Market fears end Stomping Ground/Good Drinks deal

Alarm bells over the medium-term beer market was a key factor in the termination of the sale of Melbourne’s Stomping Ground Brewery to Good Drinks Australia.

The planned deal, announced last August, was billed as having ‘strategic benefits’ based on Good Drinks Australia (GDA) developing national brands relevant to key markets.

At the time of the announcement, GDA described the move as a case of “one plus one equalling three”, with the addition of the Stomping Ground founders to the combined team seen as a key benefit.

“It’s really is a bit of a joining,” GDA’s Chief Strategy Officer Aaron Heary said at the time.

“Steve is coming onto the executive committee and we’ve got Justin and Guy as key management within the organisation.”

“We really want to want to help Stomping Ground become the number one independent Victorian brand. With that joint goal and both of our resources coming together, one plus one equals three in this case,” he said.

However, this week Stomping Ground co-founder Steve Jeffares said that, since August, data had shown worrying signs for the beer market that made the deal less compelling.

“It was just the last month or two last year, and then coming into early part of this year, [GDA] obviously have access to a lot of data,” he said.

“And they were seeing signs that were a bit worrying to them and to the broader industry, and we’ve obviously been privy to some of that data.

“We were respectively seeing the impacts on our own trade, and so it just became, as John said in the press release, it just became less compelling.”

Jeffares said that the signs for the beer market are worrying.

“I think it’s been written about in your, and other, trade publications that the market is softening and craft beer is in decline in some markets, and beer itself is in decline,” he said.

“I think that as these interest rates bite, and…confidence is taking a hit, that’s going to impact people’s decision as to how much and if they buy more expensive independent craft beer.

“I think that’s a situation that we haven’t experienced in Melbourne, or in the craft beer scene, well, for forever.”

He said that reports that 800,000 people are predicted to be affected by interest rate increases as they move from a fixed rate to a variable rate will bite.

“So what impact that has, it’s hard to know to what extent it’s going to impact on us. People will still want to drink good beer and local products where they can justify it.

“But it’s that uncertainty that is making, I think, most if not all breweries would be having these sort of chats internally, I expect, about “how do we prepare ourselves for that?”.

Scale through consolidation not all pluses

The combination of one of Victoria’s strongest venue-based breweries and Good Drink’s national footprint was seen as a strength of the planned partnership, with many other breweries also looking to consolidation as a means to reduce costs and gain scale.

However, Jeffares said that in hindsight, that wouldn’t have come without cost.

“I think we’re doing roughly one and a half million litres or so, give or take, and there’s a way to go before we get to scale.” he said.

“There’s always been the – not an issue – but we’ve always had in the back of the mind that we’re a proudly Melbourne brewery, and we would prefer our beer to be brewed in Melbourne, or certainly most of it.

“We never got to that point of actually kind of planning it as such, but if our beer had been brewed, or some of our beer had been brewed in WA, then there was that issue.

“Obviously it’s got to come all the way back to the East Coast, and [a question was] whether that makes sense and whether that’s aligned with what we’d love to be or prefer to be doing.”

Jeffares said he believes many breweries are looking at paths forward as the market matures and, for some, shrinking may be a way forward.

“There’s no question that there’s a lot of breweries stuck in the middle ground and may or may have plans for a pathway to get to scale,” he said.

“But now, caught potentially with this uncertainty, they might be caught in that middle ground and have to start looking at alternatives.”

He said he was watching the Wayward/Batch partnership with interest.

“This is a good example of that, but there’s many discussions going on around this country that I’m aware of that where people are looking for smarter ways of working and producing their beer,” he said.

“And yes, partnering with GDA would have provided some benefits. But, you know, I don’t think it’s the panacea.

“I think we’ve all got to get in various ways, a bit smarter about how we do it, contract and I don’t think there’s anything wrong with shrinking.

“I think that breweries might come to realise that rather than be stuck in middle ground, it might make more sense to contract, either for a little bit or for forever.

“I think everyone’s kind of really looking at their business model and going, “what’s the best one for us?” Because I think if you do nothing, particularly in uncertain times, you might come to rue the day that you did make that decision.”

Looking forward

Jeffares said the company was looking to protect what it had built in Melbourne, and was looking back to its pre-sale plans.

“Given what I think is all this uncertainty over the next 12-24 months or so, we just felt it’s smarter for us to focus on what we’ve built in Melbourne, and what we know and easier to execute and defend in our own patch,” he explained.

“We’re really lucky, our venues are consistently strong performers for us. And that’s always underpinned kind of wholesale ambitions and growth.

“And I think that we’ve got a good offering and venues, we’ve got a great team across our business, and I think our offer is strong.

“I think that we’re, we’re pretty well positioned to weather the storms, whatever that whatever they might be, and however severe they might be.

“We’re confident that venues are going to, thrive through any sort of period. But what that means to the broader hospitality industry, I don’t know.”

Premature announcement

Jeffares noted that being involved in a deal with a publicly listed company had put both companies in a position of announcing the deal before it had actually been signed..

“The real unfortunate thing is that it had to be announced, the initial deal memo, had to be announced in August.

“As I’m aware, most certainly this was the case with [the sale of] GABS, is that we didn’t announce anything until the deal was signed, sealed and delivered.

“So, it was just unfortunate that it had to kind of wait a bit due to their duty of disclosure and the like, is that it had to it had to come out before it was fully consummated.”

Continuous disclosure provisions in the ASX listing rules and Corporations Act require listed companies to disclose price-sensitive information on a continuous basis, or risk sanctions including fines.

While the agreement hadn’t been finalised when it was announced, Jeffares said there were no major issues that led to the termination of the sale.

“We were aiming to settle by or complete by November, and then got the process of just ironing out contracts,” he said “All the bits of the pieces of the contract just took a while.”

“There were no major sticking points. And, if there were any, we would just kind of get together and get through them. So there were no kind of issues on that front.”

Good Drinks declined to add to its initial media release and announcement to the ASX.

Since the announcement last week, its share price has fallen almost 8 per cent to $0.65.

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