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Sunday, Oct 1, 2023

Stone to Be the Rock For Small Brewers

Greg Koch and Steve Wagner

Even with his company now the nation’s 10th largest craft brewer — and with new production ramping up this summer in Richmond, Va., and Berlin, Germany — Stone Brewing Co. CEO Greg Koch appears to be doubling down on his role as outspoken defender of smaller beer makers.

Koch and President Steve Wagner, who co-founded the Escondido-based company in 1996, recently announced the formation of True Craft, a $100 million investment company that will make minority investments in craft brewing companies, while allowing those brewers to retain “their independent soul and control.”

“Craft beer needs an alternative model to the one that requires founders to sell their company in its entirety,” said Koch in a statement announcing True Craft. “In a world in which there are constant forces toward homogenization and fitting in, I specifically want to foster a world of uniqueness, depth and character.”

Stone Brewing is a founding member of the investment company, though company officials said the group’s full makeup and other details won’t be announced until a later date.

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As craft beer continues to take market share away from global macrobrewers, who make mass-produced brands including Budweiser and Miller, small and midsized brewers are increasingly the target of mergers and acquisitions. In order to grow and compete, the smaller beer makers can find it hard to resist the major capital influx and distribution clout that comes with teaming up with a major brewer.

A growing U.S. wave of consolidation was witnessed locally in 2015, as Miramar’s Ballast Point Brewing & Spirits was acquired by Constellation Brands Inc. in a $1 billion deal; and Miramar’s Saint Archer Brewing Co. was purchased by MillerCoors for an undisclosed price.

$217 Million Net Revenue

Pat Tiernan

Stone Brewing Co. is the largest of more than 100 craft brewers now headquartered in San Diego County. In 2015, it brewed more than 325,000 barrels — up 13.4 percent from the prior year — as net revenue topped $217 million and its workforce neared 1,200.

Speaking by phone from Richmond, where he and other Stone Brewing leaders were overseeing the startup of new East Coast production operations, Chief Operating Officer Pat Tiernan said True Craft is in essence an extension of outreach that Koch and Wagner have been doing for the past 20 years.

In addition to forming distribution arrangements with smaller brewers, Koch has regularly met with craft beer makers around the nation to offer mentoring on issues such as beer taste and consistency, and has received valuable feedback in return. “We learn as much from them as they do from us,” Tiernan said.

Tiernan said True Craft in future years might be able to assist smaller service and supply companies vital to the craft beer industry. For the time being, however, the focus will be on helping the beer manufacturers themselves remain financially independent.

“We want to help brewers that are aligned with our thinking and are focused on craft,” Tiernan said. “We want to assist those companies who still want to be craft brewers well into the future.”

Working Together

Local experts involved in brewery financing said the True Craft program reflects a slowly growing trend among U.S. craft brewers to look out for themselves financially, and other similar investment arrangements could be coming in the future — similar to venture and partnership funds that already operate in industries such as technology.

Brian Mulvaney

Brian Mulvaney, a local senior vice president who heads the Beverage Finance Group of Bank of America Merrill Lynch, noted that brewers have already formed partnerships among themselves and with private investors, with goals along the lines of those stated by True Craft’s founders.

For instance, Pennsylvania-based Victory Brewing and New York-based Southern Tier Brewing recently formed a new holding company — Artisanal Brewing Ventures — in a transaction with an undisclosed price. The brewers said they will remain independently run, with the holding company allowing them to obtain needed funding for expansion via shareholders.

Also, Colorado’s Oskar Blues Brewery last year sold a controlling stake to Boston-based private-equity firm Fireman Capital, as the two entities formed the new Oskar Blues Holding Group. The holding group has since purchased four other U.S. craft brewers, most recently Florida-based Cigar City Brewing, and the five brewers have in turn formed a new holding company called United Craft Brews LLC, aimed at supporting future growth and independence.

Mulvaney said such partnership and venture arrangements are feasible alternatives for smaller brewers, which often don’t have the same access to capital enjoyed by established midsized and large industry players as they seek to expand their operations.

Banks, private equity firms and other financers traditionally require a long-term track record of production and sales before making significant investments or loans to brewers, which can take several months or years to establish. Funds such as True Craft could potentially allow brewers to get through those earlier years when access to financing remains limited.

“This is the kind of funding mechanism that could help more of those small brewing companies get to that next level,” Mulvaney said.

Michael Harden

Michael Harden, a senior managing director at Ambrose Advisors in Newport Beach who has provided financial consulting to several U.S. craft-brewing clients, said approaches like True Craft could offer smaller companies more flexibility in their early growth stages.

“True Craft is offering a viable alternative to owners of craft breweries who desire or need liquidity, but who want to remain independent and do not want to sell control of their businesses to a private equity firm or a large strategic buyer like a mega-brewer,” Harden said.

New Facilities

As it looks to aid smaller players, Stone Brewing is also focused at the moment on gearing up its new brewing and restaurant operations in Berlin and Richmond, where it previously announced facility investments for the two locations totaling approximately $100 million.

After Stone began early pilot production at Berlin in late 2015, Tiernan said the first test batches — of brews including Stone IPA and Arrogant Bastard — should be rolling from the Richmond facility by the end of May, with fuller production expected to be in gear by late summer at both new locations.

Richmond will eventually serve as the primary East Coast production facility, brewing around 100,000 barrels annually as it employs around 50 by the end of this year, with more to be employed later at its upcoming new restaurant operations in that city.

Stone’s Berlin location is expected to have about 150 workers in its brewing and restaurant operations by year’s end, as it produces around 10,000 barrels within the first year of operations.

In the meantime, Tiernan said Stone continues to evaluate multiple candidates from numerous industries who have expressed interest in eventually becoming Stone’s next CEO, overseeing daily operations. Koch announced last year that he plans to transition to a new role of executive chairman, focused on long-term and higher-level strategic planning, once the CEO post is filled.

The company has set no formal timetable for the hiring process, but Tiernan said it remains extremely particular in finding a CEO who will match Koch’s passion for craft beer, along with his insistence on maintaining an independent business culture.

“It’s going to have to be a very tight fit,” Tiernan said. “It’s a very selective process.”


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