Photo by Matthew Rogers
In 2015, Ballast Point Brewing Company produced 277,152 barrels of beer, more than double its 123,435 tally the year prior. At the start of the decade, production was a fraction of those numbers—the company made just 20,000 BBLs in 2010.
What makes that 2015 figure particularly impressive, however, is it meant Constellation Brands paid about $3,600 per barrel when it acquired the California brewery for $1 billion, more than three times the generally accepted, per-barrel valuation seen during most craft brewery acquisitions. In comparison, Boston Beer Company paid around $300 million in cash and stocks to buy Dogfish Head Brewery earlier this year, which places valuation around $1,000 per barrel, a typically cited price benchmark in recent years.
Now, as Ballast Point moves into its next stage of ownership—following Constellation’s surprise decision to sell it to the Chicago-area brewery Kings & Convicts—it’s become clear that the new ownership group got a hell of a steal. According to sources familiar with discussions of the sale, Kings & Convicts likely paid around $100 million, or roughly $350 per barrel, to take over one of the largest breweries in the country—a 90% decrease in price from just four years ago.
But here's where narratives can diverge, because while the purchase and sale of Ballast Point is an objective failure from a dollars-and-cents perspective, the mistake was at least made by a company that could afford to mess up—even if the thought is a ghastly one made possible by a blend of shrewd business moves and zero fucks to give.
Constellation Brands had a record-high $2.2 billion of operating cash flow in the 2019 fiscal year. Its annual net income grew from $1.5 billion in 2016, to $2.3 billion in 2017, to $3.4 billion in 2018, averaging an annual growth rate of 48.3% during that period.
Perhaps most important, when the company entered 2015—the year it bought Ballast Point—it had a net income of $1.9 billion, boosted by its 2013 agreement to control the sale of Corona, Modelo, Pacifico, and Victoria brands in the U.S. Fat on cash and looking to enter the American craft beer space as that sector was reaching its historical apex, Constellation could literally afford to overpay—and it did.
Also important: the Ballast Point deal came during a time of change for Constellation, as it entrenched itself in a business model that valued premiumization—the notion of higher-end (and higher-priced) brands in lieu of lower-cost options. Less than a year after Constellation closed its deal to buy Ballast for $1 billion, it made a trio of moves in October 2016, buying Charles Smith's Washington Wine Brands for $120 million and High West Distillery for $160 million, while also selling a collection of its wine brands to the Ontario Teachers' Pension Plan for $780 million.
In January 2017, Constellation also made undisclosed, minority investments in Virginia's Catoctin Creek Distilling Company and Kentucky’s Bardstown Bourbon Company.
The Ballast Point deal was a monumental moment in beer acquisition, but to Constellation, it could have easily been just another deal among shifting priorities and budget lines. The company was raking in cash and adjusting its portfolio on the fly. This isn’t to imply that paying $1 billion for Ballast Point was a good idea: Constellation recorded about $200 million in impairment charges on the brewery in recent years, writing off a chunk of the purchase price due to unrecoverable losses. And that’s followed by a sale price to Kings & Convicts that could be around 10% (or less) of the original price.
As part of its influx of cash and wide-ranging ambitions, Ballast Point became a national brand in the years following its acquisition by Constellation, and Kings & Convicts says (for now) it plans to keep a 49-state distribution in place, with only West Virginia out of the loop. The company will shift most of its attention to a set of 12 states, led by Ballast's home territory of California. And that’s probably a good idea.
According to IRI, a market research firm, the volume sales of Ballast Point’s portfolio declined 24% in U.S. grocery, convenience, and chain stores in the most recent 52-week period. That included decreases for Sculpin IPA (-19%), Grapefruit Sculpin IPA (-20%), and Fathom IPA (-23%). Those losses continued in the same kind of stores in California, just not at quite so drastic a clip:
Ballast Point portfolio: -17%
Sculpin: -10.9%
Grapefruit Sculpin: -14.9%
Fathom: -17.5%
Aside from additional rebranding and renewed focus on Ballast Point's largest markets, the long-term viability of the brewery may be determined by the lead investor in Kings & Convicts' purchase: Richard Mahoney. As chairman of the board at The Wine Group, one of the largest wine distributors in the U.S., Mahoney has overseen a strategy that places extra value on planning for the future. Comstock's Magazine broke it down like this in 2015:
"Every year, (The Wine Group) hires an external auditor to calculate the company’s valuation and fold that into a 7-year rolling average. Then, the company issues new 'units,' which are like stock options. These units are owned by the top echelon of management. New offerings are called C units and can be converted into either A units that pay out over 5 years or, for the highest level of management, B units that come with voting rights and, unlike most stock options, have a long, long time frame before they can be fully monetized.”
“For someone who is just issued B units, it can take 20 years to monetize,” Mahoney told the publication, highlighting that a big payday may not come for these employees until well into the future.
This can be particularly helpful when it comes to acquisitions, as C-suite leadership and managers are incentivized to take time to create success at a newly acquired company rather than seek short-term gains.
“We’re not sure that seven years is the optimal number,” Mahoney told Comstock's. “But we are sure that managing performance based on one rotation of the earth around the sun isn’t necessarily how most business cycles work. And you can’t game the system over a long period of time.”
A long-term plan will be necessary after the difficult spot Ballast Point was put in under Constellation’s leadership. New brewpub locations, a rebrand, and a commitment to lower prices weren’t enough to keep the brewery on solid ground. Under Constellation’s management, Ballast did the exact opposite of what its parent company strived to do: it failed to succeed with premium pricing, despite leadership believing that respect for brands comes directly from how they’re priced.
Ballast in 2017 reduced the prices of its Even Keel Session IPA, Bonito Blonde Ale, Longfin Lager, and Grunion Pale Ale to $9.99-$10.99 per six-pack—a drop of up to a couple bucks each—but Constellation was doing just fine. Its annual net income was $1.5 billion, and Ballast had set a record in packaged beer sales just a year prior at its previous pricing structure, selling almost 118,100 BBLs’ worth of beer in chain stores.
The price change did nothing to help, however, and volume continued to slip. The dramatic nature of these dollar sale losses is emphasized in the most recent 52-week period in chain stores across the U.S. and in California:
Ballast Point portfolio: -27.7% U.S./-21.5% CA
Sculpin: -22.6% U.S./-15.8% CA
Grapefruit Sculpin: -22.1% U.S./-16.9% CA
Fathom: -24.2% U.S./-19.3% CA
Notably, Constellation also tried a summer 2019 experiment to boost sales of a few Corona brands by lowering the cost per case by around $2 for Corona Extra, Corona Light, and Corona Premier, although that strategy was most focused on propping up declining volumes for Extra and Light. It didn’t work out as planned.
Nonetheless, the 2017 price change for Ballast Point also came at a time when Constellation's imports were really catching fire. The combined portfolio of Corona, Modelo Especial, Modelo Negra, Pacifico, and Victoria increased 12.5% in volume in U.S. chains in 2017, more than double the 5% overall growth rate that Brewers Association-defined craft beer had that year. Changes at Ballast were also announced at the same time Constellation purchased Florida’s Funky Buddha Brewery, which would grow sales by around 38% in its first year under its new owner.
Even the improbable tale of Sculpin IPA wouldn’t be enough to change things for Ballast Point, which lost key leadership just eight months after its purchase. The losses continued through this year, as veteran employees left the company.
When announcing the deal to sell Ballast Point, Bill Newlands, Constellation Brands’ president and chief executive officer, noted how trends in craft beer “have shifted dramatically” since 2015, and that Kings & Convicts is an owner for Ballast “that can devote the resources needed to fuel its future success.”
What does it all mean for Constellation? Newlands finished his prepared statement by shouting out its “high-performing import portfolio,” with a specific nod given to the 2020 debut of Corona Hard Seltzer. Not mentioned was Constellation’s $4-billion investment in Canada’s Canopy Growth Corporation, a provider of medicinal and recreational cannabis products. That investment has already lost almost $600 million, prompting Constellation to install its CFO as CEO of the company just as THC drinks and edibles are set to become legal in Canada next week.
That revelation of a shift in business strategy and talking points is fitting for 2019: a corporation with the most money it’s ever had, shedding a failed business for a fraction of its purchase price so it can refocus on the booming segment of alcoholic sparkling water, with a little bit of marijuana sprinkled in.
Words by Bryan Roth