One of the rules of business is that growth requires capital, and there is no denying brewers are growing and in need of additional capital. The rapid growth rates of the brewers require more working capital for ingredients, labor, packaging, marketing and systems. One of the unique challenges for the breweries is also the need to build excess capacity ahead of the demand due to the nature of the brewing equipment and tanks, which requires upfront capital expenditures that increase the overhead expense relative to the production volume, putting initial pressure on the profit margins.
Most brewers start with personal and “friends and family” funding, but, in order to fund continued growth, they often need to raise capital from external sources, such as institutional equity funds and commercial banks.
Different types of investors expect varying returns on investment. For instance, equity investors do not require repayment because they are investing in the company’s long term brand and earning potential. That said, they do expect higher returns on their investment. These returns can come as distributions to shareholders, as buyouts by other investors or through the sale of the company. In exchange for this, equity investors often require a say on business decisions, either formally or informally, to protect and ensure greater returns on their investment. As the craft industry has matured, institutional equity investors, such as private equity funds and family offices, are now investing in craft brewers to provide growth capital and acquisition platforms. More recently, a few of the larger craft brewers are contemplating filing for an initial public offering.
Banks continue to be one of the main sources of capital for the brewing industry, from SBA loans for the small brewers to real estate and equipment loans for the larger brewers. Whereas the equity investors typically do not require a current payment on their investments, bank loans do. Therefore, the brewer needs to be generating free cash flow in-order to service the debt. For those brewers that are creditworthy, bank loans provide low-cost financing, the amount of which increases as the brewer grows.
Going forward, the craft beer industry will continue its robust growth due to the momentum we are seeing domestically and abroad. The Brewers Association recently reported that the number of craft breweries now stands at 1,412 brew pubs, 1,871 microbreweries and 135 regional breweries. In spite of these high numbers, the craft beer industry can be profitable across all the business models, thanks to the growing thirst and demands of consumers for the innovative products and experiences.
As companies look to expand their operations, leaders must focus on how their capital strategy aligns with the business strategy. By understanding the needs of the different capital providers from the onset, growing brewers can raise capital and execute their growth strategies for greater success in the long-term.
Brian Mulvaney is a senior vice president and the Beverage Finance Group Head, Global Commercial Banking, for Bank of America Merrill Lynch.