Brick Brewing is better left off the craft beer M&A radar
- May 05, 2014
||proprietory origination, April 2014
||Brick Brewing Co. Limited (Canada), no.1 independent regional brewer in Ontario
||candidates include MillerCoors (Tenth and Blake subsidiary)
||founders and public shareholders of Brick Brewing
||build stable of regional brands, growth of craft beer segment
||only 5% of Brick's volume sales are currently in the premium craft segment ('Waterloo' brand)
Fast-growing craft regional is the big story in developed world beer M&A these days, as Glenboden amongst others predicted. However a player like Brick Brewing demonstrates that, when you scratch beneath the surface, there's a key difference between M&A -good craft, and M&A -doubtful regional, in the beer industry.
Brick is a company that's consistently delivered sales growth above the level of the Canadian beer market in total, as well as a double-digit EBITDA margin (see profile). That's rarely the case with craft beer producers in developed markets.
So in strict financial terms Brick might be an attractive acquisition candidate. However a closer look at the numbers shows that only 5% of sales volume is genuine premium craft beer (relatively new 'Wellington' brand). 60% is 'Laker' beer, which is in the value segment; another 30% is co-packing sales.
Brick's profitability formula? Most of its sales are in its local, Ontario region. Thanks to that its selling, marketing and admin costs are relatively low, at about 20% of sales revenue. So it's a regional, not a craft, player.
Brick's model is based on sponsorship of local events, community organisations, festivals; on small-batch production and seasonal specialties; on having its own shop and sampling lounge.
The question is, how attractive is a regional beer producer, with Brick's model, from an M&A perspective ? That model is hard to sustain or replicate within large brewing groups, which most of all want a product whose sales they can multiply.
So, a beer major should be looking for a differentiated product, when assessing a 'craft' candidate, not for regionality. Take AB InBev's recent purchase of Blue Point Brewing. It's also regional, based in Long Island, but at least 50% of its sales are genuinely craft, under its 'Toasted Lager' brand.
An alternative M&A strategy is to build a network of regional brands. That involves a de-centralised model in terms of product development and marketing, to retain what's good in companies like Brick, but with centralisation of financial control and of course distribution.
That M&A model is however hard to execute, even at the transaction level let alone integration one, because of differences in valuation that plague 'marriage of equals' -type M&A situations. The seller claims to offer craft, but the buyer is paying for less-valuable regional (see valuation).
Glenboden has experience in this type of 'regional play' in its own back-yard of Poland - Ciechan and Gontyniec are both pursuing that route, with mixed success so far. Another example, which might be a buyer for Brick, is Tenth and Blake, the craft & import division of MillerCoors in the US.