“Having invested $27m on German brewing and packaging equipment, Gage Road’s jewel is a state-of-the art brewery with capacity of 17 million litres a year, of which 12 million litres is currently deployed.”
“The $4.9bn, 1.2 billion litre a year Australian beer market in essence has been flat for years, growing at a 2% clip. But craft now accounts for 11% by value and 5% by volume and has grown at a 16% compound annually in the last three to five years.”
The Perth-based boutique brewer’s CFO, Marcel Brandenburg, hesitates when asked to define what a ‘craft’ beer actually is.
“It’s a contentious issue,” he told a recent annual Australian Microcap Investment Conference. “In the US, they try to define it by the size of the brewery.
“In Australia, we define it more by flavour profile, anything that has a hoppy, floral taste profile.”
A simpler definition is any brew made in a smaller batch-style facility, no matter the level of floral hoppy after tones. But the contentious aspect is that six of our top 10 selling ‘boutique’ brewers are now owned by the big guys.
This includes the top three: James Squire (Lion, owned by Kirin of Japan), Yak Ales (Foster’s owner Anheuser-Busch) and Little Creatures (Lion/Kirin). In 2015, Asahi of Japan picked up Mountain Goat and in 2017 beer wannabe Coca Cola Amatil snapped up Feral Brewing.
For Gage Roads, it’s a case of bucking the trend, winning back its independence after buying out its 25% owner Woolworths. Two years into its five-year proprietary brand strategy, Gage Roads has made inroads into transforming its business from a contract brewer for the grocer to pushing its own higher-margin brands.
Founded in 2004, Gage struggled for critical mass before the 2009 deal with Woolworths delivered enough volume to justify building what’s now WA’s biggest brewing facility.
The trouble is, there wasn’t a lot of profit in contract brewing, while Gage’s higher margin own brands – sold exclusively through Woolworths – had become the country’s fifth biggest craft brand.
But the only way for Gage to take care of its own destiny was to win back its independence — and the ability to sell through other channels including Coles, pubs and restaurants.
Two years ago, management bit the stubbie lid and bought out Woolworths’ 25% stake.
Over three years, Gage hopes to get its own brands – including its eponymous Gage Roads, Single Fin Summer Ale, Alby and Breakwater Pale Ale – to 70% of sales compared with about one-third of sales in the 2016-17 year.
Having invested $27m on German brewing and packaging equipment, Gage Road’s jewel is a state-of-the art brewery with capacity of 17 million litres a year, of which 12 million litres is currently deployed.
The $4.9bn, 1.2 billion litre a year Australian beer market in essence has been flat for years, growing at a 2% clip. But craft now accounts for 11% by value and 5% by volume and has grown at a 16% compound annually in the last three to five years.
Based on the US craft beer experience, Brandenburg says there’s plenty of room to grow. But given the top eight brands here account for 89% of the growth, the key is to have recognisable brands with a strong shelf presence.
Hipsters also won’t pay through their pierced noses for the boutique experience: on Gage’s reckoning, a case of grog won’t sell if it costs more than $62 per case, or $22 per six pack.
Rather than spending millions on billboards and other advertising, Gage Roads has tied up key venues and events in exclusive beer supplier arrangements.
These include Perth’s new Optus Stadium and NIB Stadium, Fringe World (WA’s biggest outdoor event), Cricket Victoria and the Rugby Sevens competition.
In June this year, Gage Roads acquired the Broome-based brewer Matso’s from the Peirson-Jones family for $13.25m cash, plus 35m Gage Roads shares over three years based on performance hurdles.
Matso’s is famed for its mango and ginger beers, which aren’t exactly everyone’s taste but are high selling, high margin products nonetheless. The added benefit for Gage is these lines don’t compete with its own beers.
Brandenburg dubs the acquisition, which is expected to boost earnings per share by 35% this year, as a no brainer.
“We had made their product under contract so carried the operational risk, so all we are doing here is on boarding the brand and capturing the brand owner’s margin.”
The Matso’s buy has boosted Gage’s earnings per share by 35% to date and no doubt is a key contributor to Gage’s recent share price strength.
Joyously, Gage Road’s dash for freedom has helped the bottom line, with the company reporting a 2017-18 net profit of $2.06m, up 3% on revenue of $33.2m (up 22%).
“We are now at a point where we feel we can match it with any supplier,” Brandenburg says.
Having traded at 7.5c a year ago, Gage shares hit 14c in early September but have since drifted to around the 10c level for a market capitalisation of just over $100m.
The dilemma for management and employees, who account for 23% of Gage stock, is what to do when one of the beer multinationals comes a knockin’.
GRB Price at posting:
10.5¢ Sentiment: Hold Disclosure: Held
