new Legacy Breweries platform, co-founder Nikos Ridge told Craft Brew News. Co sold majority stake to Legacy, tho Nikos, co-founder Jamie Floyd and other early investors retain a “significant minority,” Nikos confirmed.

This deal “facilitated in part by the flexible financial model of EPR,” Nikos told us, referring to third major party in deal, EPR Properties. It’s a publicly-traded real estate investment trust, offering “financing solutions” to wide array of bizzes, it sez on its website. EPR essentially provides “another type of capital” with a “long-term vision” that differs from a traditional private equity firm, for instance, Nikos shared. EPR has $6.8 bil invested in almost 400 locations, according to its website. Co touts numerous entertainment/recreation properties as its partners, including Alamo Drafthouse, AMC Cinemas in Columbia, MD, Punch Bowl Social food/drinking/entertainment sites, TopGolf indoor golfing locations in TX and OK, and Pacific Park amusement park in Santa Monica, CA. It’s heading to next week’s Craft Brewers Conference in Denver, encouraging brewers to set up meetings “to learn more about the partnership and how we can work with your brewery,” according to advertisement that first announced “strategic partnership” with Ninkasi and Legacy, distributed via Brewbound Newsletter ahead of more extensive Brewbound report (linked above).

Ninkasi PacNW “Hub” in Legacy’s “Hub-and-Spoke” Model At this point, Legacy Breweries team a 2-person outfit, Nikos explained to us, led by CEO and strategist, Don Bryant, and sales/mktg specialist Terry Vandever. Terry relocating to Eugene to work inside Ninkasi offices, Nikos told us, while Don works on “furthering the discussion with other partners.” Don’s been around craft beer biz for some time, took over as CEO of Yakima Chief Hops after it merged with Hopunion, which he led since 2009. Before that he spent over 4 yrs with Mark Anthony Group (owner of Mike’s Hard) as sales and trade mktg veep, according to his LinkedIn profile. Terry also worked at Mike’s Hard for 7 yrs as natl director of strategic accts, per his LinkedIn, but has run beer-focused sales strategy consultantcy out of Georgia since 2012.

Nikos and co have had a “long evolving discussion” with Don about Legacy platform for almost a year and a half, he estimated, citing a “similar vision.” That involves basic “hub and spoke” strategy, where breweries like Ninkasi function as production, admin “hub” in specific geographies. Ninkasi “built a lot of capabilities from a people and a facility standpoint,” Nikos explained, allowing it to offer those capabilities to smaller brands. “There have been a lot of discussions that have already taken place” with other potential partners, at varying degrees of seriousness, he told us. But the “Ninkasi activation and partnership really opens up tailoring those partnerships in a way” it couldn’t before that deal public. To effectively pitch the plan to potential “spokes,” you “need the anchor, core brewing partner,” Nikos said. “That piece is done” now. At least in the PacNW. Legacy also hoping to replicate hub-and-spoke model “in other parts of the country,” too. So stay tuned.

Ninkasi Flat in Q1, Expanding On Cans After Down Slightly in 2018; “Sizeable” Restaurant So far this yr, Ninkasi volume running “flat to 2018,” Nikos shared. But it’s “on goal for 2019,” he said, looking at some “new distribution” going into the fall “reset cycle,” largely with more can packages. Last yr, co’s shipments finished down 1.5%, depletions off slightly steeper. But it was down in the first half, up in the second, after launching “cans for the first time.” And it’s already upgrading its canning line, natch, which should “help in this platform,” he pointed out. Co also “put in a new innovation brewhouse,” currently operating 5-, 50- and 90-bbl brewhouses at its Eugene, OR base. But Ninkasi also has big new project there, using “pretty sizeable space” to open up on-site restaurant. Space in admin building occupies a couple floors, once generally used for special events, as well as “big patio,” Nikos noted.

“Ultimately, our project in Berlin turned out to be a bit too aggressively big and bold, and a little too far from home, for Stone to continue to operate,” Stone Brewing co-founder/chairman Greg Koch told the Morning Advertiser in the UK, acknowledging that co sold the German site it opened in 2016 to BrewDog. “Too big, too bold, too soon,” the co reiterated in title of blog post penned by Greg, saying “farewell.” Stone “invested a significant portion of a decade and significant millions building Stone Berlin,” he wrote. “And it didn’t work out.” Co did begin brewing there, shipping its beers across Europe. It doesn’t plan to pull out of 26 countries where it’s currently available, Greg underscores.

The co needs dough. Recall, it sold stake to private equity firm VMG Partners, also in 2016, CEO Dominic Engels confirmed at our Spring Conference last May (see vol 9, no 48). Tho $90-mil fund acknowledged at the time ostensibly set out to establish “True Craft” platform designed to acquire and support small brewers. But no deals emerged. In meantime, Stone continued to grow overall, up over 50K bbls in last 2 yrs. But up just 3% last yr to 400K bbls, despite off-premise trends at about twice that pace. At same time it built Berlin, it also built large new facility in Richmond, VA, started project on Napa hotel and more. Co looking into numerous options to sell pieces of itself, CBN understands. Is deal to sell Berlin to BrewDog just the first to come to fruition?

Terms of deal not disclosed. BrewDog takes over the Berlin brewery on May 1. It’ll close for some renovations before reopening in the summer, with expectation to host BrewDog’s investor meeting there later in 2019, co wrote in its own blog post. It reminds that brewery outfitted with 100 hectoliter system, plus 10 hL pilot system, plus 2500 sq-meter taproom and 5,000 sq-meters of outdoor gardens. Part of BrewDog’s plan for space is to launch “Berlin Craft Collective” using pilot brewery, basically “giving the pilot system over to the craft brewers of Berlin to help them either start their brewing journey or scaling up their business.” Beers made there by other brewers will be able to be put on tap at BrewDog’s Berlin bar (opened in 2017) and coming Hamburg location.