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Can Kona Brewing Keep Craft Brew Alliance Growing in Q4?

By Rich Duprey – Updated Apr 10, 2019 at 7:55AM

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The Hawaiian-based beer has been the one bright spot in an otherwise disappointing portfolio.

Craft Brew Alliance (BREW) has been leaning heavily on its Kona Brewing brand as it tries to sort out how best to grow again. Because its Widmer Brothers and Redhook Ale Brewery businesses have faltered badly, the craft brewer has been like a three-legged stool with two legs cut out from under it.

As sales flattened over the first nine months of 2018, despite a 7% gain in depletions for Kona Brewing, Craft Brew Alliance's stock lost a quarter of its value. Having embarked on a "Kona Plus" strategy four years ago -- which prioritizes Kona sales nationally while pushing partner brands in their home markets -- it's only now that the "plus" portion of the plan may come into its own.

Kona Brewing beer bottles and glass overlooking ocean

Kona Brewing is the key to Craft Brew Alliance's future. Image source: Kona Brewing.

The brewer recently acquired three partner brands -- Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Company -- which enjoyed a combined 18% increase in depletions over the first three quarters of 2018 (depletions are shipments from a distributor to a retailer and are considered an industry proxy for consumer demand). And that increase may signal Craft Brew Alliance can gain some traction.

With fourth-quarter earnings scheduled for Thursday, March 7, here are the three important items investors should watch.

1. Still riding the wave?

The main question will be: How did Kona Brewing perform? The Hawaiian-based beer family saw depletions jump 9% in the third quarter, a steady improvement over the 3% gain notched in the first quarter and the 7% increase in the second.

There's reason to believe that this trajectory continued into the fourth quarter. Data from market research company IRI indicates that dollar volume sales of Kona Big Wave Golden Ale at major off-premise retailers like packaged-goods stores, supermarkets, mass merchandisers, and warehouse clubs were up over 32% for 2018. That makes it one of only a handful of craft beers that were able to post double-digit increases.

But it might not be enough to offset any declines in the rest of Craft Brew's portfolio. Year to date, the company's total shipments were down 1.1%, despite the gains in Kona, and depletions were off 2%.

Check out the latest earnings call transcript for Craft Brew Alliance.

2. Is the Plus strategy working?

Now that it has added three new brands that were notching strong growth when not fully owned by Craft Brew Alliance, it will be important to see whether they can continue down the same path.

Appalachian, Cisco, and Wynwood represent an important component of how Craft Brew hopes to target regional opportunities. Appalachian is based in North Carolina; Cisco is in Nantucket, Mass., and Wynwood is in Miami. With beer drinkers preferring locally made brews over mass-produced national ones, acquiring these breweries gives Craft Brew Alliance access into three important regional markets.

In return, the three breweries are given deeper access to Craft Brew's brewing capacity and are able to further tap into Anheuser-Busch InBev's (NYSE: BUD) powerful distribution network, as the megabrewer owns 31.4% of Craft Brew Alliance. 

3. The relationship with Anheuser-Busch

It's long been speculated the megabrewer is eying an acquisition of the craft brewer, particularly after the two announced an expanded partnership last year that saw Craft Brew take on brewing responsibilities for Anheuser-Busch's craft beer subsidiaries in cases where using an A-B facility would be inefficient. 

But Anheuser-Busch has only until August to decide whether it wants to buy Craft Brew Alliance. When the master distribution agreement between the two brewers was originally negotiated in 2016, A-B was given the right to make a "qualified offer" for Craft Brew of at least $24.50 per share by August 2019. If it chose not to, A-B would pay Craft Brew Alliance $20 million.

Craft Brew recently appointed to its board of directors an A-B executive with mergers and acquisitions experience to replace another A-B executive with similar credentials who left the company. A deal might not be something announced in the earnings report. But a key consideration in an acquisition would be the successful implementation of Craft Brew's Kona Plus strategy. So that's something investors should keep in mind in reading the financials and seeing how Craft Brew Alliance is performing.

Final thoughts

Kona's growth, the lackluster performance of the rest of the portfolio, and Anheuser-Busch's continuing interest in the craft beer space -- along with the clock ticking down on a possible acquisition -- could push the megabrewer into action. Kona would be an important addition to its high-end craft beer division, but only if Craft Brew Alliance is able to lift the performance of its entire operation.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.

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