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Sunday, 30 September 2012 19:26

The Mug Overflows: As breweries expand, craft brewing industry sees opportunity for growth

Written by  Nathan Peck
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Chris Andrus and Max Trierweiler Chris Andrus and Max Trierweiler

WEST MICHIGAN — Chris Andrus and Max Trierweiler know good beer.

 

The childhood friends and home brewers are seeing two years’ worth of planning come to fruition as they prepare to open their sports bar and brewpub, Mitten Brewing Company on Grand Rapid’s West Side. As they put the finishing touches on their 55-seat restaurant, Andrus sees opportunities for small craft breweries as beer consumers become more discerning about what they drink.

“What’s unique about the craft brewing industry is that they don’t compete really at all. You’re not trying to undercut each other’s price point. Craft beer doesn’t pride itself on price — it’s quality,” Andrus said. “It presents unique opportunities for collaboration that you wouldn’t see in other industries.”

What was once a basement hobby for a dedicated few now has many in the state viewing craft brewing as an economic engine for the state.

[RELATED: MiBiz's craft breweries supplemental section]

The growth of the craft beer industry is outpacing that of the rest of the beer industry. Craft beer sales grew 13 percent in 2011 compared to an overall 1.9-percent decline within the beer industry as a whole, according to data from the U.S. Brewers Association. Michigan’s craft beer industry generates $133 million in economic activity, and the state ranks fifth in the nation in the number of breweries, according to the Michigan Brewers Guild.

There’s still plenty of room for growth as just three out of every 100 beers sold in Michigan are brewed in the state — half the national average, said Scott Graham, executive director of the Michigan Brewers Guild.

“We are as a whole very healthy and are seeing great growth. Breweries have opened that I’ve never heard about,” he said, noting that even he’s often surprised by the amount of activity. “I’ve not even heard that (some breweries are) in-progress, but they’re already open.”

That observation is bolstered by statistics from the U.S. Brewers Association, which found that the number of domestic breweries is at a 125-year high. The 2,126 U.S. breweries operating as of July 1, 2012 is nearly 24 times the number of breweries from 1979, the industry’s nadir.

Despite the state’s industry growing 27 percent in 2011, Graham and others brewers in the state have their sights on the mecca of craft brewing, Portland, Ore. Approximately 14.4 percent of the 2.7 million barrels of all beer — both bottled and draft — consumed in the state were made in Oregon, according to Oregon Brewers Guild. Portland, a city of 593,000 people, boasts more than 40 breweries within its city limits, according to Guild data. The Grand Rapids metropolitan statistical area, with a population of 774,000, by comparison, has 11.

With more than 100 brewers in the state, and a spate of new breweries opening over the next six months, Michigan’s craft beer industry has caught the eye of the state’s economic developers. Rick Chapla, vice president for business development at The Right Place Inc., said the organization works to help foster a healthy environment for brewers.

“We look at craft brewing as a form of food processing, which in reality it is. Given the explosive growth that many of those companies are experiencing, ... it is a segment that has diverse workforce needs,” Chapla said, noting The Right Place is working to help brewers develop a local supply chain for ingredients such as hops. “There is a large and growing area of agribusiness in Southwest and West Michigan that is recognizing the benefit of providing quality hops at a competitive price to the craft brewing industry.”

Chapla sees heady times on the horizon for the industry and views Perrin Brewing Company, which opened in Comstock Park in mid-September, as emblematic of that growth.

“I’m mightily optimistic about its opportunities for success. They have an outstanding variety of beers,” Chapla said. “What started as a conversation three years ago has now grown into a multimillion dollar investment.”

It’s not been all sunshine and smooth sailing. Amid the flurry of new activity as breweries such as Mitten Brewing Company, Our Brewing Company in Holland and Perrin Brewing open their doors, there have been casualties. In June, the assets of Michigan Brewing Company were auctioned off after the company defaulted on its debts after a string of legal troubles dating back more than a decade, according to reports by the Lansing State Journal. Grand Rapids Brewing Co., shuttered since 2011, is being resurrected by Mark Sellers and will open near his other properties along Ionia Avenue in late 2012.

“It is unfortunate that a few breweries have gone out of business, but I don’t know we’ve ever seen this many openings,” said the Michigan Brewers Guild’s Graham.

The closing of Michigan Brewing and Grand Rapids Brewing — and the recent sale of Hideout Brewing Co. to Scott Colson and Nick Humphrey — is an indication of volatility within the industry, said Dan Slate, principal with H&S Companies, a CPA and consulting firm. That investors like Humphrey — who helped found Michigan Beer Cellar in Sparta with his father Dan Humphrey — and Sellers are investing amid the volatility indicates a maturing industry, Slate said.

Slate helped found the Brewers Professional Alliance, a consulting service catering to the unique needs of the craft brewing industry. He said that startups are still experiencing difficulty finding bank financing. Many of the new cadre of craft breweries are coming to the industry as a second or third career, bringing business acumen, but not necessarily the breadth of skills needed to understand the intricacies of sometimes arcane local, state and federal laws governing brewers, say nothing of the equity partnerships and other unique financing agreements necessary to get the beer flowing.

“Many have a lot of business savvy, but understanding the different types of financial instruments may not be the forte of many. Creativity is the key word,” Slate said.

Investors are beginning to take a look at the growth potential of the industry, and some brewers are looking at convertible divesture agreements to generate capital.

“That interest rate is much above what the average investor could make in the market, but it’s risky. There is a lot (of opportunity) out there, if you are creative,” Slate said. “You have to be mindful of how that will affect you down the road.”
The decision to get creative with financing was one of necessity for Kris and Jason Spaulding, one of the founders of New Holland Brewing Company.

The Spauldings opened Brewery Vivant in Grand Rapids in late 2010. In the midst of the credit crisis, bank financing dried up and the couple formed a private equity group to finance the project. Nearly two years later and with an expansion completed that brings Brewery Vivant’s capacity up to 5,000 barrels annually, Jason Spaulding said the industry is growing due to an increasingly sophisticated consumer base.

“I have somewhat of an interesting perspective, being part of New Holland Brewing when we opened in 1997. The craft beer industry has changed very much since then,” he said. “In the five-year window I had been away (from the industry between 2005 and 2010), it’s amazing how much the consumer has changed. We spent a lot of time back then explaining to people what pale ale is. Now, fast forward to 2010 to 2012, we are able to do a brewery that specializes in French and Belgian beers. The consumer is much more informed and that drives stores to do more with local brewers.”

While the Spauldings took the approach to remain small, on the other end of the craft beer spectrum, Bell’s Brewing Inc. recently completed installation of a new 200-barrel brewhouse in its Comstock Township brewing facility. The state’s largest craft brewer is on pace to brew 220,000 barrels in 2012. The company also recently set its sights on local sourcing of its ingredients, having recently purchased an 80-acre barley farm in Stafford, Mich., near Mount Pleasant. The barley, once it is malted, will make up a tiny portion of the total malt used by the brewery, but will go into Bell’s Christmas Ale, Harvest Ale, and its revamped Pale Ale, which is to be rebranded as Midwestern Pale Ale, said Laura Bell, Bell’s Brewing marketing director.

“We’ve learned a lot of things with our involvement with the American Malting Barley Association. That is one thing, (but) it is another to own a farm, learn how to grow barley, (to understand) how that impacts the quality,” Bell said. “Agriculture is such a big part of the Michigan economy. It felt like the right move to commit to owning farmland in Michigan, to make sure that our barley and malt are up to our standards. Obviously, we are close to the land and we have to have a good understanding of the ingredients that are going into our beers.”

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