01 Jun 2016
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Ask the Expert: Barreling Ahead

What happens when microbrews go macro?
Re: Matthew Rhenish (MBA 2008); Perry Miles (MBA 1972); Anselm Fusco (MBA 2002); Roger Ellis (MBA 1967)

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Ballast Point built a new brewery in 2014, featuring a copper brew house three times the size of its previous system. (Courtesy Ballast Point Brewing and Spirits)

The rise of American craft beer is worthy of a toast: According to the Brewers Association, the industry grew 16 percent from January to June 2015 alone—marking a 122 percent increase since June 2011. The bigger breweries have taken notice, as Jim Buechler (MBA 1989), president and CEO of San Diego–based Ballast Point Brewing and Spirits, can attest: Last November, Constellation Brands (which owns Corona and Svedka vodka) acquired Ballast Point for approximately $1 billion. We asked Buechler to answer your questions about how the craft brew industry can stay fizzy.

How are resource constraints (e.g., water shortages in California, hop shortages in general) impacting the beer business?
—Matt Rhenish (MBA 2008)

BUECHLER: To date, resource constraints haven’t been overly significant. Our pro–craft beer San Diego city government has created and nurtured an environment where 115-plus local breweries work together to create some of the best craft beer in the country. In addition, San Diego County has done a nice job of diversifying its water resources. With that said, we expect the landscape to change over time (others in California have already found it more difficult). With roughly 4,200 US craft breweries and 2,000 more in the planning stages, resource constraints will likely become more commonplace. As a result, we’ve worked hard to develop relationships. We have gotten to know many of our hop farmers, and are looking forward to working with them as the number of acres they cultivate continues to grow. We’ve also created relationships with our malt, glass, can, keg, and packaging suppliers (some of which have only become stronger as a result of our relationship with Constellation Brands).

Will the big brewers allow the acquired craft brewers to remain true to their art?
—Perry Miles (MBA 1972)

BUECHLER: Time will tell and each relationship will likely be different. Intellectually it makes sense for the big brewers to allow acquired craft brewers to remain true to their art. Keep in mind, big brewers are acquiring craft brewers for reasons such as acquiring something they don’t have, acquiring something they’re finding it difficult to develop, or jump-starting their entry into a category where they want to be more successful. As the old saying goes, “Why mess with success?” In all likelihood, the new relationships that will be most successful will be those that honor each other’s heritage while leveraging the areas where it makes the most sense to combine resources and talent.

How will Ballast Point be able to leverage Constellation to gain competitive advantage over the plus/minus 4,000 independents out there?
—Anselm Fusco (MBA 2002)

BUECHLER: Our success starts with great products. We brew more than 100 new products we like to drink at our R&D facility every year. We couple that with an amazing team that loves to work hard and have fun. Finally, we love to create great customer experiences while staying true to our roots. We don’t expect any of our strengths to change. Our new relationship with Constellation Brands, however, will create opportunities—some of which we’re just beginning to explore. As noted in my first response, our new relationship will help us mitigate supplier constraints and drive down costs. We’ll also be able to work with Constellation Brands where it makes sense on sales and distribution. (In some cases, a simple introduction may be worth its weight in gold.)

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Which side of the industry do you see having the most potential over the next 10 years, the production side or the support side (equipment suppliers, startup consultants, etc.)? Over history, some of the most successful ventures were launched on the support side. (Some people who made the most money during the gold rush sold picks and shovels rather than actually mining for gold.) Do you see that being the case with the craft beer revolution?
—Roger Ellis (MBA 1967)

BUECHLER: The next 10 years are going to be interesting. In the short term, expect both the production side and the support side to continue to do well. Tank manufacturers, farmers, engineering firms, packaging suppliers, and glass and can suppliers have all been able to take advantage of a rising tide. Like most industries, however, there are going to be winners and losers. With limited shelf space, it will be more and more difficult to be a midsized brewery. Expect brewpubs and large craft breweries to have some strategic and tactical advantages. Accordingly, expect support-side suppliers that cater to these constituencies to be the most successful over time. Ultimately, the winners will be those that have built a brand, have developed strong relationships, and are amazing at execution.

From Baker Library:

Explore HBS faculty research on brand authenticity and maintaining brand identity post-merger. Or, read what thought leaders have to say regarding best practices on integration post-mergers, or explore news on current M&A activity in the craft beer space using ABI/Proquest. Learn more about how Baker Library can help you with your research needs.

 
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Featured Alumni

Featured Alumni

Class of MBA 1989, Section B

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