Craft Brew Alliance (CBA) is in the process of purchasing a minority stake in Nantucket, Mass.-based Cisco Brewers, CEO Andy Thomas told Brewbound on Monday.
The two parties are still negotiating specific terms, but Thomas said a deal would be for less than 25 percent of the company, enabling Cisco to maintain its status as a Brewers Association-defined craft brewer.
In the meantime, the two companies have signed a preliminary agreement that will give Cisco access to brewing capacity at CBA’s Portsmouth, N.H. facility, through an alternating proprietorship arrangement, and make CBA its master distributor in exchange for undisclosed fees.
“Having a partner that knows how to manage a wholesale network and properly bring craft beer to market is just one of the reasons this partnership with CBA is so appealing,” Cisco CEO Jay Harman said in a statement. “Anyone who has been to Cisco falls in love with the beer but also the mismatched handmade bar stools and carefree unbuttoned culture that makes us who we are. When it comes to sharing Cisco off the island, and the steep competition in New England and beyond – with a new brewery opening every 12 hours – our goal is to get good, fresh beer to market in a way that truly represents our brands and culture.”
No jobs will be lost as a result of the transaction, Thomas said. In fact, some Cisco employees may be given an opportunity to join CBA, he added.
“There are some good faith investments on our end, like taking on the expense of a shared brewer and the expense of sales people and local market managers,” Thomas told Brewbound.
Cisco is owned and operated by five partners who also jointly own the Triple Eight Distillery and Nantucket Vineyard. Those brands are not included in the deal but have slowed negotiations, Thomas said.
“This deal is a little more complicated given the nature and the structure of their business,” he said. “There is a lot of stuff to stickhandle through and we don’t want to do anything to impair them.”
All five partners will remain with the business and maintain control of the company for now, Thomas said.
CBA’s lead innovation brewer, Mark Valeriani, will oversee production of Cisco beers at Cisco’s brewery on Nantucket, as well as CBA’s Portsmouth brewery, the company said in a statement.
Cisco, best recognized for its popular Whale’s Tale Pale Ale, currently produces a majority of its beer via contract at F.X. Matt Brewing in Utica, New York. Over the next few months, Thomas said, Cisco will begin shifting the bulk of that production to the Redhook Brewery in Portsmouth, where it can make beer more frequently, in comparatively smaller batches.
“They haven’t had the best infrastructure to get that done,” Thomas said. “There is an opportunity to make the beer more vibrant and a better expression of what Cisco has wanted it to be.”
Emerging Business; Distribution Complexities
There are a few wrinkles that make this particular deal somewhat unique for CBA, which makes and markets the Kona, Widmer, Redhook, Omission and Square Mile cider brands. For the most part, it’s functioning much like the company’s existing partnership with North Carolina-based Appalachian Mountain Brewing (AMB), which signed similar agreements with CBA earlier this year.
In both scenarios, CBA is acting as a master distributor in charge of sales & marketing efforts as well as a primary brewing partner. In the case of Cisco, however, CBA will inherit a mixed wholesale network consisting of more than 30 distributors in 25 states, according to Cisco’s website.
“Cisco is broadly distributed through some non-aligned wholesalers,” Thomas said. “That is new for us and it is something we haven’t done before.”
Those familiar with CBA understand that one of its biggest advantages — and perhaps what makes it such an attractive partner to some smaller craft producers like Cisco and AMB — is its ability to activate a nationwide network of Anheuser-Busch wholesalers at the flip of a switch.
In deals dating back as far as 1994, prior to the 2008 merger between Redhook and Widmer (which formed CBA), the two companies sold stakes to A-B in exchange for mandated access to its wholesale network. A-B currently owns 31.7 percent of CBA’s outstanding common stock and, in exchange, CBA is granted access to its wholesale network (where it too pays master distribution fees).
But in places like Boston, New York City and Southern California, the Cisco brand is currently sold via Sheehan Companies/ L. Knife & Son’s “Craft Beer Guild” distributing arm, a craft-focused wholesale unit that CBA does not currently work closely with.
That’s not to say that CBA is totally unfamiliar with the Sheehan family, a longtime A-B wholesaler that itself has grown via acquisition in dozens of states. It currently does some business with its L. Knife & Son outfits in other parts of Massachusetts and New York, for example.
Still, Cisco’s previously established network of wholesalers (including some Coors outfits) means CBA, which is most effective when bringing multiple brands to market through A-B’s independent and wholly-owned distributors, will have more difficulty successfully operating as Cisco’s “master distributor,” and test the larger company’s viability as a long-term strategic partner for other emerging craft brands.
Synergies
Nevertheless, there are some obvious advantages for both companies.
“As cliché as it sounds, this is a win-win,” Thomas said. “Cisco has an opportunity to make some really good beer, get priority in our Portsmouth brewery and get access to an infrastructure they don’t currently have. We get a strong local brand that enables the continued rebalancing of our brewing footprint and an option on the future.”
Operationally, a deal with Cisco enables CBA to improve capacity utilization in Portsmouth and shift production of brands like Kona Longboard Lager, Kona Big Wave and Redhook Long Hammer IPA to Memphis, Tenn., where it currently brews via an alternating proprietorship with Blues City Brewing.
It also gives CBA improved access to an important northeast market with a brand that Thomas described as “locally relevant.”
“Cisco becomes our lead brand in New England now,” he said.
Indeed, the Northeast is CBA’s weakest geography. According to a publicly accessible investor presentation, which was updated earlier this month, the Northeast accounts for just 4.2 percent of the company’s total sales. Total craft volumes, on the other hand, are over 11 percent in the region.
In other words, getting a deal done in the Northeast was vital to CBA’s future success in that marketplace.
“Just running and doing what everyone else is doing isn’t always the right way to do things,” Thomas said, referring to acquisitions on the west coast and brewery expansions in places like North Carolina and Virginia.
“We have beautiful asset in New England, a good infrastructure because of the legacy position of the Redhook brand, and great retailer and wholesaler relationships,” he added. “We can leverage those assets in a part of the country that makes sense and, with Cisco, we will have a better opportunity to activate our other brands. We are playing a longer game and asking ourselves, how can we do what nobody else can do?”
For Cisco, which expects to produce about 30,000 barrels in 2015, a deal with CBA means continued growth throughout New England and in other regions of the country.
“Today, there are a lot of options for breweries that want to grow. Working with the team of people at CBA to craft this partnership has been extremely energizing,” Harman said in the statement.
“We evaluated several options when looking for ways to embark on the next stage in our journey, and after sitting around the kitchen table with Andy and his team, we realized we had found a partner who could not just help us grow, but who could also help us realize the full potential of what we started 20 years ago,” he added.
Thomas said he expects to have “additional clarity” regarding CBA’s planned investment and official equity position in Cisco later this year.
Including contract production, CBA made approximately 830,000 barrels of beer in 2014, according to company filings.