All Hail Constellation Brands, Craft Beer’s Biggest Loser

If a beer business bombshell goes off hours before the colloquial kickoff to summer, once most of the industry is either in the trenches or out of office, does it make a noise?

It did here at Hop Take HQ. This past Friday, your humble columnist was wrapping up some reporting and looking forward to his first lager of Memorial Day Weekend when a press release arrived announcing that Funky Buddha Brewery’s founders were reacquiring the South Florida firm from Constellation Brands, to which they’d sold it roughly six years prior. It turned out to be the first of a series of explosive-ish revelations over the transom that day, all rippling across the internet from an epicenter deep below Constellation’s headquarters in Western New York. Founders at Four Corners Brewing Co., the Dallas craft beer concern Constellation bought in 2018, were also reclaiming control. That afternoon, Beer Business Daily (BBD) reported that the macrobrewer had issued a memo to its distributors explaining what any brewing industry observer still unlucky enough to be in front of a computer had already figured out: Constellation was “bring[ing] our dedicated Craft & Specialty efforts to a close.”

If there’s a more fitting conclusion to this slow-moving trainwreck, I’m hard-pressed to imagine it. Constellation’s Friday news dump transposed writing that had been on the wall for years into formal corporatespeak. Buried between lines of jargon about how these moves would allow the company to “driv[e] accelerated growth for our core portfolio” and “fue[l] innovation in key spaces to develop a pipeline of strong brands for the long term” is a plain truth: Of all the Big Beer buyers that overspent their way into the American craft brewing industry last decade, none has underdelivered on those acquisitions worse than Constellation.

Last week’s retreat bugle-sounded the ignominious end of a campaign to co-opt craft brewing’s momentum that’s been a-flounderin’ since… well, since craft brewing still had momentum, basically. That’s right, baby: We’re talkin’ Ballast Point. In hindsight, Constellation’s 2015 acquisition of San Diego brewing darling for a staggering $1 billion has proven to be the worst deal ever made for a small, independent brewery. But here’s the thing: It was also a boondoggle at the time! As Bryan Roth reported for Good Beer hunting in 2019 (when the macrobrewer dumped the House That Sculpin Built for rumored pennies on the dollar to an unknown Chicago-based firm with a board-game name) the initial term sheet meant Constellation has paid roughly $3,600 per barrel for it just four years prior — way, way more than other publicly disclosed craft brewer price tags. “In comparison,” Roth wrote, “Boston Beer Company paid around $300 million in cash and stocks to buy Dogfish Head Brewery [in 2019] which places valuation around $1,000 per barrel.” Yes, the market was frothier in 2015 than 2019, of course. But three times frothier? I don’t remember anybody thinking so when I reported on the deal then — except, of course, for Constellation itself.

From this inauspicious, expensive beginning, Constellation’s craft brewing missteps evened out a bit, but it’d be a stretch to say the company ever found its footing marketing higher-end, higher-touch craft beers. Its acquisitions of Funky Buddha and Four Corners late last decade were animated by solid investment theses: The former offered real beer-nerd credibility and a strong foothold in Florida’s lucrative drinking markets, while the latter’s Texas locale and Latinx-friendly brands suggested upsell synergies with Constellation’s Mexican lager-loaded portfolio. Both were much smaller and way, way less expensive than the Ballast Point ballast the company took on — like, at least 90 percent less expensive, by some reports, and maybe even cheaper. Unlike the San Diego snafu, these deals weren’t doomed from the jump. Constellation just kinda biffed it, steering the once-hot brands to mediocre or flat-out negative growth annually and racking up tens of millions of dollars in impairment charges along the way.

According to a 2021 analysis of IRI scan-data by Good Beer Hunting’s Kate Bernot, both brands notched to-be-expected dollar increases in chain retail the first full year after their respective acquisitions; according to volume data from the Brewers Association’s New Brewer Magazine, though, barrelage peaked for Four Corners in 2019 and Funky Buddha in 2021. Funky Buddha and Four Corners sorta-kinda made some volumetric progress with Constellation at the helm, but it was pretty obvious by the turn of the decade that the company had lost interest in getting the hang of the craft brewing segment. As Bernot noted, executives had all but stopped talking about the brands to shareholders on earnings calls by 2020. Constellation’s craft brewing albatrosses still showed up in its fillings, but as write-downs; some quick back-of-the-napkin math indicates the firm took $72.5 million in impairments on Funky Buddha and Four Corners through March of this year. Add that to the $119 million on Ballast Point before its 2019 fire sale and you’re looking at almost $200 million vaporized book value before the stomach-churning wallops the firm took by buying high and selling low. (Terms of these most recent sell-backs weren’t disclosed, but it seems reasonable to presume the breweries’ founders got better prices than they sold for as their former overlords scrambled for the exits, especially adjusting for inflation and market cooling and all that jazz.)

So concludes Constellation’s foray into craft beer: not with a bang, but with a whimper. Oh, and with a sale of the Virginia facility it had built to handle Ballast Point volume that never materialized, let’s not forget that. Don’t cry because it’s over, smile because… ah, it’s over. And certainly don’t cry for Constellation Brands! Its exercise in corporate craft-brewing rake-steppery is hardly existential, thanks to the red-hot performance of Anheuser-Busch InBev’s federally mandated 2013 spinoffs of Grupo Modelo brands like Corona and Modelo. After all, in the heavily consolidated, commodified, and three-tier-ified American beer business, the biggest loser in one segment can still be the biggest winner in another — as long as it stays out of its own way, of course.

🤯 Hop-ocalypse Now

We’ve talked before about how the American craft brewing industry is due for a shakeout as sales slow and consumer tastes change. One cohort it’ll likely hit hard is middle-market brewers who aren’t big enough to achieve savings at scale, and aren’t small enough to subsist on taproom sales and/or self-distribution alone. And lo: last week, Brewbound crunched some numbers from the latest edition of the Brewers Association’s New Brewer Magazine and found that a whopping 47 percent of regional craft breweries outside of the trade group’s Top 50 list self-reported volume decreases in 2022. To put that in perspective, 80 percent clocked volume increases in 2021. Holy smokes.

📈 Ups…

DoorDash’s first annual booze report showed flavored malt beverages/ciders/hard seltzers leading all alcohol, but (see below)… The Brewers Association will submit comments to the Alcohol and Tobacco Tax and Trade Bureau this month opposing category management, though it’s currently a little vague on the details… Postal Service beer shipping gets another look as the U.S. House reviews a new version of an old proposal… Ninkasi Brewing merges with a beyond-beer portfolio firm as consolidation nation marches on…

📉 …and downs

That same DoorDash report showed ready-to-drink cocktails, a segment to which spirits have strong claim, growing at 5x growth year-over-year… The California state senate unanimously passed an equal-access bill for spirits-based RTDs… Lest ye forget, Kroger and Albertsons are still trying to muscle their proposed $25B merger through court…

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