Valhalla Calls: Why Brewery Mergers In Ontario May Be a Better Outcome for Local Beer

The old tales of Vikings are incomplete without their cornerstone mythology of Valhalla, the hall of fallen warriors who live under the all-father Odin. Once, sustenance-based fishermen and farmers, the warriors feast on a boar that is reborn each evening and drink beer from the udders of a goat. That menu would have been luxurious for cold Scandinavia in the dark ages. Then, under a roof made of their shields, they await Ragnarök to fight against the giants at the end of times.

There are two reasons why the hall of the slain warriors gets mentioned: the last few years have been a fight for survival within the beer industry, and Danish brewing companies have made a massive claim in the Ontario beer market through their acquisitions.

These challenges shouldn't come as a surprise; it has been repeatedly discussed in the industry over the last few years. Although there are no official national sales estimates for the industry, craft beer represents approximately 10% of Canada's $9.1 billion in beer sales. According to data from the Canadian Craft Brewers Association, out of the about 1,200 craft brewers in Canada, 95% have sales that are considerably below $10 million in revenue, with most being under $1 million (Kirby & Lundy, 2022).

These are not manufacturing giants but primarily local family-owned businesses serving the neighbourhood. However, Josh Rubin of The Toronto Star published that lockdowns contributed to market slowdowns as draught beer is a large part of sales of any brewery (Rubin, 2022). The article summarized an industry already overrun with new brewers, fickle consumers, and competition from premade cocktails and seltzers that was impacted by a decline in draught sales during the worldwide COVID-19 outbreak.

Overall, beer sales are down 7.3% in 2022; they're still 8.3% below pre-pandemic levels. Common reasons include labour shortages and inflation (Brewers Journal Canada, 2022). These are challenges in many sectors, not just beverage alcohol.

Nine notable mergers and acquisitions occurred in the Ontario beer market in 2022. This article is a partial list, as there are still several online brewery sale listings, others likely underway, and a handful that cannot be discussed in this article due to non-disclosure agreements.

February 2022: Steam Whistle & Beau's

The company's shareholders unanimously approved a bid to buy Beau's Brewing Co.'s shares from rival independent craft brewery Steam Whistle, with 99.99% of shareholder votes approving the agreement (Steam Whistle, 2022). This merger was not a small affair, as alcohol distribution laws in Ontario were altered to allow for the cross-marketing and distribution of the portfolios several months prior. The result was the closure of the Vanleek Creek facility of Beau’s, with the brands being currently made at Steam Whistle in Toronto.

July 2022: Faxe & Amsterdam

Danish brewery Royal Unibrew, more commonly known as Faxe after their flagship product and brand hometown, purchased Amsterdam Brewing Company for approximately 44 Million CAD. "The acquisition we are doing today is very important for the future growth of Royal Unibrew in the Americas region," as per CEO Lars Jensen (Skydsgaard, 2022). The plan is to diversify the portfolio of the Danish brewery, which is in line with its market expansion plans. In Denmark, they have added brands such as Lottrup, Schiøtz, Tivoli Beer and Kissmeyer, in the Baltic countries, they are Vilkmerges, Kalnapillis Bergschlossen and Lacplesis Starburags, and in Finland, Lahden Erikois (Royal Unibrew, n.d.).

October 2022: Something In The Water & Stone City Ales

Something In The Water Brewing has announced an expansion to a second site by purchasing Stone City Brew Co. in Kingston, only four months after launching a brewery and taproom in Toronto's Liberty Village neighbourhood (Canadian Beer News, 2022). The sale was after a more traditional posting of a business listing from a realtor's website.

October 2022: Equals & Side Launch

In a deal that would keep both companies' flagship sites, Ontario-based Equals Brewing has bought the Collingwood company Side Launch Brewing Company (Owen, 2022). As a contract brewery, Equals was looking to develop its portfolio to protect its minimum production levels by starting Shake Lager & Bangarang Seltzers; adding several pre-existing brands would cement that tactic. Instead, Side Launch led to several years of shaky business decisions by terminating experienced personnel and lacking a long-term brand course (Johnson, 2022).  

November 2022: Bench & Henderson

As part of a long-term cooperation, Bench Brewing and Henderson Brewing will move Henderson's production of its leading brands from its Toronto brewery to Bench's plant in Beamsville. With the launch of Moving Pictures, a limited-edition Belgian-style ale last year as part of Henderson's ongoing collaborations with Canadian icons Rush, this formal cooperation builds on an earlier production agreement (Canadian Beer News, 2022).

November 2022: Muskoka & Rally

In a merger that "brings together two businesses with a shared dedication to quality, creativity, and a passion for the outdoors," Muskoka Brewery has announced the acquisition of Rally Beer Company. Rally, specializes in "functional beverages," claiming that they produced the first functional beer to be high in electrolytes.

December 2022: Carlsberg & Waterloo

The Carlsberg Group has agreed to pay $144 million to acquire Waterloo Brewing Ltd. The deal calls for the Danish brewery to exchange each share in Waterloo Brewing for $4 in cash (Ramlakhan & Bueckert, 2022). With local manufacturing and the brands of Waterloo Brewing, the acquisition is anticipated to boost the Carlsberg Group's market position in Canada and provide substantial supply chain and revenue synergies. Waterloo Brewing has added the well-known Laker brand to complement its house brands. They additionally have the rights to Seagram Coolers, Margaritaville, and LandShark (Frederiksen, 2022).

December 2022: Silversmith & Black Oak

The Silversmith Brewing Company has acquired the assets of the Black Oak Brewing Company. A recent press announcement disclosed the acquisition, the two breweries will work together to increase output and reach more craft beer drinkers around the Province (Spiteri, 2022).

December 2022: Symbev & Railway City

A new alcoholic drink firm purchased the Railway City Brewing Company, intending to turn it into a regional hub for brewing as it grows across Canada. The company now employs 20 people and manufactures a variety of beers in a 14,000-square-foot production facility. In addition, SymBev will purchase a high-speed canning line in January to draw more customers to the St. Thomas factory (Leon, 2022).

Consumer Perceptions

The mergers are not the first time that a large number of brewery transactions occurred in a short time, but it is one of the largest waves in the Canadian brewing industry. From 2014-2016 larger breweries acquired Ballast Point, Elysian, 10 Barrel, Hop Valley, Terrapin, Revolver, Devils Backbone, and Saint Archer outright. Those investors believed that the best strategy for increasing sales of their purchased brands is to attract the general public rather than the niche market consumer (Infante, 2016).

Attitudes over brewery sales have been changing as the industry matures. For example, in 2021, Japanese brewer Kirin purchased Bell's Brewing Company. Although the deal was rejected by some, there weren't as many as they had been for previous sales. Two factors primarily explain this: Anheuser-Busch and Molson-Coors are significantly more well-known among consumers, and the purchase of Bell's Brewery by Kirin was conceptually distinct from previous acquisitions. In addition, the company's founder and namesake, Larry Bell, was able to retire very comfortably (Infante, 2022). The well-known businesses and people instrumental in developing the industry are not getting any younger and require an overall exit plan.

Between 2010 and 2019, the craft brewing sector in Ontario saw extraordinary expansion. Throughout the ongoing COVID-19 outbreak, these small brewers make exceptional contributions to their local communities. However, time and time again, many craft brewers state that access to retail marketplaces is the main problem facing most small businesses. It is at the point that even The Trillium Network called for sanctions against European imports to gain shelfspace at the LCBO (Sweeney, 2022).

Production & Capital

In each of these acquisitions, there appears to be a distinct difference in manufacturing availability and capital access. Generally, the brewery purchased has an excess production capacity, and the purchaser has higher cash reserves or access to financing.

Until the current expansion of the craft brewing industry, beer was closer to a traditional manufactured good. Any brewery founded in the 1980s or 1990s would have a business model that relied on sales through distribution. It is only in the last decade that inviting the consumer into the production space has become more of a priority. This difference in the value of the land of the corporation is one of the significant contributions to how the overall brewery gets designed. Spaces closer to the consumer will be smaller, have a higher upkeep, and can charge higher margins. Facilities further from the consumer can have more extensive equipment, lower costs per square foot, and will have to ship their product to the target market.

The resulting labour from this difference plays a significant role in how the final product is marketed and sold. Larger manufacturing breweries will gravitate to consistency, quality, and trustworthiness as crucial market differentials, whereas smaller community breweries will use innovation, unique experiences, and local values to attract customers. Sometimes these efforts are rewarded with increased sales, but in the case of several of these breweries, their offering struggles to gain traction. At times, craft beer can be an industry of narcissism over minor differences. However, the marketing and sales department's overall efforts result in the product's sale for the first time, where the quality established by the brewing and packaging teams will build long-term customers.

The final factor is the difference between the fiscal capital available and the means of production established. This balancing act can be one of the most challenging aspects of the management of the brewing corporation. Too small of a facility will result in higher labour costs and inefficiencies. In contrast, too large of a brewery will have wasted capacity and resources devoted to activities that cannot generate revenue.

For example, to use one of the latest acquisitions as a case study for the differences between the two business models, it is possible to evaluate the Black Oak and Silversmith merger. Black Oak Brewing was founded in the late 1990s as a distribution-style brewery focused on producing for broader retail. In contrast, Silversmith Brewing started with a smaller facility in a tourist-focused region of Ontario. Ultimately the sales of Black Oak Brewing were diminishing due to changing consumer preferences. At the same time, Silversmith could not produce ample volume cost-effectively from a smaller footprint facility. Therefore, the acquisition gives the combined brand of having a small manufacturing facility close to a large market in Toronto, as Black Oak is located in Etobicoke.

Domestic & Imports

There is no general definition of what constitutes a craft brewery in Canada. However, such a facility typically operates independently, generates less than 400,000 hectoliters, and is licenced by the federal government. Less than 5,000 hectolitres are produced yearly by the majority of Canadian craft breweries. Even the Federal Department of Agriculture struggles to define craft vs non-craft producers. In a report from 2020, Creemore Springs (Molson-Coors), Okanagan (Sapporo), Mill Street (AB Inbev), Granville Island (Molson-Coors), and Belgian Moon (Molson-Coors) were all listed as "craft" producers. Even though the Department of Agriculture recognized that independent ownership was part of the industry definition, they could not identify that foreign interests owned them. Waterloo Brewing and Brick Brewing were listed as separate organizations, even though Waterloo Brewing formerly was Brick Brewing through a rebranding (Agriculture and Agri-Food Canada, 2020).  

It is much easier to define brewery segments on domestic or imported sales as they are traced and sold through different distribution channels. Generally, by volume, domestic beer is sold by the brewery to the customer either directly or through The Beer Store. In comparison, imported products all cycle through the LCBO during the importation process. While imported products peaked in 2017, they have declined since. At first this may appear to show that Canadian brands are gaining traction against international products, it is a shift of international producers moving foreign brands to local production (Beer Canada, 2020).

Figure 1 - Ontario Beer Sales in 2020 (Beer Canada, 2020)

For example, the Stella Artois that's destined for Ontario was initially brewed in Belgium, while Corona was historically made in Mexico. Both of those brands switched to production in London, Ontario, as Anheuser-Busch InBev has decided to make those products at its flagship Labatt Brewery. The brands are also in production at the Montreal and Edmonton locations for the Quebec and Alberta distribution markets (Canadian Broadcasting Corporation, 2020).

As international breweries are shifting to more local production, it would only make sense for their competition to follow to stay competitive in those markets when possible. The considerable reduction of overall sales in the brewing industry only expedited this practice by offering an opportunity to purchase assets at a lower market rate. In the case of Carlsberg and Waterloo Brewing, the incentive is very clear from the annual public reports.

"Organic revenue growth was 10.0%, while reported revenue growth was 13.8%, […] Revenue/hl grew organically by 3% as a result of the recovery of the on trade in some markets due to fewer restrictions in 2021 compared with 2020 and solid growth of premium products across the regions. Gross profit increased organically by 8.7% and by 10.5% in reported terms, positively impacted by acquisitions and negatively by currencies." – (Carlsberg Breweries A/S, 2021)

The Master Framework Agreement

To develop a new framework agreement for the sale of beer in Ontario until 2026, the Ontario Government and the Beer Store agreed into a contract in 2015 under the supervision of the former Liberal Cabinet. This agreement allowed any brewery in Ontario to acquire an ownership share of The Beer Store. While AB Inbev, Miller-Coors and Sapporo own the lion's share of the voting powers, it allowed for an increased market position of smaller facilities. It established the sale of beer in 450 grocery stores through a LCBO distribution. It did continue to enforce that the Beer Store operates on a cash flow basis, effectively making it a non-profit organization. It required the Beer Store to invest in the retail portion of its operations through modernization programs. The goal was to limit distribution at approximately 1,500 retail outlets to balance effective service and distribution costs.

To say that the policy has been divisive would be an understatement at best.

Initially, the Beer Store was an actual distribution cooperative. However, over the decades of acquisitions, the shares of that cooperative consolidated into the three key stakeholders. The original model was to divide the costs based on sales volume. Although in 1928, the LCBO announced that it was unnecessary to issue additional brewing licenses in Ontario, there was little input from the Province on the policy goals. Over the 1930s and 1940s, there was a series of mergers reducing the overall number of manufacturing licenses in the Province, which the LCBO initially approved as they believed there should be fewer alcohol manufacturers. The neutral retail operations for the Beer Store originally started at the time are still evident today with minimal advertising and the bulk of brewery products being hidden from the public. It wasn't until 1984 that a new brewery manufacturing license was issued to Brick Brewery, which is now Waterloo Brewing. However, they did not acquire a portion of the shares of the Beer Store, nor was there a method of determining how new shares should be created (Straight Up: The Issue of Alcohol in Ontario, 2014).  

The Beer Store benefits the proprietors in two different ways. Reduced expenses for retail, distribution and warehousing are the first method. The large brewers would have to promote and sell their beer to tens of thousands of different retail locations, incurring significant transportation expenses under a free-market economy. However, because of economies of scale, the brewers can significantly reduce the cost of their logistics by combining them into a single network of warehouses and retail locations. Secondly, the additional benefit is that controlling every stage of the retail chain allows for a greater market share of the owners portfolios. Craft brewers are particularly vulnerable to the operating practices, where their sales are at a lower performance compared to overall market penetration (Morrow, 2015).

The intentions of the Master Framework Agreement were to modernize the overall organization to make the operations more friendly to consumers and even market advantages. A distribution cooperative that did charge reasonable and fair amounts to any brewer could still be a huge benefit to the industry as a whole, and while the ownership of the Beer Store are foreign nationals, the manufacturing occurs in Ontario which does support local economies. It is unlikely that this result will occur.

In 2019, the Ford Administration attempted to dissolve the Master Framework Agreement early, citing anti-monopoly and small business growth reasoning (Hughes, 2019). The legal team representing the Beer Store issued a statement that doing so would be the Government of Ontario attempting an effort to avoid responsibilities and liabilities under the agreement, which would be a breach of the contract (The Beer Store, 2019). Damages for such a breach are estimated to be above 1 Billion CAD. As there has been little information released since, it is unlikely that the agreement will have a premptive termination. The Ford Administration must provide notice in 2023 whether or not it will be renewed. Meanwhile, the industry behind convenience stores believe that they will soon have the opportunity to retail alcohol in their own stores similar to how Quebec alcohol is distributed (Daniels, 2022).

Why These Mergers May Be Beneficial to the Industry as a Whole

So currently, there is a disorganized distribution model in the final years of the agreement, a governing body without too much concern to the nature of those contracts, and multiple adjacent industries looking to expand into beverage alcohol in large ways.

“Pursuant to a co-manufacturing agreement with Loblaws Inc. (“Loblaws”), the Company produces, sells, markets and distributes various beer products on behalf of Loblaws under the licensed President’s Choice® (“PC®”) and No Name® trademarks. The Company produces various products under a contract with Canada Dry Mott’s, Inc. (“CDMI”). The Company also has co-manufacturing agreements with other customers, including Hiram Walker®, Carlsberg® and certain other customers that are not separately identified, as per the terms of the Company’s agreements with those customers.” - (Waterloo Brewing, 2022)

The final stroke of the pen is several medium and large brewing companies posting mergers prior to the end of the fiscal year. Danish foreign investments account for an investment of a combined 188 Million CAD into brewing infrastructure in Ontario. It is likely that there will be a lot of heavy handed discussions behind closed doors in the upcoming year, as these organizations will seek to protect their recent investments. While the Ford Administration may want to direct alcohol distribution towards a model currently used for cannabis, it is unlikely that a partnership of Carlsberg and Lobaws would be in favour of this arrangement, as it would effectively retain distribution within the hands of the LCBO. This would put a major international brewing corporation and Canada’s largest grocery retailer in a very critical negotiation position.

For the smaller brewing companies, not only does this give them a chance to regroup during one of the most challenging economic periods of recent years, it collectively gives a young industry a better voice for legislating bodies. A more concentrated voice is harder to be ignored. In a majority of these acquisitions, the breweries were able to form beneficial relationships, which is much preferable to a complete closing of the business and the liquidation of the assets.

Hold fast, Vikings; it may be possible to weather the storm yet.

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