Tilray Buys Four More Breweries; What Is Their Endgame?
Tilray, the erstwhile cannabis company that has jumped into beer, announced it was acquiring four more breweries from Molson Coors yesterday. From the press release:
“The acquisition includes Hop Valley Brewing Company, Terrapin Beer Co., Revolver Brewing, and Atwater Brewery. Tilray’s strategic acquisition will strengthen its craft Beer leadership in the US and solidify Tilray beverages as the number one craft brewer in the Pacific Northwest and Georgia; Tilray‘s beverages division [is] projected to grow new beer accounts by 30%.”
Almost exactly a year ago, Tilray bought seven beer brands from AB InBev. This is the second rummage sale big beer has offered, and Tilray was again on hand with their jumbo shopping cart. These bargain purchases bring their tally to fifteen brands, excluding assorted FMBs, ciders, and canned cocktails. Still, it’s a fragmented collection of underperforming brands the bigs were happy to shed, and all in the midst of a slow-moving reset in the beer industry. Which makes one wonder: what does Tilray see that others are missing?
As I noted a year ago, Tilray is one of the many companies to invest heavily in the U.S. after their home country of Canada legalized weed. “Cannabis turns out to be an atrocious industry. Five years ago, crazy money flooded into the various states where it was legal, and we saw absurd valuations for companies like Tilray. All of that was speculative valuation based on a legal market everyone assumed was just around the corner. Because of the penalties companies face under federal law, it’s very hard to make any money. Meanwhile, weed is now extremely cheap in mature states.” So Tilray decided to shift gears and become a beer company, finding a bunch of ready-made brands in the discount aisle.
We don’t know how much they paid for the four brands yesterday, but the eight (including cider) they bought last year only cost $85 million. This will not be the end of matters, either: Drinks Business quoted Chief Executive Irwin Simon saying, “This will not be our last deal.” Finally, despite the number of brands in the portfolio, and despite being the 4th largest “craft brewery” in the U.S., these brands collectively only produce about 660,000 barrels (per Doug Veliky). Sierra Nevada, at number three, makes a million barrels.
All of this is very curious. AB InBev and Molson Coors are very old, very large beer companies, and they see no great value in these properties. Tilray, meanwhile, is a mere tween, founded in 2013, and until four years ago it had zero knowledge of the beer business. That doesn’t mean this was a dumb move, however. Let’s make the case for why these acquisitions make sense and why they might not—and you can add your insight in the comments. (By the way, the comments have really been humming lately—thanks for engaging!)
This Is Madness
Doug Veliky adds some important context to the four companies Tilray just bought: they are down 3%, 5%, 11%, and 21% year over year—the larger two shedding barrels the fastest. Craft beer is declining as a segment, and given the various challenges in the industry over the past five years, the margins are thinner. The small and midsized brewing model may not be dead, but it sure doesn’t look like the easiest way to make money. ABI and MC have seen the future, and it does not include quirky little regional brands. Moreover, these new brands are mostly not very distinctive and in decline, and their parent companies, despite their marketing and sales might, couldn’t turn them around. For Molson Coors, it was good riddance.
Nope, It’s a Savvy Move
Big beer companies started buying the little guys a decade ago with two clear assumptions: craft was the future of beer, and they could use their knowledge and resources to create national brands. They’d done it with Blue Moon and Shock Top, why not Redhook and Hop Valley? The assumptions proved to be bad ones. Craft beer hit its ceiling right about the time they were buying in, and those quirky little brands were not great vehicles for the kind of growth big companies required.
But what if you’re not trying to build a national brand? Tilray’s situation is quite a bit different. As a cannabis company, they were bleeding revenue. By contrast, beer is a real business and generates fairly reliable returns on investments. And those investments, in 2024, are pennies on the 2014 dollar. Buying companies for $10 million apiece is a lot safer than spending $100 million. Holding 15 brands (and counting), gives Tilray a lot of opportunities for growth, and bundles together the risk in a more manageable package.
Take for example what they’re doing in Oregon and Washington. With the new acquisition, they’ll now control four brands (Widmer Brothers, Redhook, 10 Barrel, and Hop Valley). They can consolidate some of their activities to save money, while nurturing the brands to develop their own distinctive personalities. The distribution issues complicate matters, but given how fast Hop Valley is declining (down 21% this year), it may be a good time to deal with that. Tilray is investing in the Northwest rather than selecting a few breweries from there to go national. With the competitive advantages these brands enjoy, it seems like a decent bet.
Craft brands didn’t work for ABI and MC not because they were inherently doomed, but because they were the wrong scale. Big beer companies want to make fewer products in massive volumes and put them into national distribution. Craft beer was never going to work that way. With Tilray, they don’t need to be national brands.
The jury will be out on this experiment for some years to come. Shifting these brands from ABI and MC will take time, as will the process of integrating them under Tilray. Some of them will dwindle and perhaps fail, but that’s not the end of the world. If they’re growing collectively, that will be adequate—especially given the low price Tilray paid for them. In Tilray’s corporate structure, cannabis remains the extremely high risk/high reward division, and the company can continue to bide its time until the U.S. legalizes weed so long as the beverage division is delivering reliable profits and keeping them afloat.
When you consider these kinds of deals it’s always useful to ask, “compared to what?” Under ABI and MC, the craft brands were failures compared to Michelob Ultra and Coors Light. Under Tilray, the craft brands look pretty good compared to the Wild West, boom-and-bust world of cannabis. The Oracle of Oregon knows better than to make predictions, but I can at least see the logic behind Tilray’s strategy.