Invest in Craft Beer with BrewDog USA

Key Stats:

Summary

BrewDog USA has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

You can also check out this Founder Profile we did on BrewDog during a previous raise for more information on the company.

Problem

Finding the right beer or other alcoholic beverage can be a challenge. In recent years, consumers have been moving away from traditional big-name providers. They have been moving, instead, toward craft brewers. Diverging consumer tastes have played a role here. But also at the center of this paradigm shift is the desire of today’s youth to support small, local firms over multi-national behemoths. This movement has created a much larger sea of brands, leading toward regional and even local favorites. There is a certain beauty to this, but there’s an accompanying problem as well. Part of the drinking experience is to share your passion about the beverage with others in order to connect with one another. But when there are so many disparate brands, this challenge intensifies. This problem is only mitigated by seeing craft brewers achieve a certain scale. 

Solution

One company in the craft brew space looking to capture this scale is BrewDog. Founded in 2007, BrewDog was one of the first modern craft brewers to really catch on. Since its launch, the company has done well to expand. Today, it operates 49 bars across the UK. It has 21 in Europe, 6 in the US, and 3 in other parts of the world. The company also owns one hotel, a distilling company, the Hawkes Cider brand, breweries in no fewer than four countries, and various other assets as well. It is worth mentioning that due to the COVID-19 pandemic, many of its locations across the globe have been temporarily closed. Management has said that it intends to re-open most, if not all, of these locations when appropriate. 

It should be made clear right away: investors are not receiving a piece of the entire company in the current raise. In an article published by Forbes earlier this year, the empire the company’s management team has set up was valued at $2 billion. That seems appropriate for a brand with such significant operations and the distinction of selling its products to no fewer than 60 countries today. What investors are receiving, instead, is ownership in BrewDog’s US subsidiary, BrewDog USA. This part of the company was launched in 2015, and its first beverage was released in 2017. 

BrewDog USA includes six bars spread across the country. It also involves the firm’s brewery in Columbus, Ohio, its DogHouse Hotel, and Overworks USA. DogHouse Hotel is a 32-room beer dreamland that includes 8 deluxe suites. Rooms cost between $172 and $304 per night, before add-on options. It also boasts an in-house marketplace and a view of the company’s beer-making operations. The facility also has a 6,000 square foot interactive craft beer museum. Overworks USA, meanwhile, brews beers utilizing alternative and mixed culture fermentation. These variants often require long aging periods before they are ready to drink. 

Today, BrewDog USA has distribution operations throughout 13 US states. With the capital the company hopes to raise, it plans to open new bars. It also wants to establish production and distribution assets in other parts of the country. In particular the company is focused on the west coast, where management has identified a great deal of potential for what it calls an “outpost.” The company will also contribute its American operations of BrewDog Distilling to BrewDog USA this year as well. This particular part of the company is responsible for the production of gin, vodka, and whiskey. 

The growth BrewDog USA has exhibited over time has been impressive. In 2016, the company generated nothing in the way of revenue. In 2017, sales were a robust $4.94 million. This surged to $17.20 million in 2018. For the first six months of 2019, the company’s revenue was $12.44 million, up nearly double compared to the $6.62 million seen in the same period of 2018. Management has not provided full-year figures across the board for all of 2019, but they did say that sales for that year exceeded $27 million. That’s at least 57% higher than what the company saw a year earlier. 

On the bottom line, the picture for the firm isn’t great, but it’s getting better. In 2017, the firm lost $7 million. This shrank to a loss of $2.5 million in 2018. For the first-half of 2019, the company’s net loss totaled $0.79 million compared to a net loss for the same timeframe in 2018 of $2 million. Operating cash flows have followed a similar trend. The company went from losing $2.33 million in 2017 to $1.15 million a year earlier. Its operating cash outflow of just $26,464 in the first six months of 2019 was far better than the $307,071 loss seen in the same period of 2018.

A Strong Market

Since investors are only receiving a piece of BrewDog USA, it makes sense to focus our industry analysis on the US market. According to our research, the US beer market stood at about $116 billion in 2019. By volume, this represented 191.25 million barrels (including 36.27 million barrels of imported beer), down about 1.6% compared to 2018. While this decline looks dour, craft beer did very well. Its volume jumped 3.6% during that period to 26.09 million barrels. The retail value of this output was $29.3 billion, representing 25.3% of all US beer sales by price despite accounting for only 13.6% by barrel count. This disparity alone shows that consumers are buying up craft beer at a growing rate relative to other beer. It also illustrates that they are willing to pay a premium for it. 

Given its size today, BrewDog USA would most certainly qualify as a regional player. Of the 8,386 breweries nationwide in 2019 (up from 1,653 a decade earlier), just 240 were labeled as regional firms. Though regional craft brewers account for a small share of the market by player count, they made up 68% of all craft brew sales. Even by those standards, BrewDog USA would be considered a fairly small player. The mean revenue between these firms, with $19.92 billion spread across the 240 firms, works out to around $83 million. Assuming the COVID-19 pandemic does not persist too long, it’s likely management can scale the business up to that size in a matter of a few more years. 

According to one source we found, the expected growth of the US craft brew industry should be around 2.1% this year. That’s reasonable when you consider the current pandemic. It is also worth mentioning that there are other ways to evaluate this market besides revenue. The economic impact, for starters, should be considered. In 2018, the craft brew market was responsible for 550,000 jobs in the US, and it contributed $79.1 billion to this nation’s economy. The largest market, unsurprisingly, was California with a $9 billion contribution. This helps to explain the company’s desire to move west. 

Terms of the Deal

In order to keep growing, the management team at BrewDog USA is trying to raise a great deal of capital. They are doing this through a Regulation A+ raise, with the goal of bringing in up to $39 million in cash for the business. If they receive the entire investment, net proceeds should be about $36.48 million. In exchange for this, management is issuing common stock to its investors with a price per share of $60 (which is also the minimum investment amount). Through its raise, the company has received commitments totaling $330,060 as of this writing. Total commitments, meanwhile, work out to $847,080. All of this is being done at a rather hefty $390.49 million pre-money valuation.

An Eye on Management

BrewDog is a large, multinational company at this point, and it has an extensive team behind it. At the core of this team are its two founders: James Watt and Martin Dickie. Watt currently serves as BrewDog’s CEO. He is also the President of BrewDog USA. Prior to founding the company, he worked as a deep-sea captain. Since founding BrewDog, he has gone on to author one book and co-author another (both about beer). He also holds the distinguished title of Master Cicerone (somewhat comparable to being a high level sommelier for beer). In 2014, he was named Great British Entrepreneur of the Year. 

Dickie is BrewDog’s COO, and he serves as a Director for BrewDog USA. He received a first-class honors degree in Brewing & Distilling from Herriot Watt University. And prior to founding BrewDog, he was a Brewer at Thornbadge Brewery. The other key person at BrewDog USA is Jason Block, the subsidiary’s CEO. Previously, he worked as a co-founder of innerspace. He was also the President (and before that, the Director of Business Development) at Homage. His role prior to his time at Homage was as General Counsel at Schiff Capital Group.

Rating

Our team has rated BrewDog USA a Deal To Watch. This high level of distinction reflects our respect for and understanding of the company’s awesome traction. Even though it’s a subsidiary of a larger multinational player, the rapid growth it experienced from 2017 through 2019 alone was impressive. Though the firm continues to generate at net loss and continues to see net cash outflows, these figures are improving annually. Add in management’s experience and a large and growing market for its offerings, and it’s hard not to like what we see. In truth, there is very little that we are worried about. The impact of the COVID-19 pandemic is certainly an open question that warrants consideration. In addition, despite strong growth, the price investors are paying for a slice of the company is also quite high. Beyond that, though, we don’t see anything particularly worrisome. In fact, if not for the uncertainty of the pandemic and if the price investors are paying were lower, we would be hard-pressed to rate this as anything other than a Top Deal.