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Hobbled by the COVID-19 pandemic and an oversaturated market, craft brewery insiders say consolidation is needed to save the industry

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Muthu Sakthivel, owner and Master Brewer at Bell City Brewing Co. in Brantford, Ont.Tara Walton/The Globe and Mail

Owning a craft brewery is supposed to be about passion and fun. For Muthu Sakthivel, co-founder of Bell City Brewing Co. in Brantford, Ont., the past two years have mostly brought pain and frustration instead.

Bell City, tucked into a corner unit of a strip mall, saw its sales plunge by more than half during the pandemic, even as the brewery scrambled to meet delivery orders from customers locked down at home. Government wage subsidies helped blunt the impact of the revolving door of COVID-19 rules – open, close, open, close. So did having an understanding landlord and forgiving vendors, up to a point.

But Mr. Sakthivel, a 30-year veteran of the brewery industries in India and Canada, had mortgaged his house to launch Bell City with a partner in 2014 and the thought of losing his home weighed heavily on him.

So in December, with Bell City falling behind on its rent, on payments to suppliers and on its tax bill, – “The government is sleeping now but we accumulated a lot of beer tax and HST that’s going to attack like a lion charging,” he said – Mr. Sakthivel accepted a deal to sell control of the brewery to a tiny upstart beverage company from North Carolina.

“Things couldn’t continue the way they were,” he said.

Mr. Sakthivel’s experience is a microcosm of an industry that to insiders and outsiders alike can seem like an inexplicable black box, in which heavy debt loads and financial red ink are the norm yet few breweries show outward signs of trouble and there is no shortage of new entrants keen to join the fray. For years the craft brewery market grew at explosive rates, with new breweries pouring into the sector at a furious pace. In the five years before the pandemic hit, the number of breweries in Canada more than doubled to around 1,100, with small craft breweries accounting for all of that increase and defying repeated warnings that the craft market was long past tapped out.

While the pandemic threw the industry into turmoil, many craft brewers managed to hold on by pivoting to deliveries and relying heavily on government largesse. Some entrepreneurs even saw an opportunity in the crisis, with scores of new breweries opening their doors last year.

Now some argue a reckoning is coming. Brewers must grapple not only with the immediate financial damage caused by the pandemic, but surging costs that threaten to wipe out what meagre profits exist in an industry where the majority of brewers were already losing money even before COVID-19 came along.

It all sets the stage for what industry observers believe will be, at best, an extremely difficult period ahead, and at worst, an era marked by closings and bankruptcies.

Or if Mr. Sakthivel has his way, consolidation. While his brewery has changed hands, he isn’t going anywhere.

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Allan Bradley, CFO of EARI Group, left, with Bell City's Mr. Sakthivel.Tara Walton/The Globe and Mail

The company that bought Bell City, EARI Group, is a world apart from the international beer giants that have stalked large and mid-sized Canadian breweries in the past. Born out of the shell of a failed video-game developer last year, EARI trades as a penny stock on the over-the-counter (OTC) market, considered the sub-basement of the public equities realm.

Small as it is, EARI has an ambitious plan to consolidate a swath of Ontario’s congested craft beer sector, with Mr. Sakthivel joining as an adviser while he continues as brewmaster at Bell City. Now it’s Mr. Sakthivel’s job to help convince other breweries to come on board.

It’s a phenomenon that’s already under way in some parts of the craft sector. Last fall, Toronto’s Lost Craft merged with High Park Brewery. Then, in February, two of Ontario’s most established craft breweries came together when Steam Whistle Brewing bought Beau’s Brewing Co.

Mr. Sakthivel believes this is just the beginning. Peering over the rim of his glasses and clutching a pint of his brewery’s lager as he sits amidst Bell City’s brew tanks and stacks of kegs, Mr. Sakthivel offers a stark message to his fellow craft brewers: Merge or die.

“Don’t be afraid of joining hands with other brewers and growing fast and growing bigger, there’s nothing wrong with that,” he said. “Remaining small forever will kill you.”

For an industry trying to regain its balance, it’s decision time. Some brewers aren’t waiting around.

While Canada’s first microbreweries launched in 1985, with the likes of Granville Island Brewing in British Columbia and Ontario’s Upper Canada Brewing Company – both since absorbed by foreign-owned beer giants – Canada’s craft beer boom really kicked into high gear in the mid-2000s as consumers embraced more flavourful, locally produced brews.

It was a trend politicians were also keen to foster, since craft breweries were proving to be big employers in local economies. Over the years, federal and provincial governments devoted untold millions in grants, loans and subsidies to young and upstart breweries.

Today the craft brewery industry is anything but micro. While no national sales figures for the sector exist, it’s estimated craft beer accounts for at least one-tenth of Canada’s $9.1-billion in beer sales. In B.C., for instance, microbreweries that produce less than 15,000 hectolitres a year (a category that encompasses 94 per cent of all breweries in the country) account for roughly 13 per cent of all beer sold through stores and restaurants, according to the BC Liquor Distribution Branch, a provincial agency.

Still, it’s a highly fractured market. Figures from the Canadian Craft Brewers Association show that among the roughly 1,200 craft breweries in Canada, 95 per cent generate less than $10-million in revenue, and of those, most post sales well below $1-million.

Which meant most craft breweries had little room to manoeuvre when the pandemic hit.

At Beau’s, for instance, the kegs had nowhere to go.

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Jason, a taproom associate, fills a glass at Beau's Brewing in Vankleek Hill, Ont. The brewery was recently purchased by Steam Whistle.Andrej Ivanov/The Globe and Mail

The brewery in Vankleek Hill, Ont., about halfway between Ottawa and Montreal, supplied beer to around 700 bars and restaurants in its home province before the pandemic decimated the sector. Seemingly overnight, the company’s sales were chopped in half. Beau’s was forced to destroy $1-million in inventory – that is, beer – as a two-week lockdown morphed into something much worse.

“Every three, four weeks, you have to throw out your entire financial plan and build a new one,” said Beau’s co-founder Steve Beauchesne. “You know it’s only gonna last three or four weeks before the world changes again. So yeah, it’s been a non-stop roller coaster, basically.”

For Beau’s and many in the industry, most of the past two years has been about finding survival strategies to keep the lights on and the brew fermenting. That meant navigating rolling lockdowns while capitalizing on new revenue streams and selling to largely couch-bound drinkers.

While bars and restaurants were frequently closed, customers became easier to reach in other ways. Most provinces, including B.C., Saskatchewan, Ontario and New Brunswick, loosened their restrictions on alcohol sales, allowing beer and wine in takeout and delivery orders from restaurants, for example.

Breweries did a lot of their own deliveries, too.

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Collective Arts Brewing in Hamilton is known for both its innovative craft beer and the colourful beer can art, created by artists worldwide.Glenn Lowson/The Globe and Mail

At Collective Arts Brewing in Hamilton, a brewery known for tapping hundreds of artists to design its cans over the years, the sales team became delivery drivers, or “beer Santa Clauses” as Matt Johnston, co-founder and chief executive at the brewery, puts it. “We were often the first person people had seen in weeks,” he said.

Not everyone could take advantage. In Ontario, for instance, only breweries with a retail store at their production site can deliver to customers. That was a problem for the many companies that pay others to carry out their production, otherwise known as contract brewers.

“It was a real struggle for us. As a brand, we didn’t have that ability to survive, frankly,” said Shehan De Silva, the CEO of Lost Craft, a self-described “virtual brewer.” To remedy the situation, Lost Craft merged with High Park Brewery in October and moved into its facility in Toronto’s west end. “We definitely believe in consolidation,” Mr. De Silva said.

Yet, even as existing brewers struggled to stabilize their businesses during the pandemic, new entrants seized the chance to launch their own craft breweries. Since the pandemic started, Ontario and B.C. have actually seen net increases in active breweries, with the two provinces alone growing their combined overall brewery count by more than 100 between 2019 and 2021, according to provincial government figures. It’s a sign of the industry’s resilience, or at least it’s unshakable lure.

One new brewery to launch in early 2021 was Good Neighbour Brewing in Winnipeg. The brainchild of Morgan Wielgosz and Amber Sarraillon, it became the city’s first female-owned brewery.

Ms. Wielgosz, who has worked as a brewer in the industry for 15 years, quickly admits that “it was a bit of a risk to launch in the middle of a pandemic.” But the couple, who sold their home to finance the launch, felt Winnipeg’s market was not as saturated as some other cities and that they could carve out a niche by serving their immediate neighbourhood.

After contracting out production to another brewery during its first year of business, Good Neighbour bought space last month to install its own in-house brewery operations. “It’s been nerve-racking but I’m quite comfortable saying we’re on the path we came up with in our business plan,” she said.

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Junction Craft Brewery in Toronto's Junction neighbourhood filed for creditor protection in October, 2020, as it restructured its business.Fred Lum/The Globe and Mail

The craft brew survival story might look very different without the help of the federal government, which offered no-interest loans as well as rent and wage subsidies to struggling businesses amid COVID-19.

Craft brewers and brewpubs pepper the list of Canada Emergency Wage Subsidy recipients, which was analyzed by The Globe and Mail. The amounts each company received under pandemic emergency programs is unknown.

That said, Junction Craft Brewery offers a clue. The Toronto brewery, which has a taproom and event space, filed in October for creditor protection as it restructured its business.

According to court documents, Junction had received around $236,000 via CEWS as of the end of 2020, in addition to other government assistance. That wasn’t enough to stem the bleeding, however, and the brewery reported a loss of about $858,000 that fiscal year.

The pandemic wasn’t the start of Junction’s problems, either. In court filings, the company said its financial difficulties dated to 2018, when its annual loss surpassed $1-million.

Losses are exceptionally common in craft beer. Nearly six in 10 breweries lost money in 2020, according to Industry Canada, on par with 2019 when just 42 per cent were in the black, down from 57 per cent five years earlier.

“A lot of breweries are not in great shape,” said Stuart Wheldon, who became CEO of Junction in 2019, after a previous career in the tech sector. “A lot are relying on investment from shareholders and finding ways to get creative and keep going.”

Despite its troubles, Junction was purchased for $1.1-million by some of the previous shareholders and continued to operate through the restructuring.

“We’re alive,” Mr. Wheldon said. “We’ve got a very aggressive plan to grow.”

Growth is a common refrain from existing and new entrants alike.

However, such talk flies in the face of a top-line industry reality. Overall beer consumption has been on the decline for years as consumers switch to spirits, canned cocktails and hard seltzers, not to mention new cannabis-infused beverages.

Indeed, many breweries have diversified into other beverages, including cannabis-infused drinks, but craft beer remains their top seller.

“Retail shelf space hasn’t kept up with the number of new breweries,” says Mr. Johnston of Collective Arts. “Previously the category was growing and you weren’t fighting for share of stomach. Now the number of breweries has surpassed the growth of the category and you’re starting to see signs the saturation point has passed. This has the potential for tough times ahead. You’re already seeing it in the U.S. with craft breweries closing.”

One problem for anyone looking to open a new craft brewery is that the private nature of the industry can create a façade of success. Even before the pandemic there were instances of brewery owners who hit the wall financially and were forced out. Yet because they quietly found new owners to take over, the troubles never became public.

“It’s an information-poor environment for making business decisions,” said Ben Coli, who co-owns and operates Dageraad Brewing in Burnaby, B.C., which he launched in 2014.

“Look, if you need to open a craft brewery because it’s in your soul, then do it,” he said. “But if you’re piling in because you think it’s a great business, you’re not seeing the people out there losing their shirt and walking away having lost hundreds of thousands of dollars of their families’ money, because it’s all private.”

More exits from the industry are likely, said Ken Woods, president of Black Oak Brewing in Etobicoke, Ont., and a veteran of the beer industry. Many breweries are emerging from the pandemic with loads of new debt, he said, and their workers have been ground down by a tough two years.

“To be honest, the price point right now would have dropped quite dramatically,” Mr. Woods said. There’s plenty of talk that “people are looking to either sell or merge.”

If 2022 will be a year of craft beer consolidation, Beau’s is one example of how the trend might unfold.

Before the pandemic, Beau’s would regularly get unsolicited – and unwanted – takeover offers and investment pitches, which it handily rejected. Yet as the crisis of the past two years wore on, the brewery was left in an increasingly vulnerable position.

To cut costs, Beau’s stopped running its own delivery trucks to liquor stores. Combined with shifting lockdowns and disruptions to its supply of cans, the brewery was struggling to keep its product reliably on shelves.

Enter Steam Whistle. In November, Beau’s partnered with the Toronto brewery on sales and distribution. The benefits were immediate, Mr. Beauchesne said. Steam Whistle was still running its own fleet of delivery trucks, “and suddenly our stock levels improved,” he noted.

In late February, Steam Whistle said it was buying Beau’s for an undisclosed amount.

At the start of the pandemic, a deal ”wasn’t on our radar screen,” Mr. Beauchesne said. But the initial partnership showed “how much better it would be for the business to combine.”

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As the crisis of the last two years wore on, Beau's was left in an increasingly vulnerable position. Once the brewery partnered with Steam Whistle in November, the benefits were immediate, co-founder Steve Beauchesne said.Andrej Ivanov/The Globe and Mail

That simple Economics 101 message of economies of scale is at the heart of Mr. Sakthivel’s pitch for the industry to consolidate, whether it’s sharing the cost of trucks, buying larger quantities of malt at lower prices or divvying up marketing expenditures.

Since EARI purchased Bell City, Mr. Sakthivel said four “major” craft breweries have called him to probe for details about the U.S. company’s plans.

A second takeover deal announced in February that would have seen EARI buy Railway City Brewing in St. Thomas, Ont., fell through after the two sides failed to reach an agreement. Railway’s president, John Peart, did not respond to an interview request but said in a statement at the time the brewery would continue to operate normally.

Despite the mixed start to its consolidation plans, EARI is eyeing a shopping spree over the next six to 12 months, said Allan Bradley, the company’s Toronto-based chief financial officer.

By tapping U.S. private equity and merchant banks for financing, EARI is looking to consolidate breweries in Ontario with a combined $25-million in revenue. That could work out to anywhere from eight to 18 acquisitions, depending on the size of the breweries, Mr. Bradley said.

The goal is to keep taprooms and brewing operations intact to maintain each brewery’s local identity, while combining back office operations and providing capital for upgrades.

For instance, in its deal to buy Bell City, EARI paid roughly US$1.2-million in equity, assumed $273,000 of Bell City’s debt and injected $150,000 in new capital into the business for expansion and increased marketing. As it grows, EARI hopes to graduate its shares from the OTC market to the Nasdaq exchange.

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Since EARI purchased Bell City, Mr. Sakthivel said four “major” craft breweries have called him to probe for details about the U.S. company’s plans.Tara Walton/The Globe and Mail

“The industry is riddled with breweries with poor management and too much debt,” he said. “We have a lot to choose from out there.”

Other breweries are also on the lookout for acquisitions. “There are assets for sale,” said Lost Craft’s Mr. De Silva. “We kick the tires on a lot of deals in craft beer.”

It’s worth noting that since the pandemic began, the multinationals that own Molson Brewery, Labatt Brewing and Sleeman Breweries have sat on the consolidation sidelines in Canada. (Labatt was the last to do a deal in the sector, buying Calgary’s Banded Peak Brewing in January, 2020.) With those beverage giants all chasing the consumer shift into non-beer drinks, and most Canadian craft breweries too small to make an acquisition worthwhile, it’s not certain they’ll be on the hunt for deals any time soon.

Nor is everyone in the craft space keen on consolidation. At Collective Arts, a brewery often floated as a potential takeover target, Mr. Johnston dismisses the idea the company would ever be put up for sale.

“From the day we started we’ve heard those rumours, but we’re all about a collective, grassroots support of emerging artists and musicians and we really appreciate our independence,” he said, adding the company still sees opportunity to expand further internationally. As it stands, Collective Arts generates a quarter of its beer, spirits and cocktail sales from the U.S., parts of Europe and Asia.

Still, signs of the shakeout may be showing up, in Ontario at least. In fiscal 2022, which ended March 31, the number of breweries in the province decreased to 427 from 432. It marked the first decline since the craft beer boom began.


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