The King of Crap

Anheuser-Busch isn't a craft beer company. It's famous mostly for brewing up swill that's barely fit for consumption and conjuring up brands that have shelf lives of roughly a nanosecond. Ironically, now comes news that AB is on the verge of becoming the king of craft beer.

That news was reported most prominently by Josh Noel in the Chicago Tribune. Noel, you may recall, is the author of "Barrel-Aged Stout and Selling Out," released earlier this summer. The book explores the transformation of Goose Island Brewing to Gooseweiser. It's great reading and recommended.

The heart of the king of craft story is that industry newsletter Beer Marketer’s Insights just reported that AB surpassed Boston Beer and Sierra Nevada in 2018 to become the nation’s top craft beer company in dollar sales. It's a fairly shocking development because AB had no presence in the craft beer space as recently as 10 years ago. Now this.

There's a catch, though. AB's standing is based on IRI data, which tracks sales in grocery, big box, drug and convenience stores. If you factor in draft and liquor store sales, Boston Beer is still ahead of Anheuser-Busch in volume and dollar sales. But the changing of the guard is inevitable and will happen in the next year or so, evidently.

Anheuser-Busch obviously didn't put itself in the position it's in via organic growth. These dunces made countless attempts to enter the craft space over the years and the best they could come up with was the dreadful Shock Top. Culturally, AB's mantra has always been to brew tepid sludge and shove it down consumer throats by way of its massive distribution network and hard core advertising.

Instead of continuing to pursue a failed strategy, AB changed course and started buying up craft breweries, the first of which was Goose Island in 2011. Today, they have 10 former craft breweries more or less scattered around the country, including Wicked Weed, 10 Barrel, Devil's Backbone, Elysian, Golden Road, Four Peaks, Breckenridge, Karbach and Blue Point.

As documented in Noel's book, the acquisition of Goose Island did not get off to a promising start. Anheuser-Busch had been absorbed by InBev prior to the buyout and the Brazilians running the show had no idea how to manage a craft brewery. They bungled marketing efforts, bullied employees and made a mess of things.

But Goose Island provided a nice learning platform. As Anheuser-Busch bought more craft breweries, its experience at Goose was significant. Lo and behold, it turned out the Brazilians were pretty good learners. They've modified and refined their approach with the acquired brands. To a significant extent, they actually know what they're doing now.

Many were skeptical of what would happen with the acquisitions. But the strategy has been a huge success. The acquired brands continue to act like local and regional players close to home, while some of their most marketable brands are brewed in giant factory breweries and peddled via the AB network in remote markets, helping make up for disastrous declines of Bud and Bud Light.

One of the reasons the strategy has been such a big success is a lack of transparency on the part of Anheuser-Busch and a lack of knowledge on the part of consumers. People who buy their beer in grocery and convenience stores typically don't have as much brand knowledge as folks who frequent beer bars and related craft beer outlets. AB does nothing to help with honest labeling.

Hoping to make it easier for consumers to identify independent beer, the Brewers Association, a trade group representing independent brewers, last summer unveiled a logo that signifies independent status. Adopted by more than 3,600 breweries, the logo isn't available to the Baby Buds or breweries that have been acquired by Constellation, MillerCoors or Heineken.

There are differing opinions on the threat posed by AB's impending dominance of the craft segment. Some highly knowledgeable people in and around the industry have no problem with the Anheuser-Busch game plan, which includes brewing some of the former craft beers in giant factory breweries and using mafia-like distribution tactics to bully retailers and independent brewers.

Needless to say, I do have a problem with AB's strategy. Don't get caught up in the local strategy, in which a brewery, such as Portland's 10 Barrel, makes great beer. That's a diversion. The larger plan is to attain a position of dominance nationally with factory-made beer and strong-armed distribution tactics. Once that's accomplished, the former craft beers will be dumbed down further.

The fact is, the people at AB have never given a shit about good beer. They care only about money. And they'd like to get back to collecting that money with the tasteless swill they're so famous for. Anheuser-Busch truly is the King of Crap, not craft.

Shock and Awe in Craft Beer

Last week was not a great one for craft beer industry news. Despite all the good stuff going on, it does occasionally seem like the industry is under siege. Things figure to get more complicated and convoluted as we move forward. We aren't in Kansas anymore, Toto.

Wicked Weed
The first bad news was the sale of North Carolina-based Wicked Weed to Anheuser-Busch. Some, (I include myself), assumed the big boys would stay fairly quiet on the acquisition front after MegaBrew was finalized and given apparent volatility in the industry. Not so.

Wicked Weed is evidently a bit of an odd duck. They've grown fast since opening in 2012 and expect to produce 40,000 barrels this year. They package 85 or so beers annually and their flagship is an IPA (Pernicious), But sours make up 40 percent of their dollar sales. Yup.

Wicked does something like 35 percent of its sales in North Carolina, and also distributes to a handful of other states, including Georgia, Massachusetts, Colorado and parts of Texas. They will certainly expand that footprint as they extend capacity and gradually get immersed in the AB network.

There's a bit of an alignment smash-up coming, say industry sources. It turns out most of Wicked Weed's distribution network, including in North Carolina, is non-AB. That has the makings of a nice little disaster as AB works to align Wicked with its network. Good stuff.

Heineken and Lagunitas
The announcement that Heineken has fully acquired Lagunitas wasn't a huge surprise. Things have evidently gone pretty well since Heineken became 50 percent owner in the company back in 2015. This is the consummation of that momentum.

When considering the deal, it pays to ignore anything Lagunitas founder Tony Magee says or has said. When the original deal was announced two years ago, Magee said he would never sell the whole company to Heineken. So much for that. And Magee's credibility.

The new arrangement is mainly an international play. According to industry sources, Lagunitas will continue to operate as a separate business entity in the US. Magee will stay on as head of the company and will serve in an advisory role on Heineken's global team.

What's going to happen is Heineken will ramp up the expansion of Lagunitas into new markets around the world. That business has grown dramatically during the past year and has huge untapped potential. That's what motivated Heineken to pull the trigger on full acquisition.

Some craft beer geeks won't look at Lagunitas quite the same going forward. But the reality is, Heineken isn't in the same league as Anheuser-Busch, particularly in the US. It doesn't operate a vast distribution network here or have a collection of craft breweries. No comparison, really.

Craft Brew Alliance
Our friends at the Portland-based Craft Brew Alliance announced their Q1 results late last week. There was good and bad news.

The good news is that Kona was up 14 percent for the quarter, and continues to drag the company forward. CEO Andy Thomas also said Widmer is growing again in its home market, though overall shipments of both Widmer and Redhook were down.

The biggest bombshell was news that the agreement with Pabst to contract brew and eventually purchase the Woodinville brewery has been terminated. That means the brewery will close and be put up for sale within a couple of months.

Realistically, there wasn't much of a chance the purchase was ever going to happen. It's an antiquated brewery and was/is overvalued on the CBA balance sheet. Selling it will be a chore because the buyer, assuming one steps up, will also have to invest in making the place usable.

Of course, Pabst's position has become tenuous. It brewed mostly Rainier Mountain Ale in Woodinville. But the launch of that brand was botched out of the gate and expected volumes never materialized. Brewing capacity wasn't being used. Then Pabst got itself ensnared in lawsuits over distributor terminations (covered here last week) in Washington. A nice little mess.

The Woodinville closure means more CBA employees will be laid off or re-purposed within the company. Reports put the number at about a dozen. That's on top of the 15-20 who were laid off last year due to lower than expected Pabst volumes and declining production of CBA brands there.

In fact, most of the CBA's Woodinville production moved to the more efficient brewery in Portland. That rush to efficiency and greater profits is a slipper slope. The CBA will soon move some production to AB's Fort Collins plant to improve efficiency. That will mainly affect City Brewing in Memphis, but a reliable source tells me layoffs in Portland are imminent. We shall see.

On the heels of the CBA's Q1 report and the sale of Wicked Weed, there was renewed speculation on the possibility of AB completing a full purchase of the CBA. As noted above, the Wicked Weed sale has some people thinking more deals are in the wind. And maybe they are. Or not.

As discussed here numerous times, Anheuser-Busch covets Kona, but has no interest in Widmer or Redhook. It's hard to imagine a scenario in which the CBA strips Kona from its portfolio and sells it to AB separately. So it looks to me like the CBA will at some point be purchased and become a subsidiary of Anheuser-Busch, with Kona as the crown jewel.

Motivating Factors
For those who want a better understanding of craft brewery acquisitions, there was a fine article exploring that topic last week. Author Chris Herron suggests the primary motivation has more to do with preserving macro brand equity than with wanting to be in craft beer. That's vaguely at odds with what most of us have generally assumed.

Herron's article is terrific stuff and required reading. Trust me.

Messy Times for the Craft Brew Alliance

Not so long ago, the folks at the Craft Brew Alliance were all smiles. That was back in August, right after they signed an agreement with Anheuser-Busch expanding the relationship and establishing the framework of a sale. The CBA's stock price spiked to over $21 a share. High times.

Fast forward to last week. The smugness is gone. So is the hefty stock price. After a three week delay, the CBA released fourth quarter and full year earnings. The numbers aren't pretty, though there is continued good news for what has become the company's flagship brand, Kona.

Despite that fact that Kona was up bigly for the year, the full CBA portfolio was down 6 percent, declining by nearly 39K bbls. The fourth quarter was particularly unkind, as the brand family was down 13 percent. That sad number occurred partly due to the fact that wholesaler inventories were built out late last year in anticipation of the Portland brewery's temporary closure. And constricted in late 2016 due to slowing craft category growth. Still. Not good.

Kona is essentially dragging the CBA forward. It gained 13 percent (up more than 45K bbls) and reached nearly 400K total bbls in 2016. Based on those numbers, Kona is a top 10 craft brewer, according to one industry publication. It is easily the CBA's largest brand family, more than double the volume of flagging Widmer.

Indeed, the rest of the CBA portfolio appears to be in free fall. Redhook tanked, declining nearly 32 percent to 127K bbls last year, Widmer shipments dropped 15.7 percent to 148K bbls. Over the course of the past two years, Widmer and Redhook have lost 136K bbls. Omission, the CBA's (throwaway) gluten-reduced brand, dropped nearly 17 percent.

Given the stifling collapse of once proud Widmer and Redhook, the CBA doesn't have a lot of options going forward. It will certainly ride Kona's momentum for as long as it can. Part of that strategy relies on its arrangement with Anheuser-Busch, whose distribution network has helped turn Kona into a national and emerging international player.

In a press release, CEO Andy Thomas acknowledged the poor 2016 performance, but emphasized the importance of the agreements with AB and the acceleration of Kona. “Looking forward, we are excited to build on the strength of Kona, which continues to distinguish itself in an increasingly competitive category,” he wrote.

The CBA may not be in as much distress as last year's numbers suggest. Even if you take away Kona, the deal with Anheuser-Busch is going to reap significant benefits on the cost and profit sides of the ledger in coming years. The partnership may actually help insulate the CBA from imminent challenges that will be faced by many if not most large craft breweries.

Nonetheless, the distressing numbers make you wonder about the road ahead. Will the CBA be absorbed by Anheuser-Busch or remain more or less independent? Last summer's agreement, which heavily favors the CBA, makes it financially advantageous for AB to pull the trigger on full purchase sooner than later. (AB currently has about a 33 percent stake in the CBA.)

When I wrote about the situation last summer, I thought a buyout was imminent. At the time, MegaBrew was still being evaluated by the Department of Justice and AB was laying somewhat low. I figured, particularly in light of the escalating costs to AB if they didn't move soon, a buyout would happen sometime in 2017. It might still happen.

I'm guessing the collapse of Redhook and Widmer isn't a huge concern for AB. Those are tired regional brands that don't have the kind of marketing traction AB wants. Kona is the darling. It suggests a lifestyle and a place consumers want to connect with. The national and international growth of the Kona family proves that.

Kona's growing popularity adds a complicated twist to the possibility of a buyout. Anheuser-Busch has little or no interest in the CBA's declining brands. It only truly wants Kona. But the CBA can't reasonably sell Kona by itself because Kona is the only growth engine it has. Without Kona, the CBA may as well not exist.

If I had a crystal ball, I'd know which way this is going to go. I don't. But it's hard to imagine a scenario in which the CBA sells Kona separately. If a sale happens, I think AB buys the CBA as a block entity, then spins off Widmer, Redhook and the other junk brands. The other possibility is there's no sale and the CBA carries on as it is, sucking up to its mentor, Anheuser-Busch.

These are uncertain, messy times in craft beer. You do what you have to.

Paradise by Buyout Light

There's nothing like a junket to the tropics to improve mental and physical dexterity. Wishful thinking, you know. These trips are more or less a regular thing, which means I've talked about the beer scene out here on many occasions. "Out here," of course, is code for Kauai. And it's a veritable desert in beer terms.

Looking at my social media and blog feed, I can't help but be amused and annoyed by some of the reporting. There are those in the blogging and writing community who continue to pander to and coddle breweries that are wholly owned by Anheuser-Busch. They know who they are and you know which breweries I'm talking about. This isn't rocket science.

I take a dim view of buyouts and sellouts and of AB's efforts to leverage its position globally and in the United States. Not everyone agrees or cares, but I think these buyouts are bad for craft beer, whatever that is these days. Anheuser-Busch hopes to purchase enough breweries and distributors to squeeze craft beer out of the comfort zone it enjoys today.

Upon arriving in Kauai, I got a firsthand snootful of what a buyout looks like to consumers. This happened at the car rental joint. I reserved a car several months ago via a website that offers options from among all or most of the car rental vendors here. I've used this approach to rent a car here for many years. This time, we rented from Thrifty.

It was pretty apparent we were in trouble the instant we got to the rental office. There was a line of customers and only two people behind the counter. Outside, a skeleton crew prepped cars that were going back out. Nearby, folks who had checked in and were ready to go waited patiently their vehicles. And waited.

As I reached the front of the line, a gent appeared from outside the ropes and told the agent he would need another car...that the car they gave him had a mechanical problem.  The agent smiled and said he would take care of that momentarily. There were a lot of vacant stares on the faces of people waiting in line. Expectations for a positive experience took a dive.

The agent taking care of my reservation had been to Portland a year or so ago and we struck up a friendly conversation. As he was finishing things up, I discreetly asked him what the hell was going on with Thrifty. I'd rented from them before and never seen a disaster like this.

"We were bought out by Hertz," he said. "A few weeks ago, they came in and switched us to a new computer system, cut staffing and made a mess." He had told me at the start that he had to access another site to find the details of my reservation. The entire process took nearly an hour, for something that typically takes 15-20 minutes in Kauai. Not good.

Of course, there's more to the story. The Hertz buyout of Thrifty didn't just happen. It happened in 2012. But Hertz has been busy dealing with the anti-trust issues that came out of its purchase of Thrifty and Dollar. Hertz had to offload domestic locations of subsidiary Advantage. It evidently took them a while to bring the various locations into the Hertz orbit. Small favors.

In fact, only three companies–Hertz, Avis and Enterprise–control 94 percent of the car rental industry in America. Recent consolidation in the industry, including Hertz' buyout of Dollar and Thrifty, has led to dramatic price increases, as discussed here. Funny how reduced competition leads to fewer choices, higher prices and less attentive service. Huge surprise.

Could this kind of scenario occur in the beer world? Maybe not. But Anheuser-Busch's strategy of buying craft breweries and distributors is alarming. It will enable them to limit access to the market for non-AB brands while their owned "craft "brands, brewed in factory breweries, become readily available. If there's an upside, I don't see it.

Obviously, the significant question is how many people know or care about what's going on in the beer wars. Here on Kauai, I see plenty of people drinking Bud Light or similar garbage. I wonder if they know or care what that choice means. Sounds like a topic for future discussion.

Aloha