Craft Brew Alliance (NASDAQ:BREW) announced Monday that it renewed its endorsement deal with sports radio host Dan Patrick, whose moniker graces the label of Redhook's Audible Ale. The agreement now runs through March 2015.
Inking a radio host whose last name isn't Stern or Limbaugh might not seem like a big deal. But make no mistake about it, this contract is important to Craft Brew, as is the beer to which Patrick has lent his name.
The former ESPN host's show reaches an estimated 1.2 million listeners each week. And he's carried on more than 250 stations across the U.S. He's also simulcast on DirecTV.
For a brewer whose beers are relatively unknown in many markets outside the West Coast, tapping that kind of potential audience is huge. Craft Brew is making a big push into the East, where sales were up more than 40% last quarter, and into the Midwest, where it just introduced its Kona brand into five new markets. Creating brand recognition during these rollouts is key, making Patrick's show important to Redhook.
What's more, Audible Ale has been a huge success for Redhook and Craft Brew. Launched at the beginning of 2013 to replace the disappointing Copperhook Ale, Audible has outsold its predecessor by three times, company executives said. Along with Redhook's Game Changer, brewed in collaboration with Buffalo Wild Wings, Audible has been a main driver of the label's 20% sales growth over 2012's corresponding third quarter.
In a league of their own
When it comes to reaching out to beer drinkers, the big brewers like AB InBev (NYSE:BUD) and Molson Coors (NYSE:TAP) are able to operate on a level that's pure fantasy for brewers like Craft Brew or even Boston Beer (NYSE:SAM).
AB InBev has a $1.2 billion sponsorship deal with the NFL, as well as a long-term deal with Major League Baseball. On top of that, it hosted a summer music festival in Chicago that drew some 120,000 fans, many of them the young male beer drinkers it's hoping to convert into loyal Budweiser customers.
Molson Coors, meanwhile, is in the midst of a seven-year, $375 million contract with the National Hockey League, a sport that provides such a significant boost to Molson's sales that a lockout last season prompted the brewer to consider seeking compensation over lost revenue.
With an advertising and marketing budget of around $12.4 million last year, Craft Brew does not have the money to ink major deals with sports leagues. In 2012, it spent about 7.4% of its revenue on advertising and promotion. For comparison, over the first six months of 2013, AB InBev spent about 15% of its revenue on ads and marketing, and Boston Beer (NYSE:SAM)spent a sizable 27%.
Operating on a small scale
But Craft Brew simply can't increase its ad and promotional spending significantly right now. The company is in growth mode, but at the same time making efforts to widen its now-narrow margins. Craft Brew's third-quarter gross margin came in at 30.1% compared to Boston Beer's 53%. And Boston Beer is actually growing faster, making it look like the better bargain between the two right now.
The Dan Patrick deal is working, and Craft Brew can afford it. That's why it's important for the company to keep the Audible agreement and get more from it, which, according to President Andy Thomas, is the plan going forward:
"... you'll see a lot more Dan Patrick with Audible throughout the course of the year, next year, built into our retail programming even and into some of the events that we'll be hosting across the country next year with Redhook."
The Foolish bottom line
The contract renewal with Patrick wasn't much in the way of splashy news for the brewer the way a killer quarter might be. But it was an important step in keeping Craft Brew's growth on track and its sales stable. Those are two things that are very important to investors in the company, which trades at a sky-high P/E ratio of around 230 and has little margin for error.
John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool recommends Boston Beer and Molson Coors Brewing Company. The Motley Fool owns shares of Boston Beer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.