This article originally appeared in the BizWest.
Brian Mulvaney is senior vice president for the Beverage Group at Bank of America Merrill Lynch, where Scott Vanderpool is a market executive for Colorado business banking.
With the craft beer industry continuing to grow, key players in the nearly $22 billion market are looking for ways to scale their businesses and meet increasing consumer demands. Colorado alone is home to 284 craft breweries, which make up 12 percent of the nation’s total. With craft beer becoming available in more places — from food trucks to fine-dining restaurants — brewers will want to invest in the infrastructure to deliver their products to retailers and consumers in an efficient manner.
Craft beer companies typically fit into three categories based on size: the small local brewpub, the regional brewer and the national (and super regional) production brewery — each unique when it comes to production and distribution.
The local brewpub typically sells most of its beer on premise and the remainder to select local bars and restaurants. This reduces the need for distribution and allows the brewpub to recognize profits quickly — but has limited growth potential. A regional brewer, however, might be selling out of a tasting room from one or multiple breweries, but most of its revenue and growth comes through selling brews into other retail accounts. From 2014 to 2015, regional craft breweries grew by nearly a third (31.9 percent). At a larger scale, a national production brewery may have several larger breweries and require a more sophisticated distribution system comprised of multiple beer wholesalers.
In today’s market, it’s important for investors and owners of breweries to be aligned in regards to their objectives when it comes to growth expectations, return of capital and appetite for reinvestment. Once brewers and investors agree on business objectives, they can develop a strategy to determine how large a brewery to build, which markets to target and how much debt and equity capital will be required. Brewers also will need to consider what the operational capital needs will be in order to maintain equipment, including maintenance and upgrades, expand sales force and what additional equipment will be needed to meet production growth.
Brewers also need to evaluate which markets and channels to expand into. Craft-centric regions — including Colorado, San Diego and the Pacific Northwest as well as the newer craft hubs of Austin and Atlanta — have turned into destinations for craft beer tourism with a high brewer per capita. Before entering into a new market, a brewer needs to fully understand the beer market shares of not only the other craft brands, but of the global brewer brands as well. Another area of opportunity for the smaller brewer is expanding into the off-premise accounts, such as traditional grocers such as Whole Foods. Whole Foods now carries a selection of craft beers, including a locally brewed program.
A key partner for craft brewers is their independent beer wholesaler, who supports, sells and distributes their product. As the craft beer industry has continued to grow over the last decade, wholesalers have adjusted their business models from supporting just a few key suppliers to now having more than 30 breweries to support, sell and distribute. As a brewer enters into a new market, they need to find out which wholesaler will best support, sell and nurture their brand. Key factors that drive this value include financial elements (growth rate and profitability), intangible factors (brand awareness and image), competitive positioning and ability to sustain growth.
According to the National Brewers Association, approximately $106 billion in sales was generated from the craft beer market in 2015, an increase over past years. The beer business is booming, resulting in an increasingly competitive industry for the next generation of brewers. Fortunately, their ability to secure capital, recruit talent and secure options for their future has never been better.