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Sunday, 13 September 2015 20:55

Why Greg Hall plans to sell majority stake in Virtue Cider to Anheuser-Busch’s Goose Island

Written by  Joe Boomgaard and John Wiegand
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Virtue Farms in Fennville, Mich. Virtue Farms in Fennville, Mich. COURTESY PHOTO

FENNVILLE — After four years in business, Virtue Cider Co. was struggling to pay its bills.

The Fennville-based maker of hard cider launched in 2011 with a massive PR blitz focused mostly on its high-profile founder, Chicago brewer Greg Hall, whose family had just sold its Goose Island Beer Co. to Anheuser Busch LLC for a reported $38 million. At the time, Hall promised to make exceptional products and to turn Michigan into a Napa Valley type region for hard cider.

As it rolled into early 2015, though, Virtue Cider was struggling to get over the very high bar Hall had set for the company. Hamstrung by inefficient equipment, Virtue was scrambling to package its ciders in kegs and bottles fast enough to meet demand from key accounts in the 20 states where it does business. And, in an industry where market share remains dominated by large, global producers, Virtue lacked the sales personnel to drive growth in new and existing markets, Hall said.

Then in April, the U.S. Department of Agriculture sanctioned Hall from working in the produce industry because Virtue Cider hadn’t paid one of its suppliers for more than $108,000 in apple juice. Bills from other vendors piled up, as well.

Faced with a growing load of operational, marketing and financial challenges, Hall turned to a familiar face for help: Goose Island Beer, which pledged to buy a 51-percent stake in Virtue Cider. The deal, which had not closed as of press time, allows the cider-maker to pay off its past-due suppliers and brings new capital and resources to Virtue Cider.

“As with a lot of small startup companies, we were playing right on the edge our first couple of years, and we might have gone over it a little bit,” Hall said. “But we caught up with everybody and we’re ready to kind of move forward now.”


A CAUTIONARY TALE

The Virtue Cider story serves as a somewhat of a cautionary tale for those who view the craft beverage industry as an easy return on investment. Despite praise for Virtue’s barrel-aged ciders and Hall’s two-plus decades helping run a successful craft brewery, he found himself having to cut a deal with one of the largest brewing companies in the world to position Virtue for the future.

When it became clear that Virtue needed more resources and capital, Hall said Anheuser-Busch-owned Goose Island Beer Co. of Chicago made a compelling partner. Not only was he familiar with the brewery that was started by his father in 1988 and where he served as brewmaster for more than 20 years, but it also offered exactly what Virtue needed: a capital investment, capacity in packaging and an army of salespeople.

“We have arrived at the best possible scenario,” said Hall, who remains as CEO and an investor in Virtue Cider. “Bringing in a partner to do a lot of that heavy lifting was not the original plan, but it works out even better than the original plan.”

The deal also works out for suppliers like Mike Beck, the president of St. Johns, Mich.-based Uncle John’s Cider Mill and the current head of the U.S. Association of Cider Makers, who recently received a check from Virtue for an undisclosed balance that had been outstanding for a year and a half, plus interest.

“Everyone has cash flow problems because they’re either trying to grow or the numbers just don’t work right,” Beck said.

But not all of Virtue’s suppliers were as patient as Beck. Lebanon, N.H.-based Farnum Hill Ciders filed a complaint with the USDA under the Perishable Agricultural Commodities Act (PACA) over a $108,024 bill that Virtue Cider owed the company. That resulted in the agency issuing an order on April 29 that restricted Hall from operating in the produce industry until he paid off the debt.

The USDA lifted that restriction on Sept. 4, the same date Virtue announced it had sold a majority stake in the company to Goose Island.

After Goose Island made the investment in Virtue, “absolutely, we were able to catch up on all our AP (accounts payable),” Hall said. “We expect we won’t get long (on payments) with people.”

That’s good news for growers, said Beck, noting that equipment suppliers can typically reclaim their products if a customer fails to pay, unlike farmers supplying perishable raw materials.

“If a grower gets left out in the cold, there’s no point in reclaiming apples,” he said.

The new financial backing from Anheuser-Busch-owned Goose Island could mean Farnum Hill Ciders also would be open to working with Virtue in the future.

“We certainly weren’t going to do any more business with them while they owed us a pile of money, but now we’ll see,” said Steve Wood, owner of Farnum Hill. “I know that it’s not going to be the same company. We’ll see how it’s constructed and how they do business.”


INVESTING TO GROW

Ken Stout, the general manager of Goose Island, said his company isn’t looking to change the culture at Virtue Cider or mandate the types of products the cidery makes. Hall and his 17-person team will continue to make those decisions.

Parent company Anheuser-Busch has taken a similar hands-off approach to the small breweries it’s acquired in recent years, including Goose Island, Seattle-based Elysian Brewing Co., Bend, Ore.-based 10 Barrel Brewing and Patchogue, N.Y.-based Blue Point Brewing Co., according to industry reports.

“For the Michigan apple farmers that supply Virtue Cider, the only thing that’s going to change for them is that Greg’s going to need more apples,” Stout said. “We didn’t get involved with Virtue to have it stand still.

“But it’s not a sugar daddy situation. Virtue is going to be generating its own profitability to be able to invest in itself.”

To date, the startup Virtue has not turned a profit as the company reinvested in the cider house and the team in Fennville, Hall said.

While Virtue Cider’s strategic growth plan remains up in the air at this point with the deal with Goose Island expected to close “very soon,” the company’s main pinch point to date has been on the packaging and sales side, according to Hall.

Although 70 percent of its sales come from draught accounts in its 20-state footprint, Virtue operated just one single-head keg filler. It used a manual, four-head filler to package its hard cider in 750-milliliter bottles for retail sales.

Under the partnership with Goose Island, Virtue plans to truck its finished ciders to the Chicago brewery and use its bottling line — equipment Hall helped install when he worked at the company — to more efficiently package its ciders. Packaging in single-serve 12-ounce bottles could be on tap in 2016, he said.

“Then we can really worry and focus here on the farm on making cider instead of all the other stuff that doesn’t really add value to what we do,” Hall said.

While Hall would not disclose Virtue’s cider output — he did acknowledge the company has the infrastructure in place to make up to 30,000 barrels annually — he said the team in Fennville could not keep up with demand from the accounts it had.

“We knew we were going to have to grow, but we’re seeing demand right now that is far out-stripping what we forecasted four years ago when we started the business,” he said. “It became a choice: Do we want to raise money so that we can build a new building and add a bottle line here, where then we’re going to have to train people to do that, or do we go to our friends at Goose where they have bottle lines that I put in myself … that are state of the art and have additional capacity?”


A MATTER OF MOTIVES

Hall said he entertained other offers as well, both from within the beverage industry and from “money” investors, but Goose Island provided the best fit. The deal came together after several months of discussions.

“None of the money people had bottle lines,” Hall said. “Money people are really great for money, but they don’t bring you that expertise.”

Because private equity firms and other financial buyers have to make an exit after a few years to generate a return for their limited partners, they also think in different time horizons than apple growers and cider makers, he said.

“A lot of the money people that we talked to, they were looking at the short term, and we were looking at the long term,” Hall said. “We’re planting apple trees. We’re not going to get fruit off those trees for a long time. This is very much the long game here. When you buy a farm and start planting trees, that’s not the kind of thing that works so well for investment bankers.

“Working with Goose, they are totally in league with us, and this is for the long haul here. We have big plans down the road to continue to grow and expand this beautiful piece of property here and we don’t have that short-term pressure that we would have had with the money people.”

Anheuser-Busch’s own investment in Goose Island after the 2011 acquisition could serve as an indication of the amount of resources the organization is willing to put into the companies in which it invests, according to industry sources.

Since the acquisition, Anheuser-Busch has invested in Goose Island’s growth, more than doubling production to 375,000 barrels as of 2014, according to data presented in April at the annual Craft Brewers Conference in Portland, Ore.

“This is very deliberate on the part of the Goose Island Beer Company because we’ve had our eye on cider for a long time,” said Stout of Goose Island. “With all that explosive growth in the cider segment, it makes a ton of sense for us to want to get into the cider business.”


A TOE IN THE WATER

Cider sales have skyrocketed in recent years, growing more than 75 percent in 2014 alone to reach $366 million, according to data from Chicago-based Information Resources Inc. (IRI), a market research firm. Still, that’s less that 2 percent of sales in the craft beer industry, which itself is but a fraction of the overall domestic beer market.

But given the cider industry’s rapid growth spurt, many of the world’s largest beer producers have started to invest in the cider category. Over the last three years, Anheuser Busch Inbev SA, Boston Beer Co. LLC, and MillerCoors LLC have all either made acquisitions of large-scale cider producers or launched their own product lines.

In 2012, Boston Beer, the makers of Samuel Adams, introduced the Angry Orchard brand of cider that now has the largest piece of the domestic cider market with a nearly 57 percent share, according to IRI.

However, the Anheuser-Busch/Goose Island deal for Virtue marks what most industry sources believe is the first time big beer has acquired a small craft cider company, said Paul Vander Heide, president of the Michigan Cider Association and owner of Spring Lake-based Vander Mill LLC.

“Most of us in craft cider are pretty darn small yet, and I don’t think we’ve hit the radar screen of a bigger company that is going to see value in us,” Vander Heide said. “It’s speculation on my point, but regional cider manufacturers don’t have a footprint or volume that’s really catching the attention of producers yet.

“Certainly, in this case, there were prior relationships and opportunities to make that be different.”

From his perspective heading the fledgling Michigan Cider Association, of which Virtue is a member, Vander Heide said he hopes the company stands by its pledge to support local growers under the new relationship.

“Our goal is to support Michigan-based cider companies that hold a Michigan wine license that are here to promote Michigan agriculture,” he said. “To that regard, we certainly hope that Virtue continues to promote both Michigan cider and agriculture.”


CRAFT OR CRAFTY?

While Beck at Uncle John’s Cider Mill would consider doing business with Virtue again, he’s not convinced a multinational corporation like Anheuser-Busch will be all that interested in craft cider.

“The only thing I don’t like about (the acquisition) is that AB isn’t going to care about cider. Is it going to be considered craft cider anymore?” he said.

That’s a belief Hall has repudiated since his family sold Goose Island to Anheuser-Busch for $38.8 million in 2011, touching off a wave of craft beer acquisitions by the large global beer companies.

Describing it simply as “a transaction in the last year with a Michigan brewery,” Hall cited the 2014 deal in which Spanish brewer Mahou-San Miguel Group acquired a 30-percent stake in Grand Rapids-based Founders Brewing Co.

“They needed additional resources. They brought some on. They’re still making their beer in Michigan. They’ve still got the same people making the same beer and now they’re just making more of it. I think that’s a win for pretty much everybody,” he said.

For Virtue Cider, Hall said the deal with Goose Island just made sense because the partner was able to help solve some of the issues — packaging, sales and capital — where his company was struggling. Hall remains among the 31 individuals and corporate entities that own 49 percent of Virtue Cider, which will stay headquartered in Fennville. Some back office functions, including new President Tony Bowker — also formerly of Goose Island — and sales and marketing, are based in Chicago.

“Ask anybody who starts a new business: It’s tough the first few years,” Hall said. “We’ve made it through the hard years and we’re ready for a very bright future.”

Read 9877 times Last modified on Monday, 28 September 2015 10:50

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