The theme: An international brewing conglomerate famous for watery beers that are losing market share buys an American craft brewer. If it’s not a brewing conglomerate, it’s a private equity firm. Big Money rules. And valuations of craft brewers have soared.
It’s a dream come true for founders, early investors, and some employees. It’s American entrepreneurialism. Guts, grit, years of hard work, luck, stick-to-itiveness, Yankee marketing, and a passion to produce the best suddenly turn into mega-dollars.
The response from beer lovers has been something close to revulsion: How could they sell out?
Now it happened to me. I love IPAs (India Pale Ales) for their complex hoppy flavors. They’re perfect when you’re just sitting there, ruminating about the rigged markets. They’re perfect with food. They’re particularly perfect with a good steak.
So today, Lagunitas Brewing Company announced that it too sold out.
The original brewery is in Petaluma, Sonoma County, about 40 miles north of San Francisco. They brew all kinds of beers, but the one that ranks on my list of favorites is their IPA.
And they’ve done an excellent job marketing the IPA. It’s broadly distributed in Bay Area grocery stores, bars, and restaurants. I drank my first Lagunitas IPA a decade ago on a ferry across the Bay. Today, our local Costco even carries it. And Lagunitas has become the sixth largest craft brewer in the US.
Four years of drought in California have been hard on the water-intensive brewing business. So it just opened a second brewery in Chicago, which has plenty of water. Both breweries combined have a capacity of 1.2 million barrels. These folks have done a lot of things right for a long time, beyond brewing beer.
And today came the payoff.
Heineken International, the world’s third-largest brewing conglomerate, is buying a 50% stake. Even in its press release, Lagunitas couldn’t curtail its irreverent manner: its hometown turned into “PETAFUKINLUMA.”
After an immense acquisition spree, Heineken shines with stagnant revenues. But it has breweries around the world – “180 of those buggers everywhere,” as the press release put it. So it’s finally trying to buy into the only vibrant sector of the otherwise morose US beer market.
American craft brewers are a phenomenal growth story, going from one craft brewer in the 1970s to some 3,200 last year, including brew pubs and microbrewers, according to the Brewers Association. Sales rocket higher at double-digit rates year after year – nearly 18% last year to $19.6 billion – in a market where per-capita beer consumption has been declining for decades.
The press release didn’t disclose the financial terms of the deal. But The Press Democrat reported that, “according to people familiar with recent acquisitions in the craft beer industry,” Lagunitas’ valuation would be about $1 billion.
Founder and executive chairman Tony Magee explained that the deal would allow him “to return some money to my shareholders who have displayed the patience of Job while letting me run the company in the way and the directions that we felt were most important.” They invested from 1999 to 2001 and weren’t “big money guys,” he told The Press Democrat, but people he knew, including a veterinarian, a dentist, a retired Navy chaplain, a police officer, and a retired school teacher.
For them, this is a great day. It’s hard to have your money stuck in illiquid shares. Countless craft brewers have gone out of business, taking their investors’ moolah with them. It’s tough out there. Brewing a great beer isn’t nearly enough. Competition is fierce, barriers to entry small. The risks are huge. And so should be the eventual rewards for the lucky ones.
It’s by no means a sell-out, Magee emphasized. “What thrills me? The idea of taking this name Lagunitas, the flavors of the IPA and our other beers, and presenting them to other communities around the world. That’s exciting.”
This deal follows numerous other deals.
Firestone Walker Brewing Company in Paso Robles, CA, recently sold a stake to Belgian brewer Duvel Moortgat. Duvel already acquired Kansas City’s Boulevard Brewing Co. two years ago; and Ommegang in Cooperstown, NY, in 2003.
Oskar Blues Brewery sold a majority stake to PE firm Fireman Capital Partners in May. SweetWater Brewing in Atlanta sold a stake to PE firm TSG Consumer Partners. Unita Brewing in Utah sold a majority stake to PE firm The Riverside Company. Southern Tier Brewing in upstate New York sold a stake to Ulysses Management. Full Sail Brewing in Oregon was acquired by an investment group formed by San Francisco PE firm Encore Consumer Capital….
PE firms don’t do this for the long haul. They’re looking for an exit either via IPO, or more likely via a sale to a brewing conglomerate.
The most infamous deal – because it triggered a mini-revolt – was when 10 Barrel Brewing Co. in Bend, OR, was acquired by the world’s largest brewing conglomerate, Anheuser-Busch InBev whose Budweiser sales, among others, have hit the skids. In total, InBev has recently bought four US craft brewers.
Lagunitas tried to reassure its nervous beer lovers.
The press release promised that the joint venture would “operate independently in the US, maintaining the integrity of its brews and culture.” Magee would “remain at the helm, with the same leadership and staff, same brewers, same recipes and same suppliers and distributors helping to drive the brand forward.” Nothing would change, not for the moment at least. Which is what they all say.
And it’s good for everyone: Lagunitas will get access to the world markets via Heineken’s distribution network; and Heineken will get “the opportunity to build a strong foothold in the dynamic Craft Brewing category on a global scale.”
There was only a tiny reference to the Heineken-izing process that will eventually set in: Lagunitas would “share in the best quality processes in the world….”
In these kinds of deals, most often, founders and executives who have done such an awesome job starting the company and ramping it up to size, and who have rewarded their investors lavishly, eventually move on to the next great thing.
But once a brewing conglomerate creates a global brand out of a craft brew, the exigencies of markets and money, of shareholders and bondholders, begin to exert their influence. Corporate cost cutters step in. Cheaper varieties of hop will eventually make their way into the IPA. To reduce the delicious hoppy bitterness that turns off Heineken or Dos Equis drinkers, and to make the beer more of a mass-market product, some ingenious marketing-guru VP might even get the company to whittle down the amount of hop in the recipe.
By then, I will have moved on to other wonderful creations of the amazing craft brew scene.
Processes will be improved. Efficiencies and synergies will be obtained by combining certain elements with existing corporate structures. This is all part of the American craft brew revolution. And in the end, Lagunitas, the brand, may well thrive, but the beer will be Heineken-ized.
This is what has happened with another local brand. It only took three years. Read… Starbucks Machinery Lurches Forward, Runs Over My Croissant