While craft beverage industry insiders expect more deals ahead nationally in 2020, the market in Michigan may be poised to level off.
That’s because most of the breweries that have reached an attractive size for national players and are open to doing deals have already secured investments or found strategic partners in the last few years, according to executives and advisers who track the industry.
“After you get through the largest six or seven breweries, there’s a huge step down in barrel size,” said Joe Infante, the head of the alcoholic beverage regulation team at Miller, Canfield, Paddock and Stone PLC. “They’re not even regional. Most of those breweries are just in Michigan or only in a couple of states, and that may not be tempting for AB, Miller or Constellation at that point.”
Companies that have already done deals include: Grand Rapids-based Founders Brewing Co., which is now 90-percent owned by Spain-based Mahou-San Miguel Group; Bellaire-based Short’s Brewing Co., which sold a 20-percent stake to Heineken-owned Lagunitas Brewing Co.; and Comstock Park-based Perrin Brewing Co., a portfolio company of the Fireman Capital-backed Canarchy Craft Brew Collective.
As well, Holland- and Grand Rapids-based New Holland Brewing Co. signed a non-equity distribution partnership with Pabst Brewing Co. to take its brands into new markets nationwide.
The outlier remains the 16th largest brewery in the U.S., Kalamazoo-based Bell’s Brewery Inc., which continues to tout its independence.
“There’s not a lot of us O.G. craft brewers left that are independent, that haven’t done a deal. I think that’s a plus for us right now, and we’re going to continue to push that,” Bell’s Brewery founder and CEO Larry Bell told MiBiz for a report last month.
Scott Newman-Bale, partner at Short’s Brewing Co., sees “two major forces” at play nationally in M&A for the craft brewing industry in 2020, both of which come with a degree of unpredictability.
2020 is the five-year mark for a number of private equity-backed deals, including the Fireman Capital-backed deal for Perrin Brewing, which could signal more activity ahead as backers reach their investment horizon and look to sell off their portfolios, he said.
“The bulk standard M&A will be a little bit limited because the market’s down and valuations are down, but I expect to see a couple of mergers,” Newman-Bale said.
In particular, Newman-Bale expects to see more midsize to large breweries begin to look for opportunities to expand outside of beer into adjacent categories such as hard cider.
Infante at law firm Miller Canfield echoed those sentiments, noting that a brewery deal for an established cider brand could make sense as companies look to maximize their capacity and gain efficiencies in logistics.
“You haven’t really seen those (cross-segment) acquisitions over the past five years; it’s been mostly within beer,” Infante said.
One potential pool of experienced buyers comes from owners who sold perhaps three to five years ago and see an opportunity to get back into the business, according to Newman-Bale.
“I think we’re going to start to see owners who sold out get a little bored and look to re-enter the market,” Newman-Bale said.
That should come as good news for current brewery owners who are looking for ways to recoup their investments or are getting forced into sales by their financial institutions.
“Everyone is over-extended in the market, the market is so bad in terms of predictability, and people need to make bets on what product is going to be successful or not, and everyone is making different bets,” Newman-Bale said, adding that the firms making the wrong bets will need to find some kind of partner to bail them out.
As well, many craft beverage companies are finding it increasingly expensive to maintain and support brands given the intense competition at the retail level, especially the farther away they get from their home markets, said Paul Vander Heide, co-founder of Grand Rapids-based cider producer Vander Mill LLC.
“You’re dealing with very large companies in this industry, and to keep up with many markets or multiple states is increasingly difficult for not just sales focus and brand awareness, but … the efficiency of logistics,” Vander Heide said. “What some of these larger breweries and more recent acquisitions have seen is somewhat of a realization that to be in that many states, or certainly to be a national brand, there is a certain amount of infrastructure that needs to be in place. That’s incredibly expensive and complex. It’s going to prove to be difficult for brands that are trying to compete in many markets.”
Given that the industry crossed the 8,000 brewery threshold in 2019, according to the Boulder, Colo.-based Brewers Association, Infante sees an opportunity for companies to band together for the sake of efficiency while still retaining their “craft” status. Call it a consolidation of like-minded craft breweries, each based in strategic markets across the country, focused on leveraging their collective strengths with the backing of a parent company, he said.
“Where consolidation may be necessary is that group that is at the pivot point, somewhere from 15,000 to 20,000 barrels, where you’re a little too big for a taproom model … but you don’t have the power to really get into a chain store — you’re not in 7-Eleven,” Infante said. “Being in Meijer’s great, being in Kroger is great if you get into Ohio, but if you get into chain stores, that’s a big change. Consolidation there might be getting four or five breweries together, so then you’re a 100,000-barrel brewery.”
At the smaller end of the scale, consolidation among breweries that are focused on the taproom model probably does not make sense, because at that size of business, “the owner is just making a living,” Infante said.
“If you got four or five of those together, it probably doesn’t even move the needle,” Infante said. “I really think you’re just going to have to stay local. You’ve got a pivot point at some point where you just have to make the call of whether or not you’re going to really go headlong into distribution or you’re going to stay in taprooms. If you’re going to stay local, if you’re going to be a taproom, M&A doesn’t really happen.”
Jason Spaulding, CEO of Grand Rapids-based Brewery Vivant, said his company never even considered an acquisition when it needed to add warehousing capacity a year and a half ago.
Brewery Vivant, which distributes its brands statewide and in some markets in Massachusetts, needed to improve efficiencies after renting space in four locations around the city and trucking product and materials back and forth.
Rather than search for a deal locally to add capacity, the nine-year-old company opted instead to buy a building in Kentwood and start a new brand, Broad Leaf Local Beer, which also would allow it to get into “trending” beer styles that didn’t fit under Brewery Vivant’s umbrella of traditional European beers.
“We’re not really looking to acquire another place; it’s just not on our list of things to do,” said co-founder and CEO Jason Spaulding. “Down the road, you never know what things look like. We’re just evaluating how the market is changing and what we’re good at. We’re good at service, we’re good with the taproom and restaurant kind of stuff.
“If this proves out, then maybe we’ll think on it from there. We’re not trying to become a huge brewery. We’re just trying to build a nice business and make it a destination, make beer that people take pride in. We’re happy with that.”