Craft beer - revenue risk or opportunity?
Craft beer is everywhere at the moment and in large beer drinking markets such as the UK and Australia beer consumers have never had so much choice. Many pubs and bars now stock a huge range of Ales, Lagers & Stouts, from local micro brewers to far-flung exotic brewers.
There will typically 8-12 beers on tap and an even larger selection bottled. This gives consumers an unprecedented level of choice at their local watering hole, even if some of them come at an eye watering price.
Going to the supermarket the trend continues. In the UK Tesco’s recent range review increased the number of craft beers listed from 2 to 30 in its Tesco Express stores at the expense of more traditional mainstream brands from mega brewers such as Heineken.
Whilst there is undoubtedly a degree of slowdown in the growth of craft beer in some more mature markets like the US there is definitely a real opportunity for brewers and distributors in a sector that has seen relatively flat growth in many of its developed markets.
Whilst the consumer opportunity is clear, how does this translate to revenue and ultimately profits for brewers and distributors?
For local brewers getting into big retailers offers a great opportunity to scale your business and grow your top line significantly by reaching many more consumers, however if you’re going to push into the mass retail space then you are likely to end up diluting your overall revenue / HL. Whilst craft beer represents a trade-up opportunity to retailers, they will use their scale to lower your invoice price and boost their margins. There will also be an expectation around financial investment for price promotions and instore activity all which will further dilute your revenue / HL and EBITDA %.
The message here is be prepared and don’t get light-headed about the volume opportunity at the expense of protecting your revenue. Ensure your business case captures likely future financial investment and factor this into your pricing projections. Be prepared for tough negotiations and ensure you have a number of options that are acceptable to you, in case a retailer doesn’t like your initial proposal. Remember that there are lots of other brewers competing for listings so your commercial and brand proposition needs to be strong.
So while off trade is a big opportunity, the story in on trade is that you need to recognise that the situation has changed, pubs and bars now have a much bigger range of products to choose from and as such it’s a more competitive environment, with outlets proactively cycling through different brands on a periodic basis. You need to ensure that your sales agents / reps are moving with the times and have the right skills to keep your products stocked. The risk here is seeing an erosion in on trade listings whilst you are distracted by off trade opportunities.
The choice here is develop or buy, if you decide to develop your own range of craft beers then as with all NPD there is risk that consumers won’t like it, that it could lack authenticity. From a revenue standpoint you will have control of your pricing and will ensure that you price and invest in your new brands in a consistent and defensible way vs your existing portfolio. Buying an established craft beer from a smaller brewer may offset the consumer risk but you are likely to inherit pricing and investment structures inconsistent with your current portfolio which could stimulate unwanted discussion on the commercials!
So if you are looking to buy a successful craft beer or brewer then ensure the due diligence extends to fully evaluating the commercial agreements so you can anticipate any headaches you will have bringing these new growth brands into your portfolio.
Overall craft beer represents a great opportunity for consumers, retailers and suppliers. Not all suppliers will do well however, some small brewers will end up diluting their business, some will over expand. Mega brewers will make some great acquisitions and launch some great premium NPD and some will make costly mistakes. Your challenge is to ensure you prepare well, do all the right analysis to make the right decisions that are going to improve your revenue and enable you to build a sustainable business. Don’t get distracted and rushed by a frenzied opportunity! Cheers!