Investors thirsting for an ASX beer exposure have been left largely unsated since Fosters/Carlton United Breweries and Lion Nathan were subsumed by foreign buyers a few years back.

Coca Cola Amatil (CCL) has long held beer and spirits ambitions that have never quite come to fruition, but in any event the bottler looks headed to offshore ownership as well.

But as any self respecting hipster would know, all the action is taking place in the ‘craft’ or ‘boutique’ sector and some ASX players are moving to the groove of the burgeoning but difficult market.

‘Craft’ of course does not necessarily imply independent: Lion owns the craft-ish Furphy brand and Little Creatures and Asahi owns Mountain Goat.

The problem for the genuine independents is that they can produce megalitres of amber goodness with floral hoppy tones, but without decent distribution they are doomed to be a backyard operation.

The good news is that while the mainstream beer market is as flat as a night man’s hat, the craft market is growing like hops in a warm wet spring.

“Independent craft is fuelling the growth, whether its beer spirits or emerging drinks such asseltzers,” says Mighty Craft (MCL) CEO Mark Haysman.

Having listed in December 2019, Mighty Craft is tackling the sector with a multi-pronged strategy of co-investing in breweries and distilleries and operating branded venues.

Having started with one investment (Jetty Road), Mighty Craft has stakes in six fledgling breweries, four distilleries and the Torquay Beverage Company, an investment incubator for emerging drinks such as seltzers and brewed (as in alcoholic) coffee.

The company’s portfolio also includes the Kangaroo Island distillery at Cygnet River, gin producer Brogans Way and a Tasmanian whisky joint venture.

Mighty Craft also lays claim to 65 per cent of Green Ant Gin, founded by former AFL footballer Daniel Motlop.

Crucially for the craft fraternity, the company has teamed up with Linfox’s Bevchain cold logistics arm, Craft Hub. The first network of its type here, Craft Hub will serve a collective vehicle to achieve economies of scale in distribution.

Haysman notes that there are more than 1700 independent breweries or distilleries nationally, but most of them are sub-scale and inefficient even thought they make great products.

“We solve a bunch of problems for the industry,” Haysman says.

“Early stage businesses can’t access the market or have access to the right capital and their costs are too high.

“One of our strengths is dealing with the strongest retailers in the country. In fact we have a joint business plan in Coles and we are working through a similar process with (Woolworths) Endeavour Drinks Group.”

Mighty Craft turned over $13.5 million in the December half, up 185 per cent. But the underlying also grew to $4.8m, in what management pleads was an unusually heavy period of investment.

The company expects to reach break even by the second half of calendar 2022. “We have a structured plan around that and a clear plan of getting to that point,” Haysman says.

Mighty Craft also aspires to have up to 12 beer and cider brands with volume of at least 12 million litres by 2025. It also hopes to develop 10-12 decent-sized beer and cider brands and sell at least 500,000 bottles of spirits.

“Ultimately we want the whole sector to grow and thrive,” Haysman says. “If we do that it will be good for our retailers and our customers.”

While both boutique beer and spirits are hot sectors, they’ve lagged behind the UK and US growth. In 2020 the local craft market currently turned over $840 million and accounted for 15 per cent of the total beer market, compared with 25 per cent in the US.

Good Drinks Australia (GDA)

A few years ago theformer Gage Roads was pretty much a commodity contract brewer for its major shareholder, Woolworths.

But having bought out the Woolies’ 25 per cent holding, Good Drinks is making inroads on the east coast with brands such as the surfing-themed Single Fin, the biggest selling craft beer in WA and the second biggest nationally.

Good Drinks is also the biggest craft beer with national annual sales of around $70 million, ahead of Stone and Wood ($65m) and Colonial Brewing ($32m).

Good Drinks hospitality presence is based at Freo’s Victoria Quay, but it’s also spending $5 million on a showcase facility – the Atomic Beer project – at Sydney’s gritty but gentrifying Redfern.

In the December half Good Drinks recorded a $3.59 million profit, a 600 per cent increase on revenue of $27.4m, up 42 per cent.

The company pumped out volumes of 8.5 million litres, in striking distance of its targeted 10 million litres a year.

With Good Drinks shares doubling over the last year, investors acknowledge the company is doing quite a few things right as it pursues its destiny as an independent artisan brewer.

Broo (BEE)

Sadly, the rising frothy tide of craft brews – or in some cases ‘chews’ because they’re so heavy – is not lifting all boats.

The Mildura-based Broo had its sights well beyond the orange groves to China, where a burgeoning middle class demands a more exciting drop than the unexciting local Tsingtao.

You’ve no doubt heard this story before and you’ve heard the ending, too: a hasty retreat.

In early January Broo said it had terminated its four year old agreement with its Chinese excusive import partner, Beijing Jihua Information Consultant, alleging non payment of royalties pertaining to the first three years of the deal.

Under the take or pay arrangement, Jihua was to have taken 1.5 billion litres at a fixed rate per litre, generating aggregate revenue for Broo of $120 million

If it’s any consolation Fosters and Lion fared no better in the Middle Kingdom, burning hundreds and millions of dollars before pulling the plug.

Undeterred, Broo has announced an exclusive local distribution agreement with pub and pokies operator Australian Leisure and Hospitality to distribute its lager to ALH’s 300 hostelries.

Impressive? Yeah nah – the parties have had an agreement in place since 2018, but it’s been non exclusive.

Last August the company also has a contract brewing with CUB, by which CUB supplies at least 48,000 cases (4.3 million litres) a quarter, over a two year period.

Broo’s plan to build a $100 million green brewery in Ballarat proved a bridge too far.

Broo, meanwhile is in a parlous position with cash of half a million, just over $2m of debt and a half year loss of $1m. The shares peaked at 47c when the China deal was announced, but now wallow below 2c (valuing the company at $16m).

From your columnist’s memory of a distant tasting, Broo’s premium product is quite agreeable despite its export-friendly garish yellow packaging adorned with kangaroos.

For beer-loving investors, the overriding lesson is not to mix business with pleasure. Having said that, the craft market is much higher margin than mainstream beer and the rewards beckon for brands that can distinguish themselves from the hundreds of other brands gracing Dan Murphy’s (revamped) beer shelves.

Tim Boreham edits The New Criterion

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Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.