Dereck and Diti Hales - Bad Shepherd

It was always part of the plan to put a brew in, but for many years it it was just a plan. It's a hundred percent acquisition of Green Beacon. No, we had a chat with everybody. Anyone would have seen this coming a mile away. Super simple and direct question.

And that's just what we're here to do, talk about beer in the brewing industry and have a conversation with the people who make the industry what it is and see what we can learn from them. And this week I speak with Derek and Dee Dee Hales from Bad Shepherd. In October, Bad Shepherd joined the growing number of small breweries that has sought to restructure through the mechanism of voluntary administration.

Last Friday, they proposed a deed of company arrangement to creditors, which was successful, seeing the business able to restructure its debts and continue to trade. In this very open conversation, Derek and Dee Dee discuss the circumstances that led to their decision to place the business in VA, how the business has run during and post COVID, and what the VA process has meant for them personally.

We also have a very frank conversation about where the market is, which will be of interest to every brewery. This is my conversation with Derek and Dee Dee Hares.

Derek and Dee Dee Howes, welcome to Beer's Conversation. Thank you. Thanks for having us. I I imagine well you're certainly looking a little bit more relieved than I imagine you were feeling last Friday, uh a as we record this. Uh it it's it's been a big uh uh well big is probably underselling. It's been a tumultuous time for you both. Yeah, you can't see the gorilla, it's gone. It's not there anymore. Uh yeah, it's probably been

probably the hardest period in our lives that we've had to face. And um, you know, getting to this point was uh months of conversation and back and forth and Lot of late night chat. A lot of late night three hour late night chats probably every night. Um but yeah we um we're here now so uh you know we're we're positively looking

Yeah. Well that's I mean uh i i it's it's a hard one to uh know where to start, but um i i if we do go back um a a little bit and just sort of tell us a very quick uh you know version of uh Bad Shepherd. Um, you know, uh for for for for listeners just to remind them where and how uh Bad Shepherd started. Uh yeah, so we started in twenty fifteen. Um

Back when there was only maybe uh there was only one other brewery in the whole southeast. Yeah, there were a hand handful of breweries and even less brew pubs. Um And uh, you know, Derek and I are both uh ex corporate. Um, so, you know, we did the whole uh I don't know what you call it, not a sea change or a tree change. Uh what what the what the I don't know what the expression is, but

We uh Yeah, yeah. We um you know, took a big risk, left our corporate jobs and sunk everything we had into opening this little brew pub in Cheltenham. So um, you know, it was fantastic, I guess fast forward probably until covet hit and and that's where Things.

you know, started to change and and fast forward again when covet ended. Um So, you know, I guess we got to the position that we're in as a as a covet hangover. Um so during co so we were on a a real growth trajectory. The first so we opened twenty fifteen in the first five years we ran in the block and we reinvested all of our cash flow for growth. um expanded our capacity massively. Um we originally shared the brewery and then we

took over the whole brewery ourselves and then we expanded and effectively doubled the capacity from there, added in a canning line. Everything was funded through cash flow. Um and, you know, our our patronage in our venue was a amazing. And we were booked out most weekends and Wednesday nights for our fifty cent wings. Everything was fantastic. And then um COVID hit and the wheels fell off. Um and we were

Yeah, we we had to cover everything we possibly could, but yeah. Yeah, so and I think, you know, during that period we made the decision to not let any permanent staff go. Um, so we redeployed where we could. We set up a online store, we had people delivery driving, we had people working the bar for takeaways, um

we had people drop down to um you know part time um just so we could retain our workforce. And we never let anybody go. No, no, not throughout that whole period. And obviously The brew pub was a little took a significant hit. A lot of our revenue was from the brew pub. Um But we saw, as I'm sure a lot of breweries did, growth in wholesale because people were buying packaged beer and drinking at home. So so we we experienced huge growth in wholesale. Uh

And then obviously I guess an important part to mention as part of our story is during that time the ATO offered relief, so to pause payments, which we did as I'm sure a lot of other breweries did during that period to be able to survive. Um You know, but there's only so far that that grace went and and JobKeeper as well. And the the math of that Um, geeze, I bet you can paint by numbers for every brewery out there on this, but um

The math of that was such that what we did is we had JobKeeper, which covered a lot of it. Um we still ran a loss, but um the ATO and and and banks um all provided um deferral of payments um for the lockdown periods uh We weren't uh we weren't leveraged, so debt wasn't a thing for us, but w for us it was with the ATO and and we um we had approval for d to defer our debts. Uh up until that point we'd always um

uh paid our liabilities uh uh for each lodgement immediately. We were always on time with everything, um with our suppliers and with um the government. Um post COVID Um we calculated we we managed to continue to defer our position um and we we saw the size of the debt that was building, but that debt um relative to the cash flow we were generating pre-COVID.

Um was still fine. Um and we were confident rather than reinvesting for growth, we were confident the cash flow that we could generate pre COVID. could manage the repayment size of that debt. So everything at that point felt fine. It was um for me, COVID COVID's a thing and I understand why all those decisions were made. It's the decisions post COVID, um around the industry uh around the world or the the the things that happened after that that

caused the real problem for us. We had a virtual lockdown um in right around the country, but especially here in Melbourne where nobody went out. And so we we had serious problems um in terms of cash flow generation. And then the industry retracted further. Um and um you know, i with inflation pressures and with retail uh lapping itself and crashing, there was some serious issues in terms of our ability to

Delivered to our expectations. Um, w so we went backward. Um and that made it difficult to meet the obligations that were um required from the deferral of debt during COVID. Um and it became untenable this year. And so we had to make a decision that we had to do something about

So you know, I think it it w we might just sort of go through the story and then I'll come back and touch on some of the things just s so we we can have that uh linear story. So I I think it was about five, six weeks ago, um, you y you reached the decision um to or you'd no doubt been speaking to administrators um before then. Um but when you went into administration, you know, what was the the financial position? I I'm I'm hearing that uh deferred ATO excise debt primarily was was a major

uh part of the the the the the debts that you carried into administration. How about your other uh suppliers and you know uh other debts? No, we were we're current with suppliers. So um we have always maintained currency with suppliers um from day one. We did have We did have to stretch the terms with a couple of main suppliers.

um in the period post COVID because of that retraction, but we had already recovered that by sort of around June, July this year fully. So we were um on and most customers, most suppliers are kind of on 30 days. Some are a little bit longer, some are a little bit shorter. But generally, it averages around there in every supplier when we went into.

um administration was current. So we couldn't accelerate payments. So otherwise that becomes a preferred payment and there's some rules around that. So um so the amount that we owed when we entered administration was just the bills from the previous week. So yeah, so so of course suppliers were caught up in the process and and that was recent purchase. That was unavoidable. Yes. Uh yeah. Yeah.

And last week you uh met with uh all of the creditors and proposed a deed of company arrangement. Uh m that that's something that is on on the record or will be once the The papers are filed. Uh can you talk us through what was proposed in in in the deed? Yeah. Um so what was proposed was a settlement of ten cents on the dollar. Um so um over twelve months. And to be repaid within twelve months. So um and that was um fully accepted by um the creditors and employees.

So yeah. And employees were heavily behind it, which is great news. So yeah. Was it unanimous? Can I uh can I ask that? It was not unanimous, no. Um that our our suppliers, so sorry, I I I've said it wrong, our Um suppliers uh were all one hundred percent unanimously in support. Um our employees. Um the ATO uh voted against the

You know, it i it it's a really difficult one in in in in one hand. You know, I I guess in in our industry we're dealing with suppliers and and please uh you know, correct me uh i i i if you don't agree with any parts of the statement slash question. Um, you know, it's an industry of people that's very, very supportive. Um the ATO, of course, has a has a job to do and it's got a very strong

uh policy background, you know, it has to look at government policy and things like that. It can't probably be as mindful of individuals when there is public policy to con to consider and I would imagine that there's hundreds of breweries in the country that are in a very similar position. Um uh and they're very much uh, you know, caught between a rock and a hard place of looking like, you know, government uh crushing small business. But on the other hand

You know, it it's it's public money that they need to to pr protect. Um you know, i i i is that a fair summary of the position that they were in? Or d d did you ag a agree that they were in a difficult position? Probably yes.

Speculating now without asking. Yes, no, no, no, of course. But I think that is a a a fair I mean assessment. Um I I can say, um, having spoken to a lot of breweries, I I know um you know, we're we're we're an incredibly inclusive community and we know each other and um you know, at BrewCon and and pre and post brew crone, I've spoken to so many breweries that all have similar challenging circumstances. Um and they do involve the ATO. So um so I think I think we can probably

I hypothesise that there's a long list there of breweries and yeah, th there's likely a precedent setting um policy that needs to be considered there. So um there was I was in one of the articles so I guess you know, out there. Um, I think was it ballistic where there's one of the articles around an administration process that mentions the ATO in that circumstance? voted against um and I think it specifically talks to that they were They didn't want to set a precedent or they were trying to

Yeah, w we we covered that with ballistic and that w which is why I'm asking now because you know, I should sort of say that we haven't had any conversations, you know, um uh uh about this. Um so I'm I I'm pres making presumptions that you can correct if I'm wrong. Exactly. So So I guess what I my point is, you know, they've probably taken the same position with us um being a brewery. So I think it's a safe assumption, yeah.

So but um but the outcome of that is that um you need to win on both. So the way the uh a deed of company arrangement is um i is reviewed in in a creditor meeting. Um each em each uh creditor. So number is effectively like the United Nations isn't how small your nation is.

If you're owed a dollar, you have an equal vote with somebody that's owed a million dollars. So um, but then value is proportionate to how much you're owed. So you do have to uh win both votes. Um if not, then the administrator carries a casting vote, and in this case, the administrative voted I. Okay, so so in this case you had the majority of votes, but with the ATO being such a significant creditor

They we were unsuccessful on value. Right. Yeah, so successful on number, unsuccessful on value. And the tie and then the administrator breaks the tie. Right. Okay. Um

I d uh f for for breweries that are listening and, you know, y you've identified what I've also heard that there are a lot of breweries that are in very similar positions. Um Was it an option to try and negotiate, you know, payment terms with the ATO that that would have allowed it to be paid off, you know, over a a a a time that you could afford to? Um we tried. Ideally we did try. Um so their their public and private position is thirty six months is the longest they'll let you go.

And the challenge is thirty six months um of payments exceeded the cash flow generated from a profit now. And that's back to that whole thing of we we forecasted that we could do that if we had pre COVID numbers and then when we didn't um then that was no longer tenable. Um and so they have been unwilling to flex on a thirty and you think about it, if you have a large

debt of any sort, to pay that off over thirty-six months is is incredibly trying. So um unfortunately that's just um it's a policy that hopefully gets reviewed. Um I know that the IBI are lod lobbying to try to have that. changed but um as it stands right now that was we tried, um and it it just wasn't wasn't an option. So so we tried um I mean, there's a lot of levers that we pulled before deciding to enter. administration. So

We did try renegotiating payment plans. We proposed we we were confident we could carry it over seven years. Um and we proposed seven years um and they rejected it. And and we probably, you know, and even over five I think we We could have over five, but they wouldn't even have a conversation. Yeah. Um then we also tried negotiating directly with them. Um and that

uh that was a bit of a Hail Mary. Um we we had been advised that in the past and during COVID the ATO were open to a n direct negotiation, um, but that was in different industries. Um so not in now in distress. We um I I I I don't know if this is gonna have his phone ring off the hook hook, but Matthew Bridgham um supported us in looking at alternatives and who's he? M um he's a tax lawyer that's a sponsor of the IBI. Yep. Um he did a talk at um Brocon. Uh right, yes.

we engaged his services to try to ultimately we were just trying to facilitate a conversation. Um we wanted to speak to somebody and because it it feels like it's a faceless entity and ultimately it's run by humans as well. And, you know, we wanted to just have a conversation and uh w we're un un unlucky or uh uh uh unable to uh to arrive at that.

So um but um look Matthew's incredibly um astute and um I'll throw him uh a bit of a plug here, I think, if and if any breweries out there are looking for advice or support in this area, he's very knowledgeable. Um And he understands avenues to try to navigate. It we were unsuccessful, but he's um he certainly knows uh what he's talking about and he's a and he's a great resource to lean on.

Hindsight is twenty twenty and you know, I'd I I I constantly look back at the start of COVID, you know, that March twenty twenty. period where no one knew um what the future held and no one would have predicted what the next two, two and a half years of lockdowns, particularly Melbourne uh w w w w would have been and, you know, e even I I think government uh the the money that the government ended up providing wasn't expected at the start and everybody was very nervous and anxious.

Do you think but a and and given that, um do you regret having put the uh tax on on pause given that it sounded like you still did get uh you know a bump in trade? It's a good question. I I think'cause you know, in the end, um what we did at that time, we did run cash flow mildly positive, um and we continued to reinvest as though we would be fine on the other end. So

would we have made different decisions, um, and perhaps retracted, battened down the hatches, and been a lot more careful of the time? Possibly. Um but In the end I think you have to trust anybody at their word. And you know, the word received at the time was this is okay, you need to pause and and the challenges you know, um on the other end of it we know That it would retract.

It's a really an impossible question to answer. I mean there's i you know the I should say and I don't expect you to I I I I'm just interested because, you know, again my m my gut reaction is if you're in a on on a ship surrounded by icebergs and someone offers you a uh lifeboat You take the life by it even if you don't think you need it. Yeah. Absolutely. So so I mean I guess short answer is we probably would have done exactly what we did because we're still

the same people with with the same thought process. It was important to keep everybody employed. It was important to us to um continue to try to see this stay open and and manage our dream. Like that none of that changed. So I think, yeah, if somebody threw that life preserver at me I'd still take it. I I think Yeah, you you you know, wasn't

Maybe it should have been buyer beware, but like Yeah. As I said, it's it's it's a hindsight question, you know, and I I the the uncertainty that took place during twenty twenty one. Look look I think you know, I don't think we would have done it.

Differently because it was you sort of have to have a level of optimism that you know, that things will go back to normal and things will change and we're not gonna be operating like this forever and you know, I mean, obviously no one could have foreseen Melbourne lockdowns being as severe and as long lasting. I mean, it w it was pretty much two years. Um for us. So w with a few you know, a month here and there that we were open. Um, but yeah, it was it was very intense in Melbourne and um

Yeah, I just think, you know, we we probably would have made the same decisions. Yeah. Um I think we would've going through it again because, you know, you We may have I I think what would have changed maybe changed, Matt, is we would've reacted faster when the in when the industry retracted. I think that Yeah. And I think I I think we all had that issue where we kinda thought, well, this is just a bit funny, it'll go away and it didn't.

Yeah, th th there was a lot of oh it'll get better. It's gotta get better. It'll get better And it didn't. And and and we might come back to that, uh how how the market's gone. But the the the the reason I asked the hindsight question was because, you know, it

There a a lot of conversations around these topics take place offline where people don't want to sort of say it. And uh it's the same with things like equity crowdfunding where breweries that elect not to take what I call the free money of equity crowdfunding. um, do sometimes feel resentful to to the ones that do because, you know, it it

For better or worse it provides envy. Hey, we have envy on that. Yeah. Absolutely. And because it's there's a competitive advantage in taking money that you never have to account for, you don't have to pay back. um to to give you business. And that's where, you know, I've had a couple of um brewers comment who who made a different decision to you and, you know, th they don't criticize the decision, but sort of now feeling well, you know, we paid our tax and we don't get the

the the the the free run, um that, you know, others may get. And uh and uh you know, I d I I I I I guess It's one of those things that depends on the decision that you made. If you made the decision to pay it, think uh that Yeah, I mean free run is an interesting choice of words because you is not well, that's at someone else's

money expands like it's Yeah, somebody else has funnel funneled that who will uh the cult space spade, they're never gonna see that money again. You know, so that's so that's just another another source of taking it from somebody else. Yeah. But no and I but I was talking about the excise that uh, you know, businesses that paid their excise made the decision to for whatever reason pay it d d despite not Uh having two. Um and I'm not sure. Yeah. Yeah. Well I I think at the time we felt

you know, it was that uncertainty, we probably felt we weren't gonna make it if we didn't defer. And we felt confident looking at, you know, however many years of forecast and history having gone before that things would return to normal. I mean there was a sense that, you know, everyone was busting to get out of lockdown and get back to normal life. Um but then a a lot of other factors happened that didn't

See that realized. So and I think you probably gotta look through the lens of each business and how they're structured too, right? So because if we were heavily production based, I think we would have made that decision differently. Yes. So being you know, we are very reliant on the turnover and our brute pub. It's a s it's a huge part of our business. So

for us to make decisions to keep people employed to manage all of our insurances, our leases, everything else that are around a business that is closed. And yes, it's getting job seeker, but other than that it's it's not getting any support. So To run those losses without making structural change at the time, we had to make decisions that would probably be different from a production focused business. So um I think. Yeah. I would agree with that.

Uh and and it it it's interesting, so looking at the uh uh again, I'm hearing a lot of brewers talking about post COVID and um um you you talk about the COVID hangover um uh a little bit earlier and Having heard and and n not not yourselves, but I'd I'd like to hear your thoughts um on uh you know

uh uh uh how would I describe it? Ass assumptions or, you know, um things that I've taken away from hearing uh a a number of other brewers talk about was when you go back to that uncertainty of um you know, March twenty twenty when everything was starting to close down and we didn't know and everyone thought that

You know, the the the sky was falling um and it was uh quite terrifying. But then as you've identified people with pubs closed, uh you know, most breweries didn't have a hu most small breweries didn't have a huge presence in in breweries so weren't as affected and then got a real benefit

in a lot of ways and certainly as the the the wholesale of cans, anyone who could get beer in cans'cause people still wanted to drink and they had uh there was a lot of money in the economy to to fuel um that that purchase. Um And we did see uh businesses. find a trade to balance out the the loss of other revenues and at the same time

you know, businesses and including mine, the the the job keeper revenue was unexpected and a huge assistance and a few other bits and pieces along the way. And I know that I found myself looking at

the times and thinking, gee, this isn't as bad as I thought it was going to be. Um imagine what it's going to be like when we go back to normal trade, forgetting that there was a very you know, w we were given a very firm safety blanket in some ways um that wasn't really real um in in in i in the times.

I I I've heard some breweries have made business decisions based on that, thinking that it was only going to get better um post COVID, you know, not accounting for the fact that COVID was actually uh supporting their businesses in a way. W was that something that you guys found yourselves? Yeah, we yeah, yeah, i it it was an illusion, right? So we had we were around fifty to hundred percent growth year on year in our wholesale business. But th they were big numbers, you know, so

Um and it casts us up the tiers and the IBA kinda grade. Like we we started sort of a poop up and we were up and, you know, kind of the higher tiers, not the highest, but w our our volume went up rapidly. Um and you know I think it's natural to expect that you'd just continue some sort of growth but the sh growth would shift to on premise. Um that's

And you'd retain most of your retail. That's kind of I think a logical assumption you have. But then the retail just crashed and you obviously we got some draft because places opened again, but it wasn't to the level we expected. So then you're kind of caught out. And the other thing is I think breaking down i it it's a hard one to kind of cast um a a brush all the way across when you look at those steps. So here's a good example for us. uh in mid twenty twenty one

um we made the decision to renovate our place. And that came at quite a cost. And at the time, again, using our cash flow, so this wasn't us using the ATO as a as a bet. But rather at the time we had been open for a few months. Um trade was looking good. Um we had a need for change in renovation, so um we planned four one um and we Engaged a builder, made a 50% deposit on a$300,000 bill, and a week later we went back into a lockdown for the one for another three months.

Um and at the same time, JobKeeper was phased out. So suddenly we're wearing losses all over the place, and we'd made a commitment that.

there was no way out of that anymore. So, you know, y now we have to carry that and see it through. There's there was no alternative. So and I'm sure we're not the only ones that just made normal business decisions during a really difficult time frame that, you know, and maybe in hindsight, maybe that was the wrong one, but it it felt right and it felt right best on our forecast and what were our expectations were.

You know, um you don't always get'em right. Um and that's unfortunately. And then we didn't know another lockdown was coming. We didn't know they were cutting out job keepers at the same time, and you know, so that's We got cut out there. So All business is playing chicken with a future. Um, really is. Yeah. Now that you've you've had the business handed back to you, um you you you've still got money that you do have to to to pay back, um

Clearly. W what is the the the the plan for uh Bad Shepherd? Well, um on the DACA front, we're nearly already halfway eaten into that. It's our intention to try to exhaust that as quickly as possible. So um and we're confident we're trading profitably. So um that uh we're confident we will manage um so and effectively so um and then as a team um we Well uh can I answer this? I think we

we have an interesting decision to make and something that we haven't Do we? No. Oh we do. Okay. Surprise me. It's something that we haven't touched on. Um, which is something that we kind of talked about offline was I think it's something that we haven't talked about here is where a lot of breweries have been caught out um in the current environment is

ones that are our size, mid size. You know, we were poised too long. Yeah. I think if you're a small operator and you are fully s realizing the benefit of the three hundred and fifty thousand dollar excise relief, you're fine. Um, if you are large enough you're probably fine as well to absorb it all. It's I think the breweries that are in that mid tier like us that were about to grow, COVID happened.

we're we're not small enough that we can really see any benefit from the excise relief, but we're not big enough to sort of buffet the storm. We're we're we're caught in the middle. And, you know, I think we probably need to decide do we want to shrink to greatness or or continue to grow, invest. So, um It's an interesting position to be in and I think, yeah, Burusa our size are the ones that i probably if you were to sit down and talk to them, um, they're probably in quite a similar

situation than us. So, you know, next twelve months we're obviously focused on um delivering the Docker, um, fully getting out of that process. and then uh looking forward to Growing, probably. Um growing smartly. I think so. Cool. I I guess that that's a lens we need to look at. Yeah. It's it w we don't have any intention to shrink, but it's more it's the lens we need to be aware of. And and I think one thing we talk a lot about.

Um, an unintended consequence of the three hundred fifty thousand hour excise scheme, um, we believe is people breweries sheltering their the from the the factors at play right now and choosing to kind of sell just to that point or less. Um and then running an unrealistic prob profitability and probably not truly a profitable business. Um so it gets into a lot of those arguments that were probably out there fifteen, twenty years ago about wet tax and an abundance

of wine. So um and I think a lot of breweries will try to stay to that size and we're b well and truly beyond that. So we have to find a way to be smart about it. Um and to D's point, I don't know so much we we don't intend to shrink further in terms of our team or anything like that, but it's how do we manage tight field. So is it about shrinking by focusing on hyperlocally to get the best relationships and best continuity to grow from as a base? Is it

About um investing in partners around us? Is it about finding other alternatives to uh to amplify our growth whether it I I don't know what is a vertical vertical integration of things or what uh we need to think differently, um, given we're caught up in that middle place. And I think that's that's the hard part for us is we have to figure that out. We've got a bo we've got a chance now to do that. Um we do run profitably but um and it's a very tight, lean, engaged team, but we have to

Consider the fact we are in that muddy middle, um and we can't the way we're structured, we we have to be smart about playing in that area, I think. So yeah.

It I again I I think that's one of the most uh um insightful uh so s it's certainly something that I've been seeing, um, you know, whether i it it's excise and I was one of those who always counseled be careful what you wish for with excise because you don't know. There there's always the assumption that, well, if the government gives us this the rest of the industry will stay the same and we will just get the benefit of this three hundred and fifty thousand dollars. But of course

the industry changes around those things. We've seen a lot of a lot more uh hotel chains install breweries because that's kind of like a three hundred and fifty thousand dollar rebate check that they get every year and uh that's yeah cutting taps um that are available to to to the one time indies. Um and that's just one of the examples and as you said a lot of small breweries are set up just to

harvest the excise payment and not grow. Um w which is a very different business model than but priced as though they are paying it. And that's where for those of us that are paying it once we you're you passed your number

you know, w it's not a level playing field. And that's it wasn't meant to be for that. It was meant to be for I mean there's a lot of arguments about what would happen, the race to the bottom, but I mean the I believe the Nintendo The intention of it was to allow for investment in the in the industry in varying capacities, whether it's through people and technology, that sort of thing, but instead now people are using it as a safety net in a really tough time. Yep. So

You y you've talked about the industry retraction and the uh you know the the the wholesale changes that have happened. You know there was certainly a huge bump when people were in lockdown and pubs were shut. Has it gone backwards from the pre COVID baseline in terms of, you know, package sales? What what's driving that, do you think?

Oh I think it'd be a few things. So it's a bit of a perfect storm of things, I think. Well I mean right at the top to me is gonna be white label. Um, you know, so um the fact that um the major retailers um have been uncompromising in their attack on um optimistically taking advantage of the growing market in in um in this area. So um and you know, that that's a fair market thing. So and and good on them um for looking at it that through that lens. They should. Um yeah, we b

I think it's unfair in a in a free market to say you can't do that. Well they can. It that's so but the reality is that comes at a cost. That breweries are all gonna hurt with um with loss of um share of throat to uh white label beers that look like craft beer. Now there's an argument about whether they should look so much like craft beer in some circumstances, but it is a fair free market. I think there's that. I think um inflation is driving purchase prices um

to uh you know uh we're w despite our our kind of tumultuous period, our lager and pale ale have exploded in growth. And I think most birds tell you the same thing. Um so our mix has shifted heavily to lower cost alternatives. Um and I we don't get scanned data, but I would guess that a lot of there's a co there's a compounding effect where people then are also shifting to lower cost alternatives with major burrs again. So I think there's a price thing, I think there's white label.

I think there's um more healthy decisions. I think people are Uh healthy and don't get me started on on whether they're healthy or not. Yeah, yeah, yeah. Don't get me started. I think there's a shift, yeah, share a throat to um seltzers. Um and I think the breweries that actually th I I I don't know. I have a personal guess that the breweries that um launched and did seltzer very well in the last four years.

have been very different to every other brewery during this period. I think they've probably done very well. That's my my guess, but who knows. Are you guys ranged in the two major retailers?

Yeah, and look we have we have a great relationship with both. So like I I wanna be clear, that's just I'm just observing. I no no I again I just wanted to put there because, you know, on one hand you're identifying an issue, but then you're also sort of uh saying, Well, that's a free market economy. I've got a slightly different view. Um

Yeah, yeah. Well, I I have a view about when when you try to make yourself look a certain way. I think to vertically integrate yourself is fine. When you try to do it unabashedly trying to steal um what is the term when you when you take some when you take People challenge you over trademarks when you're um there's there's a term for that. When you passing off, yeah. I I feel like it's arguably passing off the entire industry when you when you go too far and you make it look like

Like I have a problem with that. I I'll I'll also say that the small brewing industry allowed that to happen. You know, ten years ago the A triple C came out and very strongly um gave very, very strong expectations around labelling and what was expected to be said. And yeah the you know, Lion and C U B certainly uh you know, picked up their socks and I think there was a lot of small breweries that were contract brewing, um, were very reluctant to do it because

uh it didn't serve their purposes and they actually opened the door to uh passing off. But that's uh again th that's my view. But uh It's it's true. I I just you know look Uh we we have a great relationship with with national retailers and and I'm respectful of the fact that they have

uh it's a free market and they can make the decisions they they want to and it's up to us to respond. But that's also uh uh uh again again not not drawing criticism, um again it's just an observation not a criticism.

That is one of the things that's changed significantly in the marketplace. I think every brewery that's opened um in i in the last twenty years opened in a market that they knew that tap contracts were an issue and Uh so so you're opening in a market with a certain fact situation that you have to either deal with or confront. The vertical integration where up to 25% of the products on shelves are of the major retailers being from the major retailers.

That is a new thing that, you know, um when breweries opened and were forecasting what market growth and the market that they could target uh was. that has been a significant change. You know, is it harder to to to get range locally and you know, I I I heard from Mighty Craft that they find that the, uh, retailers don't want to take any brands national, um

a at all, which was once a strategy for for the breweries of your size. Right. I think it's we're finding it's becoming a lot more locally based. Um and if you're going well, which Um we do go very well um with coals. We've got a a very strong distribution there. Um

if you go well, they're they're very interested in taking you statewide. Um and if you have a skew like our peanut butter porter is national with them, but that's because it's different. It's a unique bit, yeah. Yeah. Yeah. So um so it does very well for us just through high distribution, not probably turnover at the shelf, but h it turns turns over enough to be unique and and stay there. So um but um I think going beyond statewide for breweries our size or even slightly larger or smaller

I don't think there's gonna be a lot of that anymore. Um I think instead getting local distribution with um new limiteds, new cores, um doing things like that that rotate, um I think they're a lot more flexible, yeah. Um I just don't think it's suddenly you come and go I'm gonna get two thousand new distributions. I think you can get thirty, um with something

Pretty cool and they'll get behind it. Um you got you gotta engage'em and call'em a lot. They're very busy people. But I think you can get that. And I think they're looking at it. And that's maybe the lens like I said, we have to respond. I think we all need to look at it. Like we need to be um investing back in our backyard. And that's where to Didi's point about about shrinking, like

I think our responsibility is to invest back in the Bayside community of of Melbourne. That's where we are. And that's where we should be. People know us, people come into us, and we should be investing back in our own retailers and the and publicans around us. I think that makes sense. You know? Of course although and I I made a note, um, right at the very start of this chat you talked about, you know, when you opened

there was a handful of breweries and it's certainly a much more crowded backyard that that you're uh Yeah. There's probably twenty around us now. So we were there were two. Back then. So yeah. But that's okay. Look, not on this side. So on this side of the Napian Highway, what I like to say the good side, the good side. We're the only one. Right. So um

And we're the only brewery in in um in the whole city of Bayside. We're one of maybe ten in Bayside and Kingston, so um and within five kilometers of us and all the way to the beach, up and down, right through to geeze. Port Melbourne, really. It's we're the only brewery. So, you know, so and I think other breweries have that kind of claim too. So it's up to us to invest there. And there's a lot of touch points, a lot of distributions, a lot of relationships.

could be made, a lot of clubs, a lot of a lot of ways to grow locally more than trying to get ourselves on the shelf in Darwin. You know, like that's I I think that's gone, at least for now. I I think that's

It's probably the right decision by the retailers as well. So And how about craft beer itself? It's you know, I I I sit back and I guess I I describe myself as a professional observer um of the industry. I don't have you know, ties in the industry that, you know, i i if if you own a brewery

your focus is on the success of that brewery and you're on on on the marketplace because that's what what you're incentivized to do. And it one of the things I've always tried to do, even though I have advertisers and things, is uh

you know, tried to keep, um, of the industry but not in the industry. So I you know I have the the the the luxury of questioning um w w without having the internal dissonance and I I I I sit back and look at the twenty year um cycle of craft beer where it was a revolution against um you know similarity, you know, or or or sameness where every beer um w was basically lager of a certain flavour type, the branding um or the uh brand promise may have been a little bit different, but You know

people who tried who went overseas um and tried beers suddenly came back wanting those beers and it was a revolution against the fact that they couldn't get that. And we've seen you know, in an enormous um the the full product cycle um where now we have almost an exhaustion coming in from the from the amount of choice that we have. What's your view of

you know, where we are at craft beer, is there still an appetite for uh a growing appetite for diversity in beer styles? Or are we starting to contract back to what we've always seen in the German market, for example, where there's, you know, a small but valid selection of high quality beers that offer, you know, a a bit of flavor diversity for others.

I think if you look at what's happening with our sales and our portfolio mix and what's performing well and what isn't, I think it's the latter. I think it's There was nothing you know the pendulum swing, yeah. You asked what happened with retail. The other one we didn't talk about was saturation of innovation. And I think, you know, we In everybody I'd tell you. This probably won't they probably won't tell you completely. It's a bit of a dirty secret I guess. But um

in the past eighteen months we no longer sell out a tank. We we announce it and it doesn't we used to jeez, five years ago if we we announced a beer, people were fighting retailers were fighting over and getting angry over them not getting a product, right? It was that high demand.

now we launch it and it's you know, retailers would be interested, they might take it, they might not, you know, and you gotta kinda gotta work for it. So I think um the saturation of innovation um and limited Um that did plateau. I think there's always gonna be a role for it, um, but I still come all the way back to I believe it's gotta be fresh, it's gotta be local, it's gotta be something um that you can have likely at the source um and from people you know and that you trust because I think

There's so many breweries and there's so many alternatives. I think launching limited that get you high turnover on high volume, I think that is gone. I think I think it's a roll, um, but I think it is To your point, probably more down the road of high quality, approachable core beers that from a brand you trust. And I think that's where gets hard though,'cause you already compete on cost right there. So but um but I yeah.

I I do think at least right now that's the future is um a regression to the mean a little bit. Um which sucks, really. But again, you have to go with what the consumers want, right? Like We didn't uh it's a passion, we got on this'cause we love it, but you also have to like if you only want to make the beers you don't be a home brewer. You know, so you have to balance it. We still make peers. Part of our strategy going forward, we used to do two um launches a month. Now we're doing uh one.

Um and a smaller volume. Um that's on purpose, you know, and it's selling out and which is good. And it's got and it's fresh and it's tasting great and that's so that's where we want to be. That's that that that that place that we can build from, again. Well, I

More than anything I'm I'm just uh mindful of the time and uh that it that it is the Melbourne Cup uh public holiday that you've uh uh uh uh allowed me to take a little bit of time off. So I will say, well you know, i i it it sounds like there's a interesting and challenging future but Bad Shepherd survives, um, to to to tackle uh you know, that that uncertainty and play chicken with the future.

Yeah. You know, I I'll I'll add one thing too that um I'm sure that there'll be lots of breweries um listening to this, um, is there are alternatives and don't be afraid to have the con This might not be it for you. It might be though. Financial restructuring can be an alternative. So can crowdsourcing, so can investors. But speak to people that have knowledge. Um, get answers. Don't be afraid to tell the truth. Don't be afraid to

have conversations that are tough, um, and get into the the the ugly part of it because um ignoring it is worse. Um we're all in it together and Um and you know, anybody wants to call me, uh I I'm happy to have more conversations to help lead and and talk about things I learned, you know, um and um and I know D's the same and we're all

We're all in this together and we're incredibly supportive industry. It's I had over eighty different um suppliers and breweries contact me in the past four weeks offering us support. Like that's that's an incredible thing, you know. So Something to just um keep in mind, just ask the questions and get support. Don't don't ignore it. Great advice. Derek and Didi Hales, thank you very much for being part of this conversation and uh all the very best for Bad Shepherd. Thanks, Matt. Thanks, Matt.

And that was Derek and Dee Dee Hales, and I thank them for being willing to engage so thoughtfully in a very difficult discussion. We'll be back this Thursday with our look at all of the news of the week. Thank you for listening.