Tuesday, August 27, 2013

Rambles: Hermitage Calypso Single Hop IPA, Grace Under Pressure, and the Latest with Lance

The latest news bits with a more autistic emphasis than times past.......

The folks at Hermitage Brewing have once again delved into the endless world of hops with another single hop IPA release, Calypso.  The name Calypso evokes gentle Caribbean breezes, but this hop packs a wallop of a distinctly different character.  It's resiny, peppery and there's this undertone of some type of fruit.   I think it's cherry even if my wife doesn't think so.  And I enjoyed just inhaling of those wonderfully fresh piney aromas. It's decidedly unlike any hop I've ever tasted although Calypso hops have been used commercially before, including Hanger 24's excellent Spring Beer and a few beers from Stone Brewing, including their 16th Anniversary IPA.  One of the best things about Hermitage's single hop IPA series is that each beer is its own unique tasty surprise.

Grace, Under Pressure: A Girl with Asperger’s and Her Marathon Mom is a new book by international journalist and runner Sophie Walker chronicles the highs and lows of raising a child with Asperger’s Syndrome and the physical challenge of training for a marathon.  As the father of an autistic child, I've found running has helped find the strength and patience to raise my son, so can relate to this message.  In addition to her book, Sophie Walker keeps a blog of her experiences, and you can also watch her in this interview.

Like Sophie Walker, you can fight autism by pushing your body and mind to their ultimate limits while challenging yourself in a marathon.  Or you fight autism by simply going to a bunch of breweries.  But of course, for Lance Rice, the simple act of visiting a brewery is a lot like running a marathon.  Yes, I've mentioned Lance's Brewery Tour many times, but it's still remarkable how a simple thing like beer has helped Lance engage with the world in ways that didn't seem possible. The latest on the inspiring journey of Lance who travels to breweries who accept him on his own autistic terms is here.

Tuesday, August 20, 2013

Are we headed towards a craft beer bubble? Back of the envelope calculations are troubling

New Brewing Equipment Entering Hanger 24 Brewery as part of their
expansion earlier this year.    (Photo from Hanger 24 press release)
A bubble brought me to California.   It was the year 2000 and fiber optic networks were all the rage.  I moved from Detroit to take a job selling optical test equipment to companies making fiber optic components to build up all those high speed fiber optic networks.  Problem was, the world was pretty much drowning in a glut high bandwidth communications.   There were too many companies selling optical components for the few fiber optic networks being built.  Lots of high flying companies run by really smart people failed.  I survived a couple layoffs while my company transitioned to other markets.  Less than ten years later, I witnessed a similar bubble in the solar panel industry, where once again, demand for a product was growing but way too many firms entered the solar panel market and most were not be profitable.

Usually when bubbles occur, a bunch of smart people say complex things using big words, sounding very deep and philosophical.  But in reality, the nature of industrial bubbles are pretty simple.  Way too much supply come online and there's not enough demand for most of the suppliers to be profitable.  The key thing to remember about bubbles is this:

Bubbles often occur even as demand rises dramatically.  Many firms jump into the market to cash in  on this rapid growth, and even though the market is growing, it simply can't support all the new entrants.  Plenty of companies full of smart, talented and hardworking people with great products still fail spectacularly.

So with lots of new craft breweries forming and with existing breweries expanding capacity, there's been plenty of speculation about whether the craft brewing industry is headed for a bubble.  If it is, plenty of great breweries making good beer with good business plans will go bust.  Such is the unfortunate nature of bubbles.

I've read a number of interesting speculations on a craft beer bubble which has inspired me to take a closer measure of the issue.  If you bare with me, I'm going to use a little math the investigate the whole bubble question.  Don't worry, it'll be just some simple addition, subtraction and multiplication that hopefully I'll make clear enough along the way.

To get right to the punch line, some straight forward "back of the envelope" calculations suggests tough going ahead for craft breweries even under fairly optimistic conditions.  We appear to be coming to a point where too many breweries are producing far more beer than the marketplace can absorb.    While there will still be room for small breweries and brewpubs producing less than 1,000 barrels a year, there will be increasing pressure for larger breweries to remain profitable with so much excess capacity coming online that can't all be sold in the marketplace.

This matters because breweries can't sell enough beer, or need to heavily discount their pricing due to the excessive supply, they will struggle to pay off the loans most of them have on their books.  Breweries require large capital equipment costs, and most new breweries operate under some form of financing.   Of course, they also need to pay for operating expenses like payroll, materials, and rent.

Let's delve into the numbers that cause me to reach for this conclusion, starting with the demand side of things.


Everyone knows the recent growth of craft beer is nothing short of remarkable.  The latest release by the Brewer's Association cited an estimate of 7.3 million barrels of craft beer sold in the first half of 2013, a growth of 15% over the previous year.  Recent growth rates of 10-15% in the craft beer industry recently are pretty common.  And the good news is that since craft beer is only about 10% of the beer currently produced, the 15% growth level can compound for quite some time before the beer industry output by volume is produced by a majority of craft breweries..  

Whether or not this 15% growth is sustainable for the next few years is an open question based on other factors such as market penetration, changing customer preferences, distribution systems and current demographics.  Of course, if this growth rate settles down to a more modest 10%, the compounded demand will slow considerably.  Just take that 7.3 million barrel figure for the first half of 2013, or 14.6 million sold annually.  If the current rate of growth stays at 15%, that means 16.8 million barrels will be sold in 2014, or 2.2 million additional barrels.  But if the growth rate slows instead to 10%, then instead only 16.1 million barrels will be sold, or 0.7 million barrels less than with 15% growth.    I'm going to use the current 15% growth rate in my analysis, even though it may be optimistic to expect the craft beer industry to continue this torrid rate of growth with a mature product.

Year           Additional Barrels over 2013, 10% Growth     Additional Barrels over 2013, 15% Growth
2014           1,500,000                                                          2,200,000
2015           3,100,000                                                          4,700,000

The Supply Question

In addition to numerous new breweries in the works, plenty of existing breweries have announced expansion plans or in some cases have announced building second breweries.  So to look at the Supply side of the craft beer bubble question, let's look at both expansion plans of craft breweries couple with reasonable expectations of the output of all these new breweries.

Supply Due to Increased Capacity of Existing Breweries

Through a simple search of press releases online, I count approximately 2,800,000 barrels of brewing capacity available to come online between 2013-2015 by some of the largest craft brewers listed below.

Brewery                                     Estimated Increased Output in barrels
Sierra Nevada                            300,000 (2nd brewery to be operational early 2014)
New Belgium                            400,000  (2nd brewery to operational late 2014/early 2105)
Deschutes                                  115,000  (Expandable to another 100,000)
Lagunitas                                   600,000  (2nd brewery operation in late 2013)
Bell's Brewing                           300,000  (Additional capacity for expansion completed in 2012)
Boulevard Brewing                   400,000   (Additional capacity from 2006 expansion)
Dogfish Head                            100,000   (Estimated growth in two years from 2013 expansion)
Anchor Brewing                        500,000   (2nd brewery to begin construction 2014)

It should be also noted the Craft Beer Alliance, technically not a "Craft Brewery" due to a substantial ownership by Anheuser-Busch added 140,00 barrels of capacity in the last year.  Furthermore, another one of those pesky "crafty" breweries, Goose Island has transferred much of their production to larger Anheuser-Busch facilities as part of a nationwide roll-out so we should expect at least a few extra hundred thousand barrels of capacity a year as part of that development.  Of course, Blue Moon is still out there, selling more beer than the entire craft brewing industry.  Since I'm using Brewer's Association data, I can't really include these breweries defined as non-craft in the analysis, but needless to say, these breweries are also capitalizing on changes in the beer market and certainly aren't making it any easier for a new enterprising craft brewery.

Given the steady drumbeat of press releases announcing brewery expansions and new distribution deals, it seems pretty plausible the 1,300 remaining micro and regional breweries  as defined by the Brewers Association, each add an average of 920 extra barrels each of brewing capacity meaning another additional 1,200,000 barrels of capacity is coming online.    I'm excluding the brewpubs from the equation as we don't normally expect them to expand their operations much.  (Of course, some brewpubs do make the leap into retail sales often requiring expanded operations, but I'll set these expansions aside to simplify things.)

Supply Due to New Breweries

According to Brewers Association, another 1,605 breweries are in the planning stages.  If existing breweries will bring an estimated 4,000,000 barrels of beer online in the next two years, how much room is left in the marketplace for these new breweries?  If the growth of craft beer declines to 10% growth, it's looking a bit grim for all these new breweries, since existing craft breweries have enough extra capacity to supply 900,000 more barrels of beer that will be demanded in 2015 at 10% compounded growth. 

Suppose for the next two years, it's full steam ahead and growth continues at 15%.  By the end of 2015, all 1,605 of these new breweries will fight over the remaining 700,000, a mere 436 barrels per brewery.  That's the yearly output of a small brewpub.  Since roughly half of the current number of craft breweries are defined as brewpubs that should be fine for many of them.  For the other half aspiring to be a successful microbrewery or regional brewery, their 436 barrel per year share is likely to be way too low to be profitable.   The craft brewing industry makes about $850 in revenue per barrel of beer, so 436 barrels translates to $370,000, ost likely insufficient to support a stand alone brewery.  A brewery this size could exist through contract brewing.

Yes, it's possible that the growth of craft beer could further accelerate to 20% growth but that would be highly unprecedented.  Call me a pessimist, but 10% growth next year seems much more realistic than 20% growth.  Don't forget, the assumptions above are all based on what I think is a reasonably conservative 4,000,000 barrels of capacity coming online by existing breweries and recent expansions by the Craft Brew Alliance and Goose Island have been left out of the analysis.  Even under the rosiest scenario, we see that a lot of breweries are clearly going to be under considerable pressure to stay in business and a number of them will probably fail.

Final Thoughts

How many breweries will fail?  There's not enough precision in the numbers to make that sort of prediction.  However, lots of people make bold predictions all the time while totally ignorant of the relevant data, so why should that stop me?

I predict starting next year, life starts getting pretty difficult when Sierra Nevada's and Lagunitas's new breweries come online, Boulevard Brewing and Dogfish Head continues their expansions,  and Goose Island's national roll out is in full swing.  The current failure rate of craft breweries is 1-2%.  It's reasonable to expect this number to grow to 5-10% starting in 2014, which means 100-200 breweries will close per year.  Given the chumminess of the industry, I expect smaller breweries to join forces in the face of tough business climate and some brewery consolidation to occur.   In addition, I expect some breweries founded with aspirations of becoming 50,000+ barrel operations will find themselves stuck struggling to barely keep afloat selling 2,000-3,000 barrels each year and fold up their tents for greener pastures.  Things could turn into a blood bath, with failure rates as high as 25%, but more likely, the industry will go through a difficult 2-3 year correction as the weaker players are weeded out, and then things stabilize.  That's my best guess.

On a personal level, I have friends and acquaintances who work for, or in some cases founded craft breweries in the past couple years.   They are all smart, hard working experienced professionals who are passionate about making great beer.  It gives me no joy to realize they will have an increasingly tough time staying profitable, may fall well short of their ambitions, and run an increasing risk of complete failure.  I also sense the normally cheerful craft brewing community is in a bit of denial over what many perceives as coming.

To end things on a more optimistic note, for decades craft beer has been about home brewers turned businessmen launching carefully aimed rocks at brewing Goliaths.  Those days have ended.  While I anticipate a difficult period ahead, what will likely emerge is a varied mosaic of breweries across the United States, with large national and multinational firms competing against stronger regional and microbreweries. Plenty of unique brewpubs will be found sprinkled throughout the landscape.  There will always be room for another brewery doing innovative and creative things, as long as they are willing to keep things small.  The brewing industry will emerge as colorful and vibrant as ever.

Wednesday, August 14, 2013

Beer of the Month: Second Conversation Belgian Stout from Discretion Brewing

I swiped this photo of Second Conversation off the
Discretion website, since the picture I tool of my
glass of it was so bad
A light crisp stout?  Well, not exactly but our Beer of the Month nearly attains this oxymoronic achievement in a good way.  I found Second Conversation Belgian Stout from Soquel's Discretion Brewing is both excellent for was it is, and for what is isn't.  It's this great dry, crisp tasting stout with a light dose of bitter chocolate from Ecuadorian cocao nibs, Belgian Saison yeast aromatics and a little bit of dried fruit.  There's a well balanced and unique combination of flavors working together, unlike some stouts which can be heavy, syrupy sweet or full of harsh roastiness.  Second Conversation is very drinkable yet interestingly complex.  I'd almost say it's sessionable, except at 7.7% abv, it certainly isn't.

Discretion Brewing is a new comer to the vibrant Santa Cruz brewing scene, which is quietly producing some of the more innovative beers in Northern California.  And there seems to be plenty of good conversations down at Discretion.  Discretion's First Conversation Saison won Silver Medal at this year's California State Fair, and their Third Conversation is a nifty session amber Saison (4.3% abv) you should also check out if you make to their tap room in Soquel.

I've gotten rather tired of all the attention hogging beers, you know, the one's that scream "Look at me!  I have 179 ibu's and I'm aged in used oaken soy sauce barrels!"  Beer is a social lubricant and you got to like beers such as those from Discretion which seem designed to facilitate just that.

Discretion's Tap Room and Brewery (I took this picture
myself rather than steal it from someplace)

Sunday, August 11, 2013

My old friend Dammit

Runners milling about at the finish on the Los Gatos High School Track
It had been five years since I last run the Dammit Run when I settled in at the starting line on the Los Gatos High School track yesterday.   Every year there was some injury or comflict that kept me out of this race, and finally running "The Dammit"  was like reconnecting with an old quirky friend.

Who ever laid out the five mile Dammit Run course forty years ago was a diabolical genius.  The race starts easy enough, with a lap around Los Gatos High School's synthetic all-weather track before weaving through a parking lot and athletic fields onto the gravel Los Gatos Creek Trail.  The next mile on the gently winding, slightly uphill trail is easy enough, but then there's a short, steep hill at mile two.  One you get over that hill, there's a flat section, then steep down hill to the foot of the Lexington Reservoir Dam.   You then take a paved trail diagonally across the Dam, climbing upwards from the bottom corner to the top, and then after a couple hundred yards on a street, take a rocky trail where immediately a steep ascent with uneven footing greets you.  Get to the top of that and you've finally made it to mile 3.  Then it's a roller coaster ride to the finish, with descents down rugged hills before you hit the streets of Los Gatos and finish back on the high school track. 

Everyone's performance captured and tagged
There's never a dull moment in races like these.  Your senses have to be alert to dodge telephone poles and drainage grates along the course.  Mental restraint is needed to hold back on the easy parts at the beginning to save up for the hills later in the race.  And of course, focus and concentration is required to get you up the steep hills, and wrong step on the downhill last two miles is a face plant waiting to happen.  Despite all this, everyone seems to have a blast at this race.  Maybe that's because most people go out and just have a good time running, rather than stressing out on every little detail like me.

Not only did I not want to miss out on the Dammit Run this year, I used it to gauge my early fitness as I begin training for the Monterey Half-Marathon, November 17th.  I'll try not to bore you with a tedious play by play.  My legs had the strength to get up the hills pretty well, the problem was I kept going into oxygen debt and really couldn't get moving up them.  I was pretty pleased with how I kept my speed during the rugged descents that I used to wibble-wobble down, and give credit to Eric Orten's form and strengthening exercises I started doing last spring for that improvement.  A time of 34:15 earned me 26th overall, higher up than I expected.   That got me 2nd in my 45-49 age group, good enough to make me pretty optimistic heading towards Monterey, and made those post-race beers taste even better.

Plenty of cookies greeted the runners at the finish. 

Thursday, August 1, 2013

Rambles: August Brings New Beers, A New Book, and Spread!

Two New Beers Arrive in the Bay Area,
South Bay newcomer Santa Clara Valley Brewing does it again with their strong second release, Peralta Porter.  It's a dry porter with plenty of roasty, dark chocolate flavors you look for in this style.  A slight, but certainly noticeable earthy hop finish gives it a nice twist.  Yet another reason you don't have to leave the South Bay to find good beer.  You can find Peralta Porter in many fine bottle shops, including where I bought mine, Cask and Flask Liquors.

The folks at Hanger 24 sent a bottle of their Polycot Wheat Ale my way, and I'm glad they did.  It's part of their Local Field Series where the Redland, CA brewery integrates locally sourced ingredients into their beers.  Polycot uses organic apricots from Southern California's high desert, which blend quite well with the wheat tang and overall dryness of the brew to create something pretty refreshing for the late summer.

Beyond the Pale
Eagerly awaited is Beyond the Pale: The Story of Sierra Nevada Brewing Co. by brewing pioneer and Sierra Nevada founder and CEO Ken Grossman scheduled for release this August 26th.  It's a well known story but I, like plenty of others, cannot wait to hear Grossman tell it.    And yes, you'll be seeing a review of Beyond the Pale here later this year.

Spread Opens in Campbell
I'm pleased to announce the opening of Spread, a wine/beer garden, bottle ship and sandwich place on the west side of downtown Campbell.  It's the sister outfit of Campbell's Liquid Bread gastropub, and just like that, Campbell's become solid beer destination.  I've tried the sandwiches and they are delish.  It's only a 15 minute walk from my home, so you'll find me there often.
The sights, sounds, smells and tastes of Spread in a photo
I swiped from their Facebook page.  Hope they don't mind.