Large distilled spirits companies have looked at what’s happened in the beer space and vowed not to repeat the same mistake.
The “mistake,” of course, was ignoring the growth of craft beer until Big Beer found that, like Pac Man, craft brewers were steadily eating away at Big Beer’s market share.
We interviewed Akshat Dubey and Rakesh Mani, who are members of PwC’s strategy consulting business about what large players should look for in the small companies they seek to acquire – and what small companies should do to increase their attractiveness to large bev/al firms.
The attraction of the craft distillers space should be evident: Last year, craft distillers in the U.S. sold 5 million 9-liter cases. The PwC team expects craft spirits volume in 2020 to grow to 25 million cases.
Today, 1,300 craft distillers produce 2% of all liquor. Just five years ago, craft distillers produced 0.8%. Take a look at what happened with craft beer, they argue, which today represents 13% of the total beer market.
“If you believe craft spirits will behave anything like craft beer, potential upside is for share to go to 10%-12%, they told us.
A lot of categories in spirits have benefited from this renaissance. Some categories have led this growth – bourbon, tequila, gin – while others, such as rum, have been slower to grow this traction. “We expect those categories that have been slower up the curve, to hit their tipping points. That’s happening with rum already/”
When it comes to acquisitions, it’s important, they said, that large companies acquire craft distillers have a broad assortment of products. They noted that most craft brewers have eight to 15 regular flavors, as well as a lot of seasonals and other special products. Spirits producers can have brown spirits, white spirits, etc., which enables them to take care of seasonality.
Even more important is that the craft distiller be able to scale up. “It’s important for the distiller to be able say, ‘well, we do brown spirits, and that’s our core business, but we’ve also got a range of clear spirits where volume can be pumped up a bit more easily.’ A range of spirits also lets a distiller respond to a broader range of consumer occasions . . . seasonality, sipped drink vs. a cocktail, etc.
How should a larger company manage and grow a craft distiller, we wondered. “First and foremost, they said, maintain the original credibility of the craft brand. A lot of acquirers let the craft beer run a bit independently after the acquisition. They help with marketing, with access to raw materials, while the founder or ceo stays on board.”
They noted the larger company can bring benefits that a craft distiller may not have. These could
include the stability of raw material supply – many big spirits firms have long-term contracts with farmers who grow the raw ingredients – as well as the ability to drive down the cost of production, access to distribution networks and marketing agencies.
Two percent of the 1,300 craft distillers in the U.S. product more than 50% of all craft spirits volume, they said.
This, we thought, would make them a natural target for acquisition. But the PwC consultants suggested this may not be the case. They noted that large distillers are trying to get into the craft distilling business much earlier than Big Beer got into the craft beer business.
Large spirits producers are seeking regionally oriented companies, they said.
The large distillers have looked at what happened in beer. They noted that Big Beer feels it didn’t get involved with craft soon enough, allowing a lot of independent brewers to succeed in establishing themselves.
So the larger spirits companies are going for slightly smaller distillers that have great products but are more regionally oriented. Yes, the PwC consultants said, that’s a risk, especially that they will be able to scale a small firm.
“But they are buying them a bit cheaply.” The simple fact is that, “if you’re a larger player, you need an acquisition that will move the needle for you.”
‘What’s really important is how much unused production capacity is available,” they told us. “That determines the near-term growth potential that has a big impact on the valuation. But also, what is the ability of the existing infrastructure to support expansion in the medium term.”