California: Standing on Shifting Ground

January 1, 2016 By Christopher Shepard

In the days surrounding the California Craft Brewers Summit in September, a handful of developments rocked the state’s beer world. Lagunitas Brewing Co. announced its joint venture with Heineken, and MillerCoors announced it would buy a majority stake in Saint Archer Brewing Co. just days before people in the business of making, distributing, selling and buying beer gathered in Sacramento for the Summit. Soon after, Anheuser-Busch InBev (AB InBev) said it will add a fifth small brewer to its high-end portfolio and acquire Los Angeles’ Golden Road Brewing. Only a few months before, Firestone Walker Brewing Co. joined the small cadre of American breweries under the ownership of Duvel Moortgat USA.

All of that followed an exceptionally busy year for people in the business of buying and selling small brewing companies. That’s as consolidation within the wholesaler tier, while less talked about, continues apace.

The flurry of announced brewer transactions in September came around the same time as a pair of Bay Area distributors said they’d made a deal to sell their businesses, too. They’d both found the same buyer: AB InBev, also their top supplier. AB InBev already operates a handful of wholly owned distributorships, or branches, in the state. After the deals close, it will take over operations of its Oakland and San Jose wholesalers.

AB InBev doesn’t sell as much beer in California as it used to. Back in 2009, it held almost 42 percent share of the California beer market. That slipped to about 36 percent by 2014. MillerCoors, the second-largest U.S. brewer, also shed a couple of share points in the last five years. Combined, they lost over 8 share points. Just one share point represents a couple of hundred-thousand barrels in California: It’s the largest beer market in the country at 23.5 million barrels in 2014.

Constellation, which imports big Mexican brands like Corona and Modelo Especial into the U.S., and smaller brewers outside the top five got much of the share that the two larger brewers lost. Some small brewers that call California home gained the most. Based on state tax records, in-state brewers produced and sold about 2 million barrels there, up 19 percent over 2013 to a little under 9 percent of the state’s beer market.

The fast growth of home-state sales for California breweries also shows up in retail data. All of the 15 fastest-growing craft brands for the first half of this year never left the state, according to off-premise sales tracked by IRI, a firm that monitors the industry. In fact, they all came from five of the largest in-state brewers: Sierra Nevada Brewing Co., Lagunitas, Stone Brewing Co., Firestone Walker and Ballast Point Brewing & Spirits. At the same time, all but two of the 15 craft brands losing the most volume in California during that time came from outside the state.

But retail data doesn’t capture the full picture of small-brewery growth there (or elsewhere, for that matter). As of this writing, the state’s brewery count neared 600, according to the California Craft Brewers Association. And most of those are small and locally focused, as the national Brewers Association’s economist Bart Watson showed during the California Summit.

Most California breweries produced less than 1,000 barrels last year, and 94 percent produced less than 10,000 barrels, Watson found using that same state tax data. Over 90 percent of breweries there sold 100 percent of their beer just within California. Further, just over a third sold all the beer they made directly to beer drinkers at their breweries. These smaller and smaller breweries serve smaller and smaller communities. Indeed, 75 percent of Californians now live within 5 miles of a brewery, Watson showed. That, too, has changed significantly in the last five years and continues to as a new brewery opens every couple of days.

But in September, it felt like a high-profile California brewery announced an acquisition every couple of days. At the Summit, an audience member asked Watson about the potential impact of brewers like AB InBev, MillerCoors and Heineken acquiring or taking stakes in smaller state operations. He responded with a comparison with other AB InBev purchases, like that of 10 Barrel from Bend, Oregon. “It’s not for Bend,” he said, arguing that California is “too far-developed for them to worry about.” Instead, acquired brands are for selling outside their home markets and filling out the craft portfolio AB InBev and other brewers can bring to their distributors, he asserted.

Less than a month after the Summit, a couple of other earth-shaking announcements hit the beer world in California and far, far beyond. Word that the world’s largest brewer, AB InBev, would acquire the second-largest, SABMiller, ramped up in the days before the two companies finally reached an informal agreement. Such a deal will require approval from the U.S. Department of Justice (DOJ), which will likely require the new company to divest SABMiller’s current 58 percent stake in MillerCoors.

So, at least in the U.S., Budweiser and Miller will not be owned by the same company. But just before that announcement, it came out that the DOJ is already investigating AB InBev. It received accusations that the distributor purchases noted above (as well as alleged pressure AB InBev puts on its independent wholesalers) limit craft brewers’ access to market. Action from the DOJ on either front has the potential to cause tremors for years to come.