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Scores of enthusiastic independent brewers have sprung up in railway arches and industrial units across Britain, each seeking to carve out a distinctive niche and develop an almost cult following. In so doing, they’ve helped to establish a widely quoted stat – if not necessarily a provable one – that the UK is home to more craft brewers per capita than anywhere else in the world.

With sales of mainstream lager tailing off, many of the multinational brewers have now started acquiring a raft of craft brewing brands, seeking a slice of this rapidly growing premium sector. This has created an extremely frothy acquisition market, whereby those independent brewers with well-developed products and brands have reaped sizeable returns. Recent acquisitions include Meantime Brewery by SABMiller, Fourpure by Lion and Camden Town by Anheuser-Busch InBev.

In this article, we’ll look at how the market is evolving and what the experience of craft brewing in the US might teach us about the sector’s future in Britain.

The market today

The growth trajectory of the sector has been nothing short of meteoric – Companies House notes the growth of businesses identifying as beer manufacturers to have increased nearly ten-fold since 2008. Recent press reports suggest nearly 2,000 craft beer businesses may be operating across the UK, with over 400 opening the taps in 2017 alone (no pun intended).

Number of companies that identify as Manufacturers of Beer, 1997-2017

Number of companies that identify as Manufacturers of Beer, 1997-2017

Figure 1: Graph showing growth in manufacturers of beer as registered at Companies House.
Source: Companies House (https://companieshouse.blog.gov.uk/2018/06/15/beer-brewing-and-business/) Available under Open Government Licence V3.0

Yet there change is afoot as the market starts to mature. In the year to March 2019, Kantar Worldpanel noted that sales of craft beers grew 16.4% to £178.2 million. Whilst businesses in most industries would yearn for such sector growth, it is a marked decline from the 54.6% increase seen the year prior.

The slowdown from tech-sector levels of growth to something more sustainable is already having a significant impact. It would have come as little surprise to those in the trade when The Grocer magazine recently noted that the average price per litre of every Top 10 craft beer brand declined over the past 12 months – a result of both wider availability in mainstream outlets and the supercharged marketing efforts of the corporate-backed operators.

How brewers manage this slowdown in demand growth will be instrumental in whether their businesses can remain sustainable. Yet recent experience across the Atlantic may help identify key characteristics.

America leads the way

Whilst there are some differences between the US and UK markets (for instance, the distinction between new-fangled craft beer and traditional real ale is itself something worth discussing over a pint), broad similarities in consumer tastes and preferences make it a useful comparator.

Our view is the craft beer market is broadly around 5-10 years’ further advanced than in the UK. Today, the market for craft beer in the States continue to grow at a steady rate of around 4%. This is a strong performance against a broader beer market that is gradually declining, but nothing like the exponential growth previously experienced.

It’s likely, therefore, that the flattening trajectory of craft beer sales seen in the UK over the past twelve months is likely to continue, as consumer preferences reach a natural plateau and the overall market remains in decline. The experience both here and in the US suggests that independent craft breweries can be divided into broad groupings, with each set displaying with their own characteristics, challenges and opportunities.
 

1. Promotion rivals

There are a handful of independent brewers that are clear stars which are likely to unlock sizeable value in any future sale to a large brewer. Key features include:

  • A business strategy with a laser focus on building up sufficient critical mass (above 20,000 hectolitres per annum production volumes) that will interest a global player.
  • Development of a distinctive product, establishing an impactful brand and associated marketing strategy that can ‘cut above the noise’.
  • The product is regularly servicing a well-known network of local on-trade customers and has a maturing presence through major off-trade customers (national supermarket listings).
  • They have been able to scale up operations effectively and efficiently, weaning off the generous tax benefits provided to smaller independent breweries.

 

2. Mid-league regulars

This group arguably makes up the vast majority of independent breweries. Typically the owners of these businesses have:

  • Little or no interest in selling to an international brewing conglomerate, instead operating as a lifestyle business.
  • Invest on a very gradual basis, incrementally building up capacity and development of new product lines. As a result, many of these may not have significant debt but growth may be piecemeal with operational bottlenecks.
  • Availability may be limited geographically e.g. to local independent pubs or within specific regions, though likely to have strong local following.
  • Operations may be run below optimal efficiency as capex is relatively restricted.

Many of these businesses may be able ‘tick along’ indefinitely and continue to be a treasured part of the craft beer ecosystem. However, for some, it’s likely that growing costs may necessitate some form of consolidation in order to share overheads and reach more sustainable production levels.
 

3. Relegation candidates

Just as there are a handful of brewers successfully executing an “invest, grow, exit” strategy, there are a number which, for whichever reason, have struggled to execute an ambitious strategy successfully. This may leave the business hamstrung by debt repayment and grappling with operational challenges.

Key features include:

  • High levels of investment has been pumped to build capacity ahead of demand, potentially expecting current growth rates to remain for the foreseeable future.
  • Often highly leveraged, with large repayments necessitating rapid growth and sizeable gross margins in order to maintain bottom-line profitability.
  • Struggled to create brand recognition – indistinctive or unoriginal product/design that may get crowded out of increasingly competitive market.
  • Business strategy may be muddled. Issues can include attempting to launch too many products simultaneously or diversifying into related activities such as events or hospitality without necessary experience or time/financial investment.
  • Struggled to build a loyal group of faithful customers, often due to intense local competition.

To date, we have borne witness to a relatively small number of brewery failures. As the number of large brewers without a premium ‘craft’ subsidiary decline, the number of potential suitors may be well decline and leave those left unsold struggling to execute a critical part of their strategy.

Where businesses are facing significant financial stress or distress, we can advise on identifying and executing options that can maximise stakeholder value.

How can KPMG help?

At KPMG we’ve worked with independent brewers of all shapes and sizes, and throughout the business cycle. We can provide support whether you’re looking to sell all or part of the business, seeking to streamline the business or avoid significant financial challenges.

If any of the issues above resonate with you, please contact one of our cross-disciplinary sector team today.

Rob Baxter

Rob Baxter
Partner,
Corporate Finance

Andrew Burn

Andrew Burn
Partner,
Restructuring

Steve Maher

Steve Maher
Manager,
Corporate Finance

Steve Elsigood

Steve Elsigood
Associate Director,
Restructuring