Of interest will be a piece from Simon Mount of Aitken Murray Capital Partners that summaries his view on the Founders First business and the growth of craft beer and spirits. Simon is an expert in the craft beer and spirits category.
The report has some valuable insights on the craft industry and the Founders First business model.
The craft beer and spirits industry has been leaching market share from 'Big Beer' and the likes for years, with no signs of slowing down. Founders First is capitalising on this trend by taking a value-add approach to small to medium sized craft brewers & distillers and helps them with the most common, complex and time consuming parts of running the business. The major beer and spirit companies like Heineken, AB Inbev and Diageo trade on 20-25x PE and yet their traditional brands have been ex growth for years. We think the major brands will continue to acquire the higher growth, higher margin craft brands. Craft Brew Alliance would be the closest listed comp to FFL in the US which is currently under takeover from AB Inbev for total value of approx. US$320m. Craft Brew owns brands like Kona Brewing and Redhook Brewery. In Australia we have had CUB (formerly AB InBev now Asahi) buy Mick Fanning’s Balter Brewing, 4 Pines and Pirate Life. Coca-Cola Amatil has also bought Feral Brewing and Yenda. Asahi has bought Green Beacon and also owns Mountain Goat and Cricketers Arms. Kirin owned Lion who make XXXX and Tooheys also own Little Creatures, Furphy and have recently bought 50% of Four Pillars Gin. Nb. Gin consumption in Australia was up 33% last year in Australia. Recently listed Founders First (FFL) is a Craft Beer & Spirits brand accelerator and aggregator. FFL's unique revenue model gives them a first mover advantage in the space, and recent results highlight just how effective management is at executing on the plan laid out in their prospectus. Importantly, the management team is well qualified to run a much larger business. The board and management lead by Mark Haysman (former CEO of Port Adelaide and ex CUB) with the support of Stuart Morton (co-founder and inaugural Jetty Road chairman) and Dan Wales (co-founder and Beer Category GM) is full of ex big beer and food people from the likes of Mondelez, Lion, and Treasury Wines.
Things like Marketing, Distribution, Logistics and Compliance are aspects to the Brewing and Distilling business that smaller players simply can’t do themselves profitably. This is where Founders First adds value on the Supply Side. By injecting capital alongside the breweries and distilleries existing shareholders, as well as offering experienced management and access a growing sales & distribution arm, Founders First scales these business's faster than they could ever hope to do themselves. This translates directly into added equity value as they take stakes (controlling or minority) in these brands and then grow them to profitability faster. Case Studies:
Acquired pre-IPO and increased investment with convertible note on 30th March, now owns 64%
Approx. $3.25m investment
Capital injection has allowed plans to expand production to 1.5 million Litres to support wholesale and venue demand.
Distribution points increased from 146 to 883 through its Indie Craft Collective distribution arm
Revenue growing strongly
Kangaroo Island Spirits
Acquired on 2 March 2020 (100%)
Purchased on 0.5x Revenue
Produces circa 30,000 bottle per year
First export orders to Japan & Singapore receive in May
Releasing first ever Kangaroo Island whisky later this year
In addition to the equity value of the FFL's brand portfolio, the company adds significant value through their growing distribution arm. This encompasses multiple parts of the business including their supply agreements with major retailers including Coles & Woolworths, their venue distribution segment, as well as their upcoming new online portal for wholesalers and preferred customers. The company owns the customer relationship and acts as the conduit between larger buyers and smaller producers. The margins on craft beers being sold in four and six packs are much higher than a standard slab of VB. You can see evidence of this as most Bottle-O's now stock their craft beers front and centre. There is clearly demand for the craft beer and craft spirit but there are supply issues for the larger players like Coles and Woolworths who struggle to effectively coordinate with small craft producers.
An online portal is under construction and is expected to be fully operational by year end. It offers a 'Single Invoice' service to the venues (unique distribution points) and bottle-shops that wish to stock their product range. This significantly streamlines the buying process for independent venues and bottle-o's that want exposure to the growing Craft segment that their customers desire.
You can see below where Founders First fits into the distribution equation. Their dominant position in the market continues to be solidified as time goes on.
We believe that one of the reasons the company’s share price has underperformed despite a promising business model and skyrocketing revenue growth, is that the company has exposure to venue operations. The Jetty Road venue in Melbourne is the only venue closed due to COVID and contributed ~20% to revenue in 1H20, however the share price is down ~40% from the IPO. The remaining venues are all returning to profitability post COVID, most operating at roughly 70% capacity. These venues are not just profitable business's in their own right, they are also invaluable marketing tools that offer consumers a chance to experience the beers and spirits that they can buy in-store. You can see below the geographical distribution of the company’s assets of various Breweries, Distilleries and Venues. The company has indicated since IPO of their intention to continue expanding their footprint with further acquisitions and partnerships.
Spirits and International Distribution
The companies spirits brands, Kangaroo Island Spirits and Green Ant Gin, both secure premium pricing due to their exclusivity and quality. As mentioned above, the Kangaroo Island "O'Gin" brand recently won multiple first place awards in international wine and spirits competitions. Momentum Foods and Wines is the company’s international distribution arm with exposure to China. This offers a platform for premiumisation and growth for the companies Liquor Brands. As seen below, the demand for Craft Beer far outperformed the demand the total beer market over the Covid Lockdown and subsequent re-opening. This is in part due to the 'Buy Local' movement, but also reflects the changing preferences of consumers away from traditional beers.
This is a fascinating industry that will continue to develop. Founders First are leveraged to the high growth and high margin segment of the industry and have an incredible platform to continue to grow from.