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Podcast Episode 02: Dogfish Head and Boston Beer Company Merger

Podcast Episode 02: Dogfish Head and Boston Beer Company Merger

Posted by Lachlan McLean on 29th May 2019

As the craft beer world process the shock news of the merger of Dogfish Head and Boston Beer Company, Beer Cartel founders Geoff Huens and Richard Kelsey discuss the ins and outs of this game changing news.

Photo Credit: CNBC

The Inside Word Podcast Episode #02

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Video from our Facebook group " The Craft Beer Collective".

Text Transcript From Our Discussion About The Dogfish Head and Boston Beer Company Merger:

Geoff: Hello everyone, Geoff Huens here from Beer Cartel, and I've got Richard Kelsey.

Richard: G'day guys.

Geoff: We thought we'd do a quick video today with regards to the news that was released that Boston Beer Co and Dogfish Head in the U.S.A. have decided to merge, which is pretty big news in the craft beer industry, and particular in the U.S. craft beer industry.

Richard: Yeah, I think this is pretty massive. I mean, you've got, so Boston Beer Co, that's Samuel Adams, but you don't really see them much in Australia. You might be able to find them at a very few select stores, Uncle Dan's maybe, but not much else. They were number two craft brewery in the U.S. by size, and Dogfish Head, that's number 13 craft brewery in the U.S. by size.

Geoff: So, every year there's released figures on the top 50 largest craft breweries in the U.S., and if you haven't seen that, you can just go online, jump on Google, and have a quick search, and you'll see that number one is a brewery called Yuengling. Yuengling.

Richard: Yuengling.

Geoff: Yuengling.

Richard: Basically nobody in Australia has even heard of, let alone I don't think anyone would have tasted their beers.

Geoff: So, yeah, jump online, have a look at that. It's interesting to kind of see where some of these breweries kind of fall, so to give you an example, Boston Beer Co is actually bigger than the likes of Sierra Nevada, yet we see Sierra Nevada here in Australia, and they have been coming in here for five or seven years, along those lines.


Geoff: Dogfish Head has made it to Australia, but only on the grey import side of the market, and Sam, the original founder and owner, has always said that he's got too much domestic demand for his beer that he doesn't even look to export markets, really.

Richard: That's right.

Geoff: I guess we wanted to put this into perspective in terms of what it means for the actual merger, so why it's actually happened. Do you want to give a couple of points as to why it's actually kind of occurred?

Richard: Yeah. I guess, so what we're seeing in the U.S., and I think it's going to happen in Australia as well, is that craft beer growth has really started to slow down over the last couple of years. There's been around about 1000 new breweries starting in the U.S. every single year for the last three years. We're at 7500 breweries in the U.S., craft breweries in the U.S. at the moment, and there's going to be about another 1000-odd in a year's time.

Geoff: Yeah. I think that that is quite an important point. I think two years ago, or maybe three years ago, they were at 5000/5500, so there's been a lot of growth in the last two years in the U.S. market, and a lot of that, from what I can understand, is in brew pubs, so people, local communities, setting up a brew pub, and having ... You know, you've got your local baker, local brewery, local businesses, and stuff, and really kind of having that community vibe.

Geoff: When the breweries get bigger, and they kind of outgrow that, and they're trying to find distribution, that's when they find challenges. One of the key things with this merger is they were both finding that they haven't, or they're not experiencing, the same growth that they've had for the previous years, where a lot of breweries in the U.S. are growing 10/15/20%.

Richard: Yeah.

Geoff: And when you kind of get used to that as a business, when that starts kind of retracting, you start wondering, well, what's going on, and how are we going to find this growth?

Richard: Absolutely. I think it's in part that the U.S. craft beer market really started in the 1970s, so when Sierra Nevada started going, Anchor Steam, or Anchor, and I think it's now getting to a stage that it's starting to mature, and that means that it's a lot harder for breweries to actually continue to grow at those crazy rates. If you look at the likes of Stone last year, they had a lot of layoffs, and I think that's something that you're going to actually see going forward as well.

Geoff: Yeah, and Stone actually had to sell their brewery in Germany as well.

Richard: That's right.

Geoff: So, you kind of think they went to international expansion to try and get their growth. I think that in the German market, their beers haven't quite necessarily worked, so they've actually had to sell that brewery.

Richard: That's right.

Geoff: One interesting, so we've kind of done back of the envelope sort of figures and stuff, if you look at the U.S. market, there's 327 million people that live in the U.S., and there's 7500 breweries, so that's one brewery for every 44,000 people. If you do the same stats for Australia, there's about 600-odd breweries, or brewing brands, or contract brewers, or brew pubs in Australia, and we've got roughly 24 million people, so that's one for every 40,000 people.

Richard: So, we've got more breweries per person in Australia than the U.S., and I think we're probably growing at the same rate as far as craft breweries, so we basically see in Australia about one new brewery every single week. They are getting 1000 new ones a year, so around about three breweries every single week for them.

Geoff: Yep, yep, so yeah, when you start putting in an international market, like the U.S., that has been around ... The modern day craft brewery, or brewing market, in the U.S. has been been around far longer than in Australia, and if you see that we're almost at parity in terms of that ratio of brewery to people, you kind of do wonder what the future is for Australia. We have actually seen in Australia that the likes of Tribe, which have got Mornington, they've got Stockade, they may be looking at other acquisitions, or mergers, or financing.

Richard: Yep, and then you look at the big guys, so you've got CUB. That's been on a bit of an acquisition path in the last couple of years, so they, CUB, they do Carlton Draught, VB, Pure Blonde, and they've needed to continue to grow, and so they've been doing that through buying other craft breweries, so Four Pines, Pirate Life, and then you've got Lion, who have done the same thing with Little Creatures, White Rabbit.

Geoff: Yeah, that's-

Richard: So, yeah, I think consolidation is something that we'll continue to see going forward both in Australia and the U.S. I don't think it's going to come as a surprise, and it's typically what happens when you get a mature market as well.

Geoff: Yep, yep, and I think we should now ... So, that's kind of the reasons behind why this has all kind of happened. There's also in some of the articles, both Boston Beer Co and Dogfish Head kind of talked about they use ... I think it's 99% of their sales go through the same channels. They've got a three-tiered system in the U.S., which is different to the Australian system. They use a lot of the same distributers and wholesalers, so it kind of made a bit of a nice fit, and they also see that their beers are complementary, and not competitive in nature.

Richard: Yeah, I think, so you've got Dogfish Head, they're famed for their 60 minute, 90 minute, and 120 minute IPAs, and they are ones that are continuously hops, so every single minute, there's another hop addition that's added. These are big, flavoursome beers, and then you've got, so Boston Beer Co is through Sam Adams that do much more, I guess, easy drinking, heavily consumed beers. There's Samuel Adams Lager would be by far and away their number one seller, but then they also do some crazy beers. They do the Utopia [inaudible 00:07:36], like 40/50% alcohol beers that come in these amazing little bottles, and they're very, very hard to get hold of.

Geoff: I guess another way to put it into perspective is around this whole merger, or this deal, is kind of looking at the size of each of these businesses. We've talked about Boston Beer Co is number two in the U.S., and Dogfish Head is number 13, but what does that actually mean in terms of volume? This does blow your mind when you consider it on the Australian scale. Here are some figures for you.

Geoff: Boston Beer Co, number two craft brewery in the U.S.. They do 4.3 million barrels a year. Now, a barrel is a U.S. standard, and that is 117 litres. It's roughly a bit over two kegs here in Australia. 4.3 million barrels equates to about 500 million litres, or half a billion litres. That's just-

Richard: From one brewery.

Geoff: ... from one brewery.

Richard: Yep.

Geoff: That's just Boston Beer Co.

Richard: And to give you a perspective of that in Australia, that will be basically all of CUB's output.

Geoff: Yeah. In Australia, the Australian beer market is worth roughly 4.9 billion Australian dollars, 1.2 billion litres, and so if you think 1.2 billion litres in Australia, and CUB or Lion Nathan individually have about 45% of the market roughly. Yeah, it equates to almost CUB is effectively what Boston Beer Co pretty much is. These are big businesses in the U.S., and obviously they can sustain that with their population.

Geoff: Now, looking at Boston Beer Co in 2018. They just almost nudged $1 billion. That's B, billion dollars in sales. That's U.S. dollars, not Australian dollars. Dogfish Head, you want to run through the Dogfish Head figures?

Richard: So, Dogfish Head, 300,000 barrels last year equates to around about 35 million litres. It's amazing, you've got Boston Beer Company number two brewery, craft brewery, in the U.S. that does 500 million litres, and then you've got Dogfish Head number 13, and they're just 35 million. It's still huge.

Geoff: 10%. But only 10% of number two.

Richard: Well, yeah, less than 10%.

Geoff: Yeah.

Richard: Yeah, but if you want to get an idea of what that 13th brewery, so 35 million litres, if you compare that to Australia, so Stone & Wood do around about, what was it?

Geoff: So, there's an article just yesterday, so they're in their 10th year now, and they're 12 million litres.

Richard: Dogfish Head is three times the size of Stone & Wood, which is one of our really biggest craft brewers outside of Coopers.

Geoff: Yeah, and been around for a decade.

Richard: Exactly.

Geoff: It's taken them kind of 10 years to get there. So, when this merger happens, so you're going to have Dogfish Head on one side, and you're going to have Boston Beer Co. When this happens, what does it mean? They're going to be over $1 billion in revenue is their forecast, and that's in U.S. dollars, so about $1.1 billion U.S., and their production is going to be 4.6 million barrels. Okay, so again, a million barrels, so 4.6 million barrels is 529 million litres. That's huge. It's phenomenally huge when you put it into perspective, and like Richard said, Stone & Wood about 12 million litres a year. The likes of Two Birds are between 1 and 2 million litres. Brands that are close to our hearts in the Australian craft beer industry are just in perspective are very, very small in the whole scheme of things.

Richard: And the actual value of this, you got some stats there?

Geoff: The actual purchase is 300 million from memory. Part of that is being funded by cash at bank that Boston Beer Co have got-

Richard: Tucked away.

Geoff: ... tucked away, and existing line of credit. Part of the merger is interesting because about four years ago, Dogfish Head went and got, or gave 15% stake to a private equity firm. As part of this deal, that private equity firm will actually exit the whole deal. They'll get a cash payout as part of the $173 million, which is being paid to shareholders, and husband and wife team that started Dogfish Head, here are some stats. They're going to be reasonably well off, at least on paper. They are to get an allocation of 406,000 shares in Boston Beer Co because it's a stock market listed company, which-

Richard: Not ASX, whatever the Nasdaq top 400 company.

Geoff: Yeah, so the share price closed about $315, so 406,000 shares at $315 is $128 million U.S.. I mean, congratulations. That's an amazing ... You know, starting a business from nothing, and then kind of growing it, and the brand is an amazing brand. I don't see it as a sellout. It's effectively a merger with another craft beer company-

Richard: Oh, absolutely.

Geoff: ... to then kind of continue to grow their journey, and involve people, and get people to drink good beer.

Richard: Yeah. If you've never seen it, there's a great I think it's a book by Sam Calagione from Dogfish Head just about his journey, and he also did a TV series, I can't remember what it was called, that ran for a couple of years in the U.S.. It was really interesting. It's a bit like if you've ever seen the Brew Dog TV series. Very similar to that, and Sam's very sort of effervescent. He's got a lot of personality to him. They have the Dogfish Head Hotel where they're based. The-

Geoff: Delaware.

Richard: In Delaware, so you can stay at the Dogfish Head Hotel, and then you can actually go to the brewery, and there's a whole amazing thing around that. Yeah, it's pretty impressive. Both Boston Beer Co, again, they started from nothing back in I think it was around about the '70s, and then you've got Dogfish Head that started early '90s I think it was.

Geoff: Yeah, that sounds about right.

Richard: So, two amazing stories, and now they're coming together as one.

Geoff: And the other thing to note as well is the big thing that Dogfish Head, and I don't know how much the share was, but it was part employee owned as well, so yeah, Sam was kind of always wanting to be independent, but also kind of ensuring he was engaging the people that work with him, and kind of allowing them to have shareholding as well.

Richard: Oh, absolutely, and both these companies, so Jim Koch from Boston Beer Co and Sam Calagione, they've both been on the American Brewers Association, so they've really tried to drive independent craft beer in America, and so one of the big things is obviously whether they'll still be independent now that they've merged together. You got some information on that?

Geoff: Well, so looking at the Craft Brewers Association, and Boston Beer Co has been a very big lobbyist to continue, as they've grown, to continue to get the Craft Beer Association in the United States to amend the actual definition in terms of size as to what a craft brewery is. The most current definition is 6 million barrels, and so the new combined merged business is going to be at about 4.6 million barrels, so they've still got-

Richard: They've got room for growth.

Geoff: ... 1.4 million barrels worth of growth, which is huge, right. It's massive.

Richard: Oh, absolutely.

Geoff: It will be interesting to see where that growth comes from. They are going to get some synergies with their own businesses, so in terms of bottom line growth, they could be consistent with where they are, and then kind of use the same systems and things like that to then be able to put to the, say, the share price and stuff, more profit and whatnot, but I'm wondering around growth of their actual business in terms of sales revenue whether they start looking more to export markets. Does this mean that Dogfish Head might start possibly brewing some beers out of Boston Beer Co, and that then allows them to have enough capacity to possibly look at exporting? Don't know. We have seen that happen in some mergers here in Australia, where the bigger parent company then brews the smaller company's kind of beers, or some of their core range beers.

Richard: Yeah, so if you look at the likes of Mountain Goat that are owned by Asahi, Mountain Goat basically all their core range is produced at Asahi breweries, and then their limited releases are done at the actual Mountain Goat brewery in Richmond.

Geoff: Yep, and I'm sure ... And that's with massive buyouts of multinationals, like Asahi, or CUB with Four Pines and Pirate Life. Don't quote me on this, I'm not sure if that's happening with, say, Mornington within the new Stockade brewery that's down south, but it's possible that some of the core range may move to that over time, as Mornington grows. I don't think it's necessarily a big multinational thing. It could be that it's regardless of the ownership structure. As you continue to grow, maybe some of the beers are being brewed in different breweries.

Richard: Absolutely.

Geoff: So, yeah, very, very interesting, and we thought we'd just put a bit of a spin on what the perspective is when you look at it from the Australian beer market.

Richard: Yep.

Geoff: Is there anything else you wanted to add, Rich?

Richard: Nah, I think that sort of sums it up. Yeah, it will be interesting to see what happens going forward both in the U.S. and Australia. These things, they sort of sometimes come as a surprise out of left-field. I wouldn't have expected this, but yeah, I'm not close to the U.S. market, so yeah, it will be interesting to see other things like this going forward.

Geoff: Yep, so thanks for tuning in. If you've got any comments, questions, pop them in the comments box either on Facebook or on LinkedIn, and yeah, we'd love to hear your thoughts on the merger of Boston Beer Co and Dogfish Head. Thanks guys.

Richard: Thank you.

Geoff: Cheers. See ya.