News last month that Victory Brewing had been sold sent a palpable shiver through the local beer scene.
The sale provided fodder for various national financial and brewing publications, which spent the next few weeks dissecting and discussing the deal. To recap: Victory was acquired by a venture capital fund and merged with Lakewood, NY-based Southern Tier brewing into a holding company called Artisanal Brewing Ventures. That company, in turn, is owned by hedge fund and investment firm Ulysses Management, which is based in New York.
But the deal, which left Victory’s structure, brand and production relatively intact despite the top-level ownership shift, spurred a profound moment of self-reflection for the brewing community in the Philadelphia region — including within Victory itself.
“You can’t sit there and say that the next 20 years of craft beer are going to be just like the last 20,” said Victory co-founder Bill Covaleski, who partnered with childhood friend Ron Barchet in 1996 to launch the brewery in a former Pepperidge Farm factory in Downingtown.
Not a surprise
Few in the local industry were surprised that some kind of sale had happened. If anyone around here was going to get caught up in the wave of consolidation sweeping the craft brewing market, most considered Victory a prime candidate.
“Rumors [of a Victory sale] have been going around since I first professionally entered the scene,” said Dominic Capece of four-year-old Perkasie brewery Free Will, adding, “If no one is talking behind your brewery’s back, you’re doing it wrong.”
Even the company’s own employees saw the sale as inevitable. “I’m happy [because] it feels like the best case scenario to an inevitable outcome,” wrote Victory regional sales manager Greg Lehman in a Facebook post the day the deal was announced.
“I did expect it,” said Tom Kehoe, founder of Yards Brewing. “It seemed like recently Victory had been preparing for it — aggressively going into new markets and expanding capacity. I always thought they would be one of the first to do a deal.
“Thing is,” he continued, “I would have never thought they’d go with a private equity firm. I thought they would go straight [to selling to] AB InBev.”
Devil in the details
In its announcement about the transaction, Victory touted it as “a new model for craft beer partnerships.” Some observers agreed, like Forbes, which headlined its first report on the deal “First Craft Brewery Sale Of 2016 Could Set An Example For A Generation Of Independent-Minded Brewers.”
What was different? Mostly, that when a deal arrived, it wasn’t an acquisition by a macro beer conglomerate, which has become more and more common of late. With the past six months alone, Constellation Brands snapped up San Diego’s Ballast Point, Heineken International swallowed half of Petaluma’s Lagunitas, AB InBev subsumed Arizona’s Four Peaks and L.A.’s Golden Road and MillerCoors bought out San Diego’s Saint Archer.
Instead, in the Victory deal, both it and Southern Tier will continue to operate independently.
Even so, some saw it as just one more brick in the road to brewery conglomeration.
“They took money from a hedge fund instead of another brewer. I don’t really see a difference,” said one local brewery owner. “Victory [has always been] a for-profit corporation with many investors, and investors want a return on their investment.”
But others note not all investors are the same.
“Dealing with a private equity firm is different than a strategic brewery partner,” agreed Yards’ Kehoe. “That kind of firm, they’re just setting you up to sell you again. They’re in it to make money, not to be brewers. And Ulysses, that firm does not mess around.”
Covaleski acknowledged that while he and Barchet maintain total control over their brewing operation, the details of the agreement put certain restrictions on their tenure. If certain production targets aren’t met, the founders could be pushed out.
“Internally, we’re going to face more discipline,” Covaleski said. “But we’re going to be doing what we’ve always done. I’ve always referred to what we do as ‘artisanal manufacturing.’ We’re still going to be using German malts and whole flower hops and making the same great traditional beer.”
Why a sale made sense
Maintaining and improving beer quality while still growing their company was definitely on the Victory founders’ minds when they made their decision.
“We were business executives by default,” Covaleski said, noting that before he decided to take a chance on a homebrewing hobby, he had a career as a graphic designer. “We didn’t back down from those challenges of running a business, but now we get to get back to making great beer — and the thrill of being creative.”
Then there was the fact that Victory already had shareholders, a group of 52 friends and family who’d trusted in the young brewery when it was just starting up and allowed it to flourish over the course of two decades. Because they were just regular folks, there was actually a lot of pressure to not misuse their money, suggested some of Victory’s peers.
“The people who maybe put in 100k 15 years ago and now need to retire on it, that’s a lot of pressure” on the Victory founders, noted another local brewery owner who financed his operation with a bank loan instead of individual investors.
The financial pressure wasn’t just from outside investors.
“At 52, I feel young and vibrant,” Covaleski said, “but it gets harder and harder to look your family in the eye and say, ‘Hey, we’re going to bet the farm…again!’”
Is it still ‘craft’ beer?
The whys and wherefores of the sale aren’t necessarily as important to the average consumer as whether the beer will stay the same. But a secondary question — and one many beer geeks will continue to discuss at length — is whether Victory products can still be considered “craft” beer.
Some industry veterans are adamant that it is.
“Victory is definitely still a craft brew and I’ll still happily enjoy consuming it,” said Flying Fish founder Gene Muller with certainty. “Especially if Bill is buying.”
“I still like their beer just as much,” said Sly Fox brewmaster Brian O’Reilly. “I don’t think the sale means anything positive or negative yet.”
It’s not a given that the quality of the beer will stay the same, however.
“Private equity is not without its risks because it leaves the founders with less control over their companies’ future. The quality of Vermont’s Magic Hat, for example, has suffered greatly since its private-equity parent was sold to a Costa Rican-controlled brewing conglomerate,” wrote Don Russell of the Daily News.
Others stress that their definition of craft encompasses more than just beer quality, but extends into business practices. One reason the mergers and acquisitions give pause to many smaller breweries is fear that the resulting companies will use their size as leverage. AB InBev and other large operations have been known to elbow their way into better access to ingredients (if they buy up all the good hops, it leaves everyone else in a pickle), better placement on bar taps and supermarket shelves, and better distribution deals with wholesalers.
So as long as Victory doesn’t engage in unfair practices, some say, they’re still operating within the craft umbrella.
“A straight-up buy out by AB InBev would’ve been disappointing,” said Free Will’s Capece. “This gives hope that the Victory we love will only get better and not turn gimmicky.
“Just because you can buy a Gulfstream doesn’t mean your beer, or more importantly, your legacy is less valid. Quality and fair business practice are what matter to me,” he continued.
Another brewery owner agreed, noting that while “fundamentally, the first thing [in craft] is about what’s in the glass — how it tastes and how it’s made — the people who care about those kind of things also tend to care about how employees are treated, how ingredients are sourced and the environmental impact of the whole manufacturing and distribution process. They tend to go hand in hand.”
Then there’s the question of whether the term “craft” is still useful at all.
“Yes, Victory is definitely a craft brewery,” said Kehoe. “But the term that’s being thrown around now is ‘independent brewery.’ It’s not a new term — it was used way back when, after Prohibition, there was the huge consolidation that led to there being less than 80 breweries in the entire country by the 1970s.” (For comparison, there are now more than 4,100 breweries operating across the U.S., a record number.)
Will the consolidation wave stop with Victory, or will soon we see other regional independents sell? Though there have been whispers of other possible acquisitions in this area, none of the brewery owners Billy Penn asked were interested in a deal. At least not anytime soon.
“I love this business and industry and am not looking to sell,” said John Trogner of Hershey-based Troegs. “Still havin’ fun.”
Free Will’s Capece concurred. “I’m having way too much fun doing this gig to want to sell,” he said. Though he’s not ready yet, he hasn’t ruled it out. “Every business person has to plan for succession.”
“We’ve had people talk to us, make offers, and we’re like, ‘Well, been nice talking to you, bye,’” said Yards’ Kehoe. “We’re still a local brewery, employing local people, and hopefully things stay that way,” he continued. “It’s a pride thing.”