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Sunday, 24 July 2016 13:46

Michigan sits out ‘arms race’ to attract national brewery investments

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Sierra Nevada Brewing Co., the nation’s third-largest craft brewer, invested $110 million into a massive 300,000-barrel production facility in Mills River, N.C., about 20 miles south of Asheville. The brewery and taproom created 95 full-time jobs and 80 part-time jobs when it opened in 2012. Sierra Nevada Brewing Co., the nation’s third-largest craft brewer, invested $110 million into a massive 300,000-barrel production facility in Mills River, N.C., about 20 miles south of Asheville. The brewery and taproom created 95 full-time jobs and 80 part-time jobs when it opened in 2012. Photo by Joe Boomgaard

When Deschutes Brewery founder Gary Fish launched a two-year search to locate the Oregon company’s first satellite production facility, one of his top criteria was determining whether the state and local community wanted his business.

Fish was also looking for a location that gave the country’s eighth-largest craft brewery access to the most-expensive transportation network with the lowest cost, provided a high quality of life for his employees and offered progressive liquor laws. A consulting group helped the brewery narrow its search to about 35 locations across the Mid-Atlantic, before the company ultimately selected Roanoke, Va., where it expects to begin construction in 2019. The commonwealth welcomed the company and its $85 million investment with open arms, he said.  

“We wanted a community that wanted us to be there,” Fish told MiBiz. “We ran into communities with anti-growth movements and we didn’t want to go somewhere where there was a fight already. … If a community wasn’t interested in working with us, it was hard to justify investing there.”

Although Fish admits he never entertained Michigan as a site for the expansion, it’s unlikely the state would have fit his criteria. 

Even with Michigan’s reputation as a craft beer destination and two of the nation’s top 20 producers, the Michigan Economic Development Corp. and other agencies have adopted a hands-off approach when it comes to attracting out-of-state breweries to invest in secondary production facilities in the state. That’s despite a period of rapid expansion for the nation’s $22.3 billion craft beer industry — which now includes more than 4,200 breweries — as companies look to move production closer to customers, cut transportation costs and ensure the freshness of their products. Critics argue the state could be missing out on millions in outside investment and new job creation as a result of this hands-off strategy. 

What’s clear is that the states actively courting brewery expansions have succeeded in securing major investments. Since 2012, craft breweries from the West Coast and Rocky Mountain region have committed more than $500 million to establish satellite facilities in just two states, Virginia and North Carolina, according to an analysis by MiBiz

In North Carolina, Fort Collins, Colo.-based New Belgium Brewing Co. opened a $175 million satellite facility in Asheville this year, while Sierra Nevada Brewing Co. of Chico, Calif. invested $110 million into a massive brewery in Mills River in 2012, according to reports. Oskar Blues Brewery of Longmont, Colo., the parent company of Perrin Brewing Co. in Comstock Park, also opened a satellite brewery in nearby Brevard, N.C.

Investment has also poured into Virginia, which secured the Deschutes project and secondary breweries for Escondido, Calif.-based Stone Brewing Co. ($74 million), San Diego-based Ballast Point Brewing Co. ($48 million) and Green Flash Brewing Co. ($20 million), also of San Diego. 

“There’s a lot to be said about attracting those large breweries with lots of industrial capacity and lots of high-wage employment,” Jason Notte, a beer-industry columnist for MarketWatch, said in a recent interview with MiBiz. “It’s an arms race between Virginia and North Carolina right now. Contrast that with Michigan, who’s kind of like, ‘Meh.’ That’s going to come back on you.”

To date, only one out-of-state brewery has announced plans for a satellite facility in Michigan. Chicago-based Haymarket Brewing Co., which brewed 1,500 barrels in 2015, purchased the former Michigan State Police post in Bridgman in Berrien County, which it plans to convert into a 100-seat taproom and 30-barrel brewhouse, according to reports. 

LACKING REPRESENTATION 

Michigan economic development officials also have largely ignored supporting the industry at its major trade shows, including the Brewers Association’s annual Craft Brewers Conference & BrewExpo America, which attracted 13,600 attendees and 835 exhibitors this May in Philadelphia. More than 20 Michigan companies, ranging from raw material suppliers to equipment manufacturers, exhibited at the show, which was attended by dozens of the state’s breweries. 

Contrast Michigan to other states, which regularly send economic development and department of agriculture officials — and representatives from various local agencies — to represent their state’s craft brewing industry and seek out new investments. 

According to Notte, Michigan ignores the industry at its peril and appears not to have learned its lesson from the last couple of decades when the state ceded automotive production facilities to the southern U.S. 

“How has Michigan not figured out that it lost out on Mercedes-Benz, it lost out on BMW, it lost out on Toyota, it lost out on all these places that are building plants elsewhere,” he said. “Michigan brings enough of this down on its head on its own, and they really need to wise up.” 

A DIFFERENT TAKE 

Virginia’s fervent push to attract large breweries and the industry’s supply chain evolved from a larger reinvention of the state’s economic development strategy starting in 2014. Faced with a federal funding cut, state officials opted to focus on growing specific sectors, including craft beverages, said Virginia Secretary of Agriculture and Forestry Todd Haymore.

For Virginia, the benefits of courting breweries extend beyond the immediate jobs and investment created in cities where the expansions take place, as the projects also impact rural communities, Haymore said. One of its statewide economic development funds — which Deschutes, Stone and Ballast Point qualified for — requires breweries to purchase at least 30 percent of their raw materials from within the state, meaning their investments also provide a boost to Virginia’s farmers. 

“It’s the ripple effect,” Haymore told MiBiz. “Wine, beer, distilled spirits, cider — those products start on the farm. It’s helping the larger economy, but also the rural economy with the jobs and investment.”  

While incentives are important in attracting outside breweries, it mostly comes down to the business climate and the state’s willingness to do business, Haymore said, noting that Virginia rarely offers the most cash in comparison to others vying for the same project. 

“You’re getting a state that not only wants you now, but is going to work with you and wants you in the future because we know it’s important to our future,” he said. 

BEER DRAIN? 

It was that attitude that lured a West Michigan craft beverage industry supplier to invest in an expansion in Virginia. In a deal announced last December, Byron Center-based Pilot Malt House LLC, a supplier of malted grains to craft breweries and distilleries, announced it was making a $1 million investment in a malting facility in Lucketts, Va., about 50 miles northwest of Washington, D.C.

The deal sprung from a brief meeting the company had with economic developers and Haymore during the 2015 Craft Brewers Conference in Portland, Ore., said Erik May, president of Pilot Malt.

“I love (Michigan), but it’s incredibly frustrating to deal with our state’s government,” May said. “That extends to the lack of incentives. We never came into this expecting grants, but it’s frustrating when I see states like Virginia that view their government as being there to help, not to regulate.” 

The commonwealth’s government supported Pilot Malt’s expansion with a 12-year tax abatement and a five-figure incentive package, he said. After encountering some initial delays, May expects the facility to be up and running by the end of 2016. 

Virginia is among the states that have actively tried in recent years to recruit Detroit-based Atwater Brewing Co. to build a satellite brewery, said President and CEO Mark Rieth, who noted South Carolina had also reached out. In 2017, Atwater plans to open a brewery in Austin, Texas, where Rieth says a growing youth and music scene will better drive profits for the brewery. Atwater will join Oskar Blues in setting up shop in the city. 

PRIORITIZING DOLLARS

In contrast to Virginia national outreach, Michigan economic developers have focused on supporting the growth of existing breweries. That decision comes as the state opted to focus its economic development resources on attracting large projects, such as in the automotive industry, said Peter Anastor, director of the Michigan Department of Agriculture and Rural Development

“One of the largest areas of focus is in agriculture and food processing, and (brewery attraction) projects would fit into that area,” Anastor said. “(But) the focus hasn’t been in that attraction mode. (Instead, it’s) how do we support the industry. But that doesn’t meant that can’t change over time.”

The MEDC deferred to Anastor for comment on this story.

So far, the state’s support of breweries has been limited mainly to performance-based grants for expansions and job training and help with other infrastructure projects. 

Grand Rapids-based Founders Brewing Co. has been among the main beneficiaries, receiving $250,000 in 2014 and $2 million in 2012 from the MEDC for two eight-figure expansion projects. Harmony Brewing Co., also of Grand Rapids, received $1.7 million to rebuild the former Rauser Sausage Factory in the city’s west side neighborhood into the brewpub’s second location. Among other statewide brewery projects supported by the MEDC, Arcadia Brewing Co. received $575,000 in incentives for its Kalamazoo facility in 2012. 

OPINIONS VARY 

Whether the state should even try to lure out-of-state breweries remains a point of discussion within the industry, given the mixed reactions from Michigan brewery executives interviewed for this report. 

On the one hand, Founders CEO Mike Stevens agrees with the state’s current economic development prioritization. 

“Being that there are more than 200 breweries in Michigan and the state currently ranks number five in the country for amount of breweries, perhaps the state feels incentive-based programs are better served focusing on other industries that need more attention,” Stevens said in a statement to MiBiz.

Meanwhile, Rieth of Atwater believes economic developers should court the best available projects, regardless of industry. 

“You want to bring in (strong) companies,” Rieth said. “There has been a lot of talk lately about why aren’t we bringing more automotive companies here. The same should be true for the brewing industry.” 

In addition to budgetary concerns and prioritizing funds for economic development, Michigan also presents logistical challenges for expanding brewers because of the state’s poor infrastructure, harsh winters and added transportation costs from being a peninsula. 

“You’re not going to attract a big West Coast brewer — it doesn’t make that much sense for Michigan,” said Don Schjeldahl, a principal at Kent, Ohio-based DSG Advisors who assisted Sierra Nevada in expanding in North Carolina. “Distribution-wise, you’re out on the end of the spoke — you’re only serving half a circle. … All those breweries that have came out of the West, you notice they’re all in North Carolina and Virginia. That’s the spot if you’re going to have two breweries. The center of the country has been slower to adopt craft beer as a culture.” 

Still, communities stand to gain from courting craft brewers, said Fish of Deschutes Brewery. The craft brewing industry contains many companies that consistently invest in expansions and add high-quality jobs. 

“I have $25 million in payroll — this is not a hobby,” Fish said. “These are important businesses. … It’s a debate communities need to have. If you want to attract breweries, then you will. If you don’t, then you won’t.” 

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