Mergers and Acquisitions

The brewing world is ripe with stories of mergers and acquisitions mostly stemming from ABInBev’s insatiable appetite for its competitors. The biggest of these recently was their consumption of SABMiller, their largest competitor. All while negotiating this mega-merger they have been actively pursuing craft breweries around the country, of which the most notable are Goose Island and Blue Point. Several other large craft breweries have been purchased by other companies, such as Ballast Point for $1 billion to Constellation Brands and Lagunitas’ merger with Heineken International. New Belgium is not immune to the merger frenzy going on in the craft brewing world with rumors swirling they were exploring sale options in December 2015. Following the successful transition to a 100% ESOP, the sale appears to be off the table with Kim Jordan vowing in August of 2016 to stay independent. Only time will tell if the employee-owned company will maintain this position and fend off the many suitors.

Strategic Alliances

The craft brewing world is a collaborative group by nature. Many began their brewing adventure as homebrewers who learned to make beer from each other, only to then take those skills to the ‘Pro’ world and make a job of it. This leads to a collaboration mindset among the brewers and New Belgium is no different. To celebrate their 25th anniversary, New Belgium gathered 5 breweries to have each produce a distinctive “Riff” on their flagship beer, Fat Tire Amber Ale. Each brewery conceived their own unique take or twist on Fat Tire and New Belgium packaged two of each in a unique collaboration 12 pack. As one of the collaborating breweries pointed out, the process involved the brewery designing the beer and then going to New Belgium’s brewhouse to brew the beer together. New Belgium took care of finishing, packaging and distributing the beer with each of the collaborators participating in the promotion of the final product. It is unclear what the financial arrangements of the collaboration was, but this appears to be a standard nonequity alliance which is very common in the craft brewing world.

Agency Problems

Frequently agency problems arise between the management teams of firms and their equity investors. Investors seek to maximize the present value of their investment which may conflict with the managers of the firm they are invested in. Managers may become risk averse or spend company capital on managerial perks, which do not add value to the corporation. New Belgium has taken a rare approach to handling agency problems by becoming 100% employee owned. Current Board Chairman and acting CEO Kim Jordan sold all of her shares to the ESOP program which makes the employees the equity owners. If the managers and employees are the holders of equity in the firm, they by default will act in their own best interest which goes a long way to preventing agency problems from arising.

In other news

Due to a surprise announcement from New Belgium CEO Christine Perich that she is stepping down after only a year on the job, co-founder and Board Chairwoman Kim Jordan will assume the daily duties of the CEO job. While it is unclear what the motivation for the sudden departure is, having the founder and past CEO available to take back over, should ensure a smooth transition for New Belgium.

Diversification

New Belgium has chosen a limited corporate diversification strategy and is essentially a single-business firm focused solely on the production of beer. This is not unusual in the craft brewing market with most breweries pursuing this strategy. The one revenue stream outside of beer is brewery swag that is sold online and in their taprooms. This swag while revenue generating, is essentially a marketing tool. Because New Belgium is privately held it is difficult to gain access to their detailed financials, but it is difficult to imagine this tiny amount of t-shirts, hats, and other New Belgium branded merchandise amounts to even 5% of their sales. Instead of pursuing a diversification strategy, New Belgium continues to focus on their original plan of producing great beer while behaving as a socially conscious employee-focused company.

Vertical Integration

What is the value chain for beer?  Beer is essentially four main ingredients combined to produce a delicious product; grain, hops, yeast and water. What does this mean for a craft brewer like New Belgium?  They must source hops, grain and yeast from alternative sources.  Generally the water comes from wherever the brewery is located.  This too is important and water quality greatly affects a brewery’s decision where to build.  As for the other ingredients, yeast usually comes from one of the handful of commercial yeast labs, but many run in house strains selected in their own labs. Some breweries are even secretive and highly protective of their in-house strains as a portion of production that is impossible to replicate. The source for hops and grain are farms in the Northwest and Midwest respectively.  Once the beer is produced from these ingredients, it must be distributed to retailers through distributors.  Craft brewers reside firmly in the middle of this value chain with almost none participating in farming activities for hops or grains, nor owning the distributors who bring the finished product to retailers. New Belgium falls into this category as well, essentially eschewing vertical integration to maintain focus on the production of beer itself.  The large conglomerate of AbInBev is different in that they own over 500 distributors and their recent merger with SABMiller highlighted the concern in the craft brewing world that I wrote about here.  AbInBev’s vertical integration strategy continues to cause much angst among craft brewers as they must rely on those same distributors that big beer owns.

Tacit Collusion

A brewer the size of the New Belgium is less likely to engage in tacit collusion by the nature of their business.  Additionally, craft brewers are fiercely independent as most began as one or two individuals following a dream.  New Belgium is no different. That is not to say that tacit collusion does not affect New Belgium and other craft brewers. As the Washington Post pointed out in their 2015 article, “The price increases that we estimate exceed the predictions of a standard economic model, accounting for changes in demand and cost conditions. This is consistent with tacit collusion between ABI and MillerCoors that emerges after the consummation of the MillerCoors joint venture,” Miller and Weinberg wrote in response to questions.” The two biggest brewers in the country are merging and there appears to be tacit collusion between their products.  While New Belgium is independent and has made every attempt to stay that way with their 100% employee-owned move, their beer is sold through similar distribution channels as ABI and SABMiller products.  Collusion between the big boys will definitely have effects on smaller players like New Belgium. As I pointed out last week, the rosy market for craft beers is finally feeling the squeeze, with Stone laying off employees.

Flexibility: Real Options

I have written in the past about the growth in the craft beer market and how strong it is. This would appear to indicate a low level of market uncertainty.  While there are many new combinations that result in great new beers coming to market, there is little substantive change to the brewing process itself, indicating relatively low technical uncertainty as well. In looking at the McGrath and MacMillan model, this would seem to indicate breweries should stick to enhancement launches, or in other words, incremental changes to current offerings. New Belgium has certainly done this over the years by expanding their different beers and slowly expanding from their home base in Colorado to distribute further and further away. Recently they made a big leap more like a stepping stone option that would give them many new options for expansion going forward, by building a second brewery in Ashville, NC. While the technical and market level of uncertainty would seem to indicate this might not be a great move according to the McGrath and MacMillan model, New Belgium is not the first growing craft brewery to make this leap. Another west coast brewery, Stone Brewing, opened two new breweries in 2014 and 2015, one in Richmond, VA and one in Berlin, Germany. Like New Belgium, Stone is a fast growing independent brewer who is known for very unique beers. This week we learned that Stone experienced a setback and will be laying off approximately 5% of their workforce. Maybe this is unique to Stone’s situation and only time will tell whether New Belgium will experience similar issues after their new east coast location comes online.

Mega mergers

Came across this article that I need to share.  The merger on the table between ABInBev and SABMiller is near to closing as the Justice Department appears to be signing off on it.  Regardless of how you feel about this, it is important to remember the issues that Yuengling brought up last week. You can read their position in the post here.

Product Differentiation

It is easy in the craft brewing world for brewers to achieve product differentiation and New Belgium is no different.  New Belgium offers 15 year round beers and many seasonal brews as well.  In these many seasonal brews, there is an enormous amount of differentiation just among their own beers with styles ranging from the beer that started the company, Fat Tire Amber, to several different IPA’s, to the Belgian style Trippel.  Even among the four IPA offerings, there is great differentiation in both hop flavor and alcohol content.  This allows consumers to pick different flavors as well as a beer more suited for a different time, like the session IPA, Slow Ride. Session beers are the latest craze in the craft beer world as they are big on flavor but with low alcohol, allowing for more drinking. Because craft beer is so diverse it is easy to differentiate on taste and style and New Belgium has mastered many styles in this pursuit.