When a Little Nibble Becomes a Full Bite

Craft Brew Alliance, the collective that includes Kona, Widmer, and Redhook, announced today it was purchasing three breweries.  

Portland, OR (October 10, 2018) – Craft Brew Alliance, Inc. (“CBA”) (Nasdaq: BREW), a leading craft brewing company, is cementing its strategic brewing and distribution partnerships with Appalachian Mountain Brewery (AMB), Cisco Brewers, and Wynwood Brewing Co. through three separate purchase agreements.

This is in many ways entirely predictable. The three breweries were already either partly-owned or “strategically-partnered” with CBA. When two breweries come into contact with one another, the gravitational force seems to pull them together, not apart. This simple equation, small engagement —> greater engagement = outright purchase, has been repeated a number of times in the past. The breweries in this deal stand as perfect examples, and reading this news, I was struck by the ironies, coincidences,and deja vu of the ongoing CBA saga.

Gravity’s Pull

Why does gravity pull breweries together? It has to do with a concept my friend and economist Patrick Emerson always cites—efficiencies. It’s a lot cheaper and easier to streamline the production, distribution, and sales of beer if you eliminate redundancies, like having two breweries, two sets of sales and marketing teams, and different patchworks of distribution agreements.

Take this example. Back when Widmer Brothers was an independent brewery, it was approached by Hawaii’s Kona Brewing about doing a contract-brewing arrangement for the mainland. At first, their volumes were too small to make it pencil out with Widmer’s big brewery, but by 2001 they had grown large enough, and Widmer agreed. What happened next is illustrative of the gravity-attracts hypothesis. The following paragraph is from my forthcoming The Widmer Way, which you can now preorder on Amazon. (Please do!)

Because of the friendship connection between the two companies and Kona’s geographical isolation, Widmer Brothers was in a position to do more than just brew and bottle beer. Kurt Widmer described the slow, natural process of assimilation between the two companies. “It just evolved that, ‘Okay we’ll do your bottles for Hawaii and the mainland.’ And then, ‘Do you want us to do your draft for the mainland? Do you want feed into our Anheuser-Busch [distribution] network? Do you want us to do your sales and marketing on the mainland?’ At each step they were like, ‘Yeah, that would be great! These were things they couldn’t do from Hawaii anyhow, so it was all just plus for them. Finally it was just, as a separate company this is not making sense anymore, so we blended them in.”

Even without a grand acquisitions scheme, incremental creep tends to lead to closer bonds.

AB InBev’s Little Nibble

The quote above alludes to a similar, earlier arrangement: Anheuser-Busch’s 1996 minority-stake acquisition of Widmer. By the time of the Kona deal, a similar process had already been underway between St. Louis and Portland. (In your mind’s eye, you might see the little Kona fish being swallowed by the bigger Widmer salmon, which in turn was being swallowed by the AB whale, which would be spot-on.) Widmer had initially agreed to the partnership with AB because it gave them access to national distribution, but the Widmers soon discovered additional efficiencies. Again, back to The Widmer Way.

The partnership produced other benefits the brewery hadn’t anticipated. “That’s been a critical piece of our success, and it’s paid off in ways we didn’t even anticipate,” Kurt said. “We’d ask [Anheuser-Busch] things like, ‘Can we piggyback on you for purchasing glass, hops, malt?’ They were like, ‘Let’s see now, it won’t cost us anything—why wouldn’t we do that?’ But that wasn’t envisioned when we started.”

This is relevant now, of course, because there’s a very good chance that sometime between now and next August ABI will swallow CBA whole. A little more than two years ago, the two companies came to an agreement that would allow ABI to purchase CBA if it buys the outstanding shares for $24.50 before August 2019. Since that time, CBA has pursued an aggressive growth strategy for its star brand, that little Hawaii brewery, Kona. It’s paid off magnificently, too. While the Widmer and Redhook brands continue to collapse, Kona has shown incredible strength, growing 7% in the most recent quarter. Speculation that ABI will buy CBA for its Kona brand has become so common it’s come to seem like conventional wisdom. (There are a lot of moving parts on this relationship, and you can do some background reading here and here.)

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So to recap. Once upon a time Widmer Brothers slowly acquired Kona through a series of incremental steps and has been brewing Kona beer on the mainland for 17 years. It was simultaneously in the process of integrating itself with Anheuser-Busch (which was still pre-InBev). Eventually, production in Portland, once designed to make Hefeweizen, was increasingly devoted to Big Wave. Now a lot more Kona beer is made in Portland than in Hawaii—and a lot more Kona is made on Widmer Brother’s brewery than Widmer Brothers beer.

It’s funny how small steps can have such profound ramifications, isn’t it?