What Top Craft Brewers Could be Worth

FILED MARCH 31, 2014

March 31, 2014

Dear Client:

Here's an interesting exercise: What do you think the top 15-20 craft brewers are worth? We put some numbers to it and came up with some ranges.

This list is entirely theoretical, based on limited public data, projections and assumptions surrounding the following brewers and the industry in which they reside. Factors like distributor footprints and growth rate projections could severely sway these back-of-envelope valuations. Still, you'll find our model yielded results matching previously stated numbers -- Forbes recently listed Sierra Nevada founder Ken Grossman's net worth at $800 million, for example, and our Boulevard valuation hit right in ranges discussed (but not formally disclosed) by bankers and media outlets after the brewer's sale to Duvel.

Why air an entirely theoretical list? Couple reasons: M&A has recently towed a slow-but-steady course for the craft category, and many believe it will continue. Valuations tend to mystify, so call this an attempt to help conceptualize the process.

Moreover, while the craft industry and its founders enjoy a folksy, of-the-people reputation, the reality is that the segment has produced its fair share of multi- and centi-millionaires, which may be teased out of the following numbers (but also largely depends on ownership structure).

A WORD ON METHODOLOGY. How'd we come up with these numbers? We enlisted the help of veteran M&A banker Wilco Faessen, managing director at Barclays, to come up with a model to valuate some top craft brewers. AC Nielsen data, public information from publicly traded brewers Boston Beer and Craft Brewers Alliance, and Beer Handbook numbers all greatly contributed to populating our numerical assumptions across a variety of variables, including volumes and CAGR projections, prices per barrel, sales and marketing costs, Capex, taxes and more.

One key takeaway is how greatly price per barrel influences valuations. It's the reason Schell is pegged at $5 million - $10 million while the smaller New Glarus brewery could be worth $120 million - $140 million, per our calculations. According to AC Nielsen, our source says, Schell's price point is a lot lower: 35% lower than Boston Beer and Sierra's, in fact, whose barrels go for around our baseline, $215, per public data. Meanwhile, while Brooklyn and Stone are right next to each other in terms of barrelage output (both produced slightly more than 210,000 barrels last year), Brooklyn's upper range is $300 million to Stone's $450 million (excluding the value of their distributor operation). Harpoon is slightly larger than both, but with a valuation up to $85 million (also sans distributorship). They do a bit more discounting and don't do a lot of pricey big beers. (Note: We assumed a $91 cost of goods sold rate per barrel for brewers over 1 million barrels, and a 1% increase in COGS for every 100,000 barrels lower than 1 million [i.e., 900,000 barrels would equate to $92 COGS/ barrel]).

Growth rates were also considered. Assuming craft beer's roughly 7% share of the U.S. beer market volume has the potential to roughly double over the next decade (via mix shift to the high end), some will grow above and with the market, and some will be squeezed out. (We assigned four volume growth buckets, from under- to over-performers, surrounding a base case 7.5% 10-year CAGR to reach that doubled volume.) That also speaks to M&A potentiality: As limited shelf and tap space collide with growing SKUs, inevitable consolidation to fewer brands will benefit those already at the top.

Without further ado, the valuation ranges:

SIERRA NEVADA: $750 million - $950 million
NEW BELGIUM: $680 million - $780 million
SPOETZL: $260 million - $300 million
LAGUNITAS: $600 million - $700 million
DESCHUTES: $190 million - $220 million
BELL'S: $300 million - $380 million
STONE: $400 million - $450 million
SARANAC: $125 million - $135 million
BROOKLYN: $250 million - $300 million
DOGFISH HEAD: $360 million - $420 million
HARPOON: $75 million - $85 million
BOULEVARD: $100 million - $120 million
ABITA: $75 million - $95 million
SCHELL'S: $5 million - $10 million
NEW GLARUS: $120 million - $140 million
SHIPYARD: $90 million - $110 million
ALASKAN: $55 million - $65 million
LONG TRAIL: $25 million - $30 million

PHOENIX GROCERY TRENDS REFLECT LARGE RETAILER CHALLENGES

Retailers are eager to be in the growing, Hispanic-heavy metro Phoenix market as it's "sort of similar to what America will look like in the future," a food industry publisher told AzCentral.com. It's worth noting then what's going on in that grocery market: Albertsons and Safeway's announced merger will likely give that entity "a double-digit market share closer to Walmart" in the area. The $9 billion merger should give the combined a company 11% Valley market share. Meanwhile, the existing two largest market players, Kroger subsidiary Fry's and Walmart Supercenter, have 14% and 10% (Neighborhood Market stores add another 4%) respective market share. Fry's share is down a couple points over the last five years, while Walmart Supercenter is up one percentage point.

PRICE WARS? Per the "Perishable Pundit" [trade outlet] pricing study, Fry's produce prices were 15% higher than Walmart's in the Phoenix market. Safeway's prices were 17% higher, Albertson's were 22% higher and Bashas's 25% higher. "Safeway hasn't competed but they just tried to get out of Walmart's way," Pundit publisher James Prevor told the paper. They're towing a more upscale model. But in some places - like Tulsa, Oklahoma - natural food market Sprouts had lower produce prices than Walmart.

NATIONAL COMPETITION STIFFENS. The Phoenix case is a microcosm. "Traditional grocers are increasingly going up against an even more varied lineup of players that ranges from big-boxers like Walmart Supercenters and Costco to specialty- and natural-foods markets like Sprouts Farmers Market, Trader Joe's and Whole Foods," per the story.

You may know that Walmart is the leading U.S. food retailer, followed by Kroger, Costco, Target and Safeway. Albertsons is No. 9, per Supermarket News. Kroger has more than 2,600 stores and $96 billion in annual sales. And now, Boise-based Albertsons and Pleasanton, California-based Safeway will together have more than 2,400 stores, 27 distribution warehouses and 20 manufacturing plants nationally.

And don't forget the Amazon Fresh online grocery model rolling out on the West Coast. James said if that and specialty markets like Trader Joe's and Sprouts each take 1% of traditional supermarket sales, it could kill them.

BEER BRIEFS:

MARCH MADNESS IMPACT ON BEER DISTRIBUTOR. A local affiliate followed delivery guy Jason Miller of MillerCoors house Bonbright Distributors to see the effects of March Madness. The Dayton Flyers' run has been a boon for them. "A lot of these guys are taking more beer than what they would normally sit on," Jason said of their local bars. "Nobody wants to run out. The five, six case delivery orders were now eight, nine, ten cases. The 12 case deliveries were now 18. They were just making sure they had enough to cover for the weekend." Hopefully enough beer remains to drown the sorrows in Dayton as the Flyers magical run came to an end this weekend.

Until tomorrow, Harry

"The best way to cheer yourself is to try to cheer someone else up."
-Mark Twain

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