What People Are Saying About Boston and Dogfish

Dear Client:

Yesterday’s news that Boston Beer would acquire Dogfish Head is undoubtedly the story of the year so far.

How did that play with readers, analysts, association heads and consumers? Here’s the quick pulse:  

BA: THEY WILL “NO DOUBT CONTINUE TO CHAMPION FOR BREWERIES.”  Naturally, Brewers Association chief, Bob Pease, put out a statement. After all, a big driver of this deal was DFH co-founder Sam Calagione’s desire to stay within the BA definition parameters.

“Boston Beer and Dogfish Head have been at the forefront of innovation, creativity, and community,” said Bob. “As industry veterans, Jim and Sam are staunch supporters of the independent beer movement. … We’re in a maturing market, and small and independent brewers are embracing ways to remain competitive.” In this BA-craft definition compliant deal, the two “will no doubt continue to champion for the more than 7,400 small and independent breweries in the U.S.”

Wall Street was mostly positive, too, based on beer upside.

RBC ANALYST: NO HUGE NEAR-TERM IMPACT, BUT DEAL “MAKES US SLIGHTLY MORE OPTIMISTIC ABOUT SAM’S BEER.” Wall Street has been notably wary of Boston Beer beer trends, even in the face of their ever-growing seltzer and tea side, which have been driving stellar depletion growth for more than a year now. Certainly this deal would placate them, right?

It appears largely so.

RBC beverage analyst Nik Modi saw the move as favorable. But despite good projected growth for the year (Sam Caligione told CBD last month they’re planning for 11% growth in Q1 2019, and Boston has said the company should finish the year up high singles), because they estimate DFH (at 300K barrels) at about 1/5 the size of core Sam Adams, “it is too small to move the dial near-term.”  

“However, we believe that combining founders/leadership teams will improve the outlook for both Sam Adams and DFH. For now, our view on the name is unchanged, but this news makes us slightly more optimistic about SAM’s beer prospects going forward.”

GOLDMAN SACHS: STRATEGICALLY GOOD BUT STILL A “SELL.” Judy Hong also saw the move as “strategically positive,” due to complementary portfolios, distribution upside for DFH innovations like Slightly Mighty, and Dogfish head’s superior pricing, “with revenue per barrel at over $380 [for DFH] versus $235 for SAM’s total portfolio based on our 2019 estimate.”

She still has a “sell” rating (she downgraded Boston recently, before this deal) — but it currently has little to do with DFH. Rather, “We remain Sell-rated as we believe SAM’s current PE multiple reflects higher depletion growth rate prospects for the company in 2019 than we estimate. … Our estimates and valuation do not incorporate the proposed transaction.”

MACQUARIE IS “BULLISH.”  Macquarie’s Caroline Levy and Co. did not change their neutral rating upon the news but did raise key metrics like target price, from $325 to $365, post-announcement.

“We are impressed by this acquisition because it: 1) strengthens the overall beer business and returning it to growth; 2) lowers SAM’s reliance on RTDs; and 3) most importantly, was acquired at a reasonable valuation compared to past craft deals ($1,000/barrel here vs. Ballast’s $1 billion deal, for example, at upwards of $8,000/barrel).  

As BBD noted this morning, riffing off Dave Burwick quotes surrounding the deal, the firm also believes “this could mark the beginning of a careful strategy of acquisitions of high-growth brewers.” It should also improve distributor attention levels.

In all, “we believe SAM’s sales growth rate should improve by 5pp to 14% on average from 2019-2021.”

HATERS GON’ HATE. The esteemed Joe Sixpack did a roundup of reactions. His take? It’s “something of a mixed bag.” From his grokking, nobody outside the two breweries got “terribly excited” by the news, though he did note that he hasn’t really been hearing the “sellout” talk that has followed strategic/craft tie-ups. He did opine that the beer rarely gets better after a big merger. “At best – as in the case of Ommegang/Firestone Walker under Duvel Moortgat – the beer has held its own,” he says.

His other main point, which we found interesting: despite the absence of a “sellout” trigger point, some people dislike the SAM/Sam tie-up anyway, because they just don’t happen to like the breweries. Like, simply the way I  don’t happen to care for Vienna sausage.

“There are an awful lot of beer freaks who really don’t like either Sam Adams or Dogfish Head,” Joe mused; mainly, because Sam Adams is big, and for Dogfish, because apparently some think their beer tastes like “paint thinner.”  

READERS REACT: A GRACIOUS COMPETITOR; BUT WHAT ABOUT THAT DEFINITION? As for our own readership, reaction has been generally positive. Said one craft VP of a big Boston competitor, “Two great companies led by two great leaders. Combined, they will make a formidable portfolio in the high end.”

Another considered the future: “Looks like the Brewers Association is going to have to do some mental gymnastics and change their definition again.”

Hmm. With Boston barrels at 4.3 million total shipment barrels last year, and presuming to grow in 2019, and Dogfish around 300K, they’re already pushing up on 5 million barrels for 2019. The BA’s volume cap definition cuts off at 6 million barrels — but that considers beer only, and Boston doesn’t disclose its beer/FMB breakdown.

When we asked how they’ll track Boston’s beer barrelage against its total for the cap, BA economist Bart Watson told us: “No one has ever been close – so [we] haven’t spent too much time thinking about this.”  

He continued: “As for how will we know?” when Boston is pushing up against the 6 million barrel mark in beer only: “Good question,” he said.  “We spend a lot of time on that estimate every year. It is just an estimate, but I’m confident we get it roughly correct. If they were approaching that threshold, I’d imagine we’d spend even more time/effort/resources to get it correct.”

CBA IS STICKING TO ITS STRONG OUTLOOK FOR 2019, HERE’S WHY

As we reported earlier this week, Craft Brew Alliance depletions fell 4.5% in the first quarter of 2019, while shipments increased by 2%. Not exactly an ideal start, given their full-year shipment and depletion guidance to be up somewhere between 5-and-8%.

How will they get there? Good question. In fact, it was the first question fielded in yesterday’s earnings call.

CBA chief Andy Thomas opened his reply up, saying they’re “well aware” of the magic number they need to get them there – a run rate of 7% for the balance of the year. And they feel confident they can do that. Here’s a smattering of reasons why:

THE BIG KAHUNA: KONA. Of course, it all starts with Kona, Andy said.

“We feel really positive about the results we’re seeing from the distribution drive on Kona and from the velocity and the rate of sale for those new points of distributions, as well as the existing ones,” he said.

Indeed, Kona’s points of distribution for Big Wave Golden Ale and Longboard Lager collectively grew 25% at the end of April. Total Kona depletions grew 16% in April, while Big Wave alone increased depletions by 37% during the month.

Suffice it to say, they feel good with where they are with Kona, in fact, they “feel anything but emboldened by what we’ve seen as a result of the heavy-up spend in March and April for the balance of the year,” Andy said.

ACQUIRED CRAFT UP 13% IN Q1. Then you add their now fully-acquired craft brands – Appalachian Mountain Brewery, Cisco Brewers and Wynwood Brewing – to the charge, Andy continued.

The combined depletions from the trio of brands were up a collective 13% in the first quarter, said CBA CMO Ken Kunze in his opening remarks. Wynwood and AMB, in particular, “continued to move up the ranks,” Ken said, “with strong share gains behind” Wynwood flagship La Rubia Blonde Ale, up 54%, and AMB’s Longleaf IPA, up 38%.  Cisco Brewer’s flagship, Gripah IPA, meanwhile, was up 19% for the quarter.

REDHOOK “IMPROVED SIGNIFICANTLY” IN HOME STATE. Then Andy turned his attention to Redhook, which saw a “real bending of the trend” during Q1 in its home state of Washington. Indeed, Redhook’s performance in Washington “improved significantly,” said Ken, primarily off the back of Big Ballard Imperial IPA, which grew depletions by 64% in the state. As a result, Redhook’s first quarter trend improved by 1,300 basis points in Washington, with depletions down 3.5% versus a decline of 16.5% in 2018.

WIDMER BROS. NO LONGER FOOLING CBA. As for Widmer Brothers, the brand didn’t see an acceleration, but it didn’t see a deceleration either, Andy said. “I think it’s the first time on this call I can say that we don’t sit here in Q1 saying ‘wow, it fooled us again.’ It performed pretty much the way we thought it would,” with overall depletions down 17% in Q1.

Andy then tossed out some “unknowns”, “gambles” and “wild cards,” to round out some of their confidence looking ahead.

WHAT THEY EXPECT FROM pH EXPERIMENT. When it comes to their new growth unit, the pH Experiment, Andy conceded that they’re “not banking on a lot” there. Still, they feel “really good” about some of the ideas and products being hatched out of the unit. In fact, Andy said he feels the 2% ABV seltzer line coming out of pH, dubbed Pacer, is “one of the most innovative things out there right now.”

“It’s remarkable the herd mentality at play right now,” Andy said. “Everybody is piling atop of each other with these 5% seltzers and hoping that the color of their graphics or the flavor profile or the strength of their wholesaler distribution is going to differentiate them… We’re trying to take a different path” with Pacer.

OMISSION LAUNCHING A SELTZER. He has a point, but it’s also kind of funny considering… Omission is transitioning its portfolio into to the “better-for-you” realm, and as such, will release an Omission Seltzer later this year that clocks in at 4% ABV, contains 0 carbs, holds 99 calories, and of course, will be naturally gluten-free.

A “WILD CARD” IN THE PORTFOLIO? Wynwood’s La Rubia Blonde Ale. “We believe La Rubia has the opportunity to expand outside of Florida based on the Caribbean Hispanic target or those broader kind of Latin target as opposed to certain geographies,” Andy said. Indeed, they’re in “the final stages” of launching La Rubia in Puerto Rico and Andy noted that you’ll be “hearing more on these calls about, where does La Rubia go next? That won’t be limited to Florida.”

BEER BRIEFS:

BLUE MOON UNVEILS NEW LUNAR KEG FOR SUMMER. We’ve already seen a couple of brewers coming out with beers for the summer that will commemorate the 50th anniversary of the Apollo 11 mission, which resulted in the first Moon landing on July 20, 1969. Anheuser-Busch is launching Budweiser Discovery Reserve Lager as a nod, and Schlafly Beer is rolling out a Lunar Lager Pack to celebrate.  Now, MillerCoors is getting in on the action with Blue Moon, naturally. The brand is set to release “a limited-edition keg design inspired by the recent announcement of Blue Origin’s new lunar lander,” which as luck would have it, is called Blue Moon. Although, the new lunar lander isn’t set to hit space till 2024, the brand found it fit to roll out the limited time kegs (see brewpic below) this summer, as a toast to the 50th anniversary of the lunar landing. Pricing and availability of the limited time keg will hit closet to that date.

BREWPIC: The Blue Moon Lunar Keg

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EDITOR’S NOTE:  UPDATE ON OUR READER APP

Good news. Our SchuPub reader app for iPhone and Android has been fixed and updated to now include imbedded links and images, just like the email and web versions. Download the app for free and start reading BBD and all our publications in one easy place on your phone or tablet.  Search app store for SchuPub.  

Until Monday,

Jenn, Jordan, and Harry

“Not only is the universe stranger than we imagine, it is stranger than we can imagine.” – Sir Arthur Eddington

———- Sell Day Calendar ———-

Today’s Sell Day: 8

Sell days this month: 23

Sell days this month last year: 23

This month ends on a: Fri.

This month last year ended on a: Thurs.

YTD sell days Over/Under:  0