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
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I prefer Sierra Nevada pale ale but Lagunitas rocks when it comes to IPA. Got a case 1 time from Costco and drank it for months. My fave lager is Heineken as it tastes same all over the world. Anyway let’s hope Heineken does not ruin Lagunitas like InBev did with Becks. Bought 12-pack of Becks on sale for $9.99 and it tasted funny and lo and behold it was brewed in US by AB! Also bought 12-pack of Bass Ale on sale for $10.99 couple of weeks ago and it too was brewed in US. Now it has been a while since I had Bass so can’t compare it to the original Bass from UK but it tasted more like Sam Adams.
Thanks wolf street for the update on lagunitas ipa
Wolf, I feel your pain. My recommendation is to start looking for a replacement now. Think of it as a quest. You may find what you are searching for and the search itself should be fun. If you need help in your IPA quest, I expect you will be able to field a Corps of Discovery from the readers who visit this site.
Cheers
Fort Collins Colorado is home to many fine craft breweries. Limagrain Cereal Seeds also has their headquarters in Fort Collins. LCS has a high quality malting barley, Genie, that they’ve brought over to the States from Europe that is specifically bred to make beer and ales. Ironically, when they approached both Budweiser and Coors a few years back with an offer to let the big brewers test some of their European barleys they were soundly rejected. Coors’ reply was, “We don’t want any of your genetics polluting our lines.”
LCS is going full scale to supply the craft breweries with the best malting barley available. Readers may want to check them out at http://www.LimagrainCerealSeeds.com
Here in Minneapolis, we have a great selection of independent craft breweries, Surly is probably the most well known, but Schell’s is the oldest in Minnesota. Since 1860 in New Ulm, a family has been brewing the best beer in the world (OK, I may be a bit biased), and they ain’t selling out! Happy to report that I’ve got a couple bottles of Oktoberfest chilling in my fridge to enjoy with dinner tonight.
The real story here is that a company with a big budget can’t innovate a new beer. Really! All the MBAs running these companies are only good at buying innovation elsewhere not producing it internally. Even when they have a best selling product, they dilute it by producing inferior competitors, which eventually fail and bring down the money makers too. I’m glad the small brewery could cash out. I hope they take the money and make another new cool thing. Big business won’t and can’t.
Same thing with Boulevard in KC a couple of years back. They were an amazing brewery. Now I see there quality really suffering especially in their specialty/seasonal beers. Sad day for beer lovers. Lagunitas made my favorite beers as they widely distribute to the KC area. I always look forward to Hairy Eyeball, Undercover, or anything else they make that is cutting edge crazy. Alas, I’m sure they will suffer the slow corporate death, like Blvd!
Wolf, as a fellow beer lover, I couldn’t agree more. Here was my solution: I started making my own beer. Just cooked up a batch last night; it was bubbling away in the fermenter this morning.
I’ve made beer from kits that blow away some of the finest tasting craft brews I’ve ever had. Friends of mine (craft brew lovers all – I don’t hang with Coors lite drinkers) have agreed. If I can do it, anyone can. Start with the Festa Brew kits, no boiling or mixing required. You’ll love the results. After some initial investment in equipment, you’ll be saving money and drinking far better stuff than even the snobbiest craft brew aficionado.
The home brewer has an advantage even the small, artisan craft brewer can’t match (and I’m not just talking about the tax on booze, which here in Ontario is reason enough to make your own). Just like no artisan bakery could ever bake bread as good as Grandma’s, no craft brewery can brew beer that tastes as good as the stuff you make yourself. I don’t know why that is, but I suspect it is because even the smallest commercial enterprise must aim for total consistency from batch to batch. This extreme control for all variables removes the little accidental idiosyncrasies and variations which add the character and flavour to home brewed fare. This phenomenon remains true even for brewing from kits; something as simple as a slight accidental variation in fermenting room temperature can yield surprising (and delightful) results.
This is why I homebrew. If Vinny from Russian River sells out, I’m switching to Bourbon.
But same thing is happening to craft bourbons…
Thanks for reporting on this.
I have been into Eel River IPAs lately (I hope they are still indie enough, that we don’t have to worry about the beer being degraded anytime soon?) + organic.
It could have been worse Wolfman- it could have been Budweiser
The buyer
Hate to hear the news that Boulevard got bought out. When I was growing up in Omaha the big local beer was Storz Triumph. Think Genny beer in NY, or Iron City Beer in Pittsburgh. They were bought out by Grain Belt in the 70s; my Dad bought one case, and never bought another. The brand disappeared and it did not take 3 years. I wonder if any of the youngsters driving today on the Storz Expressway even know who he was or why there is a highway named after him.
Wolf,
please do an article, measuring inflation by the price of beer.
peter
I’ve been trying. But after the 5th beer – you’ve got to check quality of today’s brews v. last year’s when comparing prices – I usually can’t remember what the topic was.
I used to buy mixed cases of Dos Equis for $20 long before The Most Interesting Man appeared – he hangs out at the Man of Kent on the NY/VT line.
Then, the case price spiked to $23. Now, every case of imported beer is like $34 – this has happened over the past 4 years. I have done no research other than putting cash money in front of the cash register.
Beer is a reliable measure of inflation because it combines the cost of agricultural products; the cost of brewing (not much different than the processing costs for chemicals); the cost of bottling or “kegging”; warehousing; trucking and distribution; and retailing.
My personal experience with the price of beer is horrible – and similar to yours. Since beer is a must-have item, I have stopped lamenting what has happened to its price. Craft brews have gotten VERY expensive. That’s why everyone wants to butt into the market. The margins are big. And obviously, we – me included – are willing to pay whatever it takes to get our hands on one. And THEY know it.
BTW, I hate shopping, and I hate shopping at Costco … but they sell a case of Lagunitas for around $24. Some other brews are cheaper. I don’t know about imports. But you might want to give them a looksee. $34 a case sounds like a lot to me.
Thank you for this interesting article Wolf. One thing that I don’t quite grasp though. While reading this article I constantly thought back to the product being discussed. Beer-brewing is thousands of years of old. And it’s still the subject of new business startups and buyouts and things like that? Am I missing something or do I just not understand modern business?
You didn’t miss anything, Gary.
Big brewers have killed the taste of beer by corporatizing its production. Hence the decline in per-capita beer consumption over the past few decades. People just didn’t care to drink this stuff. This opened up a huge opportunity for resourceful small outfits that make a huge variety of beer with the best ingredients to come up with something that people love again.
Ok Wolf,
I am in Vermont now and 1,500 ft from the local “beer store”.
Your
Lagunitas IPA 6.2 12oz. 6 Pack Bottles $10.00
That is $40 per case.
http://www.craftdraughts.com/beer.html
Now, you can bring in your empty “pail” – no they call the glass jug they rent to you a “Growler” and get it filled up with tap beer.
Do the math:
Growlers Glass bottles filled with draft beer to bring home.
Northshire Sicilian Pale Ale7.5
64oz. Growler
$15.25Queen City South End Helles5.4
64oz. Growler
$12.75
Ok, let’s say $14 for a 64 oz jug.
That translates into 22 cents per oz. x 12 oz per “bottle” rate = $2.63 per bottle x 24 bottles per case = $63 on a per case rate.
I will not pay that. But, others seem to do. The beer store, after making zero money for 4 years, just started to show a profit (without my help).
I remember getting a cloth sack from the UK about 30 years ago and adding water and “making” my own beer. The pricing is so absurd – the whole thing is going to implode.
I could never justify the price of these craft brews. I do pay up for that “brewed under German purity laws” label.
Ha! Although IPA’s arent my favorite, I love Lagunitas as well – when I see one on tap often go for it. Shame. But good for the brewers, they deserve the reward.
fortunately, for me, i don’t care. and i don’t drink. brew your own!!