Craft Brew Alliance Is Finally Ready to Ride the Big Wave

Investments in Kona brewing are paying off big.

Rich Duprey
Rich Duprey
(TMFCop)
Mar 14, 2019 at 8:00AM
Consumer Goods

The market might not have liked Craft Brew Alliance's (NASDAQ:BREW) fourth-quarter earnings report, sending shares 10% lower, but the craft beer brewer looks like it finally has in place the right strategy to make the turnaround investors have been patiently waiting for.

The coming year might not be marked by much growth, but in hindsight, investors may say that this was when the company officially made a u-turn.

Kona Brewing's Big Wave and Longboard beers

Image source: Kona Brewing.

Riding the wave

The brewer is now fully vested in its Kona-plus strategy. It will be making significant investments in growing the Kona beer brand, but also making relatively substantial down payments on the "plus" side of the portfolio with its recent acquisitions.

Right now, there aren't many headwinds affecting Craft Brew Alliance's ability to expand Kona further, but the plus portfolio is still going to be weighed down by its legacy Widmer Brothers and Redhook Ale Brewery brands, though Craft Brew believes it now has the right insights to minimize the effects.

Kona is, of course, Craft Brew's big kahuna. Fourth-quarter depletions, or sales by distributors to retailers, an industry proxy for consumer demand, jumped 11%, representing an acceleration over the 7% gains witnessed over the first nine months of the year, which lifted full-year companywide depletions to 8%.

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

The golden child

The largest contributor to that growth was Kona's flagship Big Wave Golden Ale, which posted a 30% increase in quarterly depletions and drove full-year depletions 26% higher. Management noted that by the end of 2018, Kona had become the 10th-largest national craft beer brand, according to Nielsen data, and it was one of only three of those top 10 beers that saw any growth last year.

Through its relationship with Anheuser-Busch InBev (NYSE:BUD), which gives Craft Brew Alliance access to the mega-brewer's distribution network, the Kona brand now has sufficient scale where it can begin marketing heavily. It will spend $70 million to $74 million this year on new programs, the lion's share of which will go to supporting Kona, such as during college basketball's "March Madness" tournaments.

Yet with Anheuser-Busch's assistance, it's now also breaking into the Brazilian beer market. It will start small this year, but AB has been marketing the beer on the beaches of Rio de Janeiro and is moving toward local production of Kona, which will help evade tariffs.


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A plus-sized opportunity

As robust as the Kona portfolio is, the plus side has been weak. Widmer and Redhook have largely succumbed to their niche status in the Pacific Northwest and continue to drag down overall performance. Craft Brew Alliance emphatically said there wouldn't be any growth coming from these two brands, but they won't stop declining, either. It believes they've gotten to the point where their contraction has stabilized.

Yet even in the wreckage, there is hope. Widmer's Hefe, for example, remains the largest craft beer in its home market of Oregon, some 1.5 times larger than the nearest craft beer, so while there is opportunity for Widmer to see some growth, it is all from Hefe as opposed to the brand as a whole. 

The real lever for the future is Craft Brew Alliance's acquisition of regional brewers Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Company, which Craft Brew Alliance says it will keep local, but will work to increase their penetration in their respective markets.

A sizable portion of the $70 million marketing budget will be going into these brands, and because they're now wholly owned, Craft Brew Alliance can reap the full benefits of their profitability.

A marriage proposal in the works?

The elephant in the room for Craft Brew Alliance is whether Anheuser-Busch will make a "qualified offer" to purchase it by the August 2019 deadline. Management says regardless of how it pans out, CBA is sitting pretty.

If the offer is made, it becomes a part of the mega brewer for at least $24.50 per share, a 60% gain from where it currently trades. If one isn't made, nothing changes for the brewer. All the agreements it has in place with Anheuser-Busch remain in place; it still has access to AB's distribution network; and it continues to enjoy Kona's growth and the opportunities it has with its recent acquisitions.

Although Craft Brew Alliance seems to be in perpetual turnaround mode, it finally looks like the brewer has all of the pieces in place to achieve that turnaround. Of course, that just might be what entices Anheuser-Busch to make a move, but investors will benefit regardless.