Last Orders

In the space of a couple of weeks around the end of March and the beginning of April, three of London’s craft-beer retailers shut up shop, one of its leading independent craft beer wholesalers entered liquidation, and its newest football stadium opened, complete with a microbrewery and taproom.

At the same time, the U.S. Federal Reserve announced that it would probably not raise interest rates for the rest of this year. Two weeks earlier, the European Central Bank had sent out a similarly “dovish” message, slashing its growth and inflation forecasts, committing to below-zero interest rates for as far as the eye can see and lining up a new package of emergency liquidity provision for the eurozone’s banks.

It has been 10 years since the world’s wealthiest economies were last in recession. If they manage to get to the other side of July without falling back into contraction, this past decade will have become the longest uninterrupted economic expansion in modern history.

All of these things are related.

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The tremors that struck London’s craft-beer ecosystem began on March 20, when The Beer Boutique, which runs bottle shops in Putney, Wandsworth and Tunbridge Wells, entered into a Creditors’ Voluntary Liquidation.

“When we first opened, there weren’t any specialist beer shops,” it says on the company’s website. “It was almost impossible to get a Belgian beer in London.”

Today, Londoners are much more likely to have a craft-beer retailer in their neighbourhood, not to mention a local brewery selling their own wares from an onsite taproom. They can get bottles of Boon Oude Geuze for £3.25 in their local Waitrose.

There is a We Brought Beer store a kilometre away from The Beer Boutique’s Wandsworth outlet. Or at least there will be for another few weeks. On March 27 the company announced that the shop would be closing because its landlord wants to sell the premises and has therefore doubled the rent. This is not exactly craft-beer saturation, then. We Brought Beer says it will maintain its stores in nearby Balham and Tooting. Nonetheless, the shadows of ultra-low interest rates, bubble-like equity valuations and the uncertainties of Brexit are discernible behind the decision to get out of London’s commercial real estate market.

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Arguably more significant than these store closures was the March 25 announcement that The Bottle Shop, one of London’s leading craft-beer wholesalers, would be forced to liquidate in mid-April.

According to founder Andrew Morgan, a successful crowdfunding round in 2017 was followed by the loss of two major suppliers, and recent efforts to find a deal to plug those gaps or get new financing have collapsed.

The crowdfunding raised £394,630 from a total of 367 investors—an average of £1075 each. To qualify for Enterprise Investment Scheme tax relief, that money had to be invested in fixed assets or wages and could not be used to support the company’s cash position. It appears largely to have been spent on the firm’s cold chain infrastructure, with a view to winning business from U.S. breweries that refuse to export without guaranteed refrigeration at all points in the distribution chain. Unfortunately, this seems to have substantially increased the firm’s operating leverage at a time when its high level of exposure to a small number of suppliers—one brewery accounted for 23% of the wholesale business—might have been mitigated with a more robust balance sheet.

This was an unenviable chicken-and-egg situation: the long-term security of the business depended upon the diversification of its suppliers, but that diversification could only happen with substantial investment in fixed assets. Now, those fixed assets will be divided up between the creditors, the crowdfunders’ equity will be wiped out, and a £5m business at the heart of London’s craft-beer ecosystem will disappear overnight.

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The failure of The Bottle Shop, in particular, raises the question of how much unsustainable operating leverage remains hidden beneath the surface of the U.K. craft-beer scene.

Over the past 10 years, short- and long-term interest rates have been suppressed and the banking system has tightened its lending conditions as it adapted to tougher liquidity and capital-ratio requirements in the wake of the 2008 financial crisis. This has led to a seething mess of risky investment practices, and arguably malinvestment, as enterprises have sought capital from outside the banking system and non-bank providers of capital have willingly advanced it in a desperate search for adequate returns.

This kind of disintermediation distorts financial markets. As the recent collapse of the London Capital & Finance investment company has revealed, many individual savers who have gone looking for a slightly-better-than-bank-account return have gone straight from cash to some of the riskiest investments in the market—in this instance, unregulated mini-bonds. That is an extreme case which may have involved criminality, a textbook example of John Kenneth Galbraith’s “bezzle”. But crowdfunding contributes to the malinvestment bezzle, too, because it is so often based on personal relationships or interests rather than considered financial risk taking.

Crowdfunding represents the pinnacle of a boom-time process that begins with investors forgetting about risk in pursuit of returns, and ends with them forgetting about returns in pursuit of their enthusiasms.

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Which brings us to London’s newest football stadium and its in-house microbrewery. This, surely, is the ultimate clash of enthusiasms, the final irrational exuberance of the late-cycle craft-beer scene, the malinvestment to end all malinvestments?

I don’t think so. In fact, I think this is part of a business plan specifically conceived to navigate the perils of the forthcoming downturn.

The football club is the newly-invigorated Tottenham Hotspur, and the microbrewery is an offshoot of its craft-brewing neighbour, Beavertown.

Beavertown is no stranger to operational leverage. At around the same time as it was negotiating with its local football club, it was also negotiating the sale of a minority stake to Heineken. It took advantage of the sky-high equity valuations that have resulted from a decade of rock-bottom interest rates and a red-hot leveraged loans market to realize a substantial amount of money. It is using that money to build a huge new brewery and visitors’ centre, “Beaverworld”. The important point here is that, while this is massive operational leverage for Beavertown, it is negligible for Heineken: Tottenham’s local brewery now has the backing of a multinational giant with a big stake in making sure the Beavertown business and brand gets through the next recession.

Against that background, the football stadium venture can be seen as a low-risk way to make the Beavertown brand more visible and accessible.

Founder Logan Plant is utterly unapologetic about that ambition.

“The partnership with Spurs offers us an amazing opportunity to get our beers into the hands of a new audience, the thirsty football fan masses,” he said when the project was announced last year, “which in turn gives us the ability to grow our Beavertown fanbase and aligns perfectly with our mantra of getting great beer onto every street corner.”

Every other week throughout the football season, Beavertown be exposed to a whole new set of thousands of away fans from every corner of England and Wales. Moreover, with Spurs looking increasingly likely to qualify for the 2019-20 UEFA Champions League, tens of thousands of those fans will be visiting from across Europe, many with little or no knowledge of Beavertown or the modern U.K. beer scene.

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This combination of financial security, scale and intelligent, unpretentious brand-building is the way to turn local ambitions into national and international ambitions at the top of a cycle. It is astonishing how rapidly Beavertown has grown itself into this position of strength and robustness.

Some dismiss this as “selling out”. But that is just a symptom of the fact that, after 10 years of easy money and non-stop economic growth, far too many people who are working, investing, commenting and consuming in the craft-beer ecosystem believe that ecosystem to be normal and sustainable. They have forgotten what a recession is like. Some were economically inactive the last time a recession occurred. If they can hear a bell ringing at all, they still don’t recognize that it’s the bell for last orders.

In short, this ecosystem is not normal or sustainable. It is saturated, over-leveraged and much more brittle than it appears. The cracks have started to open up. At the same time, the ones who will survive have reinforced their walls. Time, and the inexorable forces of the business cycle, will do the rest.

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