Constellation Brands to Acquire Ballast Point Brewing & Spirits

You bring up some very valid points, which is clearly enhanced by the fact that you're knowledgeable about the subject matter and you're an industry insider. So with that being said, I do thoroughly enjoy the conversation and I hope you find it engaging and enjoyable as well.

I do disagree with your valuation modeling. A main reason why US craft brewers are attractive to overseas buyers (such San Miguel purchasing Founders or Heineken purchasing Lagunitas) is that they can take the enormous brand equity they have built at home in the United States and then monetize that value overseas in other markets (where they have very little to no distribution). They're buying them for the massive upside abroad, and they have even telegraphed that message in their press releases. The brand equity has already been built here - now its just time for them to extract it from aboard.

The same exact thing applies to why Corona was valuable to Ab-InBev even without the United States. Its because there are tons of beaches worldwide (such as Australia, Thailand, Ibiza, etc.) where they will market it as a niche product and likely be extremely successful. Even in the UK (not exactly a beach lover's tropical paradise) its selling like crazy and there have been supply disruptions due to low stock levels. So once again - brand equity has been built in the largest tastemaker market in the world, and now its time to extract that value in other countries.

"Consumers in Japan or Europe aren't going to be thinking about Florida or California when they order a Corona. The brand is associated with white sandy beaches and Mexico."

The marketing messages do not forcefully associate the brand with Mexico, and if anything, they have been shying away from that with the increased violence and bad press Mexico has been generating recently. Beyond any print on the bottle, the TV and print advertisements position it as a lifestyle or aspirational brand, and its all about escapism and "finding our beach."

And the Heineken example was clearly only in reference to the brand vs. company distinction - not meant to draw a parallel in the anti-trust separation.

 

When was the last time a large company was broken up? Mergers get blocked every mow and then, but monopoly breaking seems to have fallen out of favor.

 

Perhaps I'm just not as intimately familiar with foreign beer markets, but I don't see how domestic brand equity means much of anything in foreign countries. Were I starting an export business to export American craft to a foreign country (I'm going to assume it's going to cross a large ocean), I'm relatively confident that the market who is already aware of any particular American craft beer/brewery is rounding error at best.

I'm going to send beer to Country X and market the brand as an American powerhouse whether it's Goose Island with 50 state distribution or whether I just decide to start exporting a local Ohio craft who makes 5,000 bbl a year and doesn't sell outside of it's taproom (ignore the logistical concerns of exporting any quantity of beer from a 5k bbl brewery, it's beside the point). As a domestic example of this practice, Look at the top Canadian brands. Molson is headquartered in Denver, Labbatt is owned by ABI (sigh, NAB in the U.S.), Sleeman is owned by Sapporo, yet every Molson/Labbatt package I see (not that I pay a bunch of attention, so I could be thinking of old packages) has a Canadian flag and is dropped in the "import" section. I think the only place that domestic brand equity has any value would be in attracting marketing capital for sales overseas.

Your Founders example is confusing because (as far as I'm aware) Mahou San Miguel isn't actually selling any Founders in Europe. You might have a point with Heineken, but I will maintain that I don't see why Lagunitas has any more value to them (other than their willingness to sell) than anybody else the looked at buying...

 

Stay tuned, you will very soon be seeing more of these types of advertisements:

 

Maybe that's because there aren't any to break up.

 

Founders is all over Europe - had it in England, Sweden, and Denmark. And as a matter of fact, I was recently in Singapore and I had one of their beers there as well. So the San Miguel partnership is definitely driving volume and distribution overseas in tons of countries, and they are pushing very hard.

The vast majority of beer that Heineken sells is overseas - very little of their total volume is in the Netherlands. But there was a time when the opposite was true for them, when they sold 100% of their product in the Netherlands. So yes, there is tremendous value of incubating a brand at home, then creating a massive market for it across the globe. That is why the big global companies are buying US craft brewers now. A lot of the upside (if not the majority) can come from selling it abroad, as there are historical examples of this.

 

Completely agree. I'm from San Diego too, and I think the Ballast Point thing is a bit like looking back on the kids in school who were voted "most likely to succeed". Like hearing that the Prom King is now a State Senator years later. It's not surprising at all. They had this kind of success coming to them eventually. It was also no surprise when Stone opened their huge San Marcos location, or when Green Flash opened their Sorrento Valley hub.

Reality check on the "beer scene" here as well. There are a ton of new breweries in San Diego. But let's be honest. Like any city with a lot of breweries, only 10-15 out of the 100 that have started up in the past few years are actually making quality brews at that high level. The rest are simply too young in the game, hoping to ride the wave of what started here long ago with the likes of Stone, Pizza Port, Alesmith and Ballast Point. All of those guys took a long time to build up their reputation.

What's really crazy here is not so much the sale (hooray for them), but just how damn quickly they were able to scale up. When did they start bottling Sculpin? 5 years ago? Before that it was a rare keg around town (which wasn't really that big of a deal, amidst so many other great beers doing one-off kegs in town), and then the 1 growler policy at Home Brew Mart once the beer got more popular. Fast forward a few years, their product line is huge, they have locations in Scripps Ranch, they have the distillery, and they opened the enormous Miramar location, and then Little Italy. They went from a locals-only familiar favorite to being on TV shows in a span of what, 6 years? Now they sold for a billion dollars. That's incredible.

Remember the days when Ballast Point was known for 1 beer only? Yellowtail. Can't remember how long it's been since I've seen that on tap anywhere.

 

???? What? What? No large companies? What planet you on?

 

I'm on the same page, I always enjoy respectful debate.

I don't really disagree with anything you've said there. I think we just have a slight difference of opinion about how brands should be valued. Primarily I think revenue streams are the driver of value, and you take a more "all encompassing" approach. Both are valid, I just like numbers you can take to the bank. I don't dispute that Corona is an aspirational or lifestyle brand and that it has tremendous value globally. I also agree that the primarily driver of value for a San Miguel or Heineken with their craft transactions is to leverage the global value of the brands that were build in the US. Part of their ROI calculation however, will include US based revenue, whereas US revenue is excluded for ABI in regards to the Modelo brands.

For me, its a bit Apples and Oranges. Modelo started exporting to the US way back in the day, like 30s? ish? While global international exports started in the 80s. So the brand was built on a global platform up until the split in ownership, which in itself is an extremely unique situation. We're honestly probably too early to determine how much/if Constellation will diverge in its marketing approach from the approach taken by ABI/Modelo globally. I think my original objection was to the "tied at the hip" statement. And again, I can't mention much about my personal experience, but nothing could be further from the case in terms of the sales and operations aspects of the brand in the US.

 

I have no real connection to Ballast Point other than they make decent beer. I feel bad about who they are selling too, but it's hard to speculate on the impacts, if any, to the beer or the market. What I will say is the Big Craft battle is going to be the next Big Beer Battle.

 

So you guys are saying my ardent love of Pacifico is misplaced? I refuse to accept that.

 

I already don't drink them cuz they're expensive. Maybe now they will lower the price. I'd be down.

 

BP has a stupid price pt in NY/NJ so i dont drink much w/ all the other craft around
but maybe it will make its way to Citi Field which im all for....AB has these type venues on lock down

 

I'll attest, I just had their porter in Oslo, Norway

 

$1billion! Well deserved IMO. I have had BP kegs in the kegerator for 6yrs now and almost exclusively for the last 2. It is simply a fantastic product and company.

However, I can't think of many quality products/services that got better after joining a large Corp or going public. I've been through one myself as an employee and got to witness the transformation. Once the focus becomes maximizing profits for investors it eventually takes over every aspect of a company from QC, management,morale, to ethics.

I realize it is nearly impossible to be un-hypocritical in regards to being totally local/non-corporate but when it comes to things like my beer hobby I want my dollars to support local.

 

The Brewbound story on the deal has an interesting side aspect that I haven't seen discussed elsewhere (and partially could answer the question, "What is BP's owner gonna do with a billion dollars?")

 

Don't assume that everyone here is a part of the "Craft beer culture" as you have defined it. Some people just love beer.

Anyway, the larger marketplace will determine if Sculpin (and you bet your ass grapefruit and habanero will be rolled out in a huge push as well) is marketable successfully to the masses. I wouldn't be surprised to see a "Lite Sculpin" in a year or two if the brand is able to be a big hit nationally.

This might be the beer that a company like Bud thought they were getting when they tried rolling out Goose Island IPA nationwide to apparent indifference.

 

Yeah, but then you give Modest Mouse an expensive producer and major label support and you get a bunch of shit music that barely resembles the original stuff you loved, but has broader pop appeal.

 

Marketing is much more than advertising of course but the dialogue between the two of you (fun to read!) and Jack Horzempa's post with the iconic Christmas-lights-in-the-palm-trees "Feliz Navidad" ad, combined to make me wonder--Did ABI retain the right to, and does it continue to, drive decisions re advertising campaigns in the US or do they, by virtue of the DOJ ordered divestment, have absolutely nothing to do with that any more, period, full stop, case closed?

I mean, could they have said, and could they and Constellation agreed, and the Justice folks also agreed, that though they receive no money from US sales, they should have the right not to have US marketing and advertising detract from their international messaging and brand equity, therefore even US advertising decisions will be made by ABI?

I ask because I thought that particular ad pre-dated the merger/US divestment, but it still runs every Christmas season. And I assume it runs worldwide, and I assume it is the intellectual property of ABI. Although I guess there could have been licensing of some of that sort of archival IP to Constellation....

 

The later. ABI has zero input on Constellation marketing and ad campaigns. Constellation acquired the right to use any IP created for the brands within the US as well as any new line extensions. The original agreement was supposed to actually only be 10 years, but that was nixed by the DOJ and made permanent.