Gage Roads shifts focus to craft beer

Gage Roads Brewing Co has reduced its supply to Woolworths amid an operational overhaul focused on the craft segment.

Western Australian brewer Gage Roads Brewing Co has struck a new distribution deal with its biggest shareholder, supermarket and liquor giant Woolworths, that will see a 15 per cent reduction in beer supplied to the retailer to allow Gage to devote more of its precious amber fluid to higher margin craft beer.

Announcing a new supply deal with Pinnacle Liquor Group, a subsidiary of Woolworths’ extensive liquor operations, the publicly listed Gage has also unveiled an operational overhaul of its brewing business that will focus on its growing and highly profitable craft beer activities at a time when consumers are increasingly turning away from commercial beers.

Gage managing director John Hoedemaker said the macro environment of the $14 billion Australian beer sector supported a shift in focus back to Gage Roads’ heritage and core competency – the development and brewing of quality craft beers.

“The overall beer market is slowing, primarily due to the decrease in volumes in mainstream beer sales,’’ Mr Hoedemaker said.

“In contrast the higher-value craft beer sector has been improving year-on-year, as Australia’s tastes evolve and become more accepting of beers produced by smaller craft brewers.’’

Under the new deal with Woolworths, which has a 25.3 per cent stake in the ASX-listed brewer, it has executed a three-year extension, with a further two-year option of its supply and distribution partnership. The agreement provides a steady reduction of supply of contract beer to Woowlorths from 2017 to 2019, allowing Gage to prioritise the supply and increase distribution of its higher-margin craft beer.

Woolworths chief executive Brad Banducci is a former director of Gage, which is ranked as the sixth-biggest craft brewer in Australia. Its beers, sold under the Gage Roads branding, include an IPA, US-style pale ale, a Czech-style pilsner and European-style lager.

The minimum volumes of beer sent to Woolworths will be 1 million cases in 2017, falling to 950,000 cases in 2018 and 850,000 cases in 2019.

“Under this agreement we maintain certainty over volumes through the continued support of Pinnacle (Woolworths) while also providing us with the scope to pursue our strategy of growing Gage Roads’ higher-margin proprietary brands nationally,’’ Mr Hoedemaker said.

Gage’s earnings have suffered of late, posting full-year losses in 2014 and 2015, although a lift in craft beer sales helped it return a half-year net profit of $731,000 in 2016.

The brewer’s contract sales of mainstream beers have hit sales downturns of 30 per cent, which has dragged down Gage’s profits.

The craft beer market is growing at more than 16 per cent and now accounts for almost 9 per cent of Australian beer sales. This is against falling demand for commercial mainstream beer brands.

Gage plans to expand its marketing, invest in an in-house sales operation and target the rest of the retail market outside of its traditional partnership with Woolworths.