Why Victory Brewing went Wall Street

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The story is familiar to Philadelphia-area beer drinkers:Two fifth graders named Bill and Ron meet on a school bus, become fast friends, grow up together, learn to make beer, and many years later open Victory Brewing in an old Pepperidge Farm bakery in Downingtown.

Tales like these are part of the hagiography of craft brewing, a backstory that distinguishes Victory Helles Lager from Budweiser, that helps explain why you should pay more for a beer made by small-business entrepreneurs than the cheaper, mainstream brands that dominate the market.

But what happens when that story takes a twist? When the down-home craftsmen go to Wall Street?

Those two kids – now 50-something business partners Bill Covaleski and Ron Barchet – are going to find out. This week, they announced a not-unexpected deal to join New York’s Southern Tier Brewery in a unique partnership that will be managed by a Manhattan private equity firm.

I say it was not unexpected because, if you asked Philly beer insiders who’d be the first local brewery to make a deal, the answer was always Victory. That’s mostly because of its size: It was the area’s second-largest brewery (behind Delaware’s Dogfish Head), making it a ripe acquisition target for anyone seeking a quick share of Philadelphia’s craft beer market. But it was also because Victory has a reputation for innovation and growth, whether in expanding its wholesale distribution network or in building new brewpubs and production facilities.

In its first 20 years, Victory could depend on the promise of double-digit sales growth to underwrite its need for capital. When it needed cash, as in the case of its construction of a brewery in Chester County, banks were eager to lend.

But the craft beer landscape is changing rapidly.

A dozen other small breweries have been bought up in the last 18 months by the likes of Anheuser-Busch InBev and Heineken. The industry was rocked when Ballast Point – a San Diego brewery about the size of Victory – sold out to a Mexican beer importer for a stunning $1 billion.

Meanwhile, larger Western breweries – including Sierra Nevada, New Belgium, Oskar Blues and Lagunitas – have moved eastward with second facilities.

With more than 4,000 breweries competing for tap handles and support from wholesalers, Covaleski and Barchet realized they needed to grow even bigger, and fast, or they’d be left behind.

The pair had suitors willing to hand them cash (they won’t name names), but that option left a bad taste.

Covaleski said he didn’t want to “turn to our employees and say something like, ‘Hey, the same guys who brew Coors Light are now calling the shots here. ‘ “

Barchet added: “I’m sure a strategic partner could have delivered money, but at the same time we were very concerned about our legacy and our brands. I wanted to feel good about going into a supermarket, buying Prima Pils in five years, and not worrying whether it tastes the same. “

Victory opted instead to accept money from a private equity outfit in New York called Ulysses Management that already owned a minority stake in Southern Tier. Together, they formed a holding company, Artisanal Beverage Ventures, that now owns both Southern Tier and Victory.

Private equity is not without its risks because it leaves the founders with less control over their companies’ future. The quality of Vermont’s Magic Hat, for example, has suffered greatly since its private-equity parent was sold to a Costa Rican-controlled brewing conglomerate.

The greater threat, though, may be to the company’s story.

Each bottle of Victory beer is printed with a message and the signatures of Bill and Ron. It’s their personal trademark, one that – despite the brewery’s considerable size – makes it seem Victory has a personal relationship with everyone who drinks its beer.

Now, with their holding company under the leadership of two former Anheuser-Busch execs, could Victory’s big-money deal damage that image?

The initial reaction on social media has been mixed. Some beer enthusiasts are worried about the New York influence on their local beer; others are supportive and taking a wait-and-see attitude.

“It’s a concern, for sure,” Covaleski said. “But people should have 20 years of confidence in the way we manage a company, that we are focused on quality and innovation.

“There’s no reason for us to crash our most important creation ever. “

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