Not Wrong, Just Early: The Sequel

Possibly yet another sign that things are not well in the economy. Here's an inside scoop from a popular Midwest brewpub.

Back in January, I shared my rationale for going long Molson Coors TAP 0.00%↑ stock.

Portfolio Positioning: I'm Not Wrong, I'm Just Early

Paid subs can read that entire post for a refresher but the summary goes something like this:

• Inflation is high, craft beer drinking consumers will inevitably down trade in a high inflation environment

• Down trading would ultimately be bad for brewers with high product price points and good for brewers with low product price points

• Microbrewers, which have been taking revenue share from larger brewers, would be the biggest losers and some would even go out of business

• Declining competition from craft would theoretically be good for Molson Coors

Of course, being the walking contradiction that I can sometimes be, I’d prefer to see microbrewers succeed rather than die. Back in late 2020 when I still had a job and alternative investments were all the rage, I tried to allocate some capital to small businesses through platforms like Netcapital, Mainvest, and Republic.

Honestly, these investments did not amount to a large sum of money so I didn’t see much issue in doing it. There wasn’t really any equity ownership either as these instruments were mainly debt notes. But I liked the idea of providing capital to smaller businesses especially during the lockdown era. Unfortunately, things aren’t well with one of my small business borrowers.

The intention of this post is not to put this business on blast. I’m absolutely still rooting for this company to succeed but things don’t look great at the moment. For the Heretic Speculator paid subs, the following may offer some fresh insight into the current market for craft brewers. Additionally, one of the stated issues from the owner absolutely jumped off the page to me and dissecting it may serve as an additional insight for any of you who are running your own consumer discretionary small businesses.

Struggles at SBBW

One of the companies for which I purchased low-rate debt notes is South Bend Brew Werks. Over the weekend, investors received an update from South Bend Brew Werks with a proposed amendment to our revenue sharing agreement. The entire post is rather long so I’ll be sharing select quotes with a few takeaways.

Everything in quotes from here on out is attributed to Owner and Head Brewer Steve Lowe. Some nuggets I feel may be useful in gauging where we are in this business cycle:

I won’t beat around the bush – business hasn’t been great of late, and we are struggling to find the extra money to be able to make a repayment at this time.

Ouch. Lowe continues…

We started the year well, seeing an increase in overall sales from January through April at just over 18%. Unfortunately, those increases stagnated as we got into the summer, which is normally our busiest time of the year. Things began to take a downturn once we got into August. From August 1 through the first week of October, we are down over 13% and sliding into the slower winter months with cashflow issues that make it difficult to meet weekly responsibilities.

As a result, we are asking all of you to allow us to push back the maturity date of your investments to October of 2025, and to pause quarterly repayments for the next four quarters, to resume again next summer.

To put what Lowe is asking here into perspective, the debt repayment plan was originally supposed to mature in October 2024. South Bend Brew Werks is essentially asking to pause all debt repayments for a full year. I’m seeing additional anecdotes of October weakness felt in other industries as well but summer month weakness at a brewery is unusual. I think its telling. More from Lowe:

We are working on options in terms of cutting costs, trimming payroll, and finding other revenue streams. We began opening on Mondays last month, we added back canned beer as an option recently with the purchase of a new canning machine, we took part in DTSB’s Wine Walks and Summer Restaurant Week, and we are on month 3 of a digital and on-air advertising campaign with a local TV station. We have spent more on advertising and marketing this year than we ever have before.

So far, this hasn’t contributed to the extra sales we had been hoping for. Our Mug Club members and regulars continue to be our lifeblood and help us keep our doors open, but we don’t have much left over each month to do the extra things that make us us, like our Beer4Good donation program.

Bold is my emphasis. And it brings us to our second possible insight for you small business owners out there. The market spend ain’t working and they’re using a local TV station for their campaign. I have two takeaways on this. First, I understand the power of marketing and I can appreciate why South Bend Brew Werks is doing a multi-screen campaign. Where I think I can weigh in here is I actually have local media experience in South Bend. All I can say is, I don’t even know who I hope this local TV campaign is with and that should be telling.

South Bend TV Market

The Sinclair-owned SBGI 0.00%↑ station (WSBT) has historically been the local viewership powerhouse and I’d imagine that station has a greater ability to hold ad rates than its peers. There’s two ways to look at that. On one hand, WSBT may be able to offer better reach to its advertisers but that may not even really be beneficial to South Bend Brew Werks since craft beer might do better with a more targeted campaign.

The NBC-affiliate is WNDU. That Gray-owned GTN 0.00%↑ property is an interesting prospect because it’s sort of been in the middle of the pack from a viewership standpoint. However, I would not say Gray is generally well-known for being a digital-savvy company as it seems very committed to extracting every dime from the slowly eroding linear model that it can. Thus, I suspect any campaign with WNDU may skew too heavily to TV.

In my time in South Bend, the Weigel property (WBND) was kind of viewed as a joke but it’s been a while and a lot of the talent from my old station (which is now defunct after being sold off for parts) ended up over at WBND. It’s possible that station could be better today. The TV viewing component of any campaign is really just half the equation but it’s an important one. Digital advertising solutions are sort of like concentrated orange juice at this point. The point is, I’m curious about who South Bend Brew Werks did this deal with but none of the options actually seem all that encouraging.

To any of you who have your own businesses and find yourselves in a position where you’re spending marketing dollars with local media companies, these are things that I think are important:

1. Make sure you know exactly what your KPIs are. How are you measuring campaign success? Conversions? Are you buying ratings/impressions or programs?

2. If you’re buying programs, make sure there is clear data justification for that program. Meaning, there must be a provable affinity overlay between that program’s audience and the product that you’re selling.

3. You want CPMs to be low but you don’t want low CPMs to come at the expense of saturation. For instance, you’ll probably get a great CPM in a 5 am newscast but you’re limiting the amount of people who are going to actually see it if you just pile into that hour because the rates are dirt cheap. You get what you pay for…

4. Finally, give a campaign time to breathe. Especially with an on-air campaign which may take longer to produce results. If you need immediate results from marketing spend, you shouldn’t pick broadcast TV.

South Bend Brew Werks appears to be regretting its multiscreen campaign and it’s only been three months. Three months isn’t actually that long for a broadcast campaign. So I’m slightly hopeful the remainder of this ad spend can generate something for them but “debt investor Mike” has quite a bit of doubt. Because at the end of the day, even a good marketing campaign probably isn’t going to help them beat a recession. And that’s the real question for me. Is South Bend Brew Werks yet another signal that things are not well? Or is it a struggling business that is suffering financially from a poorly constructed advertising campaign? Tough to know for sure.

What we need to do in the short term is survive this winter, plain and simple. The hope is that with continued advertising we begin to see the increases we had to start last year and build back up to the levels we enjoyed in 2019 before the pandemic hit. But it won’t happen overnight. I consider asking for this pause in repayment as something of a last resort. My intention is to see that all of you get back your investment in us.

Narrator (probably): They did not.

Disclaimer: I’m not an investment advisor. I’m also not an expert in anything, especially not advertising or media research. I don’t own stock in any of the dead-men walking media companies mentioned.