Date: Thu, 18 Dec 1997 06:31:04 GMT Server: Stronghold/2.0.1 Apache/1.2.0 Connection: close Content-Type: text/html BIG ROCK BREWERY:CANADA'S LEADER IN A GROWTH INDUSTRY

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CANADA'S LEADER IN A GROWTH INDUSTRY

The past decade has seen consumer tastes leading a premium revolution in the food and beverage markets. From coffee to ice cream to wine, old brands have lost their market share to improved new age, new image products. A dramatic example of this change can be seen in the growth of the craft beer business, the only bright spot in a stagnant industry. We at Big Rock believe this segment is still undeveloped. In both the U.S. and Canada this segment only accounted for approximately 2% of the 1995 domestic beer market. It is widely believed this market share will grow to 10%.

This growth has attracted numerous entrants. Both the U.S. and Canada have seen a large inflow of capital from Initial Public Offerings. Big Rock was the first craft brewery in North America to complete an I.P.O. and obtain a listing on NASDAQ in the summer of 1992.

A recent American research report prepared by Hambrecht and Quist L.L.C., San Francisco, CA believes that this is a trend, not a fad. "Like the shift to varietal wines, specialty coffee, and bottled waters, we believe the shift to specialty beer is permanent and irreversible. Once a consumer switches to a more flavourful product, they rarely go back." It is, in their words "an affordable luxury."

Big Rock, with its soon to be completed ultra modern brewery, is in a strategic position to capture a growing share of this exciting new market. Among craft breweries it has achieved international recognition for its high quality and unique brands.

To maintain its leading position, the decision to build a much larger brewing facility was finalized early in 1995. As a first step, 14.4 acres of land in a newly developing industrial site was purchased from the City of Calgary. The new facility, including equipment from the existing brewery, will increase Big Rock's annual brewing capacity from 150,000 hl to 450,000 hl. This is the first major brewery built in Canada in a generation.

During the past year Big Rock has adjusted growth plans for many major changes.

In 1994, the Alberta Liquor Control Board privatized the retailing of all beer, wine and liquor. Prior to privatization there were just over 200 government stores. Now there are in excess of 700 liquor stores in the Province. The increase in stores required Big Rock to develop new systems for both service, delivery and packaging.

These numerous retail outlets have greatly changed shopping habits. Previously, a purchase of liquor was pre-planned and individual sales were quite large. With the large number of convenience or small stores the tendency now is to purchase for immediate consumption. This change favours smaller and more convenient packaging in both bottles and cans. Fortunately, Big Rock, at a time when the standard package was the 12-pack, converted to the 6-pack and will have cans in the marketplace by July of this year.

In 1995, sales of cans in Alberta exceeded bottle sales for the first time. This trend continued at an accelerated pace in the first three months of 1996 with a further 20% decline in bottle sales relative to cans. In spite of these changes, Big Rock's share of the Provincial package market grew in 1995.

Big Rock will add cans to its market line by early summer. It will be the first craft brewery to introduce cold, sterile filtered, unpasteurized beer in cans. This move is viewed with some skepticism by purists in the industry. We at Big Rock, however, have concluded that the advantage of cans -- lower shipping, packaging and handling costs, plus greater stability of the finished product -- will overcome any lingering image problem. In Europe, many of the traditional breweries have changed to cans since the availability of this new technology.

We believe, in view of the declining bottle sales, the introduction of cans will substantially increase Big Rock's market share.

 

 

Product Development

During the past two years our business has developed a new lower alcohol, lighter ale with 3.5% alcohol by volume. It is difficult to produce lighter beer with the satisfying full flavour associated with Big Rock beers. During the summer of 1995, we tested a 3.45% alcohol by volume (called Birdie Par Bogie) in draught. This product was very successful everywhere it was tested.

Recently, to replace our static Porter, a dark, 7.0% alcohol by volume, Black Amber Ale was introduced experimentally in draught and large bottles. This product has attracted an enthusiastic response.

 

 

Financing

An agreement to finance the development of the new brewery was finalized with the Royal Bank of Canada. This $16,500,000 loan was structured with an attractive fixed interest rate of approximately 7.5% over a five year term.

 

 

Distribution

Until last year, Big Rock relied on smaller distributors in the United States and other Canadian Provinces. Many of these companies were unable to finance and service the rapid growth in these varied markets. In the United States our original American distributor, Alehouse, the first company to recognize the growing craft beer business, was purchased by a national distributor, G. Raden & Sons of Seattle, Washington. We were sorry a long and friendly relationship with Alehouse had to end. However, G. Raden & Sons is now in the process of greatly expanding our market both in Washington and throughout the U.S.. We are currently in twenty-one states.

The changeover in various states, particularily California, resulted in partial interruption, loss of sales and long delays. Subsequently, G. Raden has successfully restructured the distribution network. Since the fiscal year end, sales to the U.S. are beginning to exceed previous monthly shipments. In Washington, where there was no interruption, sales growth since the Raden takeover grew in excess of 25%.

 

 

Construction

Cold weather, starting in early November, delayed construction of the new facility. Testing of the new brewery was planned for early May but has been delayed, and a June start up now appears probable.

I would like to thank all our employees and associates who have adjusted and coped with the many growing pains and difficult changes that occurred in the last year. The contractors, our brewmasters and technicians forged ahead under extreme conditions. Even when temperatures hovered around -30 F they continued their work.

The good news is that in the first month of our fiscal year, growth in sales again exceeded 15%. Initial reports from Ontario and the many new states where G. Raden & Sons have appointed new distributors are promising. Big Rock continues to gain national and international recognition and has developed plans to enhance this market awareness.

Although disappointed with the results, we believe the year of construction, market development and financing has provided the basis for solid long term growth.

Sincerely yours,

 

Edward E. McNally
President

This Annual Report
Financial Highlights | Report to Shareholders
Management Discussion and Analysis | Auditors' Report
Financial Statements and Notes | Corporate Information


Big Rock Brewery
5555 76th Ave S.E., Calgary, Alberta, Canada, Phone: 403-720-3239, Fax: 403-236-7523
ale@bigrockbeer.com

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