CHAPTER 5
Craft Businesses That Work
Craft producers crave independence and freedom. Opening a craft brewery, distillery, or cidery usually involves partnering with friends or family who share your vision. As businesses mature, financial needs lead to more complex business arrangements. But during the current “neighborhood” age of the craft movement, when the best opportunities for new ventures are often the ones that start in an abandoned building down the road from where you live, working with a partner, in whatever kind of form it takes, makes life easier.
If partners stick together through the difficult years, sharing the burdens enhances a startup’s chances. The challenge is setting the partnership up to reward each individual’s sweat equity. “I’ve spent 20 years marketing Firestone Walker. What is the value you would put on that chunk of your life?” asks David Walker, cofounder of Firestone Walker Brewery Company (www.firestonebeer.com) with brother-in-law Adam Firestone.
Twenty years, says Walker, is the minimum planning horizon for a new brewery. “Don’t start if you have to make it work in five years.” Launched in 1996, during the deadly lull in the craft beer business, Firestone Walker was located in the Santa Barbara wine region, physically cut off from California’s beer revolution. “It was a dark time,” he says. The partners relocated two hours north to Paso Robles in 2002 and built a pub next to their production brewery. But the struggle continued with sales topping out at 50,000 barrels in 2006.
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Firestone Walker’s David Walker says that, these days, you can start your craft business on a shoestring. “Everyone near you, including Whole Foods, will carry your beer. Once you get to the next level—around 15,000 barrels/year—marketing and distribution are very expensive. It will be 25 percent of your budget. The window for expanding from microbrewery status to be a regional brewery is closing. You may be stuck on that 15,000 barrel plateau,” he says, so be prepared to adjust accordingly. Most importantly Walker says, “Whoever gives you money for investment can cause havoc. Make sure they are aligned with your long-term vision.”
Risky Business
There are risks. Two well-written tales of building a craft brewery—Sam Calagione’s Brewing Up a Business: Adventures in Beer from the Founder of Dogfish Head Craft Brewery (John Wiley & Sons, 2011) and Ken Grossman’s Beyond the Pale: The Story of Sierra Nevada Brewing Co. (John Wiley & Sons, 2013)—detail the painful and nearly fatal fallout of failed partnerships. Tony Magee’s So You Want to Start a Brewery?: The Lagunitas Story (Chicago Review Press, 2014) details the intense pressure and daily challenges of running a one-man show in the craft alcoholic beverage business. Make them a part of your required startup reading.
When the market finally woke up to their distinctive oak-barrel fermented ales, it took them by surprise. Firestone Walker sold 200,000 barrels of beer in 2014 with sales growing 45 percent annually. With a second brewery opening in Los Angeles in 2015, near the beach in Venice, Walker expects sales to be twice that by 2016. They are now one of the top 20 craft breweries in the country. “I’m a little confused by it all, but very happy.”
Walker’s advice for new craft brewers is simple: “Focus on making extraordinary beers. Narrow your geographic expectations. Beer performs best near the brewery. Think big within a small footprint. Value your product and don’t discount. We expect some ugly price wars with so much new competition; avoid them at all costs.”
Before planning how you will market your business, “listen to people’s stories,” says Charlie Papazian, president of the Brewer Association. “This is a unique industry. Before you spend any money, spend your time learning the technology, science, and art. Gobble up all the information you can. This is a highly regulated business, and you need to understand it. Go to conferences.”
Remember to:
Protect personal assets by separating them from business liabilities through an LLC, corporation, or partnership early in the development of the business. The more formal the documentation (e.g., partnership or LLC agreement), the better.
Take care with potential investors. Selling shares in a craft venture involves registering or at least filing with the Securities and Exchange Commission as well as the state where the business is registered. In general, you cannot widely advertise that you are selling shares, and there are laws governing your communications with potential investors.
Protect intellectual property, particularly trademarks, by registering them as soon as possible with the U.S. Patent and Trademark Office. Reserve your internet domain names promptly.
Hire a professional accountant to maintain accurate records of everything that happens in the business and supervise payroll.
Location, Location, Location
The craft movement is stronger in some states than others. Texas, Florida, and the Deep South, along with the middle-middle of the country—Kansas, Oklahoma, Arkansas, Nebraska, and Iowa—are far behind the rest of the country in the number of craft alcoholic beverage enterprises. Portland would seem to be a saturated market with as much as 50 percent of the beer sold there produced in the state. Ashville is leading North Carolina’s craft explosion. And Washington, DC, is only just getting started.
FIGURE 5–1: State-by-State Rankings of Craft Breweries per Capita
Credit: Brewers Association
Some states do more to promote craft businesses and some states go out of their way to inhibit their growth. Opportunities exist in each of these situations. But as James Fallows wrote in the November 2014 issue of The Atlantic, “The presence of craft brewers—and their more hip counterparts, craft distillers—are important markers of cities that are attracting the young and ambitious.” At this point, every state wants to have craft beer, spirits, and cider producers.
Florida
Florida is the third largest beer market in the country but one of the slowest to develop craft breweries. “We’re a vacation market,” says Mike Halker, president of Florida Brewers Guild (http://floridabrewersguild.org). “Our distributor network was entrenched, and they controlled the market. They spent lots of money to have friends in Tallahassee [the state capital]. We’re a rare place where Anheuser-Busch and MillerCoors still command 95 percent of the beer market. Our consumers didn’t know they wanted something that they didn’t know exists.” When Sam Adams and Sierra Nevada beers became available, it changed everything. Once consumers knew not everything tastes like Budweiser, they wanted more of it, he says.
“The inflection point for us was five years ago,” says Halker. Twenty-five new breweries opened last year for a total of 100 craft breweries in the state. “We continue to add two a month, which is still a small number. San Diego county has more breweries than all of Florida. When the national craft brands come in, they create customers for us. So it’s OK, as long as they don’t slash prices. New Belgium launched in Florida with discounts. It cuts our throats.”
Portland, Oregon
Marcus Reed, an attorney with Miller Nash LLP in Portland, Oregon, who specializes in representing craft breweries, says there is plenty of room for more breweries in Portland, particularly if they are neighborhood-focused and serve food. “New restaurant pubs do really well. The margins for beer sold in a brewpub are stunning. You can make the beer for 50 cents and sell it for $5 a glass. It’s an order of magnitude better than selling to a distributor. The volume you can produce is limited, but you can always open another pub.
“It is getting harder for production breweries. Distributors are flooded with accounts. Store shelves are filling up. There is a limit to the number of tap handles in bars. But bars keep adding more taps, and grocery stores are adding more coolers and racks. There is opportunity if a brewery is creative.
“We are not seeing any breweries fail. There is a growing trend of new people who have very, very little experience. They are asking for trouble by having substandard quality. Still, we hesitate to discourage them. We have seen too many people succeed who we thought couldn’t. We just encourage them to go work in someone else’s brewery before they open their own. In Portland, every neighborhood will have a brewpub. And some will have five or six of them within walking distance of each other. We’re heading for one brewery for every 5,000 people, pretty crazy. There is no sign of a slowdown. Every brewer is expanding because they have reached their maximum capacity.”
warning
Choose your message carefully, and be wary of diversifying your vision. If you want to offer a taproom, do it simply and with focus. Don’t delve into offering a restaurant feature if you don’t have the street cred (and funding) to back it up. “I am amazed that all these brewpubs stay open,” says David Fleming, a Portland-based brewery consultant. “I don’t know where the money comes from. I keep waiting for it to drop off, but it never does.”
“There are 70 breweries in Portland,” says David Fleming, a Portland-based brewery consultant, and that doesn’t count across the river in Vancouver. “I’ve worked for 11 of them. I see a lot of homebrewers open brewpubs. It’s like a kid learning to drive a car and then getting into an 18-wheeler. They learn things the hard way. So many people I think shouldn’t go forward, do it anyway and they succeed. I don’t judge anyone.”
Los Angeles, California
California is literally the birthplace of craft beer, says Tom McCormick, of the California Craft Brewers Association (www.californiacraftbeer.com). But throughout the revolution and until the late 1990s, most of the craft breweries were in Northern California. “San Diego happened in the late 1990s. Stone Brewery pushed that forward, and now there are 100 breweries in San Diego alone. Los Angeles was the late-bloomer and is still late to the party.”
“[Los Angeles] is the largest import beer market in the country,” says David Walker with Firestone Walker Brewing Company . “It imports its craft beers from Mexico. It’s only 5 percent of the beer market, similar to Florida. In San Francisco, craft is 25 percent of the market. Los Angeles is neither homogeneous nor provincial, which is where craft beer took off first.
“Part of the problem is the Los Angeles city planners don’t get craft beer,” says Walker. “They have no idea what it is and how to cultivate it.” But Los Angeles is finally starting to change. There are pockets—Downtown, Silver Lake—switching to craft. Opening a brewery in Venice, California, Walker is betting Los Angeles will transform over the next five years and become a craft city.
Golden Road is a new Los Angeles brewery, and it is starting bigger than nearly any craft brewery ever before. “Almost every brewery that has ever started big has failed,” says McCormick. “That probably won’t happen anymore. Golden Road is one of the new models.”
Starting with an 80,000-barrel capacity production brewery, Tony Yanow and Meg Gill have declared Golden Road Brewing (www.goldenroad.la) to be L.A.’s brewery. “We needed a big plant for a big city. No one was even selling craft beer in Los Angeles,” says Yanow. “We saw the window of opportunity closing. Someone was going to do it. We had to get up and running quickly.” When they opened in 2011, there were three breweries in Los Angeles. By the end of 2014, Los Angeles had 26 breweries and 30 in development.
Hand-Crafted Companies
Craft companies are as handcrafted as their products, reflecting their founders’ personalities. You want to create a company that reflects who you are and your values. But it helps to learn lessons from others who are still in business. Below are several short profiles of companies showing various approaches to operating a craft business. In the craft tradition, these founders are open about their successes and their mistakes. They hope their tips are useful. Consider them your craft business Sherpas, ready to guide you to the mountaintop.
Grand Traverse Distillery, Traverse City, Michigan
Kent Rabish, Owner Founded 2007
“I had never had a business class or read a P&L statement before we started our distillery,” says Kent Rabish, who in 2007 opened Grand Traverse Distillery (www.grandtraversedistillery.com) with his wife and son. Aside from a visit to Bend Distillery, an Oregon grain-to-glass operation, he was just as clueless about the spirits business. But that didn’t bother him. After 25 years of peddling pharmaceuticals, he says, “I was bored to death.”
Keeping his day job and distilling on weekends, Rabish started out the hard way—distilling from wheat, rye, and corn grown on a farm nine miles down the road. Still, within three months of firing up his shiny copper stills, his first product, True North Vodka was in all the major Michigan chain stores, a total of 1,200 accounts. First-year sales totaled $400,000; year-two sales were $800,000; year-three sales reached $1 million, and Grand Traverse Distillery turned a profit. Rabish quit selling pharmaceuticals to focus on spirits, even though it would be another two years before he could pay himself a salary. In 2014, sales reached $1.8 million.
An initial smart move, he says, was connecting with German equipment maker Arnold Holstein, who sold him a turnkey distillery with both a pot and rectifying column stills, 6,000 pounds of copper in all. The best part of this Ferrari was the distiller sent along to train Rabish and his son how to use it. The still, and related equipment, accounts for roughly two-thirds of his $1 million in capital costs. The distillery building is the rest. Rabish spent $400,000 of his and his wife’s savings and borrowed the rest from a bank.
A bottle of his True North Vodka retails for $29.99, for which he is paid between roughly $14 or $16, depending on the distributor. Out of that he pays taxes—$2.14 for vodka and $2.80 for whiskey. Overhead is $4.60 per bottle. Bottles, labels, corks, caps, and packaging cost $3 per bottle. After ingredients and other costs, he makes roughly $5 a bottle.
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Do you have the patience for distilling? Think before you answer. Rabish didn’t appreciate how much quicker and easier whiskey was to produce. “With vodka, I have to distill, distill, distill” to get to 190 proof. But whiskey isn’t a neutral spirit. It is a one-time shot through a three-plate still, a much faster and easier process. Costs for holding the spirits in barrels are higher, but the overall profit margins are fatter. Named after his grandfather, Ole George now accounts for 65 percent of Rabish’s sales; he has 200 barrels aging at the distillery and has moved to a 24-hour, seven-day-a-week production schedule.
The problem with vodka, says Rabish, is the understandable perception that all vodkas taste the same. Most commercial vodkas are distilled by a handful of industrial giants, including Cargill and Archer Daniels Midland, so they actually are the same product. “The big guys sell to the little guys, and all the little guys do is filter it and perhaps one pass of distilling. It’s all from corn because, pound for pound, you get more alcohol from corn. And vodka from corn has no flavor at all,” he says. “I’m Polish. I like rye vodka.”
Rabish now is scrambling to shift his emphasis from vodka to his Ole George rye whiskey and bourbon. The consumer preference for brown spirits caught him off-guard. “I didn’t start our aged-whiskey program fast enough,” he says. “The three-year barrel aging set us back. Now barrels are in short supply.”
This year, Rabish expects profits to soar. Michigan passed a law allowing the state’s growing collection of craft distillers to sell directly to customers through tasting rooms. “Our new goal is to sell 75 percent of our product direct to consumers. There are no lost margins to distributors and retailers on the revenue coming in the tasting room door. No transportation costs or delays on receivables. We get to meet our consumers and tell our story.” To celebrate, Grand Traverse customers will have the opportunity to create their own whiskey—choosing a corn, rye, wheat, malted barley, or peated malted barley distillate to age in small charred oak casks at home.
Insights from craft producers such as Rabish offer benchmarks for progress you can expect your own craft distillery to meet. These are cautionary tales as well. You will want to avoid miscalculating the relative cost of producing whiskey and vodka. And if you want to make whiskey, you will start that project Day One. Every bit of advice producers offer cost them precious time and resources. To be true to the craft code, they share their stories to help the next wave of craft producers.
Albemarle CiderWorks, Rural Ridge Farm, North Garden, Virginia
Bud, Charlotte, Chuck, Anne, and Bill Shelton, Operators Founded 2009
The siblings bought Rural Ridge Farm for their parents 30 years ago, a small farm close to Charlottesville where their father, Bud Shelton, could retire as a gentleman farmer. A then-nascent movement to rescue disappearing heirloom apple varieties by planting orchards had started in the area and the family signed on. Today, the siblings are partners in a thriving nursery and orchard, with a cidery the natural last step in the evolution of their apple adventure. After all, hard cider is why apples were grown in Virginia in the first place.
The Sheltons planted hundreds of varieties of apple trees in their original orchard, says Charlotte Shelton, the business brains of the family. “There is such a dramatic nuance of flavor in appledom. It was going to be lost with the heirlooms falling by the wayside. We are interested in preserving this culinary and cultural heritage. A historian by training, this resonated particularly with me and the boys.” One brother runs the nursery and orchard and another is the cider maker.
The family forged ahead slowly. Virginia Vintage Apples became a commercial nursery in 2000, and Albemarle CiderWorks (www.albemarleciderworks.com) launched in 2009. “We are reasonably intelligent. Most of it is common sense. We cross-examine ourselves and have different skill sets, and are good at different things. And we’re proud of that. You can’t let ego get involved. It doesn’t matter who does what,” says Shelton.
Even though they had the land and the apples, building the cidery required construction of a cider house and tasting room large enough to host events—roughly $1 million in personal savings and a loan against the farm. “We were in a state of complete shock by the time we figured it all out. But by then we were committed to it and we waded right on in,” says Shelton.
Apples cost $12 to $20 a bushel, and each bushel yields one case of finished hard cider. The first year the Sheltons produced 900 cases and now produce three times that amount. “We’re feeling our way along” to see how much cider to produce, she says. Royal Pippin was their first single varietal cider introduced in 2009. Old Virginia Winesap was introduced in 2010. They now have eight cider varieties for sale. The cidery was cash-flow positive its third year and may soon turn a profit.
The Sheltons bought their farm and planted their orchards before even thinking about making hard cider, so they had a head start in the hard cider business. Still, they were surprised by the cost of the cider making equipment. A list of the major pieces of equipment and what they cost is a reminder to grow slowly. You only want to invest in the equipment you absolutely need.
Big-ticket items:
Apple press—$30,000
Chiller—$22,000
Six German double-jacketed stainless steel tanks—$40,000
Pressure-filler bottler—$10,000
Multiple pumps—$5,000 each
Cider making is not cheap. As you can see from this list, the process involves more than pressing apples. Gather plenty of financial and anecdotal information about the upfront costs of cider making before you write that first big check. If you’re in it to win it, be prepared to lay out significant funds at the outset.
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Grassroots marketing is the way to go in this particular business. Reach out and get to know your buyers, says Charlotte Shelton. “We have to proselytize. We sell to the wine market, not the beer market,” she says, noting that the cider-tasting room has been their smartest business investment. Self-distributors, their workshops and festivals at the farm are essential to spreading the word about hard cider. They want the business to remain in the family forever.
The cidery remains a mission for the Sheltons. “We’re interested in restoring cider to its rightful place in libations. We enjoy the notion that we are preserving rare apple varieties,” says Shelton. “The cider industry is very, very young. We’re just in the first years of it. What is it going to be in 50 years? If we don’t let it get run off the road by the beer companies that are just looking to increase their market share by making a cider novelty, I think it is possible that well-crafted hard ciders will stand alone as a category. That future is tied to a revival of heirloom apples.”
Alchemy & Science, Burlington, Vermont
Boston Beer Company, Owner Founded 2011
When Alan Newman sold his Pennsylvania craft brewery, Magic Hat Brewing Company, Jim Koch invited him to create a new division within Boston Beer that incubates microbreweries. He would be ripping a page from the MillerCoors playbook for its Tenth & Block craft division, only Newman and Boston Beer had craft cred. “My mission is to grow craft’s market share in ways Boston Beer would never think of,” Newman says. In three years, he has launched a new national beer brand and two microbreweries, with a third under construction.
Newman created Traveler Beer Company to be the holding company for Shandies, a wheat ale infused with fresh citrus juice, an American version of the British tradition of mixing citrus soda with beer for a light quaffer. Shandies initial sales are promising enough, he says, to justify a national rollout this year. A second attempt at launching a national brand—Just Beer’s Anytime IPA, a lower alcohol light beer—crashed on takeoff. “Everyone is making session [lower alcohol] beers now. You can’t make one separate from a brewery.”
Microbreweries are expensive gambles, and Newman is launching them in far-flung corners of the country. “These are opportunistic breweries,” he says, explaining that the three cities he chose are in underserved markets. Angel City Brewery was a defunct Los Angeles brand he picked up in January 2012, along with its 10,000-square-foot warehouse space in the emerging downtown Los Angeles arts district. He built a small, on-site brewery, relying on food trucks to provide taproom grub for the young crowd frequenting this emerging section of the city. Using Boston Beer’s breweries and distributors, Angel City beers are available throughout Southern California.
Newman employs a similar concept at his Miami-based Concrete Beach Brewery located in the Wynwood arts district, this time with Latin-themed beers. The start-from-scratch operation, launched a year after Angel City, was slow to open, in large part due to the notoriously craft-averse Florida regulatory process. Although it was his third project, purchased in August 2013 from founder Jeremy Cowen of Shmaltz Brewing Company [note: Shmaltz Brewing Co. no longer exists] Coney Island Brewing is up and brewing on the famous boardwalk. Buying an existing brewery with ongoing operations is the easiest way to jump into a market. The only challenge is marketing the beer, which is Newman’s forte.
aha!
Start small to win big. “The opportunity is building neighborhood breweries,” says Alan Newman. “We focus on being part of the local community with each of our brands.”
The economies of starting a company within a larger brewer are substantial, says Newman. Boston Beer takes care of backroom functions such as human resources, accounting and legal, and gives Alchemy & Science (www.alchemyandscience.com) access to its network of giant regional breweries to produce the beer it sells in grocery stores using Boston Beer’s powerful distribution network. Newman has his own sales teams and supply systems, but he has access to the parent company’s lower bulk prices and can piggyback on Boston Beer whenever it makes sense.
Newman spends his time traveling between his still-struggling, small businesses and doesn’t have an office in the parent company’s Boston headquarters. And he never will. “Jim thought we would end up doing things the Boston Beer way, which was the opposite of what he wants,” says Newman. “Jim allows us to not have a plan, to bring him the opportunities we see.”
Craft beer is a capital-intensive business, says Newman. His job is to figure out how to make it less so. “With so many new breweries, there is too much beer, too many brands, too few open taps at bars, too little space on retail beer shelves. Something is going to happen to clear things out. It’s just not clear what is going to start the chain reaction. It may be as simple as the Millennials settling down to their favorite brands and no longer trying every beer they see.”
What’s next for A&S? So far, Koch has approved every concept Newman’s brought him, he says. Now he has to make those concepts, and Koch’s trust in him, pay off.
Greenbar Craft Distillery, Los Angeles, California
Melkon Khosrovian and Litty Mathew, Owners Founded 2004
Greenbar Craft Distillery (www.greenbar.biz) is a partnership between former software engineer Melkon Khosrovian and his Cordon Bleu-trained wife, Litty Mathew. Khosrovian sold a software company he started to turn their hobby infusing neutral spirits with locally sourced fruits and botanicals into a commercial operation. “We had no business plan,” he says. “Our friends liked our infusions, so we thought there was a market for what we made.”
To allow them to focus solely on infusions, Khosrovian created a cooperative scheme with independent producers sharing marketing and distribution. “We only wanted to make vodkas and gins. We brought in partners who wanted to make other spirits,” he says. The idea was that a larger portfolio of products would be easier to sell. It soon became clear, however, “the only thing anyone wanted to share was the rewards,” he says. “The economy tanked in 2008. The investors disappeared. It was a monumental failure.” With hundreds of thousands of dollars of their own money invested in the venture, the couple doubled down to produce the larger portfolio of products themselves.
Now independent, they committed wholeheartedly to a hyper-local, strictly organic approach to off-the-wall flavored spirits. The goal made them a darling of local politicians and, with a $250,000 loan from the Los Angeles Community Redevelopment Agency, they bought their current downtown location in 2012 and became a grain-to-glass distillery. Committed to full disclosure about every aspect of their operation, Khosrovian and his wife opened a tasting room overlooking the distillery two years later.
For white spirits, they use a wheat wash, which the couple believes “lifts” flavors and aromas of infusions like their Tru celery/dill/fennel vodka. Their Slow Hand Six Woods Malt Organic Whiskey is 100 percent malted barley and aged in an oversize charred oak barrel with hickory, grape, mulberry, red oak, and hard maple blocks thrown in for added flavor. They make bitters, liqueurs, rum, and tequila, which they produce in a rented distillery in Mexico. Everything is packaged in eco-friendly lightweight bottles with 100 percent recycled labels. They plant a tree for every bottle sold (400,000 trees and counting).
The idea of joining forces with other spirits producers didn’t die. Greenbar’s success is due in large part to contract distilling. “We design products for our clients and produce them in our distillery,” says Khosrovian, noting they have both pot stills and continuous column stills. Without that, the arcane liquor laws would have killed them, he says. “We didn’t see how hard it would be. We had to sign contracts with distributors—Mafia-like deals—that locked us in for life. It was a total surprise. We couldn’t believe it was legal to demand these kinds of payments. I can’t ask [our distributor] to do anything without paying them money to incentivize them to do their job. You can’t leave a bad relationship in this industry. The little guys—we are fledglings in a world created for elephants,” says Khosrovian.
California does not allow spirits producers to sell their products at the distillery or to self-distribute, as craft brewers can. “Ninety percent of the successful craft distillers in the country make it on sales from their distillery. Tasting rooms are the cash cow. In California, wholesalers fought us tooth and nail before the craft distillers won the right to have tasting rooms where people could at least sample our products. But we are limited to quarter-ounce tastes.”
Besides the ongoing battle to loosen state sales and distribution laws, Khosrovian says his biggest challenge is maintaining the consistency clients such as Darden Restaurant Group and Whole Foods Market demand. “We have had to become control freaks,” he says.
Craft Brew Alliance (CBA), Portland, Oregon
Public Company One-Third Owned by Anheuser-Busch Brands include: Redhook, Widmer Brothers, Kona, Omission, Square Mile Cider Founded 2008
“Margins for very small craft brewers are good now; really, really good,” Andy Thomas, Craft Brew Alliance’s (http://craftbrew.com) CEO, told the craft brewers attending a recent Brewbound business conference. But each rung up the craft beer ladder—bottling beer instead of just delivering kegs, salesmen to get those bottles into stores, expanding capacity to meet increased sales, multistate distribution, and mass marketing to support increased production—adds costs that will squeeze those margins. It is a long, difficult, slow climb to become a brewery big enough to have the market efficiencies necessary to regain those lost profit margins.
CBA is feeling that squeeze. Its profit margins fell during the past several years, even as revenues rose and sales climbed to give it 4.3 percent of the craft beer market. The increased competition from the rush of new small breweries into the market only makes the fight for profitability more difficult.
Banding together with other brewers to grow more quickly is the CBA model. The alliance was formed around an initial public offering of stock out of necessity in 2008 at the end of craft beer’s devastating no-growth decade. Anheuser-Busch partnered with two icons of craft brewing, Portland-based Widmer, launched in 1984 by Kurt and Rob Widmer, and Seattle-based Redhook. Hawaii’s Kona Brewing sold to CBA in 2010. The company launched the gluten-free Omission brand of beer in 2012 and Square Mile Cider Company in 2013. Anheuser-Busch owns 32 percent of CBA.
Appalachian Mountain Brewery (http://appalachianmountainbrewery.com) signed a strategic sales and distribution partnership with CBA in December 2014. Also a public company, the small North Carolina brewery’s razor-thin margins have depressed its stock price, even though its third-quarter revenue was $266,283, up 38 percent compared to the previous quarter and up 77 percent compared to the same quarter in 2013, due in part to the introduction of a new line of craft hard cider.
Through CBA, Appalachian will have access to Anheuser-Busch’s powerful national distribution and sales apparatus, one of the drivers of CBA’s 24 percent increase in adjusted operating income in its 2014 fiscal year and 11 percent growth in sales. For its part, CBA gets “the opportunity to be ‘local’ while expanding our reach into North Carolina,” says Thomas.
Back in 2010 when Widmer and Redhook jumped into bed with Anheuser-Busch, the rest of the craft beer industry was shocked. The Brewers Association kicked CBA out of the craft club, a move that still stings. “We consider ourselves to be craft, regardless of the Brewers Association definition,” says Kurt Widmer, a CBA director and former board member of the craft beer association, who has no regrets. Anheuser-Busch “has been very good to work with,” he says. “They are committed to quality. Joining with them allowed us to have state-of-the art facilities. They’ve lived up to their commitment to us even though we’re both independent public companies in competition with each other.
CBA operates as one company with the various brands sharing marketing, breweries, and distribution. Anheuser-Busch allows them to use its purchasing power to lower the cost of supplies, he adds. When there was an equipment failure at a brewery and the vendor estimated three to five weeks before the brewery would be back online, Anheuser-Busch stepped in and it was fixed in 24 hours.
It’s an advantage that other breweries are interested in sharing, he says. “We get calls all of the time from breweries who want to join our club. We’re in conversations with several breweries now. It makes sense for us to be bigger, more efficient. It is possible that a shakeout is coming. I’m not going to say we’re guaranteed success, but we have all we need to succeed.”
fun fact
Some analysts are bullish and predict Craft Brew Alliance sales will grow by more than 300 percent during the next three years, with profits expected to grow from $3.1 million in 2014 to $8.3 million on revenues exceeding $220 million in 2016.
Despite increases in operating income and sales, CBA’s stock price was down 10 percent for the year in December 2014 with the company reporting slowing sales growth attributable to the increasingly crowded craft beer market. Over the five years it has been publicly traded, CBA stock has increased more than 300 percent in value and is now considered overpriced based on current earnings and the company’s difficulty sustaining profit margins while it invests to grow sales.
Just as in the last shakeout that started in the late 1990s, “the breweries who won’t make it are the ones who stop making beer their main thing and screw up the quality,” says Widmer. “Breweries that are not adequately financed often sell beer that should be sewered” or thrown down the drain.
Troy Cider, Sebastopol, California
Mark McTavish, Owner Founded 2012
Old, overgrown apple orchards were everywhere Troy Carter looked when he took a post-college motorcycle trek along the back roads of California’s Sonoma Coast. Planted in the 1950s, the trees had been fending for themselves in the generations since wine arrived. A kombucha fan, Carter treasured artisan hard cider’s funky flavors and guessed the ugly apples were the perfect raw material for his favorite libation.
The first pressing of Troy Cider was in the fall of 2012 using the mostly Gravenstein apples he and about 100 of his Stanford University friends harvested one afternoon. To manage the wild yeast fermentation, Carter hired organic winemaker Tony Coturri to produce his inaugural vintage. Artisan hard cider makers view cider apples and orchards much like vintners view wine grapes and vineyards. The taste of the “place” is in the cider.
Fresh-pressed juice with nothing but the orchard’s natural wild yeast, cold fermented in pinot noir barrels, Carter’s cider made itself. He aged it for eight months before bottling it, unfiltered. The next year Carter made Troy at Sonoma’s Old World Winery with winemaker Derek Trowbridge overseeing fermentation.
The 25-year-old, who thought to check out the apples by the side of the road, moved on in his journey around the world. While Carter remains the “artist in residence,” he sold his cider operation to Mark McTavish, whose 2-year-old company Half Pint Ciders imports and distributes hard cider in Los Angeles. McTavish says he will stick to Carter’s protocol. The third vintage of Troy was released at the end of 2014.
Still using the wild fruit, the third vintage grew to 50 barrels to meet rising demand for the funky, dry, low-alcohol drink. With 20,000, 500 ml bottles priced at $10, the business is thriving. McTavish added a traditional quince, pear, and apple blend to the Troy portfolio. The rest of the hard ciders McTavish sells are from Spain, Canada, and other parts of the U.S. Northwest. “It’s an easy sell. Once people taste it, they want it. But they don’t know where to find it. I’m the first cider-only distributor in the Los Angeles market,” he says.
Eager to capture hard cider’s sudden popularity, McTavish is planning to launch another cider brand, 101 Cider House, and open a cidery and taproom in Westlake Village in Los Angeles’ San Fernando Valley in 2015. The juice is pressed-to-order and shipped to the Westlake Village from Oregon, where he ferments and ages it in 100 used tequila barrels. “All wild yeast. Nothing pasteurized. No sulfur. Just raw juice,” says McTavish.
Harlem Brewing, Harlem, New York
Celeste Beatty, Owner Founded 2001
Celeste Beatty made a long-term bet on herself when she launched Harlem Brewing (www.harlembrewing.com) in 2001, selling her home and liquidating her 401(k) to pull together the $500,000 to launch a beer brand based on recipes she created homebrewing in her Harlem kitchen. The new Harlem Renaissance was underway, and she believed that her neighbors would embrace a craft beer made for them. She named her signature beer after a Harlem neighborhood called Sugar Hill, from the lyrics of Duke Ellington’s song “Take the A Train.”
“I compare my homebrew process to a jam session,” says Beatty. “You have improvisation and transformation of notes and ingredients to make a unique brew. Most times I am listening to Sarah Vaughn when I am homebrewing.” Beatty pays homage to the culinary heritage of beer making among African women by infusing cumin, coriander, and grains of paradise, a West African spice, into her beers.
“I focus on making a good product and being connected to everything that goes into every step of production. The nature of craft beer is to stay small and special. It is all about quality and keeping it real,” she says.
tip
Get investors on board early. The earlier, the better, in fact. “My big mistake? Not partnering with investors sooner than now,” she says, noting that financing growth is an ongoing struggle. “Not listening to good advice was a mistake. I had opportunities to form partnerships. But I did not see a good fit. It is a great struggle to keep my business going. If you don’t have investors, you will be bootstrapping so much that it can become overwhelming. So don’t wait too long to have a plan to get capital.”
Beatty contracted with Olde Saratoga Brewing Company (www.harlembrewing.com) in upstate New York to produce her Sugar Hill Golden Ale and other beers, initially distributing them herself in an old SUV that accommodated 25 cases of beer. With her son managing marketing and sales, she says, “It is one beer at a time, one restaurant at a time,” making a direct, personal connection with customers. She estimates she pours her beers at 200 events a year, which is her primary marketing effort.
The quality of her beer and her dogged determination caught the attention of former President Bill Clinton, who invited Beatty to participate in the 2006 Clinton Foundation Entrepreneur’s program. Through the program, she was partnered with craft beer veteran Pete Slosberg, founder of Pete’s Wicked Ale, who continues to help Beatty establish her brand.
While her beers are served in legendary Harlem restaurants, including Sylvia’s, Red Rooster, The Cecil, Minton’s and Chez Lucienne, after 14 years of many ups and downs, real growth has been gradual. Beatty currently produces 3,000 barrels of beer a year. That will change in 2015, she says. She plans to build a brewery at an old family farm in Saratoga Springs, where she has already started growing her own hops. This year, she also plans to open a Harlem Brewery taproom in its namesake neighborhood and ramp up exports to Japan, Sweden, and England.
“I am always working, but it is my love and joy. I love that this business is about hospitality and being green—gardening, farming, cooking, community empowerment, building local economies, as well as bringing people together,” she says, noting that a favorite gift to her clients are garlands of hops from her farm, which look like Hawaiian leis.
What is the worst thing about the beer business? Kegs! “Having kegs is like having 30 children. You have to keep track of each keg to bring it back home. It’s expensive and time-consuming. Kegs get lost. Restaurants are supposed to return them, but they put empty kegs out the back door and they often are stolen,” says Beatty.
Wormtown Brewery, Worcester, Massachusetts
Ben Roesch, Tom Oliveri and David Fields, Owners Founded 2009
“A piece of Mass in every glass” is Wormtown Brewery’s declaration (http://wormtownbrewery.com). Even though they were the first brewery in Massachusetts’ second largest city, by 2009, Wormtown was late to New England’s craft beer party. To set their beers apart, Massachusetts-grown and -produced ingredients would be the goal. For the Mass Whole line of beers, all the ingredients would come from local growers—the hops down to the grain malted at Valley Malt, the first malt house to open in New England in 100 years. Wormtown joined Valley Malt’s “Brewer Supported Agriculture” initiative, with long-term malt contracts.
warning
You’re a brewer, distiller, or cider maker. You are not, however, a distributor. That’s a whole other industry. So, leave the distributing to the experts. “We started self-distributing to get the full sales [dollars], as opposed to using a distributor who takes a portion of sales,” says Ben Roesch. “If you are self-distributing, you drop off a keg on the first of the month, and the bar has until the end of the next month to pay you. You have a receivable on your books for 60 days.” And you are in the collection business, which is a pain. “We quickly gave that up.”
“We’ve had success with Mass Whole,” says Ben Roesch, Wormtown’s brewer. “Whether that’s because we’ve priced it the same as conventional beers or because of the local ingredients or that it’s just a good beer, I’m not sure. I don’t know if our customers care about local ingredients. But it is important to me as the person making the purchasing decisions.” That is a big commitment for a new brewery. Roesch believes fresh malt adds a layer of flavor beyond what is possible with industrially malted grain. But his insistence on local ingredients is also a philosophical position: small businesses should support other small businesses.
The original Wormtown brewery that opened in 2010 was certainly small, designed to make enough beer to supply the two restaurants owned by Roesch’s partner, Tom Oliveri. The ten-barrel brewhouse fit nicely into a 1,000-square-foot storefront next to one of his cafes. “Being Worcester’s local beer was the vision,” says Oliveri.
They hit a soft target. Wormtown sales doubled from 1,000 barrels ($200,000) in 2010 to 2,500 barrels ($400,000) in 2012 and were 3,000 barrels ($800,000) by 2014 with profit margins between 15 percent and 17 percent. The new brewery opening in early 2015 allows them to produce up to 30,000 barrels a year. “One of the smartest things we did was to spend money on radio advertising to kick off our canning of Be Hoppy IPA. Demand for our flagship beer just exploded,” says Oliveri.
It helped that after their first five years they added a third partner, David Fields, a former Anheuser-Busch distributor. In an unusual twist, joining the business coincided with Fields selling his family’s beer distributorship. While Oliveri financed the first brewery with a $250,000 bank loan, Fields covered the $3 million cost of building the second one. “As we stand today, we are a debt-free company, aside from the money that’s owed to David [Fields]. If we believe in something and spending money is going to make us more money or help us, I have no problem doing it. When you have that freedom, it’s a lot easier for any business.”
And what they want to do is double down on local. “We are taking the Mass Whole series and bringing in Massachusetts herbs and spices and vegetables beyond pumpkin,” says Roesch. “Our Warthog Wheat is named after the variety of wheat that the owners of Valley Malt grow. We’ll use it on the label and tell the story of Valley Malt.”
“As the entire globe has become more intrigued by local ingredients and local everything, it gives us credibility,” says Fields. “We are committed to local, both at the senior management level and our field staff. Our sales reps have a story to tell. It matters, no question about it. Because our new brewery has twice the capacity, I thought we would add some geography to our distribution. But as I met with distributors, I realized our brand had a lot more room to grow within our existing footprint. Our brand can grow deeper in Worcester.”
Green Star Brewing, Chicago, Illinois
Michael and Helen Cameron, Owners Founded 2014
When is a brewery attached to a restaurant not a brewpub? When it sits next to one of Michael and Helen Cameron’s Uncommon Ground (www.uncommonground.com) restaurants in Chicago. Celebrated for their extraordinary environmental activism, the couple serves seriously good farm-to-table fare using organic ingredients. And from the moment they opened their first eatery in 1991, they wanted to have house-made beers on their menu. The perfect location—next door to their original restaurant—became available in 2012.
They built a modest seven-barrel brewhouse designed to serve only in-house needs and funded the $250,000 project through personal savings and a small bank loan. The space needed structural reinforcement and a search for inexpensive used equipment was fruitless, so the project was more expensive than they expected, but only modestly so. The couple pays a premium for organic ingredients—going so far as having a supplier grow their yeast on organic grain—but the cost is in line with the organic products they buy for their restaurant.
Read It . . .
Read these books to find more stories from the front lines of the craft revolution:
The Art of Distilling Whiskey and Other Stories, Bill Owens and Alan Dikty, (Quarry Books, 2009)
The Audacity of Hops: The History of America’s Craft Beer Revolution, Tom Acitelli, (Chicago Review Press, 2013)
Bourbon Strange: Surprising Stories of American Whiskey, Charles K. Cowdery, (Made and Bottled in Kentucky, 2014)
“We have always educated our staff and our customers, continually talking about the seasonality of our products, always using the best and the ripest produce. And now we can talk about the best seasonal beers to match our seasonal food,” says Cameron. “We are very consciously making a closed-loop brewery. Some of our spent grains go into our vegan spent grain and black quinoa burger, and some are dried and ground into flour we used in our Parmesan bread sticks. The rest goes to a local chicken farmer for feed.”
tip
Yes, the craft business is on a quick upswing, and you have to be ready to pounce on the opportunities. But patience does come in handy, especially when you are waiting to see if your gamble pays off. “You can accomplish anything with time and money,” says Michael Cameron. “It just took us more time, 23 years, to get the money.”
Their tagline is “do-good beer.” Green Star Brewing is the first certified organic brewery in Illinois. Beyond going to local beer festivals, they do little to actively market their beer.
