Local breweries becoming attractive to big investors?

With success in the local brewing industry comes booming sales, lots of tourists — and the guys with business cards.

Investors big and small are checking out Asheville's brewing scene, which has exploded in recent years to include two dozen breweries in Buncombe County and more than 50 in the mountains. Rumors have even swirled recently about the really big boys sniffing around town — outfits like Anheuser-Bush/InBev or Miller/Coors — although that's tough to confirm, as the big companies aren't talking and local breweries might be dealing with an investor representative, not the corporation itself.

What's clear is that the huge brewers, essentially shut out of the fastest-growing segment of the beer industry, have been snapping up craft brewers in recent years, sometimes for some pretty staggering sums.

Local brewers say it's not uncommon for potential investors to approach them, but they don't necessarily identify who they're with or what outfit they're working for.

"I just know we’re constantly having people walking in our brewery, saying, 'I'm with XYZ company,'" said Rick Guthy, a partner in Wicked Weed Brewing, which has enjoyed strong growth since opening in December 2012. "Whether they're with a large brewer or an investment banker group or a private equity group, I don't know. But I do know money kind of follows the trends, and right now craft beer is one of those trends."

As "The Street" website reported in January, mega-brewing companies including Anheuser-Busch InBev, MillerCoors and Constellation bought up eight craft breweries last year, and this April Anheuser-Busch nabbed Devil's Backbone Brewery in Lexington, Va. Devil's Backbone, originally projected to produce 10,000 barrels of beer in its first ten years, actually produced almost 45,000 barrels in its first three, after its founding in 2008, according to the company website.

The big companies are buying because craft beer brewers, like Devil's Backbone, keep growing. In 2015, craft brewers produced 24.5 million barrels, a 13 percent rise in volume and a 16 percent increase in retail dollar value, at $22.3 billion, according to the Brewers Association, which represents small and independent breweries. That represents 21 percent of the overall beer market, and with more breweries than ever before in the country — 4,269 as of last year, the industry shows no signs of slowing down.

"Throughout the year, there were 620 new brewery openings and only 68 closings," the association noted. "One of the fastest growing regions was the South, where four states — Virginia, North Carolina, Florida and Texas — each saw a net increase of more than 20 breweries, establishing a strong base for future growth in the region."

Earlier this year, Benj Steinman, publisher of Beer Marketer's Insights, a trade publication founded in 1970, told the Citizen-Times they had tracked "a couple of dozen" craft beer transactions last year, including the Ballast Point mega-deal, in which the San Diego-based craft brewer sold to Constellation Brands, maker of Corona, for $1 billion.

"That's going to make anybody sit up and take notice," Steinman said.

In late December, the Reuters news agency reported that New Belgium, which just opened its $140-million Asheville plant and tasting room, was looking for a buyer that could value the company at more than $1 billion.

Money to be made

Some of these smaller craft breweries, especially those with in-house restaurants or a brewpub, can be tidy little money-makers, upping their appeal to investors. Craft brewers usually don't divulge profit margins, but Tim Kent, executive director of the North Carolina Beer & Wine Wholesalers Association, which represents 28 companies and 5,600 employees, said relatively small-scale brewing can be lucrative if an operation is well-run.

"I can only tell you what I've been told anecdotally, and I’ve been told it costs about 75 cents in material and labor to make a pint of beer, and what does that pint of beer sell for?" Kent said, noting that it's often about $4-$5 a pint. "It’s a very handsome profit margin selling your own beer at your own tap room."

The giant breweries still dominate the total domestic beer market, but they also have to be concerned about craft, especially losing younger drinkers who develop a taste for craft beer in those brewpubs and then eschew more mundane standbys such as Budweiser, Miller and Coors.

"They've clearly identified a strategy of acquiring independent breweries, because their own attempts at trying to enter the craft market themselves have failed," said Patrick Emerson, a professor of economics at Oregon State University who writes a blog called Beeronomics. "I think what they’ve realized is craft beer is a lot about being a local product, a regional product, having a back story — it's more of an artisanal product than an industrial product, and they just can't enter into that market nationally."

While the breweries acquired so far are considerably larger than most of Asheville's brewers, they're not that far ahead, size-wise or in cachet. And big brewers are looking for that coolness factor, or "buzz," as Emerson says.

"What they're looking for is a hot new property or brand that will continue to grow or establish a regional presence," Emerson said. "They're looking for relatively small breweries that have a good growth trajectory and a good buzz about their beer."

Anheuser-Busch/InBev and MillerCoors did not respond to inquiries for this story.

But they were busy looking for prospects last year. Kent ticked off several craft breweries bought by major companies last year: Blue Point in Long Island, Goose Island in Chicago, Elysium in Seattle, 10 barrel in Oregon, Golden Road in Los Angeles, Four Peaks in Tempe, Arizona; and Breckenridge in Colorado. Buyers in recent major purchases have included Anheuser-Busch InBev, Miller Coors, Constellation Brands and Heineken NV.

"There’s a common denominator in all those breweries: they all brew at least 40,000 barrels a year or more at the time of purchase, and all of them have a strong retail presence, meaning they own one or more prominent retail locations (a brewpub or bar)," Kent said. "If that's the DNA of whom Anheuser-Busch or MillerCoors is interested in buying, then you have to figure out if anybody in Asheville's market fits into that category. There's only one brewer in Asheville that brews more than 15,000 barrels and that's Highland."

Indeed, Highland Brewing, founded by Oscar Wong in 1994, produces about 44,000 barrels a year, has a highly successful brewpub and has distribution throughout much of the Southeast. Wong, who passed the president's torch to his daughter, Leah Wong Ashburn, last year, still works full-time as a vice president.

While Highland has been approached numerous times over the years by investors, Wong says the heavyweights have not come knocking yet.

"We're too small for them to really consider," Wong said. "They're usually interested in someone who has national appeal, and we're very regional. We're in nine states, all in the Southeast, and we have an intention of maintaining what we've got there."

Wong said he and the leadership team wouldn't necessarily say no to a potential offer out of hand; they just like being a local company under local control.

But everybody in the craft beer world was rocked last year by that Ballast Point deal. Wong is not expecting that kind of offer to materialize, but if a big house came knocking, they'd have to listen.

"I'm old enough to know better than to say, 'Never,'" said Wong, 75.

'Continued, steady growth'

Wong suggests some local breweries that have seen fantastic growth might be more appealing to the big cats, mentioning Asheville's Green Man and Hi-Wire Brewing in particular. Green Man just opened a new 18,000-square-foot production facility/brewhouse some refer to as the "Green Mansion."

Hi-Wire, which started on Asheville's South Slope in 2013, announced plans last year for a new $4 million expansion brewery at 2 Huntsman Place at the edge of Biltmore Village, and it is fully functional now.

It should boost Hi-Wire's production over 10,000 barrels this year, to 15,000 by the end of next year and eventually up to 55,000 barrels. Founder and "Ringmaster" Adam Charnack downplays the notion that such production might just make the company attractive to the non-craft industry behemoths.

"There's always people asking about investing in brewing," Charnack said. "It’s the brewing industry in Asheville — there's always going to be people asking questions. I think that would happen in any industry that's growing."

Just this week Hi-Wire launched sales in their fourth state, Georgia, with plans for distribution along the Savannah River, including Athens, Augusta and Savannah.

"We want to keep growing throughout the Southeast — continued, steady growth," Charnack said.

They're not looking to sell, but Charnack is well aware that the big players are looking to establish a footprint in craft beer.

"I think they’re looking for small- to medium-sized, growing breweries all across the country," Charnack said, citing the recent purchase of Devil's Backbone. "If you look at a map of where they've purchased, they're all over the country. They want to have as much geographic diversity as possible, so I'm not surprised to hear it if they come knocking through Asheville, or any other town, really."

Most of the acquisitions have occurred out west, so the Southeast remains largely wide open.

"Most industry experts think there will be more purchases (by large brewing companies), but it’s going to be breweries that fit their portfolio," Kent said. "The only Southern brewery they’ve purchased is Devil's Backbone."

Pros and cons

Mike Rangel, founder of Asheville Brewing, said the mass of brewers in Asheville, and the high quality of the beers made here, are drawing national attention. But he said you've also got to put that in perspective — craft is still a small part of the market, and Asheville is nowhere near as big a market as Portland, Oregon, which has more than 150 breweries.

While America has some 4,300 craft breweries, Kent notes that 90 percent of them produce 7,000 barrels or less annually (a barrel is 31 gallons). And the big buyers have been selective in their choices.

And some brewers don't want to sell.

"What you're seeing with some of the breweries that have already been purchased is they lose a certain amount of what makes them cool," said Rangel, whose company produces about 8,000 barrels a year. "They put them on a huge production schedule, bring in focus groups and a board of directors and shareholders, and then they lose what made them so good."

Guthy says if someone invests that kind of money in your business, it's going to come with pressure — to produce, to be more profitable, to maybe squeeze more out of your ingredients and employees. That might cause your quality to slip to save some pennies or dimes, as he puts it.

"Our philosophy is not to run it that way," Guthy said. "We don't want to compromise our recipes because somebody has a minority or majority stake in the business."

Wicked Weed will hit about 20,000 barrels this year, and Guthy expects them next year to approach the 25,000 barrel mark, a cap level at which you've got to go with distributors. Wicked Weed just signed distribution deals across North Carolina with distribution outfits in Charlotte, the Triad, the Triangle and on the coast.

While they're not looking to sell and are well-capitalized — Guthy came to the industry after a lucrative career in infomercials with the Guthy Renker company — he does not look down at anyone who decides to sell or take on a large investor.

"I can understand why other brewers have gone that route, because capital is important," Guthy said. "If you want to grow, it requires capital, and getting that infusion of money can help you get to the next level in this industry."

At Hi-Wire, Charnack said they've been fortunate to be able to fund two successful taprooms and a large production facility. When you get into bottling, canning and kegs, not to mention buying large tanks and even real estate, it gets "super capital intensive," he said. That's why some operations go for strictly producing and selling their beer on site only.

"It can be as low-key or as fancy as you like," Charnack said. "I think the start-up cost vary from a few hundred thousand dollars to a few million dollars, depending on what you're building."

Like Wicked Weed and Highland, HI-Wire is not seeking out a buyer, but Charnack isn't flatly ruling it out, either.

"Whether that’s a sustainable move for our brand in the long term or not, selling to a bigger brewery, that remains to be determined," he said.

Rangel, citing that blockbuster Ballast Point deal, said he's happy at their current level, but...

"We’ll take a billion," he said with a laugh. "You can quote me on that."

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Craft brewing national, state numbers

• In 2015, craft brewers produced 24.5 million barrels, and saw a 13 percent rise in volume and a 16 percent increase in retail dollar value.

• Retail dollar value was estimated at $22.3 billion, representing 21 percent market share.

• In 2015 the number of operating breweries in the U.S. grew 15 percent, totaling 4,269 breweries, the most at any time in American history.

• Small and independent breweries account for 99 percent of the breweries in operation, broken down as follows: 2,397 microbreweries, 1,650 brewpubs and 178 regional craft breweries.

• Throughout 2015, there were 620 new brewery openings and only 68 closings.

• Combined with already existing and established breweries and brewpubs, craft brewers provided nearly 122,000 jobs, an increase of over 6,000 from the previous year.

• With 161 craft breweries, North Carolina ranked ninth nationally.

• North Carolina's craft breweries produced 675,469 barrels of beer, ranking 11th nationally.

Source: Brewers Association