Craft Brew Alliance on 2013 earnings, international moves, SKU rationalization

The Craft Brew Alliance (CBA), the parent organization for Kona Brewing, Widmer Bros. Brewing and Redhook Brewery, announced final 2013 financial results for the fourth quarter and full year. Here are the notable numbers from the earnings, goals for 2014, and some insight from the executive team.

Earnings numbers from 2013

• 2013 closed with a 10-percent growth in depletions over the fourth quarter of 2012, the third consecutive quarter of double-digit depletion growth. For the full year, depletions growth hit 111 percent.
• Net sales and branded beer shipments increased 5 and 6 percent, respectively, in the fourth quarter. The company attributes the growth to sales execution, as well as support from national partners, wholesalers and retailers. Net sales grew 6 percent for the full year as well.
• A decrease in gross margin rate by 100 basis points to 26 percent  in the fourth quarter compared to the fourth quarter last year primarily resulting from shifts in product and geographic mix and increased distribution-related costs.
•  Contract brewing revenue reduction of 40 percent as a result of the termination of certain contract brewing contracts in late 2012.

Quotes from the execs

Chief Executive Officer Andy Thomas on their growth challenges. “Despite the success in gaining topline momentum and despite the depth management of spend and allocation of our resources, our gross margin continued to be relatively unresponsive, driven largely by challenges in managing the complexities of product mix, geographic mix and slower than expected progress in optimizing our infrastructure to more efficiently service the evolved demands of our portfolio and geographic footprint.”

Scott Mennen, VP, Brewery Operations, on changes to strategy: “There are some significant changes we’re implementing this year to help us address our current gross margin pressure in our business. Working closely with our sales and marketing team, we’ve eliminated over 25 percent of our SKUs for 2014. The SKU rationalization process will improve the focus of our sale and operating groups while reducing complexity and reducing our cost structure. The most significant of these changes for 2014 is the expansion of our brewery footprint to support our strong volume growth and reduce operating costs. Yet another initiative toward improving gross margin.”

Mennen on the new partnership with Blues City Brewery in Memphis: “We will use this partnership to brew over hundred thousand barrels of beer. Production is scheduled to begin late in spring with shipments early this summer. We’ve been working closely with the team of Blues City over the past six months and are looking forward to producing some of our larger volume beers at this centrally located brewery.”

Thomas on International expansion: “Internationally we’re off to a great start. We were right slightly ahead of our targets for last year and this year we will expand probably into three to four more countries. The emphasis is going to be — consistent theme here guys and CBA is taking the seeds we’ve planted over the last couple years and helping them to grow more so than planting a lot more seeds. So what does that mean for international in concrete terms, we’re seeing a really strong growth in a couple of European countries, Italy and the UK to single out a couple. We’ve got a really positive response from our initial foray into places like Puerto Rico and the Caribbean. Our Asian business continues to be particularly strong for the Kona brand in markets like Japan and we’re looking at some expansion into Pacific Rim, specifically with the Omission brand.”

Chief Financial Officer Mark Moreland on the long-term outlook. “Over the five-year horizon, we expect to drive gross margin rate expansion with gains from portfolio optimization and brewing infrastructure and supply chain improvements.  Lastly, with regards to the annual guidance, we will continue to focus on full-year estimates with the understanding that quarter-to-quarter performance will exhibit volatility.”

A look at 2014

• Widmer Brothers will launch a new signature year-round IPA, Upheaval.
• Kona Brewing will be expanding into four new states (hitting 40 total) as well as launching Castaway IPA on the mainland.
• Redhook will continue to build on its strong national partnerships, including Dan Patrick, Buffalo Wild Wings, and theCHIVE.
• The CBA will continue its commitment to its Omission brand and growing its adjacent categories such as cider and in cross-brand packaging.
• Anticipated financial highlights for 2014 include a depletion growth estimate of 7 to 11 percent, average price increase of 1 to 2 percent, growth in contract brewing revenue of 25 to 50 percent as a result of new partnerships.