In a follow-up earnings call on Thursday, Craft Brew Alliance (CBA) executives expounded on third quarter results and discussed the increasingly competitive craft beer landscape.
Let’s start with the highlights: Total CBA depletion volumes grew 6 percent compared to the third quarter in 2013. Year-to-date depletion totals are now up 8 percent, while year-to-date net sales are up 13 percent, the company said.
But despite shipment gains, gross margins declined 200 basis points, to 28.1 percent, compared to the third quarter of 2013. CBA attributed those declines to the startup costs associated with the launch of contract brewing operations at Blues City Brewing in Memphis, which CBA chief Andy Thomas described as a “big deal” during the call.
Despite the third quarter declines, however, gross margin rates — which had been a point of frustration for CBA in years past — were still up 80 basis points through the first nine months of the year.
So what did Thomas have to say about it all?
“Our team believes that we are likely to look back at Q-3 2014 as a pivotal milestone on our journey,” he said.
That journey, one that will no doubt include a heavy reliance on the production capabilities at Blues City Brewing, will not come without its own set of challenges.
Calling Blues City a “bridge to the future,” Thomas said it “begins to highlight the possibilities for future improvements and supply chain network design, as it enables us to rethink the manner in which we handle all aspects of our supply chain.”
That future, however, will include intensified pressures from brewers, both large and small, at bars and restaurants.
“The on-premise channel continues to be extremely competitive,” said Ken Kunze, the company’s chief marketing officer. “The competitive situation is driven by the proliferation of local craft brands — many of which are only available in draft format — and by very aggressive pricing activity by the majors, specifically ABI, aggressively pricing draft to defend its presence in the on-premise. While we want to be competitive in the on-premise channel, we do not want to chase volume in a rapidly changing and deteriorating channel dynamic.”
Thomas elaborated.
“I think there’s a metamorphosis happening in on-premise,” he said. “We are seeing pretty aggressive pricing as you start to see more and more of those handles moving away from the majors and moving to craft. Another dynamic, especially in craft-centric and very well-developed craft markets, we’re seeing is increased rotation of tap handles.”
So instead of trying to fight for low-volume tap handles at craft-savvy rotator bars, CBA will look to strengthen its relationships with larger accounts like Buffalo Wild Wings and other chains.
“We feel really good about how we’re competing in that rotating space,” Thomas continued. “But we’re unabashedly and unapologetically picking our battles. Because it’s important to be there and it’s important to stay vibrant, but it’s also important to not let the tail wag the dog and start chasing unprofitable volume for all the wrong reasons.”
Brands:
- Redhook depletions fell two percent during the quarter, but are still up six percent year-to-date, Kunze said. The quarterly declines were attributed to SKU rationalization — 50 percent of Redhook SKUs were cut in 2014 — and tough comps against last year’s launch of Game Changer Ale at more than 900 Buffalo Wild Wing locations.
- KCCO, which was originally launched as a co-branded opportunity under the Redhook label, will become its own standalone brand as part of a licensing agreement with The Chive’s Resignation Brewery. “We believe KCCO can be a bigger opportunity by treating it as a standalone brand fully leveraging the Chive’s digital marketing capability,” said Kunze.
- For a Widmer brand that historically has struggled to post positive results, third quarter depletions actually increased by 4 percent. Year-to-date depletions are up 2 percent, Kunze said.
- Omission, CBA’s gluten-free offering and perhaps the company’s biggest growth opportunity, grew aggressively in the third quarter, up 65 percent, Kunze said. In only its second year, the Omission label has achieved a 46 share of the gluten-free beer market, according the most recent IRI scans.
- Kona continued its impressive growth trends, with depletions increasing 15 percent during the quarter and 14 percent year-to-date. That growth was driven primarily by Big Wave, Castaway IPA and variety packs, Kunze said.
Editor’s note: Additional details from the call, including more on the company’s brewing operations in Memphis, will follow next week.