The Ballast Point Effect
Ballast Point sold to Constellation for a BILLION. What does that mean for the craft beer industry?
In case you haven’t heard, Ballast Point Brewing just sold to Constellation Brands for $1 Billion. The biggest acquisition in craft beer history. A lot of dough. A seismic shift. The kind of money that can change the face of an entire industry.
Ballast wasn’t the first San Diego brewery to be acquired. A few months ago, MillerCoors bought Saint Archer for $87 million. And Heineken bought 50 percent of Petaluma-based Lagunitas. AB InBev bought L.A.'s Golden Road Brewing. While the world’s biggest beer companies have seen flat growth for the last few years, craft beer has grown an average of 18 percent year over year. And that’s why the Great Craft Sale is on.
Craft beer was so exciting because mainstream beer was so blah. Craft was a revolt against “fizzy, yellow beer,” as Stone Brewing Co's Greg Koch is fond of saying. Now the movement has reached that same awkward point that's happened to every good movement, from punk rock to politics:
The mainstream is purchasing the revolution.
What does this mean for the industry? As I wrote last week, calling Ballast Point “sell-outs” is pretty precious and naïve. But if major corporations continue to acquire smaller craft beer companies, what negative effects could that have on one of San Diego’s, and America’s, most thrilling industries? An industry that has now become a bigger tourist draw for San Diego than Shamu?
I asked a handful of industry experts what, if any, negative fallout could come about. All of them were very adamant about their support of Ballast Point’s decision to sell, especially since Ballast’s only option was either raise hundreds of millions for the infrastructure to expand (breweries, distribution, etc.), or sell to a distributor who already has the nationwide infrastructure.
Still, I pressed them for possible fallout. And here’s what they said:
SMALLER GUYS MIGHT GET SQUEEZED OUT
It's illegal for beer companies to offer compensation to retail outlets (bars, stores, etc.), whether money or goods amounting to a certain value. Just ask the Federal Alcohol and Tobacco Tax and Trade Bureau.
But it happens. All the time. I’ve seen pretty convincing physical proof of the practice in San Diego. One of the major beer companies hired a third-party company to build a tap system for a new bar (a value worth at least $3,000). They charged the new bar owner pennies. The unwritten agreement is that the new bar owner agrees to sell a certain amount of their beers. And the person who fed me this information says it happens all the time.
“We’ve all heard the myth of the $500 cheeseburger,” says one industry insider. “There are many ways to give marketing dollars to bars so that they’ll sell your beer.”
“On the east coast pay for play is real,” says Michael Peacock of Glacier Design Systems. “The large distributors get 75 percent of a bar’s handles. It’s against the law, but nobody’s enforcing it. Nobody can cite where it’s happening. With these big distributors, it’s going to put the squeeze on small guys like, say, Benchmark or Groundswell, who self-distribute.”
“Expansion for your brand here will be more of a challenge than ever this year,” says Greg Koch. “I say this because of all the recent acquisitions of craft brands by AB, MillerCoors, and Constellation Brands who, as you know, are big players here. With that said, there will be an ever higher level of expectation this season from them.”
Another local brewer reported that a big account told them this: Now that Ballast Point is part of Constellation, the big account has less impetus to search out small craft beers when they can get four to six “craft” options from a single vendor (Ballast/Constellation).
If bar and restaurant owners can get both mainstream beer and craft beer from one source, and therefore save money from buying bulk—why wouldn’t they?
But Tom Nickel, owner of San Diego’s first craft beer pub, O’Brien’s, as well as Nickel Beer Company, disagrees. “Maybe that happens with one or two big corporate accounts,” he says. “But small bars and restaurants are still going to serve small craft beers. And it’ll push people who want truly small craft beer to those smaller bars, which is what the movement was about anyway.”
So what does Nickel think might be a negative outcome?
MONEY BECOMES THE NEW GOAL
Craft beer began as an artistic pursuit. Sure, brewers wanted to sell their beer and make money. But it was more of a passion project with a medium-sized profit margin. That’s why it drew beer people, not money people. But there is nothing medium-sized about a BILLION dollars.
“There were already a lot of people getting into the industry,” Nickel says. “But now it’s going to attract people who are in it solely for the money. What is the trickle down effect of that?”
When any industry becomes a pursuit driven by cash and not necessarily quality or art, the product and appeal of that industry is going to take a hit.
BIGGER, BUT NOT BETTER
While everyone at Ballast Point and Constellation say the quality of Sculpin IPA and other BP beers will remain the same, maintaining quality at that level of quantity isn't going to be easy. It’s easy to make one great meal. But making 50 great meals at the same high level of quality? Harder.
“When Snapple was in its infancy, it was made in garages and packaged by hand,” says Peacock. “Then Rush Limbaugh got a hold of it, started talking about it and singing its praises. So Snapple’s production increased. The recipes have changed and it’s nothing close to the awesomeness that it was. The danger is that the awesomeness is going to be diluted.”
Granted, that same challenge would have faced Ballast Point if they had tried to expand nationally on their own. The same "going micro to macro" problem faces other big independent craft brands, whether Sierra Nevada, Stone or Green Flash. But going from Ballast Point's scale to Constellation's massive national scale is going to take some extra special maneuvering to maintain quality.
So those are some of the concerns from a few top industry minds. I’ll finish this series next week with an expansion of this thought: Your favorite things are not meant to be your favorite things for life.