We got a look inside the beer business today as shares of micro-cap brewery Redhook Ale Brewery (NASDAQ:HOOK) fell sharply following the company's release of a statement reminding investors that its 20-year distribution deal with Anheuser-Busch (NYSE:BUD) can be terminated at the end of this year, despite only being midway through the contract's run.
Should the contract end, Redhook would be in hot financial water (or, gross, warm beer) with both its lenders and Anheuser-Busch, which is an investor as well as a partner. Its business would certainly also suffer. Either or both situations could conceivably be enough to seriously endanger Redhook's business.
Redhook management says its relationship with Bud is good, and the companies are in discussions to re-up the agreement. (There was no statement on the matter from Anheuser-Busch today.) Redhook investors must certainly be watching closely for an update, as the company's products are distributed in just two ways: through a network of wholesale distributors and, to a larger degree, through Anheuser-Busch. The deal lets Redhook maintain brand and product control while gaining access to Bud's distribution network.
If you love beer, you'd probably think running a business like Redhook would be the world's greatest job. Certainly being surrounded by high-quality beer all day probably isn't considered drudgery by most (I'm partial to Redhook's Indian Pale Ale), but trying to take a smaller brewery national can create headaches as bad as your first college hangover. (I sure wish it didn't, because I've had a whale of a time finding Pyramid (NASDAQ:PMID) in the Washington, D.C. area, lately.)
With so much distribution capacity tied up by the brands owned and managed by companies like Anheuser-Busch, Coors (NYSE:RKY), and Miller, it can be extremely difficult getting shelf space for your bottles, cans, and barrels in many markets. (Independent wine and spirits companies frequently suffer the same ailment.)
Given that, Redhook's deal with Bud was huge strategic news for the company. Still, it's easy to see how the absence of such a deal could really hurt business -- especially for a company like Redhook, which in its latest 10-K filing displays years of operating losses compounded by significant (though shrinking) interest payments. There's little easily available evidence suggesting today's news is more than a boilerplate warning, but that doesn't mean it's not potentially serious business.
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Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story, and he no longer lives within arm's reach of a tap.
