Yahoo Finance Can Kona Brewing Save Craft Brew Alliance?
The Kona Brewing portion of Craft Brew Alliance's (NASDAQ: BREW) Kona Plus growth strategy looks like a resounding success, with depletions of the Hawaiian-based beer surging 9% in the third quarter. It's the "plus" component of the program that is failing to gain any traction and is weighing the brewery group down.
Helped along by Anheuser Busch Inbev's wholesaler network, Craft Brew Alliance enjoyed unparalleled growth in its flagship brand this quarter. Depletions, which represent the rate at which beer leaves a distributor's warehouse and is sent on to customers, of some brews like Kona's Big Wave Golden Ale expanded by 30% for the period. Yet because much of the rest of its portfolio is underperforming, net sales fell 6.6% to $52.9 million, and total depletions were down 1%.
Shares of the brewery group are down 13% year to date and have lost one-fifth of their value from their 52-week high.
Image source: Kona Brewing.
Catching the wave
Craft Brew Alliance may need a new plan. First unveiled in late 2015, the Kona Plus strategy prioritizes Kona Brewing's beers, and then is supposed to involve the addition of complementary brands to make the whole portfolio stronger in a given region.
Kona benefits because it plays like a local craft beer, which is especially popular among beer drinkers these days, but also taps into the preference for imported brews because it is shipped in from Hawaii. Some have called Kona the "Corona of craft," referring to Constellation Brands' Mexican beer import.
Craft Brew Alliance has increased its marketing on the brand this year, and it's paying off, as depletions have rapidly risen during 2018 -- up 3% in the first quarter, 6% in the second, and now 9% in the third. In the competitive on-premise channel, which means in bars and restaurants, Kona depletions were up 12% for the period (Big Wave Golden Ale alone was up 40%!).
Retooling the rest
Unfortunately, the rest of Craft Brew Alliance's portfolio is not really following suit. Widmer Brothers shipments tumbled 25% in the third quarter, while Redhook shipments plunged over 33%.
To put that in perspective, the brewery group was formed in 2008 through the merger of Redhook Ale Brewery and Widmer Brothers Brewing, two of the largest craft brewers in the Northwest at the time. The company bought Kona Brewing two years later for $13.9 million.
Back then, the combined production of Widmer and Redhook was 470,000 barrels of beer compared to 113,000 barrels for Kona. Fast forward to today and the tables have turned dramatically, with Kona producing over 360,000 barrels year to date while the founding brands have produced just 132,000 barrels.
Craft Brew Alliance is attempting to fix what's wrong with the complementary component of its growth strategy. Recently it purchased three partner brands, Appalachian Mountain Brewery, Cisco Brewers, and Wynwood Brewing Company. Year to date, these three have seen a combined 18% year-over-year increase in depletions, and CEO Ken Kunze says they "will play an increasingly important role in key geographies rounding off the plus portion of the portfolio and will begin receiving increased levels of investment."
A risky new strategy
Kunze also plans on making bigger investments in Kona Brewing, expanding the brand internationally and "supported by the greatest spend ever."
The first stop will be Rio de Janeiro, which will be the lead market in Brazil, the world's third largest beer market. Local production is expected to come online in the first half of 2019, with greater production to follow, with the plan to expand into more markets afterward.
There's risk in that plan, though, because the Brazilian market hasn't been kind to brewers lately, with both Anheuser Busch Inbev and Heineken taking it on the chin as beer sales continue to fall and hurt margins. Anheuser Busch just cut its dividend in half as volumes fell in the U.S. and major markets like Brazil.
And expansion doesn't necessarily guarantee continued popularity. Craft beers have fizzled out in some cases after being acquired by mass brewers who took their product national. Ballast Point Brewing Company was a fast-rising regional star before Constellation acquired it for $1 billion in 2015, but after broadening its base across the U.S., the brewer ended up having to take an $87 million writedown as sales dwindled.
If beer drinkers hew closer to home with the beers they drink and Brazil doesn't rebound, not even Kona will be able to save the brewery group.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Anheuser-Busch InBev NV and Constellation Brands. The Motley Fool has a disclosure policy.
