Lagunitas Enters JV with Heineken Global


September 8, 2015

Dear Client:

Heineken and Lagunitas are announcing a JV between the two companies.

Few things to stress about this deal: It's between Heineken global and Lagunitas; it has nothing to do with HUSA. And it's not an acquisition, but a true, 50/50 joint venture, by DOJ standards. (And the move wasn't for capital needs. We understand that Lagunitas has a $190 million line of credit to see their brewery projects through.)

Tony will continue to run the company. The crux here is the prospect of going global with Heineken.

OUR TAKE. In our view, this is the most exciting announcement Heineken global has seen in awhile.

Lagunitas is a superstar. Their 5-year CAGR growth rate is 52.4%. That's unheard of in consumer product goods. Even on large bases they've continued to grow at an impressive rate: They finished 2013 at around 400,420 barrels, and 2014 at more than 600,000. By now, of course, they're just about national. Just eight years ago, they were 40,000 barrels.

Their footprints don't align well at the moment, but putting Lagunitas into the HUSA chain machine would escalate that brand further stateside.
This is the shot in the arm that Heineken needed to fire up distribs right before convention season. They don't have a brand like Lagunitas. And they needed a punch: Dos Equis growth is slowing; brand Heineken has picked up a bit, but it's not on fire; and Newcastle is ... Newcastle.
We bet they'll try to move Lagunitas to more Heineken distribs as years go on.

We've heard that Lagunitas actually got higher offers than the one they took. But this is the best fit, again, mostly for the global imperative.


In case you missed it, last week CBD reported on a joint venture between Virtue Cider Company of Fennville, Michigan, and Goose Island Beer Company, wherein Goose Island will become the majority shareholder. As some of you may know, Virtue's co-founder Gregory Hall (also Goose founder John Hall's son) is formerly Goose Island's brewmaster, who left the company five or so years ago to start the cidery.

Greg and co-founder Stephen Schmakel, will continue to be the creative and operational team behind the business and will continue producing
Virtue Cider in Fennville, per announcement.

Greg called the deal with Goose "a natural" progression. "We had plans to make great cider, enough to make customers happy --- problem is, the cider market has blown up," Greg said. "We just didn't have resources to make enough cider. So we started looking for partners, as with everyone in the craft side of things... The phone never stops ringing.

Their "main gap in meeting demand" has been a "little bottle filler," according to Greg. The tie-up with Goose allows them to "concentrate on making the ciders, and not spend lot of time and energy on packaging side." Virtue will utilize the facilities at Goose Island†s Fulton Street brewery for packaging needs â€" including bottling and kegging, and as a hub for increased distribution.

Last year, Virtue probably produced around 200,000 gallons for its 20-state footprint (which includes some MillerCoors houses like Monarch in the Midwest and boutique shops like Flood Distribution in Texas; they're also with a few Sheehan houses and wine and spirits guys). Greg said they didn't "have any plans for immediate changes" to their distribution footprint but they'll "look at it in a case-by-case basis," and he's "sure" that "some things will happen over time."

As for potential markets: The "focus right now is going to be on the markets we're already in; we wanna make sure we can meet demand in those markets. And if we have more cider, we'll be looking at new markets as well. We've already had a lot of interest from other markets, that we've been holding on ... I'm sure after today we'll have even more interest. This is good news for apple growers of Michigan, and cider lovers."

For those conspiracy theorists, Greg hasn't been scheming this tie-up since he left Goose. "I wish I could have told you in 2011 … the cider market was gonna grow like 700% according to IRI in four years ... but I wasn't planning on that," he said. "We were content on growing our brand up here in Michigan and getting it out to the markets that were asking for it, and the cider market blew up and demand greatly exceeded our ability to supply. So our plan had to change; this path led us back to Goose."

He called them "the perfect partner - like family to me, but also for their resources in packaging, sales and distribution, spots we needed help in. It makes sense and allows us to make all our cider in Fennville with Michigan apples. Then Ken Stout and his team in Chicago will help us by packaging and getting it out to market."

Goose general manager Ken Stout told CBD that for them, "there was no other cidery. It was Virtue all along. For everything we've talked about, with Greg's history with Goose; being on our advisory board; and the quality of cider Virtue is putting out ... it's seamless. It's perfect."

This may be the "craftiest" of A-B affiliated cider brands to date. Virtue makes European-style Farmhouse ciders using Michigan apples pressed at their farm in Fennville. Their barrel-aged ciders, like bourbon-barrel aged offering, "The Mitten," command top accolades and pricing in the segment.


Friday our sister publication Wine & Spirits Daily wrote on the note from Nomura analyst Ian Shackleton regarding ongoing speculation over a possible Diageo and SABMiller merger. "We see strong pressure on both Diageo and SABMiller management to create value for shareholders," wrote Ian, as SABMiller's shares have fallen by 18.1% and Diageo has declined by 10.2% over the past six months.

Nomura estimates that an equal emerging and mature market split of profits between the merged companies "could offer a firmer profit base in uncertain times (for SABMiller holders) and potentially increase its growth profile in the longer term (for Diageo holders)." Looking at Diageo specifically, Ian thinks a "more balanced portfolio of beer and spirits could produce material upside," such as adding 18% to combined net profits and improved revenue synergies.

But there are other reasons why these speculations continue to surface. For starters, a number of analyst and news reports have intimated that SABMiller "feels under threat still from a bid from AB InBev" (indeed we wrote about SAB allegedly hiring a firm to help fend off a bid, per Sunday Times, just last week). Joining with Diageo could protect them from that scenario.

WHERE DOES ABI FIT IN? Recall similar speculation has risen around AB InBev acquiring Diageo, or SABMiller, or SABMiller making a deal with Heineken. A note from ISI's Rob Ottenstein last year said ABI is the "most likely partner" for Diageo globally, while in the U.S. Diageo and SABMiller would be "a better fit as just under 2/3 of MillerCoors distributors also sell Diageo brands, although both TAP [Molson Coors] and SABMiller would need to agree on terms."

Bernstein Research's Trevor Stirling also took on the possibility of an ABI takeover of Diageo early this summer. While there are potential upsides from a break-up and cost-cutting angle, a number of barriers stand in the way. For one, both U.S. beer and spirits distributors "would likely fret very publicly about a potential ABI-inspired consolidation/roll-up," he wrote. Furthermore, "it's not clear how attractive would be the financial returns from the deal." ABI's largest shareholder (3G) has historically bought relatively stable cash-flow industries, and then significantly cut costs and enhanced margins. The problem with Diageo, or any spirits producer, is that the cash flow for premium spirits is inherently less stable and driven more by image and trends.

So while it doesn't do to discredit these possible scenarios as crazier things have happened, neither a SABMiller/Diageo or ABI/Diageo deal seems likely right now as there are a number of hurdles in both scenarios. But we don't expect the speculations to die down anytime soon, and in the meantime we'll have our ear to the ground.


NFL FANS CAN "LEAVE THE DRIVING" TO MILLER LITE. With the NFL kickoff this week, Miller Lite has announced it will bring Miller Lite Free Rides to six cities this fall. The brand has partnered with local public transit companies to provide free lifts for fans in Atlanta; Chicago; Cincinnati; Green Bay, Wisconsin; Nashville, Tennessee; and Philadelphia. This is the biggest expansion of the Free Rides program to date, last year 73,000 fans in Philadelphia and Atlanta hitched a ride with Miller Lite on game days. Miller Lite estimates it has provided more than 4.8 million people a free ride since they started the program 28 years ago.

BREWPIC: Bud Light Apple? Beer Street Journal posted the label on their site.


Until tomorrow, Harry

Don't forget to register for Beer Summit 2016 in New Orleans January 25-26 at The Roosevelt hotel. Lineup will be announced later this month. Tickets go quickly, so reserve your spot today:

"Nothing like a lot of exercise to make you realize you'd rather be lazy and dead sooner." - Randy K. Milholland

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