Brewers' Bounty: the rise of microbreweries



We all know a friend who has tried to make their own beer in a home-rigged brewery: more often than not, it ends in a hoppy, fizzy disaster. Spurred by a trend in the USA - which is now home to 1.1 million homebrewers - small, bespoke breweries are increasingly becoming a fixture of the beer landscape. But what if we told you that microbreweries could be one of the most valuable small business acquisitions that you could make?

Beer is the most commonly consumed beverage across much of the world, including the UK, North and South America, Australia, Eastern Europe and North Africa. As a result, it is perhaps no surprise to hear that beer sales are still at healthy levels - though the majority of these sales are not being made by the usual players.

In contrast to other consumer industries, the beer sector is not kept afloat through big players consolidating the market: its success is down, in large part, to the rise of microbreweries.

On the rise
According to analysis carried out by accountants UHY Hacker Young, there are 64 per cent more breweries today than there were just 5 years ago, with more than 2,000 distinct beer-makers in operation around the country.

This figure - the highest level recorded since the 1930s - has largely been propelled by beer entrepreneurs, according to UHY Hacker Young. Based on an analysis of HMRC data, the number of breweries grew by 18 per cent in just one year: from 1692 in 2015 to 1994 at the end of 2016. Between 2011 and today, that number represents a 65 per cent increase in just five years.

Entrepreneurs and new brands are largely responsible for this growth, says the accountancy firm. There are a few reasons for this: first, since 2002 breweries which produce less than 5,000 hectolitres of product need only pay half the beer duty of larger companies; second, consumers are increasingly looking out for local, independent brews rather than the usual mass-produced lager.

As a result, there were 520 new brewery openings in the UK - an increase of 55 per cent on 2016’s figures - and of all the beer sold in licensed venues around the country, nine per cent was described as “craft beer”, the produce of independent breweries. The value of craft beer sales alone grew by 23 per cent in 2016.

This looks set to continue given the government’s commitment to support independent breweries with both a freeze in beer duty and a reduction in business rates for small firms announced in the Autumn Budget for 2017.

With this growth comes more M&A activity as larger corporate entities try to get in on the rapid growth that smaller brewers are enjoying. The USA’s Brewers Association found that craft beer controlled 11 per cent of the country’s total beer market in 2015, and that number has only increased since.

“In the last two years, we’ve seen one by one, several strategic moves by the large global brewers to do mergers and acquisitions of smaller craft breweries in a more fast-paced manner than in the past,” said Julia Herz, craft beer program director for The Brewers Association.

Getting a round in
This is certainly the case in the UK today. In the past year, several high profile deals have seen popular microbreweries get picked up by the world’s largest drinks companies. In December 2015 Camden Town Brewery was bought out by AB InBev - which owns Budweiser, Stella Artois and Beck’s - for a reported £70 million, while in July, Carlsberg acquired the London Fields Brewery for an undisclosed sum.

AB InBev’s deal for the Kentish Town-based craft brewer, which produces pub favourites such as Camden Hells lager and Camden Pale Ale, was welcomed for its potential to drive the brewery’s growth, both by providing access to more funding and lending strategic insight.

Since then, Camden Town Brewery has funnelled £30 million into a new, 57,420 foot, state of the art facility in Enfield, North London, which will produce 400,000 hectolitres of beer each year. It has also grown its workforce by 40 percent and tapped into several new markets. In December 2016, the beermaker officially debuted in New York with an international launch party, bringing in new American sales of over double what was anticipated.

As James Simmonds, UHY Hacker Young’s partner, told City AM earlier this year, microbreweries represent quite the opportunity for small business acquirers. “Recent high-profile takeovers by larger breweries have given entrepreneurs and their backers proof of what can be achieved and proper benchmarks of how craft breweries can be valued. It is a long way from the cottage industry of a decade ago,” he explained.

Indeed, given that many microbreweries are local, community-led organisations, one of the most valuable growth drivers available to them is better distribution. Getting into new markets can be tough, especially when many pubs and chains only have one or two craft beers on tap. Other motivations include larger sales or marketing teams, an established HR department, higher quality ingredients and - just like Camden Town - shiny new brewing equipment.

Last orders
Being picked up by a multinational corporate behemoth is not the only route to growth for a small brewer, however, with one more palatable way to grow being to seek a merger with another craft brewery. While maintaining the benefits of economy of scale and a wider distribution network, it enables owners to maintain their independence and helps retain a loyal customer base who might be used to a local, community feel.

Another route is to look at partial private equity deals, providing another way for breweries to retain some independence. US label Lagunitas sold half of its business to Dutch giant Heineken for an estimated $500 million (£380 million) in a deal that let the beer maker maintain its business strategy, day-to-day operations and crucial brand identity.

A similar deal was agreed for BrewDog, one of the UK’s most fiercely independent brands. Even though the firm’s founder James Watt once described raising venture capital as “selling your soul to the devil”, he accepted a $264 million deal with TSG Consumer Partners in April 2017, handing over a 22 per cent stake in his business. With eyes firmly on the Asian and Australian markets, Watt conceded that the deal would “take our business, and the community’s investment in BrewDog, to the next level”.

As local, independent producers of what might be called “artisan” produce, these alternatives might provide a more acceptable route for growth for smaller breweries. One of the key challenges for such businesses to reckon with is the consumer perception that they have “sold out” to a corporate body.

On the other hand, the opportunity for growth - both from a microbrewery’s point of view, and any potential owner or investor’s too - is such that the swelling rate of M&A in the industry is not likely to cause a hangover for buyers or sellers any time soon. Last orders, it seems, are still a long time away.

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