Has SweetWater Cracked the Seasonals Code?

FILED AUGUST 2, 2016

Dear Client:

It's barely August, but Oktoberfest beers already abound.

Seasonals have been tough for many big craft brewers lately. They're down around 5% YTD and in the latest 12 weeks per mid-July IRI numbers. And the rhetoric is about to get worse, as more than a few distributors have complained about all the pumpkin beers they got stuck with last year.

That's partly why SweetWater new sales and marketing chief Paul "PK" Kirbabas is helping to overhaul their approach to seasonals, from shelf life to new wholesaler policies.

Having come from United Distributors, he sees the glut distributors deal with as the seasons change.

So SweetWater is codifying some policies.

Seasonals are tough for both sides, OK? From a brewer's perspective, you might get two good years out of one brand, maybe three, says PK. (He hinted at SweetWater's imminent new winter offering, which will play on a "favorite song of many from many years ago." He promises it should be "much talked about.")

On the other side, distributors are "scared" of the glut: "So many items are thrown at you" he recalls from his United decades. That results in hard projections, "because you don't know what's going to cannibalize your projections from competition, or even internally."

NEW SEASONAL POLICIES WITH DISTRIBUTORS. SweetWater's solution: "we'll sit with our distributor network, and come up with an acceptable distribution and volume goal. If a distributor hits their distribution goal at 100%, we pick up the product if it doesn't sell. If they don't hit their goal, we're still gonna give them a 50% credit against the product.

"Our intent there is to be the ambassadors in craft in doing the right thing by quality, and keeping things fresh in the market, and not having these SKUs on top of SKUs in the marketplace." To wit, he's still seeing some last-season winter beers at $2.99.

QUALITY INITIATIVES. "Another thing we've adopted in our volume markets is only keeping 10 days of inventory on the floor, and in lesser volume markets, max 20 days." So for distributors, "if they're doing the right thing, they have their money in the bank before they have to pay [us]."

Such policies are helping the flock fly in formation. For example, their summer Goin Coastal pineapple IPA trends "blew us away," said PK. It's just phasing out of market as we speak; recall from yesterday's issue that it did triple the former summer seasonal.

PK attributes some of that success to new employee incentives. "My number one mission, coming into the brewery, was longevity of our personnel," said PK. "There were a lot of vacancies when I joined in March, and they've closed them all off."

That's important, for example, in trying to measure an acceptable point of distribution threshold for seasonals.

How the heck is that related? "We didn't have a full team in place when rolled out Hash Session [recall, that's the spring seasonal that is going year-round]." Well, they passed that seasonal's points of distribution by 4,000 points with Goin' Coastal. That was 40% over projections, and a new benchmark for the brewery. And it was directly related to their workforce.

"Coming from the distributor side of the business, I understand how to incentivize people to perform," said PK. Previously, "70% of our workforce's bonus opportunity was benchmarked against volume.

"But we're in a business where you've gotta be sensitive to what you put out the door, because we're peddling perishable products. So I took that down to 30% of their overall bonus; 40% is now distribution driven. Working with distributors to get the right distribution in the right places, is what drove Goin Coastal."

"The beer business is a business where C students can excel," PK said. "It's not rocket science: I gotta have the right distribution before I'm going to generate volume."

ON-PREMISE. Retooled policies will hit the on-premise, where SweetWater will attempt to conduct the frenzy of choice. They're offering bars a yearly beer calendar focused on two-month cycle rotations, to cover their core styles, new Dank Tank innovations and other new offerings.

OUTLOOK. It's all helped the brewer achieve its best summer trends in quite some time. "I would tell you, at United Distributors in Atlanta, our draft business is up," said PK. "We gotta protect the home base, it's 40%-45% of our business."

"Honestly our June really set up the rest of the year for us. And actually the remainder of the year looks pretty promising, cycling some softer numbers."

NEW ACQUISITIONS WILL BE "SIGNIFICANT CONTRIBUTORS" TO MILLERCOORS' PREMIUM PORTFOLIO AND PERFORMANCE

In the past two weeks, MillerCoors's craft division, Tenth and Blake, has announced majority interests in two IPA-centric craft brewers. They converted their minority interest into a majority stake in Athens, Georgia-based Terrapin, and just last Friday announced a takeover of Oregon's fast-growing Hop Valley.

T&B chief Scott Whitley was pressed on the brands' potential distribution upside on today's earnings call. "Our first view strategically in partnering is, do we think these are strong brands and complementary styles that will grow our business over time?" he offered. Obviously yes, which kind of begs the answer. Still, "job one is getting capacity in place" for guys like Saint Archer, which Tenth bought last fall. They've "already secured thousands of points of distribution that would be very difficult for Saint Archer to get on its own."

So the "goal is obviously down the road for these [recent acquisitions] to be significant contributors to our above premium portfolio and performance."

RETAILERS FINALLY STARTING TO CURTAIL CRAFT'S LONG TAIL?

Do you smell that? With a record 4,700 craft brewers in existence and another 2,200 in planning, sales multiples and transactions mounting, and the biggest deal in beer history about to go down, it's safe to say that the poop has about hit the fan. And now it's time to clean up the walls.

What's that mean? Retailers might actually be starting to deal with fallout from craft's long tail. We've heard the issue addressed on Boston calls, and now it's hitting MillerCoors calls, too.

MillerCoors sales chief Kevin Doyle today offered his own observations from the trade: "Major retailers [are] starting to reduce the tail," he said, referring to the ever-proliferating group of small and new brewers, which are a challenge to manage. Kevin reiterated that they're "definitely seeing some of the retailers start to see the SKU adjustments." Meanwhile, FMBs are "a fairly significant growth driver" for the category; he says retailers are reacting to that, too.

That built on comments that Heineken chief Jean-François van Boxmeer made on their own earnings call yesterday. A caller was interested in slowed craft growth, in context of Heineken's almost year-old JV with Lagunitas.

Jean-François told the caller that while the craft category is now in single-digit growth territory, "within that, Lagunitas is clearly outperforming with 17% up in that first half year. So, the performance in the craft segment is a very mixed [bag]."

His take on craft dynamics: It's "difficult" for distributors to handle the ever-increasing number of SKUs. "And I think there's a kind of shake out going on in the U.S. craft market and we will have to see where it lands," he said. "The IPA category is still, I would say, at the rather winning end. And in the IPA category in the craft, Lagunitas is the winning brand, so that's why we are performing quite well at the moment which we, of course, enjoy."

All which, of course, the brewer (Lagunitas) will be relatively insulated from in their international "journey," which is just starting, per call: They are currently "disembarking in Europe, starting with the Netherlands and the UK" with "more countries to follow," including France. "It's going well, but it's very early days," said Jean-François.

BEER BRIEFS:

MAINE BEER CO. PLANNING MAJOR EXPANSION. Maine Beer Co. is looking to quadruple the size of its brewery and tasting room, per Press Herald. The seven-year-old brewery submitted plans "to add a 20,300-square-foot, two-story building to its existing 6,000 square-foot brewery and tasting room," to the Freeport Planning Department last week. The brewer would convert the existing building into an "expanded beer tasting area and retail store," per report. Maine Beer said an outdoor seating area and parking lot are also in the works. The project review board will reportedly review the plans at an August 18 meeting.

Until tomorrow, Jenn

"The best way to get approval is not to need it."
- Hugh Macleod

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