Craft beer market offers plenty of upside to discerning operators

Craft beer market ASX
The craft beer sector is a growing albeit difficult market with good distribution being the key to success.

Investors thirsting for an ASX beer exposure have been left largely unsated since Fosters/Carlton United Breweries and Lion Nathan were subsumed by foreign buyers a few years back.

Coca Cola Amatil (ASX: CCL) has long held beer and spirits ambitions that have never quite come to fruition, but in any event the bottler looks headed to offshore ownership as well.

But, as any self-respecting hipster would know, all the action is taking place in the ‘craft’ or ‘boutique’ sector and some ASX players are moving to the groove of the burgeoning but difficult market.

‘Craft’ of course does not necessarily imply independent: Lion owns the craft-ish Furphy brand and Little Creatures and Asahi owns Mountain Goat.

The problem for the genuine independents is that they can produce megalitres of amber goodness with floral hoppy tones, but without decent distribution they are doomed to be a backyard operation.

The good news is that while the mainstream beer market is as flat as a night man’s hat, the craft market is growing like hops in a warm, wet spring.

Craft brands fuel growth in the beverage market

“Independent craft is fuelling the growth, whether its beer, spirits or emerging drinks such as seltzers,” Mighty Craft (ASX: MCL) chief executive officer Mark Haysman said.

Having listed in December 2019, Mighty Craft is tackling the sector with a multi-pronged strategy of co-investing in breweries and distilleries and operating branded venues.

Having started with one investment (Jetty Road), Mighty Craft has stakes in six fledgling breweries, four distilleries and the Torquay Beverage Company, an investment incubator for emerging drinks such as seltzers and brewed (as in, alcoholic) coffee.

The company’s portfolio also includes the Kangaroo Island distillery at Cygnet River, gin producer Brogans Way and a Tasmanian whisky joint venture.

Mighty Craft also lays claim to 65% of Green Ant Gin, founded by former AFL footballer Daniel Motlop.

Crucially for the craft fraternity, the company has teamed up with Linfox’s Bevchain cold logistics arm, Craft Hub. The first network of its type here, Craft Hub will serve a collective vehicle to achieve economies of scale in distribution.

Mr Haysman notes there are more than 1,700 independent breweries or distilleries nationally, but most of them are sub-scale and inefficient even though they make great products.

“We solve a bunch of problems for the industry,” he said.

“Early stage businesses can’t access the market or have access to the right capital and their costs are too high.

“One of our strengths is dealing with the strongest retailers in the country. In fact, we have a joint business plan in Coles and we are working through a similar process with (Woolworths) Endeavour Drinks Group,” Mr Haysman added.

Mighty Craft turned over $13.5 million in the December half, up 185%. But the underlying loss also grew to $4.8 million, in what management pleads was an unusually heavy period of investment.

The company expects to reach break even by the second half of calendar 2022.

“We have a structured plan around that and a clear plan of getting to that point,” Mr Haysman said.

Mighty Craft aspires to have up to 12 beer and cider brands with volume of at least 12 million litres by 2025. It also hopes to develop 10-12 decent-sized beer and cider brands and sell at least 500,000 bottles of spirits.

“Ultimately, we want the whole sector to grow and thrive,” Mr Haysman said.

“If we do that, it will be good for our retailers and our customers.”

While both boutique beer and spirits are hot sectors, they’ve lagged behind the United Kingdom and United States growth. In 2020, the local craft market currently turned over $840 million and accounted for 15% of the total beer market, compared with 25% in the US.

Australia’s leading craft beer company

A few years ago, the former Gage Roads was pretty much a commodity contract brewer for its major shareholder, Woolworths (ASX: WOW).

But having bought out Woolies’ 25% holding, Good Drinks Australia (ASX: GDA) is making inroads on the east coast with brands such as the surfing-themed Single Fin, the biggest selling craft beer in Western Australia and the second biggest nationally.

Good Drinks is also the biggest craft beer company with national annual sales of around $70 million, ahead of Stone and Wood ($65 million) and Colonial Brewing ($32 million).

Good Drinks’ hospitality presence is based at Freo’s Victoria Quay, but it’s also spending $5 million on a showcase facility – the Atomic Beer project – at Sydney’s gritty but gentrifying Redfern.

In the December half, Good Drinks recorded a $3.59 million profit, a 600% increase on revenue of $27.4 million, up 42%.

The company pumped out volumes of 8.5 million litres, in striking distance of its targeted 10 million litres a year.

With Good Drinks shares doubling over the last year, investors acknowledge the company is doing quite a few things right as it pursues its destiny as an independent artisan brewer.

Craft brews fail to make headway abroad

Sadly, the rising frothy tide of craft brews – or in some cases ‘chews’ because they’re so heavy – is not lifting all boats.

The Mildura-based Broo (ASX: BEE) had its sights well beyond the orange groves to China, where a burgeoning middle class demands a more exciting drop than the unexciting local Tsingtao.

You’ve no doubt heard this story before and you’ve heard the ending, too: a hasty retreat.

In early January, Broo said it had terminated its four-year-old agreement with its Chinese exclusive import partner, Beijing Jihua Information Consultant, alleging non-payment of royalties pertaining to the first three years of the deal.

Under the take or pay arrangement, Jihua was to have taken 1.5 billion litres at a fixed rate per litre, generating aggregate revenue for Broo of $120 million.

If it’s any consolation, Fosters and Lion fared no better in the Middle Kingdom, burning hundreds and millions of dollars before pulling the plug.

Undeterred, Broo has announced an exclusive local distribution agreement with pub and pokies operator Australian Leisure and Hospitality (ALH) to distribute its lager to ALH’s 300 hostelries.

Impressive? Yeah, nah – the parties have had an agreement in place since 2018, but it’s been non-exclusive.

Since last August, the company also has a contract brewing with Carlton United Breweries (CUB), by which CUB supplies at least 48,000 cases (4.3 million litres) a quarter, over a two-year period.

Broo’s plan to build a $100 million green brewery in Ballarat proved a bridge too far.

Broo, meanwhile is in a parlous position with cash of half a million, just over $2 million of debt and a half-year loss of $1 million. The shares peaked at $0.7 when the China deal was announced, but now wallow below $0.02 (valuing the company at $16 million).

From your columnist’s memory of a distant tasting, Broo’s premium product is quite agreeable despite its export-friendly garish yellow packaging adorned with kangaroos.

For beer-loving investors, the overriding lesson is not to mix business with pleasure.

Having said that, the craft market is a much higher margin than mainstream beer and the rewards beckon for brands that can distinguish themselves from the hundreds of other brands gracing Dan Murphy’s (revamped) beer shelves.

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