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Craft beer is no stranger to private-equity money, but private-equity firms are rarely familiar with craft beer.
As the number of U.S. brewers climbs above 4,000, and they start competing for resources, distribution, and shelf and tap space, private equity and beer have become more intimately acquainted.
Ulysses Management, which shares an address with NBC at Rockefeller Plaza in New York, got into the beer business in 2014 when it bought an undisclosed stake in Lakewood, N.Y.-based Southern Tier Brewing Co. from owners Phin and Sara DeMink. At the time, Southern Tier hired former Anheuser-Busch BUD, +2.19% senior vice president John Coleman as chief executive and former A-B sales director Brendan Smith as vice president of sales and marketing.
Since that time, the brewery has launched its DeMunck’s hard cider brand and opened a distillery, and gave Ulysses the opportunity to get comfortable with investing in the beer industry. Ulysses’ training period apparently ended in mid-February, when it announced that it was not only acquiring 20-year-old Downingtown, Pa., brewery Victory Brewing Co., but putting it and Southern Tier under the auspices of its Artisanal Brewing Ventures (ABV) holding company.
That company, headquartered in Charlotte, N.C., will have Coleman as its chief executive and plans to offer “advice, assistance and vision to a select but growing list of independent craft brewers and distillers.”
“I’m a beer guy; I’m not a private-equity guy,” he says.
In the past decade, that’s become a tougher distinction to draw. Wellesley, Mass.-based Fulham and Co. got into craft beer when it purchased Bridgewater Corners, Vt.-based Long Trail in 2006. It’s since picked up Vermont brewers The Shed, Otter Creek and Wolaver’s, but just shuttered the latter in 2015.
In 2010, KPD Capital Partners purchased Burlington, Vt.-based Magic Hat and its Seattle-based subsidiary, Pyramid Breweries, and Portland, Ore.-based Portland Brewing, and merged them with Genesee Brewing Co., Dundee Brewing Co. and Labatt USA as part of Rochester, N.Y.-based North American Breweries. However, it sold the whole works to Cerveceria Costa Rica, a subsidiary of Costa Rican company Florida Ice & Farm Co., for $388 million in 2012.
That year, Boston-based Fireman Capital paid $35 million to purchase the Utah Brewers Cooperative and its Wasatch Brewery and Squatters Beers. Fireman liked the beer industry so much that it took a majority stake in Longmont, Colo.’s Oskar Blues last year.
During that span, however, Salt Lake City’s Uinta Brewing sold a stake to New York/Cleveland-based Riverside Co., Atlanta’s Sweetwater Brewing sold a piece to San Francisco-based TSG Consumer Partners (which once owned a stake in Muscle Milk), and Hood River, Ore.-based Full Sail actually had its employee-owners vote to sell the brewery to San Francisco’s Encore Consumer Capital last year. Even Victory’s neighbor in Delaware, ever-independent Dogfish Head, sold a 15% stake to New York-based LNK Partners.
For Victory, ABV was the best option for their fast-growing brewery amid a frightening landscape. Victory’s brewmaster, Bill Covaleski, and Chief Operating Officer Ron Barchet founded the brewery in 1996, when the U.S. had a quarter of the breweries it does today. Covaleski and Barchet pushed their brewery into 37 states, saw their operation expand to a second brewery and brewpub in Parkesburg, Pa., another brewpub in Kennet Square, Pa., and a Victory-branded beer hall at the Xfinity Live pavilion in Philadelphia’s Wells Fargo sports complex.
It also, in the past half-decade, saw Anheuser-Busch InBev swallow Goose Island, Blue Point, 10 Barrel, Elysian, Golden Road, Four Peaks and Breckenridge Brewing. That’s as Heineken took a stake in Lagunitas, Mahou San Miguel bought a piece of Founders, and Constellation Brands STZ, +2.20% dropped $1 billion on Ballast Point. By partnering with ABV, Covaleski and Barchet — along with Southern Tier’s DeMink — get to remain stakeholders and play an active role in their brewery’s future without worrying about how they’re going to match bigger brewers’ financial bulk.
Just after Victory’s deal was announced, we spoke with Coleman, Covaleski and DeMink about how ABV came to be, what it can do for Victory and Southern Tier, and why the current beer market makes private equity so appealing.
Did Victory have much interaction with Southern Tier in the past, and how did it get to the table with them during the search for a partner?
Covaleski: In all honesty, it was through a professional process that we were linked together to first meet and talk about the possibilities of pulling our businesses together. Those meetings went extremely well right from the start.
What made you comfortable enough with this arrangement to convince you to entrust ABV with your life’s work?
Covaleski: It’s somewhat personal at some point. That’s why it’s important to get together and learn about each other.
ABV really put together an intelligent proposal. It was well-researched, the benefits for both breweries and fans were obvious, there are some geographic synergies, and there are some marketplace gaps that we feel this new entity can fill rather nicely.
What kind of gaps in distribution does this fill for both Southern Tier and Victory? Does it open up new markets?
Covaleski: We are a united front now, and we will be tackling sales from a united stance, but not instantaneously. This is a patient model that is anticipating leveraging existing strengths and building upon them.
Coleman: As far as going further, Victory’s in 37 states and we’re in 33. Victory already had a couple of states where they did their due diligence and were looking for expansion in 2016. We were really not looking for any additional expansion in 2016 so we, on the Southern Tier side, probably won’t be opening any additional states. Going forward, as we do due diligence on new states, we’ll look into potentially opening them together, as Bill said, with a united front. We’ll also be looking at, from a distributor’s standpoint, who serves the geography best and who makes the best partner for Victory and Southern Tier combined.
Phin, we’re wondering what Victory can expect from its partnership with ABV and what your personal experience with Ulysses has been like over the past few years. Are there any advantages that they were able to offer your brewery that you didn’t have as an independent entity?
DeMink: Ulysses is really just a small family office in New York City. The partnership that I formed with them was essentially me getting tired of doing it myself, so I sold a part of my business to [Ulysses managing directors] Paul [D. Barnett] and Toby [Rando] and Josh Nash. One of the reasons we did a partnership with them was because we shared the same vision of building a platform — that contradicts what’s happening in the marketplace with the big brewers gobbling up the smaller guys — where any number of breweries could collaborate together, partake in the partnership, and share synergies and resources.
I don’t think there’s anything hidden to expect from ABV or Ulysses: It’s just kind of a group of guys that share the same vision. We’re just glad that Ron and Bill believed in our vision and took the leap of faith on us. I can only say that my experience with Ulysses as partners has been great and now, with ABV, I think we’ll do great things with Victory.
In the days following Victory’s announcement, Bill mentioned that he couldn’t ignore what was going on in the marketplace anymore. Amid the brewery consolidation and jostling for distribution rights, what forced your hand on this deal and looked like more than you could handle on your own?
Covaleski: That’s a great question that I think has an unexpected answer. What forced our hand and forced this deal forward was the synergy and partnership we saw with our friends at Southern Tier. It was really a balance and allied front that made us comfortable about approaching a future that we can’t know until we get there.
The factors that pushed us in that direction — Lagunitas now having Heineken money, Ballast Point now having the Modelo marketing capabilities, essentially — didn’t intimidate us. But we saw an opportunity to course-correct and chart a different strategy into the future because we didn’t want to lead our fans, our employees and our shareholders into a storm without a good strategy. Looking for that strategy, we found a great partner.
This deal seems fairly unique in that Victory and Southern Tier overlap so much geographically and have so much familiarity among buyers in their core states. Will this lead to a more regionalized approach, or are you just building a broader footprint off that base?
Coleman: I think the opportunity that we saw in the partnership and why we thought it made great sense for everyone involved was just that: the regionality of it. If you look at what’s going on, and Bill kind of touched on it, there are a couple of national players out there — whether it’s Sam Adams or Lagunitas or New Belgium — and they’re in the vast majority of the U.S. Then there is the uber-local guy who’s brewing, self-distributing and maybe not going outside his area code. Then there are the regional players like ourselves who produce anywhere from 70,000 to 150,000 or 200,000 barrels.
I think as we looked at the Northeast, nobody’s really put a stake in the ground there. You look in the Pacific Northwest and there are some players in the Northwest, you look at San Diego and there are some players in San Diego, but nobody’s really put stakes down in the Northeast. We think it’s a great opportunity for ourselves to stake that claim. There’s great crossover in our core markets of New York, Ohio, New Jersey and Pennsylvania.
When we look at what we call opportunity markets in the Mid-Atlantic and Southeast, we see lots of the pockets of population from our four core states because that’s where they’re migrating to. They’re moving to those states for climate reasons or for business reasons or for job opportunities, and they already know our brands down there as well, so we feel there’s a great opportunity to expand our footprint into those markets in a combined effort. We’re already physically there, but we can get much more of a marketing presence in those outlying markets.
DeMink: You watch what a lot of these guys are doing, and it’s almost like the race is on: Who can be national first or who can become a national brewery the quickest? I just fail to see the great value in that.
I just see, in our core market with Southern Tier and Victory, there’s still so much more opportunity. By joining forces with two powerhouses in the Northeast, that just makes a lot more sense and is more relevant than us trying to go and compete against Sierra Nevada in California.
Looking at Victory and Southern Tier’s portfolios, you seem well-matched for the region. Not to discount what you’re doing with your IPAs, but Southern Tier’s imperial stouts and high-gravity beers and Victory’s traditional Bavarian styles have always been a natural fit in your backyards. Do you see that as a particular advantage over breweries with a larger footprint?
Coleman: The easier path is to open a new market. You come rushing in, you get a nice little pipeline fill and it helps show some nice trend improvement in a given year. The tougher position, but the one that has greater longevity — to Phin’s point — is owning your backyard. If you look at our business, even in our largest market, we’re still at best a 5% share of craft sales. If you look at the total industry, we might have 1% share in some of our best markets out there, so there’s a lot of room to grow within the craft segment of our major markets as well as in total beer categories.
We think that, instead of going a mile wide and an inch deep, we’d rather go a little deeper and get more penetration in those core markets. Then we’ll have a very solid strategy for those opportunity markets surrounding our core markets. That way, you become a better partner to the distributors as well instead of going into a new market where we just can’t support it. Between the two companies, we’ll have 70 people — with new hires this year — in the market on the sales side. That’s a tremendous amount of support for the wholesalers who are out there selling the beer and servicing the account, and we think that’s important in that partnership.
Covaleski: We’ve often discussed, here at Victory, the concept of “building the castle walls strong.” Our brewpub strategy was part of that as well, where we have great brand recognition and deep penetration. We want to make sure that’s durable and that it exists for the future, and I believe Phin and Sarah have done the same thing in their marketplace.
Now, with two regionally oriented breweries, we have the chance to overlap our castle walls and create a stronger defense mechanism. I don’t want to sound ridiculously assertive here: We love lots of craft beer from lots of craft brewers. But at the same time there is a battle going on to achieve certain sales plateaus. Together, it’s so much easier for us to defend what is a really rich territory. Between the two breweries, there are 93 million people in our core market, so that’s worth working hard for.
Victory’s recent construction of a new production-brewing facility in Parkesburg, a brewpub in Kennett Square and a beer hall near Lincoln Financial Center and Citizens Bank Park in Philadelphia seem to go back to early craft beer strategy of opening brewpubs and establishing a community presence. What was it about recent expansion trends in craft beer that made Victory embrace that plan?
Covaleski: You just hit it there on the community presence. Every transaction has a customer: a buyer and a seller. We believe that a connection to our buyers has made us a stronger, more well-informed operation. Our brewpubs are of critical importance because we host people, they spend money on our beer, and they tell us very loudly how they feel about them. That’s been a good thing that informs our business.
Our strategy is built out of that desire to continue to have a strong connection to our customers. When you’re on the other side of the country, all you have is a beautiful label and maybe some great liquid. Social media can’t fill in the gaps. You need a better connection, a deeper connection.
Given Victory’s connection to Philadelphia, Pennsylvania and the Mid-Atlantic, did you give consideration to what being bought out by another brewery would do to the perception of your brewery in your core markets and how that would affect the brand equity you’ve built over the past 20 years?
Covaleski: Oh, absolutely. We tried to look at the pros and cons of each opportunity, but the difficult thing to describe here is the sense of partnership, hope and possibility that we get under the umbrella of Artisanal Brewing Ventures in connection with Southern Tier.
There’s a lot of promise to this that outweighs any reluctance in staring too long at other models that are less attractive to you.
Phin, you went through this process a couple of years back when you first teamed with Ulysses. What was the community reaction like then and how have things progressed since?
DeMink: The community reaction was really good. If you peel the onion back, it was really just two New York-based companies doing a deal together. It wasn’t too complicated, there wasn’t some huge equity company involved or some sort of mechanism that had a sunset to it. I think it was accepted really well.
There are always people out there who think that we sold our soul to private equity, but we’ve always prided ourselves on having high-quality and very innovative brands. There’s a cost to that. Quality and innovation are expensive to do well, and as competition grows, you need access to capital to keep growing these brands. It’s one thing to fund a brewery at 15,000 barrels. There’s a whole other thing to funding a brewery at 115,000 barrels. You just do what makes sense for your business, choose the right partners and you’ll have a good future.
I remember speaking to one of Southern Tier’s brewers a couple years back about what it takes to get a batch of Pumking through the brewery and how many hours and how much capacity it takes to make one of Southern Tier’s imperial Blackwater Series batches. After Southern Tier partnered with Ulysses, what did that allow the brewery to do in terms of freeing up some space, getting those barrels produced more efficiently and working on its beer portfolio as a whole?
DeMink: The nice thing about Ulysses is that they’re kind of a nose-in, hands-off kind of partner. We really didn’t change the way we make beer or innovate beer. It just made sure we had the resources to keep doing so.
It did allow us to bring in some really professional management that we kind of lacked, but were very necessary for the next chapter of Southern Tier. They were very proactive in helping Sarah and myself find John and then, when John came on board, really add depth to our administrative team. It really brought a professional element to the business that we lacked and needed, and it opened our eyes to the fact that there are a lot of breweries out there that are going to need the same resources. That was kind of part of the evolution of ABV.
With both Victory and Southern Tier, there have been a few tweaks within the past few years to differentiate your beers in the marketplace. There have been changes to the labels and additions to each brewery’s beer lineup. Has that ABV management element been helpful in making some of those changes at Southern Tier, and has Victory discussed doing something similar?
Covaleski: On the design side of things, we’ve been undertaking some refreshes to our brands. We have a solid design department with three graphic designers, a digital-media specialist and my other hat as creative director. The creative side of things is well-supported here, but the ultimate support is Artisanal Brewing Ventures saying, “Yes, this is a good investment, we should do this.” That guidance is a big part of it.
On the liquid side, we’ve been as innovative as ever. We have a seven-barrel brewery in our Kennett Square brewpub that gives us the opportunity to play on really small batches. What’s really important is the innovation on the liquid side that might come from ABV and Southern Tier putting our heads together to do collaborative stuff.
Coleman: Some of the things that I think the management team brought to the forefront delves a little deeper into the data.
Obviously, 10 years ago and even up to five years ago, there were things you could do on the creative side and, for the most part, you would be pretty successful because your competitors were growing, but not at the rates we’re seeing now. Now, there are 4,400 craft brewers out there, you have the bigger craft brewers out there innovating, you have the big brewers innovating who aren’t necessarily craft, all the mom-and-pops and the uber-locals innovating. What we’re able to do is go a little bit deeper, look at the data and understand the consumer a little bit better by just doing some consumer research, looking at IRI or Nielsen and see what exactly is selling well and why. Then, it’s about innovating along those lines rather than innovating because it was something that we really, really liked — and we still do a lot of that and innovate with the things we like drinking — find out what the consumer is looking for.
Craft is also growing by being more inclusive and bringing more people into craft. That’s important because, if you look at craft from a volume standpoint, it’s still only 11% of the whole industry, so there’s still 89% of the industry that’s drinking something else. So how do we welcome those folks who are drinking other styles of beer into craft by innovating along the lines of something they’re used to drinking and makes them more comfortable before exploring along the lines of the entire portfolio.
Victory’s Prima Pils seems to fit that description. It’s vaguely similar to the light lager that the broader beer marketplace is already drinking, but it’s a more pure translation of the original Bohemian Pilsner. What kind of opportunities does that open up for ABV to expand its market in the way that you just mentioned?
Coleman: I think that’s a perfect example of it. Just because there have been pilsners or lagers available since the beginning of beer doesn’t mean you can’t make a better one.
I think Ron and Bill have proven that by brewing Prima Pils into a very flavorful pilsner. Now someone who is used to drinking pilsner can come over to that and be very impressed. Honestly, I think you can do that across the whole spectrum. Obviously IPAs are booming and there was a big push on [low-alcohol] sessionable IPAs, but that phase has died down a little bit. Now you see a lot of fruit-inspired IPAs. What’s next in pilsner?
I don’t think any of us know the answer, but we have the license to go out there and start doing some different innovation and start exploring that space more than other do.
How much does the character of each brewery factor into the decision to innovate? Can you just throw a couple of grapefruits and some bags of coffee at Victory’s brewers and say: “Here, work with this” when a trend comes along? Or do you have to factor in each brewery’s backgrounds and what they’re known for bringing to beer drinkers before using ABV’s market data? It would seem, for example, that a beer-and-soda Radler or sour gose might be better suited for Victory given the German style’s history and Victory’s background.
Coleman: I think Bill can speak to it better than I on the Kirch Gose, but I had a Radler when I was down in Philadelphia last week that was delicious that I think Bill is either rolling out now or in spring.
Covaleski: We were drinking a test batch of what’s rolling out in April.
One of the thing that’s been discussed among the four of us here is that, in the context of 4,400 breweries across the United States and in the context of being valuable and relevant to your wholesalers, we’ve kind of kicked around the mantra of “Be rational or be rationalized” — meaning, put products in the places where they’re going to do the best and where there’s an audience interest in those products.
Phin can brew any type of beer, and Ron and I can brew any type of beer. Does any type of beer have relevance and a place in all markets equally across the United States? What we’re learning with the proliferation of breweries across the country is that’s not the case. Being more market-specific is probably the wave of the future for breweries that want to do well in other markets.
Just because we can make all these beers and serve them all in Downingtown — my gosh, we make 30 beers and keep them on the taps at the three brewpubs we operate — that’s an embarrassment of riches that you can get away with locally, but it isn’t necessarily a stable strategy on a national platform.
So, Bill and Phin, what has your experience with this been in the marketplace? Are there markets that respond better to some of your beers than others?
Covaleski: There’s an obvious one for me that’s been a surprise from the get-go: Golden Monkey in the South. Some of the warmest states we do business with is where our 9.5% ABV Belgian ale does the best. It’s our leader in the southern states and, moving into those states, we thought it was going to be Prima Pils, for obvious reasons. But Golden Monkey is the clear product of choice throughout Florida, Georgia and South Carolina. It defies description, but we go with it.
DeMink: Two products in our portfolio that fit that bill are our IPA, which does extremely well in New York. It’s 60%-plus of our volume. But then you go over to Pittsburgh, two and a half hours away, and it’s 2XIPA. That’s what Pittsburgh beer drinkers embraced as our core product. Even demographics that are very close can enjoy two very different flavors.
One of the common bonds between Victory and Southern Tier is availability of the core brands and seasonals. In its core markets and even in some of the more far-flung distribution areas, the more sought-after Southern Tier and Victory beers are fairly readily available and seldom attempt to bring in drinkers through scarcity. Do you feel that’s more important as the number of U.S. breweries swells and distribution and availability become more pressing concerns?
Coleman: Obviously, distribution is king. There’s awareness of the brand, but there’s also availability and the brands have to be available to consumers and to the retailers.
You also have to be consistent. If your supply chain is inconsistent and your retailer gives you that space and then all of a sudden your out of 2XIPA and can’t supply it, you’re going to lose that distribution pretty quickly and, in some cases, it’s impossible to get back. I think the fact that both companies are very well run, have great brewing teams, procurement, supply chains and logistics makes them a reliable partner for wholesalers and for retailers. When they give us a feature, a program or distribution, they know that the beer is going to be there to support that effort. That’s critical, because we’ve seen a lot of folks stumble, and it’s tough to get the confidence back from wholesalers and retailers once that happens.
DeMink: The other thing here is, when you talk about scarcity, it kind of leads to a lot of one-off brands and seasonal products. The one thing that we’ve found in talking to some of our wholesalers is that those can be some of the hardest things to manage because they’re a lot of SKUs [stock keeping units] and they’re coming at you all the time. I think that it’s a strong advantage for both Southern Tier and Victory that we have some established core brands.
I think, moving forward, you’re going to see the wholesalers kind of dig deep and go back to their roots where they’re building brands and they’re focusing on core items that have longevity and aren’t as complicated to manage … or sometimes less risky to manage. Sometimes brewers are asking wholesalers to take propositions on products that have no history and, on some occasions, wholesalers are getting burned and have massive amounts of inventory that they’re dumping and taking losses on. I think there is going to be some shifting at the wholesaler level for seasonal, special release and one-off products unless you’re these well-established brands like Victory and Southern Tier.
Covaleski: Phin makes a great point on that one for sure. If you move up that chain one more link, you find that retailers are in a tough position as well because they’re obligated to supply the next bright, shiny object for the geeks who are out there buying one bottle of it.
Often times, the dynamics of the situation involving prolific brewery SKUs and a very fickle audience conspire to make beer museums out of retailers. That’s not what they want to be doing. They want to be moving larger volumes of steady products.
Reposted from MarketWatch by Jason Notte is a freelance writer based in Portland, Ore. His writing has appeared in The New York Times, The Huffington Post and Esquire. Notte received a bachelor’s degree in journalism from the S.I. Newhouse School of Public Communications at Syracuse University in 1998. Follow him on Twitter @Notteham.