Why big distribution really matters and what smaller breweries can do about it

Southern Tier Celebrated their alliance with Victory
Brewing with this picture on their Facebook site

Jeff Alworth over at Beervana recently predicted that it's distribution that will drive beers future, using a somewhat alarming development to drive his point. He notes that Goose Island's Goose IPA's recent explosive growth rate of 260% , making it one as the top five nationally selling IPA's. Goose Island is owned by Anheuser-Busch InBev (A-B InBev), and accomplished this feat by largely leveraging there pre-existing distribution system, simply putting Goose IPA into the hands of more people than any smaller brewery could.

Personally, I find Goose IPA to be a rather underwhelming IPA compared to more national favorites like Sierra Nevada's Torpedo, Green Flash West Coast IPA, Deschutes Inversion IPA, and Lagunitas IPA. Go to rating sites like Rate Beer and BeerAdvocate and you'll find a similar story. Goose IPA rates well, but other IPA's with large, national distribution rate higher. It's hard to come to any other conclusion that Goose IPA's success is largely driven by the resources its corporate parent has to get it on more shelves in front of customers.

That's what makes makes all the recent "craft" brewery acquisitions by large corporate breweries a scary development for small regional breweries heavily dependent on retail sales. How can smaller breweries fight back? Well, they can join forces and get bigger. That's just what eastern regional breweries Victory Brewing and Southern Tier decided to do, effectively merging as Victory Brewing was brought into Southern Tier's parent company, Artisanal Brewing Ventures.  On their own, each brewery was a strong regional brand, with both ranking around 30th in size by the Brewers Association.  (Victory was a little bigger than Southern Tier before the merger.) Combined, they now rank as the 15th largest breweries craft brewery, with an annual capacity of 250,000 barrels a year.

Expect to see more of this. Brewing involves many economies of scale, whether in sourcing materials, investing in brewing, bottling and other production equipment, and of course, distribution. Brewery consolidation is inevitable and don't be surprised it the merger and acquisition frenzy of smaller breweries joining forces becomes every bit as intense as what the big corporations have been up to these days.
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Thoughts on fears of a "Beer Bubble" and why we probably won't see one

People still kick around the idea the craft beer might hit a bubble.When I say "bubble", it's about a concern that somehow, all these new and growing breweries might somehow fail. During the dot-com bubble fifteen years ago, we saw so many Internet based firms proliferate and spectacularly flame out. With the housing bubble, we saw housing prices increase and housing construction reach a crescendo, only to screech to a halt as the easy credit fueling the market became unsustainable. So it's not too unreasonable to look at the exceptional growth of breweries in American, couple that with our experience of previous bubbles, and conclude something similar could easily happen in the brewing industry as well.  On this, I have a couple thoughts to add.

There is psychological side to these beer bubble concerns. For such a long time in the United States, there was only a handful of breweries. We're just not used to seeing so many breweries in operation which can cause us to think something can't be right and all these breweries simply cannot be sustainable. I used to think this way myself. Those thoughts ended for good last fall when I visited some friends in Bend, OR, a town of only about 85,000 easily supporting more than ten breweries.  Yet, when I went to the local grocery store, I noticed plenty of people rolling through the check out line with stuff like Bud or Coors's Light in their carts. Given all the crowded brewpubs all over Bend while there were still plenty of people who could still convert to craft beer consumers, in no way did the craft beer market in Bend seem saturated.

The more you think about it, the more it makes sense.  Breweries like A-B InBev sell beer by the millions of barrels. That's a little less than the annual output of Sierra Nevada.  Ten brewpubs, each selling just a few thousand barrels of beer a year is still pretty small fraction of total beer sales in city of 85,000. The market can easily absorb that many small breweries and certainly a few more.

The second thought has more to deal with mathematics. If there will be a bubble, it will depend a lot on how fast the growth of craft beer's market share declines. Right now, craft beer is growing at a rate of 15-20% per year. Given that craft beer is only about 11% of the overall market in terms of volume, these torrid growth rates are actually sustainable for a number years.  But of course, they cannot last forever.

How will all this growth end? Will it be a gradual decline as the adoption of craft beer slowly reaches equilibrium or will things just hit a wall when everyone is converted to craft who can be and the rest of the market stubbornly sticks to their macrobrews?  This matters because a lot of future growth is built into the beer industries. I don't need to tell you hundreds of breweries are coming online each year. But more importantly, lots of established breweries are investing in major expansions. As more money is being invested to produce more beer, if the market demand suddenly stopped increasing, it could no longer absorb all the beer produced by this expansion. People who paid a lot of money based on future expectations could find themselves in a lot of trouble if they could sell enough beer to pay off their loans. That's how bubbles happen, folks.

My take is when craft beer's growth rate inevitably slows, it will do so at a rate that breweries can adjust to.  Suppose in 2016, the growth rate is 15%, and then in 2017, it's 12%, with 2018, 2019 and 2020 respectively being 10%, 8%, and 6%. Breweries will have time to reign back in their investments and adjust to changing market realities. On the other had, if the growth rate in 2016 is 15% and then it drops to 3% in 2017, there will likely be a whole bunch of extra unused capacity with costs and lost opportunity that could cause some breweries to fail.

My guess is that we'll see the former scenario rather than the latter. Habits like beer drinking tend to change over years, not overnight. Craft beer isn't some new fad, it's been around arguably for fifty years, and started becoming firmly established 20 to 30 years ago. As such, craft beer isn't going anywhere. While breweries will likely see more a more difficult business climate moving forward than the current go-go times and breweries will fail as any businesses do, the idea of a devastating craft beer bubble seems less and less likely. I certainly hope to be right.

The Session #75: Putting on My Brewery Consultant Hat

For this month's Session, Chuck Lennati over at allbrews asks us to weigh in our thoughts on the success and failure of breweries.  Which makes me think, maybe I should ditch my day job and become a Brewing Industry Consultant.  After all, I do have plenty of qualifications for the job.

I drink beer.  I read about beer. I talk about beer.  I write about beer.   And every two or three months, I try to brew beer in my kitchen.  Some might quibble with the fact I have no actual brewing industry experience to be brewery consultant.  But when has something like that stopped any consultant from collecting a check?

So without further ado, allow me to put on my consultant's have and give you my three rules for any aspiring brewery to follow

Rule #1:  Develop a flagship
Beers like Sam Adam's Boston Lager, Sierra Nevada Pale Ale, and Anchor Steam have become ubiquitous.  They may not be the sexiest beers in these breweries portfolios, but lots of people who might otherwise have a Budweiser try them now and then.  Flagship beers pay the bills.  It's not uncommon for a brewery to earn 75% of their revenue from their flagship.  Any brewery that establishes popular flagship beer that is drinkable, yet flavorable and consistent with the brewery identity is going to do well

Rule #2:  Budweiser is not your competition, Sierra Nevada is
Or Sam Adams. Or Lagunitas.   Or that great brewery just five miles down the road.  Sneer all you want at Blue Moon, lots paying customers don't give a damn about contrived "crafty vs craft" debates and happily drink Blue Moon, so that's your competition, too.  I still see new breweries positioning themselves against Budweiser and other light industrial lagers.  Maybe that worked five years ago.  The bar was raised considerable higher than that years ago.

Rule #3: Honestly address the shortcoming of your business
Despite the rising popularity of craft beer, I know of couple breweries that failed in the past couple years.  In my opinion, the problem was they simply didn't see obvious problems of their business and correct them. 

Mayfield, which specialized in high-end barrel aged beers, failed a couple years ago. 
I remember speaking with the owner a couple months before it all went south.  He was a very smart man with a Ph.D. in Molecular Biology.   He talked about deep subjects like "winery business models" and the historical context of his beer's sophisticated flavor profiles.  There was just this small problem.  He was charging a whopping $40 a bottle, over twice as much as barrel-aged offerings from well regarded breweries like Firestone-Walker and Russian River, and in some of his beers, those sophsticated flavors really clashed.  Any 5th grader can tell you that's a recipe for disaster.  And it was.

Another brewery that failed recently was Buckbean Brewing from Reno, NV.  I know less about this brewery than Mayfield, but they were relentless marketers and also aggressively expanded their distribution.  They sponsored CanFest, a canned beer festival.  When Buckbean closed,  a lot of people speculated it was due to the rising costs of hops and grain, over-expansion, or other complicated industry factors. 

Actually, Buckbean's real problems were fundementally different than that.  The beer sucked.  I tried a four-pack of their red ale and was overpowered by phenolic off-flavors.   Plenty of reviewers on RateBeer and Beer Advocate recognized the same problems.  Apparently, lost in all of Buckbean's aggressive marketing is that the product has to be made competently for the marketing investments to pay off.

I have to think that if Mayfield and Buckbean honestly recognized their problems and confronted them, they would be around today.  Mayfield tried to intellectualize away a serious pricing issue.  Buckbean seemed to sweep serious quality issues under the rug of marketing.  The truth caught up with them.  So perhaps my advice to anyone wanting to start a brewery, or any business for that matter, is look yourself very hard and honestly in the mirror.

It's Not Looking Good for Mayfield Brewing

I can now admit to having a bit of sick feeling while writing a recent post on Mayfield Brewing for The Session. This sickness was due to a nagging suspicion the brewery was going out of business. The week before I posted the article, I wanted to do some extra research for the article at Mayfield's usual open house, held monthly on the last Friday of the month concurrently with Devil's Canyon Brewing's much larger Beer Friday just across the alley of the small industrial park in Belmont, CA both breweries call home. Everyone was having at good time over at Devil's Canyon, but Mayfield was all closed up, with a new "For Lease" sign covered the top of Mayfield's building. Now this sign could have been intended for any of the units in that industrial park, but it did looked a little ominous up there over Mayfield's loading dock. I sent Mayfield owner John Alderete an e-mail asking "What's up?" and didn't get a response. Hmmmmm.

So I thought maybe he was just on vacation that month. Alderete had talked to me the previous open house about transitioning to a "Wine Club" business model, and so I rationalized this this might have been part of that transition. But now their website has nothing but a boiler plate "Under Construction" graphic and Alderete hasn't responded to another e-mail about what's going on, and it's pretty hard to come to any other conclusion than Mayfield Brewing is in pretty serious financial difficulty, if it hasn't completely gone out of business. I certainly hope to be wrong.

You never want to see anyone fail, and Alderete clearly had the passion for beer everyone in the craft beer community shares. The ever present elephant in the room at Mayfield was the very high price of their premium beers, aged for several months in used wine barrels. Their $30-$45 price for 750 ml bottles was way above what most breweries charge for similarly barrel-aged and special releases, and I'm afraid not everyone who tried his beers felt the taste justified this pricing.

Now I gladly paid $30 for a recent vintage of Mayfield's Noctura Imperial stout, a sensational brew with wine, vanilla, smokey notes mingling with the ale's very rich, complex roasted malt. But I didn't feel the same way about Mayfield's IPA and Alt-style offerings, nor was I alone. Aged in red wine barrels, the resulting flavors seemed to clash more than they complimented. An interesting, complex, thought provoking, but not necessarily delicious beer is not something most people will pay $45 a bottle for, especially in the Bay Area's floundering economy. The fact that the Bay Area has many excellent barrel-aged beers, such as Russian River's Temptation, that taste sensational, are hardly "acquired tastes", and cost about half of what a typical bottle of Mayfield was going for indicates how out of whack Mayfield's pricing seemed to be.

Of course, this is my outsider's view. Who really knows the complex set of issues facing this business? A lesson I learned from running that has served me well in professional life is that when setting goals, one can sit down and formulate an intelligent, reasonable, and well conceived plan to reach them. And then you follow that plan with great effort, dedication, and focus. And even after all that hard work and well directed effort, failure is still very much an option.