May 10, 2016

Craft Beer Consolidation and Acquisitions — and the Inflated Valuations They’re Causing

I just got a new brewery investor proposal from a group of guys with a lot of passion as well as a great idea.  They’re bootstrapping their new brewery concept.  They’ve scrapped together almost enough cash to buy their equipment.  They’re intellectual property (IP) is pretty good and their concept of distinguishing themselves from their competitors (in the ultra competitive San Diego County market) is solid.

I like the guys.  I like their concept.  I believe they can make good beer and be successful.  I had one major problem with what they sent me.  They are valuing this new brewery at $2.5 million.  They have not sold a can of beer yet.  They’re assets are barely six figures.  And they’re forecasting based on some pretty optimistic numbers.  I love optimism.  But I prefer realism.  And these guys have also never had their asses kicked (in the business sense).  I have.  And I typically prefer to work with others who have had that ass kicking (because it will come sooner or later — better to get it out of the way).

The problem with some of the crazy deals that have been happening, led by the $1 billion acquisition of Ballast Point by Constellation Brands, is that it messes with everyone’s compasses.  Some investor will surely look at these guys and think, “well, hey, they’re not Ballast Point, but with some luck, we might be able to sell at 15% of that number, right?”  Wrong.  You can’t run a business that way.  I think there are two examples of investors who only want to be in for the wrong reasons:

  1. Pride: they only want to be able to tell their friends they own part of a brewery.  It’s a vanity move.  People are talking a lot about breweries, and they figure they should have a dog in the race.
  2. Greed.  Much more dangerous.  These guys don’t care about the beer.  They only care about the numbers you produce.  These are great people to have involved in your organization to add in a layer of discipline.  Careful, though, when you stop hitting your monthly numbers.

I think the more acquisitions there are, the more creative license breweries are getting to value their business.  I was looking at a pretty prominent brand the other day that has gotten statewide distribution.  When his business plan talked about the number of cans they were selling, I was really impressed.  Then I saw his sales numbers and realized he wasn’t even hitting $1 million in annual revenue.  Remember that a can of beer sells wholesale for less than $1, after all.  So you gotta sell a bunch of beer until you can truly value yourself at a few million dollars.
A lot of talk is focused on if there is a bubble in craft beer, and if so, when it will bust.  Business is business. And if you’re not growing, you’re dying.  If you’re focusing more on sales and acquisitions versus creating great product, you will fail.  I get that craft beer is rising, and I get that just because I don’t want to invest in a particular deal doesn’t mean that nobody will.  But focus on the product.  And if I ask you why you started your brewery, I really don’t want to hear the word “acquisition anywhere in your answer.”

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