In March 2017, The craft beer sector has absolutely exploded. I could probably make an argument that it’s peaking now.
But the craft liquor market is just getting started.
It’s heated up in a big way. And it’s time to get in.
Despite the craft beer craze, beer lost a portion of its share of U.S. alcohol revenue in 2015 to liquor for the sixth consecutive year and the 12th time in the past 15 years.
Trends shift. And right now, the booze market is trending toward liquor (as opposed to beer and wine) in general and craft liquor in particular.
The signs are everywhere.
Jose Cuervo went public last year in an IPO worth ~$900 million. It had been private since 1758.
A whiskey ETF was launched in Fall 2016.
There’s clear appetite for liquor equities.
That whiskey ETF, for example, counts Diageo (23%), Pernod Ricard (12%), and Brown-Forman (6%) among its top holdings. Those are multibillion-dollar behemoths that own some of the world’s top brands like Captain Morgan, Smirnoff, Tanqueray, Jack Daniels, etc.
That’s not where the liquor growth is coming from. It comes from high-end, local, craft distillers.
And there is little way to play that market.
We have one with Eastside Distilling (NASDAQ: EAST).
Why Craft, Why Eastside
New research from analytics firm Mintel has found that craft spirit debuts increased by some 265% globally between 2011 and 2015. Around half of that growth is driven by U.S. craft distillers.
According to the Wall Street Journal from March 2017:
Don't look now, but American whiskeys are gaining ground on Scotland's finest.
Up until about five years ago, you'd have been hard pressed to find an American single-malt-the term for a whiskey (or, in Scotland, whisky) made from malted barley at a single distillery. But U.S. distillers are fast learning they have several advantages in this category. The Pacific Northwest is a world-class growing region for two-row barley, the variety used in Scotland. Scotch whisky is traditionally aged in used oak barrels — a practice that significantly extends aging time. Stateside, most distillers use the new charred-oak barrels bourbon is aged in, yielding a spirit that's smooth, rich and ready for consumption after as little as two years' time, compared with 10 or more for Scotch.
Distilleries are tinkering with cask materials, yeast strains and barley varieties as they begin to define a distinct American style.
That defines the opportunity with Eastside exactly. A small craft distiller in the Pacific Northwest that has award-winning spirits.
Eastside Distilling also happens to be a very well-run public company with fast-growing sales and highly strategic shareholders that I think could rise by many multiples if it executes as planned during this craft liquor boom.
Here’s just a taste of what it's been up to:
- In January 2017, it hired Sandstrom Partners to increase brand value and accelerate sales. Sandstrom is an industry tour de force. It was hired to brand Bulleit Bourbon, Miller High Life, Bacardi rum, and has been used by all the big brand owners I mentioned earlier like Brown-Forman and Diageo. (See past Sandstrom work here.)
- In March 2017, it acquired MotherLode Craft Distillery, a Portland, Oregon-based provider of bottling services and production support to craft distilleries. Eastside relocated its operations to MotherLode's facility and jointly expanded both companies' manufacturing resources. It added a pneumatic bottling line, allowing for a five-times increase in bottling rate, and large-volume spirit handling capability. It is expected to be immediately accretive to earnings as well as reduce costs by more than US$200,000 per annum. The acquisition also moves Eastside into the “private label” side of the business.
- In May 2017, it acquired Big Bottom Distilling, another Oregon distiller that continues to operate as a separate business. With this, it gained the insight of Big Bottom founder Ted Pappas, a past president of the Oregon Distillers Guild.
- In July 2017, it entered the business of canning wine and cocktails on the private labeling ("white-labeling") side of the sector with its new line at its new facility. It's one of the few companies in the Pacific Northwest to offer this service.
- In August 2017, the company uplisted to the NASDAQ. A major milestone that few small-cap companies ever achieve.
- In October 2017, its rebranded whiskey line, Burnside Bourbon, led by Sandstrom Partners, began hitting the shelves. This is still continuing in 2018 with each new bottle for each brand Eastside offers being rolled out individually.
- In November 2017, which is perhaps the most important news yet, Eastside partnered with multi-platinum American country music star John Rich, who is one half of the duo Big & Rich. You may know one of their more popular songs, “Save a Horse (Ride a Cowboy).” John Rich is using his star power to promote a line of whiskey that Eastside is making called Redneck Riviera. He is co-branding it with a chain of honky-tonk bars he owns that share the same name. The launch of this whiskey brand, still only in a handful of states, is shaping up to be one of the best new liquor launches across the entire industry in recent memory.
(Click to Enlarge)
Since then, everything has been ramping up. Distributors are fighting among themselves to be the ones who distribute Redneck Riviera in their state.
John Rich is hosting concerts to celebrate the launch of his whiskey in new states when they're announced. He's been featured on the news promoting the brand and was invited to ring the NASDAQ bell along with Eastside. The whole thing is getting nationwide attention very quickly.
Eastside Distilling’s sales have also been growing very quickly. And that's without the new sales from the rebrand or from Redneck Riviera being included yet.
In 2016, gross sales increased 31% to $3.1 million, compared to $2.3 million in 2015. Total case shipments increased by 53% to 15,596 cases.
It will likely do $4 to $5 million in revenue this year as it expands into more states.
And it is only trading with a $24 million market cap, giving it little value for the upcoming expansion.
Acquisitions in this space are typically done at a 5-15X multiple, which should see Eastside valued at $20-$75 million. So it's at the very low end of that range right now.
Eastside has a portfolio of 14 different spirits, but it’s going to focus, at least initially, on the growth of Redneck Riviera, Oregon-Oaked Burnside Bourbon, and its Portland Potato Vodka, the latter of which saw an 88% growth in case sales last year.
With Sandstrom leading the marketing, it will hit all the buzzwords like “local” and “craft” and “gluten free”. The bottles and labels are being redesigned as well.
And it will also tout its master distiller Mel Heim, who took home a Double Gold Medal at the prestigious 2016 New York Wine & Spirits Competition for Burnside Bourbon Oregon Oak.
(Click for Full Lineup)
Here’s what else the company is planning this year:
- New product launches in the "super premium" category;
- Using its award-winning Oregon Oak (Garryana Oak) barrel finishing to differentiate its bourbons as a unique and premium product;
- Potently 'disruptive' ventures in e-commerce;
- Targeting high-growth segments like bourbon and flavored whisky;
- Stoking growth in high-margin products like Portland Potato Vodka;
- Cost reductions and margin building from economies of scale;
- Realization of benefits from its spirit branding experts, Sandstorm Partners; and
- Expansion in private labeling under the leadership of Allen Barteld via the recent acquisition of MotherLode Craft Spirits.
On the John Rich front… the country music star is now entering full-out promotion mode. Remember, he has a stake in the Redneck Riviera brand of Eastside Distilling whiskey with minimal current payments. His big exit will only come from a buyout of the brand, so you can bet he is going to work hard to promote it and get it recognized.
And this is only the beginning. I imagine the star will be promoting the brand in every city he goes to while on tour.
Back in October 2016 the company consolidated its shares 20:1, significantly reducing the amount of outstanding shares. It now only has ~4.8 million shares outstanding. Many of those are owned by insiders and strategic shareholders. I would estimate there are only several hundred thousand shares available to trade.
It's an extremely tight share structure that can go higher very quickly. It’s also a very real business in a hot sector with fast-growing sales and star branding power to reach millions of customers. Many things are in its favor.
The stock has room to grow by many multiples to be fully valued. It is still very early in this game.
I am recommending the purchase of Eastside Distilling (NASDAQ: EAST) shares up to US$5.00 in the open market. Please stick strictly to that limit. As I said, there aren't many shares out and we don't want to blow the stock up.
You can see the most recent corporate presentation here.
And you can check out some of the spirits that Eastside has available for sale online by clicking here.
As for beer, there are still ways to play that market, as well...
While craft brewing continues building market share, major players are remaining relevant. And they're determined to maintain their places at the top.
Anheuser-Busch InBev (NYSE: BUD) was already the biggest beer company in the world when it acquired the world's second-biggest brewer, SABMiller, for $107 billion.
AB InBev is now a $200 billion juggernaut that holds the No. 1 or No. 2 positions in 24 of the world’s 30 biggest beer markets.
Its brands include Budweiser, Stella Artois, and Beck's — among others.
It's also dipped into the craft beer market.
Since 2011, AB InBev has purchased Goose Island Brewery in Chicago, Blue Point Brewing in New York, 10 Barrel Brewing in Oregon, Elysian Brewing Company in Washington, and Virtue Cider in Fennville, Michigan.
Indeed, many craft brewers have been in the crosshairs of “Big Beer” that, having failed to compete against them, has decided to simply buy the craft brewers out.
Constellation Brands (NYSE: STZ), proprietor of Corona Extra, Modelo Especial, Negro Modelo, and Victoria beer brands (and also Svedka vodka and many wines), recently paid $1 billion for Ballast Point Beer — a popular craft brewer out of San Diego.
Since most craft brewers are privately owned, this trend can be difficult to profit from. However, there are still a few microcap microbrewers, such as Big Rock Brewery (OTC: BRBMF) and Appalachian Mountain Brewery (OTC: HOPS).
Big Rock is based in Canada. Its principal operations are in Alberta, but the company is continuing to expand in Ontario and also recently opened a new brewpub and brewery in Vancouver, British Columbia.
Appalachian Mountain is based in Boone, North Carolina. It not only makes craft beer, but it's also going full millennial with an added focus on sustainability, community, and philanthropy.
The Craft Brew Alliance is another craft brewing company that brews, brands, and markets American craft beers. Its own brands include Kona, Widmer Brothers, Redhook, Omission, KCCO beer, and Square Mile Cider. The company also operates five pubs.
The Craft Brew Alliance is larger and more stable than Big Rock and Appalachian Mountain.
Of course, getting back to the buyout binge, AB InBev owns nearly a third of the Craft Brew Alliance, too.
Other big names to be aware of include Molson Coors Brewing Company (NYSE: TAP), Heineken (OTC: HEINY), and The Boston Beer Company (NYSE: SAM).
Molson Coors has the Molson and Coors brands, obviously, and also Blue Moon. It also bought San Diego’s Saint Archer Brewing Company.
In addition to its namesake brand, Heineken owns Tecate, Dos Equis, Lagunitas, and Red Stripe.
And finally, let's not forget the quintessential craft beer Sam Adams — a product of The Boston Beer Company. The craft beer company has built one of the most recognizable brands in the beer market, and its stock has soared more than 245% over the past 10 years.
So, when it comes to beer, there's no shortage of brewers to invest in.
But you're still probably better off with liquor...
Call it like you see it,
Editor, Early Advantage