Increased M&A activity in the premium & craft beer manufacturing industry in Australia
The premium & craft brewing sector has grown strongly over the last five years as beer drinkers have increasingly moved away from traditional beers. The large numbers of small brewers that have popped up has resulted in a highly fragmented market which is ripe for consolidation. In fact, large players have already started to ramp up their acquisitions in the sector over the past few years.
Consumers have shifted their demand from traditional beers to premium and craft beers because of two factors: (1) Traditional beers are considered largely homogenous in nature; and, (2) Drinkers have become increasingly discerning and more willing to try different brands and styles. Premium beer and craft beer currently represent 22.9% and 11.9% respectively of the beer manufacturing industry in Australia.
Most small craft breweries have a licensed establishment where beer is sold on tap, while bottled beer is sold either directly from the brewery or online. Craft breweries also supply some specialty bars, clubs and pubs – sales to this segment are expected to decline in 2019-20, due to restricted operating conditions and closures of cafes, restaurants, pubs and bars across the country following the COVID-19 outbreak. This will put pressure on the profitability of craft breweries and could present some cheap acquisition opportunities.
Many small brewers have entered the market over the past five years, driven by the shift in consumer preferences towards premium and craft beers, which has significantly increased industry enterprise numbers over the period. In fact, craft breweries make up the majority of enterprises within the beer manufacturing industry in Australia. This highly fragmented market will present opportunities for consolidation. Furthermore, as product premiumisation trends are projected to continue, the industry's major players are anticipated to progressively increase their presence in the craft beer segment.
In 2017, AB InBev acquired both 4 Pines and Pirate Life, and in 2019, CUB bought Balter Brewing thus showing that larger companies have interest in adding profitable craft breweries with strong brand recognition to their beer portfolios, particularly as traditional beer consumption declines.
During the current market disruption some craft brewers have been able to increase their margins by lifting their proportion of sales through their direct to customer channels (predominantly online). For some this is a welcome offset against reduced sales volumes through the hospitality sector, however those craft brewers that have not been as successful in the direct to customer market are increasingly finding themselves rationing capital and in various stages of distress.
COVID-19 has not been friendly to many businesses but in general it has favoured large, mature and well capitalised businesses when it comes to M&A and we expect the premium and craft brewing sector to be no different. But what we might see in this sector is the emergence of the larger craft brewers (think Stone & Wood and Burleigh Brewing) aggregating the smaller brands to ensure their survival as a counter to the large traditional brewers that are likely to begin a campaign of opportunistic acquisition at some point.
Either way, we expect to see an increasing level of M&A in the premium and craft brewing sector over the next 12 months as the negative impact of COVID-19 on the profitability of in the highly fragmented market create some attractive opportunities for consolidation in the sector.
Sources:  Suzy Oo – Beer Manufacturing in Australia (May, 2020);  Mergermarket