One day after reporting portfolio-wide shipment declines of 6 percent for 2016, Craft Brew Alliance executives held a call with investors and analysts to explain the company’s performance and provide their outlook on an industry in the midst of “revolutionary change.”
“I won’t mince words,” Craft Brew Alliance CEO Andy Thomas said at the beginning of the call. “It’s messy out there.”
In an effort to help analysts better understand why the craft brewing conglomerate shipped 86,300 fewer barrels of Widmer and Redhook products while simultaneously growing Kona shipments by more than 45,000 barrels, Thomas, as much an observer of the beer scene as a CEO, described three “critical” category developments that he believes are transforming the way businesses within the craft space operate.
“Consumers across a vast spectrum of demographics are drinking differently,” he said. “Drinking occasions and channels of trade are being redefined before our very eyes.”
From Thomas’ point of view, three forces of change — consumers, channels and competition — have “reached a tipping point,” and are having a dramatic impact on category dynamics.
“Not only have consumers, outlets and occasions changed — past tense — they are continuing to change in the present tense,” he said adding that because the pace of that change has accelerated, it could be could be contributing to the recent spat of brewery closures.
“For the first time, we are seeing evidence of a shakeout, brought about by the collision of a transformed beer market and a disproportionate number of industry participants largely modeled for yesterday’s challenges and yesterday’s dynamics,” he said.
His statement comes exactly one week after San Francisco’s Speakeasy Ales & Lagers, which had been in business for 20 years and scaled production to more than 33,000 barrels during that time, announced it was ceasing operations.
The demise of one established, regional brewery doesn’t prove there’s a shakeout. But Thomas highlighted other challenges that larger craft players, like CBA, are up against.
Among them, new breweries that continue to flood the scene while smaller projects fold, taproom-focused breweries that are taking volume away from traditional on-premise retailers, and wholesalers that are “carrying more brands and more inventory” while struggling to turn product fast enough before it gets old. Those factors, he said, indicate that more tumult could be forthcoming.
Nevertheless, CBA still managed to increase shipments for its Kona brand by 13 percent in 2016, a trend that included 50 percent growth for Kona Big Wave Golden Ale on draft, 133 percent growth for Kona seasonals and 12 percent growth for the Kona “Island Hopper” variety pack.
“The Kona opportunity remains large,” chief marketing officer Ken Kunze said during the call. “Even as a leading craft brand, Kona’s basic distribution opportunity remains significant.”
According to Kunze, Kona, which is more than 50 percent of total CBA production and is sold across all 50 states, is still only distributed at just 20 percent of all potential off-premise retail accounts.
“We believe CBA’s future value will be driven largely by Kona’s domestic and international volume opportunity,” he said.
And while Kunze believes other craft breweries might struggle to scale their operations in an increasingly crowded environment, CBA still intends to finish 2017 either flat or up as much as 6 percent with its “Kona Plus” strategy — which combines a nationwide sales effort for the Hawaiian-themed brand with a regional sales approach for strategic partners Cisco Brewers, Appalachian Mountain, Wynwood Brewing as well as the more established Widmer and Redhook labels.
“Our 2017 topline guidance is supported by the strength of the Kona brand, our expanded partnership with Anheuser Busch, and the ongoing development of our emerging business,” chief financial officer Joe Vanderstelt said via a press release.