GRAND RAPIDS — As the four partners developed the business plan for Creston Brewery, they faced a key decision that would define the future direction of their company.
The question: Do they start a production-only brewery based on a distribution model of selling beer, or do they instead launch a taproom and community gathering place and focus on serving patrons over their own bar?
Very quickly, they dismissed the production-only model, said co-founder and CFO Vince Lambert.
“Trying to get on a Meijer shelf and put our beer in cans just seems way too difficult for a rookie business owner right now,” Lambert told MiBiz this week.
The business partners surveyed the craft brewing landscape and realized the highly competitive nature of retail sales did not fit their model for Creston Brewery, which opened Aug. 10, one of 826 breweries to open nationwide last year, according to new industry data from the Brewers Association.
“I think there’s definitely potential for us to grow a brand, and one day, in five years, 10 years, who knows, to distribute our beer on a bigger scale,” Lambert said. “But for now, we just want to make amazing beer and focus on a neighborhood.”
Creston Brewery fits a larger, national trend outlined in the Brewers Association data that suggests the $23.5 billion craft brewing industry is becoming more concentrated among small businesses as the overall number of breweries continues to grow.
Last year, there were 5,301 breweries operating across the country, of which 5,234 were independently owned craft breweries as defined by the Brewers Association. That’s up from 4,225 craft breweries in 2015.
Craft breweries added 1.4 million barrels of beer in 2016, even after the association stripped out several large regional breweries that no longer fit its definition of craft. Mostly, that’s because regional breweries have been the targets of acquisitions by large international brewing conglomerates like Anheuser-Busch/InBev, MillerCoors, Constellation Brands or Heineken.
Craft beer commands a 12.3-percent volume share of the overall beer market, but makes up 21.9 percent of beer sales, according to the Brewers Association.
But with a 6-percent expansion in craft beer production, the industry grew at its slowest pace since 2011.
“There’s a much higher percentage of microbrewery and brewpub production in that overall (production) number this year,” Brewers Association Chief Economist Bart Watson told reporters this week in a conference call to discuss the industry’s 2016 results. “Much of the growth … came from smaller brewers.”
In essence, the typical craft brewery last year looked less and less like super-regional producers such as Comstock-based Bell’s Brewery Inc., which sold more than 170,380 barrels of beer in Michigan alone, according to annual data from the Michigan Liquor Control Commission.
Instead, it’s an industry of smaller, neighborhood-focused companies like Creston Brewery, which sold 280 barrels of beer in the five months it was open last year.
Lambert, a CPA who founded Creston Brewery with wife Cailin Kelly and Scott and Molly Schultz, said the industry dynamics still work for companies that are appropriately scaled. Creston opened with a 20-barrel brewing system in preparation for future growth, he said.
“It was our intention from the very beginning to have a big enough brewing system to have a big taproom that all of Creston could come to, but then sort of set ourselves up so that once we do hopefully build a neighborhood following, that could build into having tap handles all around Grand Rapids,” Lambert said. “I would like to see that grow one day, but I’m seeing what’s happening with New Holland and Founders and everybody else, and I’m glad we’re not trying to compete with that.
“It’s just this cool, living and breathing local business. We’re not thinking about the Chinese beer market like Founders is.”
BEAT THE MARKET
|Brewers at New Holland Brewing Co.’s production facility transfer Dragon’s Milk into bourbon barrels for aging.
PHOTO BY JOE BOOMGAARD
Despite the market challenges, even some regional breweries have been able to buck the industry trend toward slower sales growth.
According to New Holland Brewing Co. Vice President of Marketing Joel Petersen, the Holland-based brewery beat the industry trajectory last year by shifting its product mix to higher-margin beers, namely Dragon’s Milk, an 11-percent alcohol by volume bourbon barrel-aged imperial stout that typically sells for around $15 per four-pack.
The company distributes in 34 states and this week began executing a sales and distribution agreement with Los Angeles-based Pabst Brewing Co. Even as that agreement was being implemented, New Holland’s first quarter 2017 beer sales were up 27 percent compared to a year ago, Petersen said. Dragon’s Milk alone was up 30 percent in on-premise and off-premise sales.
The deal with Pabst “allows us to do what we’re extremely good at, which is brew wonderful beers, be the experts on our brand, be the tip of the spear for craft in the market, build a brand, and market it in a way we feel it should be,” Petersen said. “And this allows PBC to do what they’re incredibly good at, which is get product to market and work with the wholesalers and key chains to drive product out there.”
Rather than focus on a more popular — and crowded — beer style like India Pale Ale, New Holland’s go-to-market strategy with Pabst hinges on Dragon’s Milk.
“This is a brand that has a potential to be the defining brand in its segment. We did a lot of homework on making sure that is the case,” Pabst CEO Simon Thorpe told MiBiz. “We can then take it nationally in the U.S. very, very quickly — that’s what Pabst does. … We need to catch the wave of what Dragon’s Milk can be and make that happen as quickly as we can.”
Petersen said the partnership with Pabst allows New Holland to grow its chain sales team immediately from one person to 50 people, which will allow it to do “an order of magnitude” more than what it had in the past.
“I think we’re already starting to see some chains paying more attention to this little brand called New Holland,” he said, noting the company brewed around 40,000 barrels of beer last year.
While smaller producers like Creston Brewery may not compete as effectively at retail with the regional and national breweries that can command more shelf space, they’re still finding ways to drive brand awareness with a grassroots approach to distribution.
Lambert would like to see Creston continue to add draft accounts slowly. The microbrewery is self-distributing its beer for now, but will likely have to start working with a distributor in the next four to six months, he said.
“Grand Rapids is a pretty collaborative and supportive city for local businesses, so I think people here definitely want and seek out the more authentic Grand Rapids experience,” Lambert said.
According to Watson at the Brewers Association, that drive for local experiences in many cases positions smaller breweries in a more favorable position to compete than regional breweries in local markets. That, in turn, could act as a drag on any growth in the ranks of regional breweries, which also face pressure from large international brands with better sales, marketing and distribution systems.
“Certainly, it’s going to be more challenging for any small brewery to break out to that level,” Watson said of becoming a super-regional or national brewery like Founders, Bell’s and New Holland. “We certainly still see micros moving up and becoming regionals. Moving from a regional to a super-regional is certainly — I won’t say coming to an end, but it will be much more challenging. Any brewery that does it will be exceptional at that point.”
For its part, Creston Brewery has aspirations of leveraging its local connections into a broader following. This year, the brewery plans to participate in more beer festivals, including the Chicago Beer Classic May 6 at Soldier Field, and align with local causes that fit its ethos, according to Lambert.
Even after little more than seven months in existence, Lambert says his expectations for the startup company have been exceeded at nearly every turn.
“I thought we’d be struggling for the first year, and we only struggled for the first six months,” he said. “I’m getting a lot of sleep at night. We’re making payroll each week, paying the bills, and we’re still having some change leftover to keep investing in right places in the company.”