Beer News - The World is Awash with Capital

One of the biggest issues to hit the financing world over the past 2 years has been the weight of surplus capital around the world which has promoted the emergence of the highly financially engineered private equity transactions (ie the Qantas deal and its ilk). This spare cash also tends to find its way into segments that would be fighting for investment funds under normal conditions. The minor spate of equity market floats for craft brewers is, to my mind, a clear indicator of cash desperately trying to find a home.

It will be interesting to see if investors have the patience to stick with these brewers over the longer term as brands and distribution systems are built.

There's been a bunch of news articles on this subject and I'll post a few of these over the next day or two.

Empire Beer's subdued debut, 10 January 2007, Townsville Bulletin

"EMPIRE Beer Group Ltd has made a subdued debut on the bourse as the beverage company looks to quench the thirst of Australia's fledgling boutique brewing market.

Shares in the company hit the screens of the Australia Stock Exchange (ASX) at 34 cents early yesterday, a one cent discount on the issue price of 35 cents. By the market's close, they had fallen five cents to 30 cents.

Empire Beer chief executive Phil Gallagher said while he was disappointed with the stock's first day of trade, he believed the company could flex its muscle in the emerging craft beer market.
"It's always disappointing that a float would go backwards on day one, but we're still very confident in the business model," Mr Gallagher said.

The Perth-based beverage group owns boutique label Colonial Brewing Company, from the Margaret River, south of Perth.

It is looking to expand the brewery's business model of on-site brewing and distribution.
"We're not going to be out there trying to get mass distribution in Coles and Woolworths," Mr Gallagher, a former Foster's Group executive, said.

"We're about building venues where we brew on the premises for consumption on the premises, with very high margins at the point of sale," he said."

(ed - don't want to be overly negative but surely there's a bit of drug smoking going on if they seriously think they can make a buck selling beer via a handful of brew pubs?? eh? beer economics is 99% about distribution)

Boutique beer rush tests thirst of investors HOP HEADS, CAROLYN BATT, 16 December 2006, The West Australian

"Australians like their beer. Collectively, we sip and slurp our way through 1.8 billion litres of liquid amber each year, or roughly 90 litres for every man, woman and child. And we are getting pickier about what we drink, with fashion-savvy drinkers shunning VB and Carlton Draught in favour of a Mountain Goat, Dr Quick or Raging Bull.

In a $14.5 billion beer market that is flat overall, "premium" brews, and particularly "boutique" or microbrews, have enjoyed surging demand. There are now about 80 microbreweries nationally, a quarter of them in WA.

One of the best-known is Little World Beverages, owner of Little Creatures, which listed on the stockmarket last year and is now trading 40 per cent above its offer price. With revenue and profit jumping 29 per cent in its first year as a public entity, and its beers now being showcased in London, LWB is a tale of success.

But this month three more boutique players - Gage Roads, Oz Brewing and Empire Beer Group - joined the stockmarket party, and questions are already being raised as to whether investors, and consumers, have the thirst for so much choice. Independent analyst Peter Strachan warns that the three new companies are very different in size and maturity to LWB, and investors should not underestimate the challenges ahead.

"The market is very buoyant, there's a lot of money being made, and people are willing to take a punt and back someone's judgment," Mr Strachan said. "But for me, there's got to be an easier way of making a dollar than competing in the beer market. With the exception of petrol, I can't think of any more competitive market to be in, in Australia or globally."

Wholesale brewer Gage Roads was first off the blocks, l~isting on Wednesday after a $4 million capital raising. It plans to put the funds towards a major marketing push in the Eastern States, helped by an exclusive distribution arrangement with the Hardy Wine Company.

Empire Beer Group is set to follow by Christmas, and will use the $6.4 million raised to expand its Colonial Brewing brand with a Fremantle venue. And by year end, shares in Oz Brewing should also be trading on the exchange.

Oz Brewing, which is developing its Mad Monk Brasserie in Fremantle and is yet to start selling beer, closed its $1.5 million offer oversubscribed last week.

"I think the chances that (these new listed companies) will get their labels beyond their niche areas are very limited," Mr Strachan said. "Established players like Little World Beverages and Lion Nathan (owner of the James Squire brand) will fight strongly for the market they have established already, and as such, it's going to be difficult. Only time will tell, and I stand to be corrected if these companies thrive, but I don't think they will."

The debutants, however, are convinced the market can sustain everyone. Oz Brewing managing director Trevor Pugh argues the boutique sector is still in its infancy in Australia, accounting for less than one per cent of sales despite 40 per cent growth in the past five years.

"If you look at the UK and US, where the market share is 5 per cent, we've got huge growth potential," said Mr Pugh, who hopes eventually to expand Mad Monk nationally and internationally.

Empire managing director Phillip Gallagher dismisses arguments that small-scale boutique beers cannot compete with the resources of big-name imported brands, which target the same image-conscious consumers and have become cheaper as the Australian dollar has strengthened.

It all came down to taste and quality, he said, and consumers were prepared to pay for a fresher, better-tasting product. The challenge was to educate consumers.

Little World Beverages chief executive Jason Marinko is quick to d~ifferentiate his company from the rest. "We've been around for six years, we'd established a national brand and needed more capacity so we went to the market," Mr Marinko said. "We're on a significantly larger scale to the newer ones, some of whom haven't even started yet. Our motivation for going to market was different.

"I'm not surprised, given the market conditions and the growth in demand for boutique beer, that there are a lot of new entrants. But the brewing industry is pretty competitive and it's very, very hard work.

"The major brewers in the country control the majority of the market, and then there are the big distribution outlets owned by the supermarkets to deal with as well. You need to know what you are doing.

"As a listed company we publish revenue growth and margin growth and that's what shareholders look at. It would be wise for people to focus on that with the others too."

The problem for investors is that much of what the newcomers offer is unproven. Bell Potter Securities head of wealth management Heather Zampatti predicted subdued trading until the companies first reported earnings as listed entities and revealed whether they had achieved prospectus targets. "There is certainly interest from investors because labels such as Gage Roads are known to the WA community, and Empire is showcasing the Margaret River region with its Colonial operation," Ms Zampatti said. "But local appeal is not enough - people have to look at the fundamentals to see if the business stacks up."

Although the flurry of activity in the sector provided useful publicity to the brewers during their pre-listing phase, Ms Zampatti said overall the crowding could work against the companies. "There's only so many dollars that can go into a particular sector from a balanced portfolio, so there is less money to go around. It means more competition in a relatively niche area," she said.
Mr Pugh acknowledges that going to market without a tangible product has posed challenges. He was forced to extend Oz Brew~ing's offer after initially failing to attract the necessary 400 shareholders to allow a public listing. "If I had my time again I would allow myself more selling period," he admitted.

But he said the company now had "well over" the required shareholder numbers, and he predicted strong investor interest once the group's Fremantle site was operating. "In WA, it's all about property, resources and beer," Mr Pugh said. "If you're not in any of those three, you're missing out."

Beer accounts for 53 per cent of alcoholic beverage sales in Australia, with annual sales of about $14.5 billion Lion Nathan and Carlton and United dominate the market with 88 per cent of all sales.

The premium beer segment is the fastest-growing, jumping 29 per cent in WA last year.
Boutique or craft beer, a small part of premium sales, grew 15 per cent last year. "


Hop on: Boutique Brewers Tap the Bourse, Blair Speedy, 02 December 2006, The Australian

"The trend towards expensive beers has reached the stock market, with three boutique brewers set to debut on the bourse this month after raising a collective $15 million from investors via initial public offerings.

All three of them -- Gage Roads, Empire and Oz Brewing -- are based in Western Australia, where the mineral boom has left drinkers with the sort of disposable income that makes a $9 beer sound like reasonable value.

But West Australians are not alone in their liking for top-shelf suds -- premium beer sales rose by about 12 per cent in the 12 months to the end of July, compared with just 4 per cent for the beer market overall.

Craft beer -- the handmade, small-batch stuff made with unpronounceable ingredients and wearing a vaguely Belgian-sounding label -- grew even faster, at about 23 per cent.

It's only a small fraction of the 1.3 billion litres of beer Australians drink each year, but a fast-growing and lucrative one. "Premium beer is really the growing part of the market right now," said Peter Nolin, managing director and brewmaster at Gage Roads, which is seeking to raise $4 million to fund a marketing push into the eastern states.

Mr Nolin said Gage Roads had pre-sold most of the 10 million 40c shares it had for sale before the offer had opened; it is scheduled to close on December 6.

"The response has been overwhelming," he said.

Gage Roads in July signed a sales and distribution agreement with Hardy Wines, which fostered the national growth of the Coopers and James Boag brands during the 1990s.

Trevor Pugh, managing director of Oz Brewing, said his company was surprised to find that its $1.5 million IPO would be competing for investor funds with two other West Australian boutique brewers.

"When we first started thinking about it earlier this year, we were the only ones," he said.
"But it shows the market is moving towards the connoisseur, something different from the mass-produced beers."

Oz, which plans to brew and sell European-style beers under the Mad Monk label, has had to extend its offer, which had originally scheduled to close on November 10.

"We don't have a sponsored broker, and the original takeup was a little slower than expected -- we had trouble getting the necessary 400 shareholders (for ASX listing), but that's now been sorted out and we'll close the offer about Wednesday," Mr Pugh said, adding that he expected a listing before Christmas.

Oz will operate a brewpub -- a hotel with onsite brewery -- in Fremantle, home to the Little Creatures and Matilda Bay breweries, two of Australia's most successful boutique beer makers.

The company also plans to open another brewery to make packaged beer in the second year after listing.

The brewmaster at Oz is Richard Moroney, formerly of the Sail and Anchor, the brewpub owned by Australian Leisure & Hospitality Group, which was credited with sparking the West Australian love affair with boutique brews back in 1984 and is still a major draw for tourists on brewery tours.

Phillip Gallagher, managing director of Empire Beer Group, had his first encounter with boutique beer when working as a barman in the mid-1980s, when Matilda Bay's Redback wheat beer became popular.

"People are looking for quality and new styles of beer, just like what happened in the Margaret River 20 years ago, when people were discovering new wineries and styles of wine," he said.
Empire will use the proceeds of its $10 million IPO to buy the Colonial Brewing Company brewpub in Margaret River from its private shareholders, and then to open another outlet in Fremantle.

"Our business model is venue-driven, so we're looking to open more Colonials around Australia, and each venue will be a brewpub," he said.

Mr Gallagher said having the beer made onsite makes it easier to charge higher prices than people would be willing to pay for a garden-variety lager. "It's not price-driven, it doesn't have to be $15 a six-pack in order to sell. People can see the brewhouse, the hops that went into it, that it's handcrafted, all the things the big breweries aren't," he said.

Jason Marinko, chief executive officer of Little Creatures brewer Little World Beverages, said he's not surprised at the rush of new entrants to the sector. "It appears to be the `in' thing to do. But it's bloody hard work," he said.