The beauty of craft has been that you can start out small and learn as you grow. That has never been truer than it is today. The growth, however, used to come as a result of backbreaking work. Today, growth can happen far more quickly and with less effort. It can be a function of being located in the right place. It can come from a fat check from an investor. Or you can be successful in a niche that makes you attractive to a larger company that needs to diversify.
The free-for-all will become more chaotic with so many early craft founders looking to retire, move on, or step back, and so many large industrial beverage companies seeking to buy in, takeover, or dominate. Change will happen quickly with unexpected ramifications.
“Every brewery you can name is ripe for being bought out. But they won’t do it. They’ll be seen as sellouts by other craft breweries. It would tarnish their image,” says Michael Lewis, professor emeritus of Brewing Science at University of California, Davis.
“The next younger generation might sell,” Lewis says. “They make superb beer, but aren’t quite making it financially and can’t afford to expand. They are successful, but struggling in the middle, making 100,000 to 150,000 barrels a year. They can make a deal that allows them to continue to be engaged in their breweries.” These companies—new players entering the craft industry that are neither the independent-minded entrepreneurs who founded craft, nor the giant industrial companies like Anheuser-Busch that craft has worked to defeat—are a mystery. No one knows who these new players will be or what effect they will have on craft.
The disruptive effect of the big companies playing in craft’s small sandbox may not end to their advantage. Craft is interchangeable to the vast majority of consumers, regardless of who owns the brand. Once consumers develop a taste for craft, they stick with the higher quality, more flavorful beverage. They don’t go back to the cheap stuff.
tip
Stay loyal to craft and protect your identity. “Craft breweries aren’t growing the beer market. They are taking market share away from big beer companies, and those companies are going to buy anything they can to gain craft legitimacy. But only an idiot would think you could quickly build a craft beer brand with the idea that you can sell it to Big Beer,” says Lewis.
Rather than blunting crafts’ most powerful marketing tool—the ability to differentiate themselves from industrial producers—the involvement of Anheuser-Busch and MillerCoors in craft helps grow the craft sector at the expense of Budweiser and Coors, says Beer Market Insight’s Steinman. With Blue Moon (MillerCoors) and Shock Top (Anheuser-Busch), “they invited drinkers to switch to craft,” says Steinman, and it is speeding the erosion of sales for their flagship brands.
Price is the wild card with craft. Bigger companies with efficiencies of scale can start price wars that craft producers cannot win. In fact, they cannot even play. Gaining market share by cutting prices is such a dangerous game for craft producers, it has happened only on rare occasions. Anheuser-Busch and MillerCoors have the advantage here. They could drop the price of their “craft-ish” or craft satellite brands and leave it there for as long as it takes to squeeze the craft competition. But with revenues tanking, there are just as many reasons to believe that Big Beer will avoid doing anything that depresses craft prices. In fact, it may turn out that craft creates a rising tide that truly does lift all boats, even the big companies, as consumers become used to paying a premium for higher quality food and beverages.
Craft isn’t a fad or a trend. It is part of major shift in how consumers view what they eat and drink. And, so far, the transition to new owners has been quite civilized. Everyone appears to be concerned with the long-term viability of these companies as well as the craft sector.
There are many ways to cash out of a company. But many craft producers, particularly the pioneers of the American craft beer and spirits movement are people with an anti-industrial, anti-corporate streak. When there is news of a craft company being purchased by Anheuser-Busch, other craft producers respond as if a friend has died. Someone they know “went to the dark side.” That is what John McDonald and Fritz Maytag faced when they were ready to retire.
This limited their options for selling their companies and moving on to other things, or even simply retiring. Below are the stories of these two craft pioneers. They sold their companies and are happy they did. And they did it in such a way that the rest of their craft sector is applauding their moves. The stories offer insights into the craft culture and the type of people who have led the industry, but also the difficulty of passing the torch from one generation to the next. It took these founders years to find the people they trusted with the future of their companies. As more of the first generation of craft producers seeks to retire, this transition may grow easier. There will certainly be more and more options with so many new people wanting into the craft sector. The largest craft companies will grow larger, and there will be more opportunities to work for them and gain the training you need to start your own venture.
These succession stories are still unfolding. They’ve started well and it will be illustrative to see how these companies fare over the coming years.
Anchor Brewing and Anchor Distilling
It was a whim acted on quickly with little thought. That’s how Fritz Maytag often speaks of his decision in 1965 to buy Anchor Brewing (www.anchorbrewing.com). That whim turned into a passion that lasted 45 years. By the time he was ready to sell the company, Maytag moved far more slowly. Anchor was both a craft brewery and a craft distillery as well as the sum of his life’s work.
Maytag spent years meeting with potential new owners, but no one felt like the right fit. Then six years after he first met with Keith Greggor and Tony Foglio, he circled back to them to shake hands with the guys who were shepherding Skyy Vodka through an explosive growth phase that culminated with the sale of the brand to liquor giant Gruppo Campari. It doesn’t get less craft than that. The father of the American craft beer and spirits movement sold his baby to a couple of Big Booze hacks.
At least that’s how it looked to some people in the industry at the time. Four years later, it is clear Maytag saw something in the pair that may not have been obvious to others. Anchor is growing at a much faster pace, certainly, but it has not lost its focus on innovation, creativity, or quality. Decisions are made with a respect for the authenticity of the Anchor brand, says David King, head of the distillery. No one cuts corners.
“Fritz was a very careful seller with interesting requirements,” says Greggor. Out of respect for the historical significance of the Potrero Hill brewery in San Francisco, he wanted the brewery and distillery to stay where they were, and he wanted his employees to stay there, too. “These are things that are difficult to put into contracts. So it came down to faith,” Greggor says. Partnered with Berry Brothers & Rudd, a 300-year-old London wine and spirits merchant for the Anchor deal, the pair also owned San Diego-based Preiss Imports, which had a portfolio of craft spirits brands from around the world. Greggor and Foglio also had invested in BrewDog, a sensational British craft brewery.
“Berry Brothers is a huge believer in education with their wines,” says Greggor. “And that’s the way to approach craft consumers as well. Developing the Anchor brands would be about education.” They folded Preiss Imports into Anchor Distilling (www.anchordistilling.com). But they kept operations, sales, and distribution of Anchor’s beers separate from Anchor’s spirits, which required doubling their sales staff from 12 to 25. “It was a grand experiment. No one had ever done anything like this before. It was a scary time,” says Greggor. “People drive this business. It is always about the people. We tripled the spirits business in four years.” Anchor Brewing’s beer sales have doubled, and the company announced plans to build a second brewery near the Giants baseball stadium that will add 500,000 barrels to Anchor’s overall production capacity, which is currently close to 200,000 barrels at the historic Potrero Hill plant.
“The category is vibrant,” says Greggor. “A lot of private equity money is floating around. But you cannot build your business fast enough to satisfy those people. The last thing we want is venture capital money. The new brewery ensures our survival” as independent craft producers.
“The credit for Anchor’s successful transition goes to Fritz,” says David King, who runs the distillery. “He laid the foundation we are building on. Fritz would recognize everything we are doing; we’ve just increased the pace a bit, put more resources behind the ideas.” Craft spirits is about telling a story. Every one of our products has a story that is true to Anchor and San Francisco,” he says.
In the fall of 2013, John McDonald sold his Kansas City-based Boulevard Brewing Company (www.boulevard.com) to the Duvel Moortgat Brewery, a fourth-generation, family-owned Belgian beer company, for $125 to $150 million, according to industry analysts. The 12th largest U.S. craft brewer at the time, Boulevard produced 185,000 barrels of beer that year. Duvel is smaller than some U.S. craft breweries, making 700,000 barrels. Speaking to a Brewbound conference, McDonald said he started thinking about selling the brewery when he turned 59.
“We needed to take Boulevard to the next level,” says McDonald. “We needed a lot of things. And I had become disengaged. I was part of the problem. Selling the brewery was part of solving that problem. It was very emotional. In my mind, I did the right thing. I impulsively got into the beer business, and I impulsively got out.”
McDonald said he considered selling the company to his staff in an ESOP—an employee stock option plan—a frequently discussed endgame for craft brewery pioneers. January of that year, New Belgium Brewing Company founder Kim Jordan had sold all of her family’s interest and control of the brewery to employees through a long-established ESOP already holding a 41 percent interest in America’s third-largest craft brewer. Deschutes Brewery, Full Sail Brewing, and Alaskan Brewing have taken advantage of the succession tool’s advantageous tax provisions and established ESOPs holding minority interests in their breweries. And as of August 2014, an ESOP formed by Boston’s Harpoon Brewery holds 48 percent of the company, allowing cofounder Rich Doyle and other early investors to liquidate some of their holdings.
Private equity offers were considered and rejected, says McDonald, noting that the brewery would have been in flux until those investors flipped it to other owners. “It would go someplace I didn’t intend for it to go.”
Discussions of a sale to MillerCoors became serious, McDonald says. “It didn’t seem right to me. They’re good guys, but wasn’t the right fit. Once we started talking with Duvel, the more I looked at it—and they are one of my favorite beers—it seemed right. Duvel kind of invented craft beer. They’ve been selling high-margin beer longer than any of us.”
McDonalds’ lawyers advised him to step out of the negotiation and let them handle it, which was fine by the then 60-year-old brewer. But when the negotiations started to stall and the deal appeared to be hanging by a thread, McDonald jumped in. “I flew to Belgium on the spur of the moment for three days and hammered out some details. I got a better feel for them. I was on the ledge. But when I went over there, it changed things. It saved the deal. It gave me a chance to meet the Moortgat brothers, to meet some other people. We talked about employee benefits. You want your people taken care of.”
More than the money, McDonald said he was concerned about the future of the brewery. “I was looking for an active partner that could bring a lot of things we didn’t have, not really looking for a big brewery” to absorb Boulevard, he says.
“We’re a little bit tired now. We just finished the transition. We have a much more interesting pool of people to pull ideas from. Going forward in the craft beer business is going to be tougher. Making good beer is just the table stakes,” he says. “There is a lot of optimism. Amazing things are happening in the U.S. craft today; if you can figure it out, you can make a lot of money. Everyone wants local, but the business is more global than ever. Go figure.”
The future for craft has never looked more promising, thanks in no small part to pioneers like Maytag and McDonald. Craft may have started out a ragtag sector, but many craft companies have grown into exemplary operations. The sector is maturing with example after example of smart, insightful operators growing their businesses in constructive, thoughtful ways. The more you learn about the craft beverage business—particularly craft beer—the more you find yourself wishing the rest of American business offered so much opportunity within such a collegial community.
Craft is, without a doubt, a more competitive environment than it was five years ago. But this sort of maturity sets an example for thriving in a wild and crazy business. The pieces are in place for a strong future for the sectors and for any craft business that launches now. It may never be a better time to start a craft company.
The wind will be at your back for the foreseeable future.