Published in Manufacturing

As headwinds arise, craft brewers refocus on community, smart growth

BY Saturday, May 26, 2018 03:17pm

The craft brewing industry continues to evolve at a rapid pace. 

As breweries strive to stay relevant in the eyes of thirsty customers, they also need to find ways to keep their distributor and retail partners happy. Companies need to balance all those demands and more if they plan to grow beyond the taproom model, which still provides their most lucrative sales.

Michigan's craft brewing sector faces many headwinds, including heightened competition from the latest wave of brewery startups, growing price segmentation and figuring out how to get in front of and meet consumers’ demands. However, most still see opportunities for their companies to grow, particularly when focusing on their home turf.

That’s according to a group of brewery owners MiBiz convened this month for a craft brewing industry roundtable. Participating in the discussion were:

  • Justin Buiter, co-founder of Dutton-based Railtown Brewing Co., which is in the process of moving to a new, adjacent facility and opening a restaurant
  • Mitch Ermatinger, founder of Speciation Artisan Ales LLC in Comstock Park, a wild and sour brewery that expects to open a taproom sometime this summer
  • Travis Fritts, co-founder of Old Nation Brewing Co., the Williamston-based makers of the wildly popular M-43, a New England-style IPA
  • Dennis Loughlin, senior counsel based in Southfield, Mich. and head of the craft brewery practice at Warner Norcross & Judd LLP, the Grand Rapids-based firm that sponsored the roundtable
  • Seth Rivard, co-founder of Rockford Brewing Co. LLC, which was named the Small Brewpub and Small Brewpub Brewer of the Year at the Great American Beer Fest last fall.
  • Jason Spaulding, co-founder of Grand Rapids-based Brewery Vivant, a Belgianand French-inspired brewery and restaurant founded in 2010
  • Tim Suprise, founder and CEO of Kalamazoo-based Arcadia Brewing Co. LLC, a microbrewery originally founded in Battle Creek in 1996 that is licensing its name to a brewpub and barbecue restaurant in Lansing that plans to open this month.

Here are some highlights of the lively conversation.

The national trends suggest a leveling off or plateau in the growth for the craft brewing industry. How do you see the industry changing these days?

SPAULDING: I had a strange realization the other day. We’ve been open for about seven and a half years. I just looked back at my business plan the other day, there were just about 2,000 breweries open when we opened in 2010 and now there’s more than 6,300 at last count. Over half the breweries that are opened now have opened in the last four years. At seven and a half years old, we’re already considered an older brewery in the industry, which is kind of crazy to me.

SUPRISE: The pie isn’t growing the way it used to. Market share continues to grow, but the pieces of the pie are getting smaller for most people with some notable exceptions. … The models for growth and development, particularly with the consolidation on the distribution side, mean the circle around your brewery is much tighter than it ever was before. Having that saturation closer to home is now more important than I’ve ever seen it.

FRITTS: The typical and traditional model of sales for breweries is to work the threetier system, which is ultimately to produce the beer that we make, have some sort of an incentive program that surrounds that beer … and tell the distributor, ‘These are the incentives for your staff to sell this brand.’ That, I think, has been working less and less the more competitive the beer market gets.

LOUGHLIN: There’s a saturation point that I think we’re reaching, that you can only have so many beers on a retailer’s shelf. If you’ve got a great brewpub, that’s great, (especially) if you were adequately capitalized to begin with.

BUITER: I think we’ve got to keep an overall perspective, too. This leveling-off, I mean we’re still talking mid-single digit growth for most folks, even in a worstcase scenario. There are a lot of industries that would take that year in and year out. The last 15 years, we’ve been in a special time as an industry. … There’s been strong growth for a very long time, and in all honesty, we’re probably pretty spoiled with that.

How does the narrowing window for distribution and the increased competition serve to emphasize the importance of connecting directly with consumers at your taprooms?

ERMATINGER: (Taprooms produce) a higher profit margin that will allow you to do more things and maybe even take some more risks with more experimental beers. For us, we sell mostly packaged products to-go every month. Since we’re selling most of it directly, we have pretty good margins, but still not nearly as much as having a taproom that’s open four days a week — even one day a week could be great for me right now. That’s just increased profit margin that allows you to do more things really, and it just provides more stability. It’s a lot more stable for cashflow.

RIVARD: On top of what he’s saying, it definitely feels to me right now that there’s a race for finding these open areas to be the local brewpub.

SUPRISE: An experience-based cultural shift I think is what taprooms are benefiting from. … I think that taprooms do have an experiential opportunity to build a culture that we all need. Quite frankly, it’s all part of trying to stay relevant.

SPAULDING: I also see the taprooms as a way to build your brand in a wholesale market because you are doing the job of winning people over, giving a visual to spot your brand in the market. I almost think you need to do that if you’re going to survive as a small brewery, and you’re doing your distributor a service by doing that. Otherwise, it’s a long road trying to establish a brand name without having that opportunity to build those fans one at a time.

Many taprooms also seem to be serving food these days, which comes with its own set of challenges. For those that have restaurants, is it worth the new hassle? Does it change how customers view your company?

SPAULDING: We kind of went down the path of having emphasis on a really solid restaurant idea — a food menu, in addition to the beer. We talk about how we put as much effort into the menu as we do our beer, and the sales go hand in hand.

RIVARD: People are starting to look at us more like a brewpub, in a sense. A lot of people don’t realize we distribute our beer as well. But what’s been the most fascinating to me, I’m surprised how big of a demographic non-beer drinkers are that come in and they want wine or cider. And I’m even more surprised how many nondrinkers at all come in. They love the food, they want the food, and they don’t want any alcohol at all. So on that front, it’s been a great niche for us.

BUITER: We’re hoping it’s positive.

FRITTS: Our pub is a full-service restaurant that my wife runs. It’s doing somewhere between $40- and $50-grand a week. We’re doing about 5,000 (case equivalents) of beer out of the brewery every week, about 4,000 case equivalents of that is M-43, which is our flagship brand at the moment. … It’s huge for us. I mean, it’s a $2 million dollar a year restaurant and it’s awesome. Ultimately, what the restaurant does is accentuate the philosophy of the brewery through its food and through the service.

As breweries start to focus more on serving local markets, does that change your distribution plans and force you to think differently about your business model?

SUPRISE: It used to be I could sell some beer every month in St. Louis or in Kansas City or in Philadelphia without having somebody in that market, or maybe sending somebody into that market three or four times a year and still manage to sell 300, 400 or 500 cases. Today, you’re not even relevant unless you’ve got a real major push. It’s a good thing, actually, because it forced us all to really draw in the focus closer to home.

SPAULDING: Our brand couldn’t make it in Chicago. We had to pull out. There’s just too many regional breweries there. It’s just a different reality. Luckily, we didn’t build having to sell 5,000 barrels of beer in Chicago, otherwise we’d be screwed.

RIVARD: We’ve always wanted to do bigger distribution, but most of the beer we make gets sold in the pub, and that’s our first limitation. Every year that goes by, we feel like that window of opportunity is getting tighter and tighter and that it’s harder and harder. However, we do feel we have our foot in the door because of the brand that we built and people know us and whatnot. We still feel like if we execute an offsite facility or a second location with a bigger system, that if we do package some beer beyond kegs such as bottles or cans, ... we have good opportunity to distribute that.

BUITER: We got going at the community level. We wanted to have a positive impact on our community. We worked corporate America for a decade and it sucked. … That was a big reason we got going. We wanted to develop those relationships locally. We’re passionate about beer and we want to share that beer with as many people as we can. For us, it’s more about that local relationship. If the distribution comes and people start demanding our product beyond that, great — fantastic.

SPAULDING: I would love for people in Grand Rapids to be proud that we’re here and they’re going to drink my beer because it’s the beer made in their town. That can’t work everywhere because there’s a certain finite distance that it’s going to work. It also takes time to build that. We’re seven and a half years into it. There’s that adage that it takes 10 years to build a brand, and I think that’s probably true. I think we’ve got some good foundation and I think it’s starting to happen, but there’s little bit of time where we also have to be patient.

LOUGHLIN: In order for that to work, there has to be a true passion and authenticity behind what you’re doing as opposed to ‘I’m going to get into the craft brewery business because it’s cool right now.’

SPAULDING: If an exit strategy is in your business plan, you’re getting into the wrong business. … Those who are coming to the table with multiples and an exit plan, if those are the first things out of your mouth when you’re starting a brewery in today’s world, it’s going to be a different experience for you.

How can you leverage that connection to communities to drive your business?

SPAULDING: In Travis’ case (at Old Nation) … he’s let the market tell him how much beer to make. You get people asking for it. That’s a whole other less risky way to grow rather than putting the cart before the horse.

FRITTS: We just say, ‘Try it.’ We communicated with folks until we found enough people that we believed who told us what it was that they wanted. … It just kind of took off from there. We had thousands of people out there proselytizing for us and really becoming advocates for us and then becoming better than paid salesmen. I still don’t have a salesman. I will do at least 16,000 barrels of beer this year, and I don’t have one salesman.

BUITER: In essence, you’ve got 3,000 salespeople and that’s that relationship building.

What role does social media play in driving that communication with the community, however you define it?

FRITTS: It seems silly. I’m 39 years old. Social media — I was not into it. But then when we tapped into it, it became extraordinarily powerful, and essentially we were just trying to speak truth to power, and it worked.

ERMATINGER: As much as I talk about how much I hate Facebook and social media, if you own a business it’s so powerful. We attacked just getting the word out in a lot of different ways. Social media was obviously the key to all of that. … It’s Instagram, it’s Facebook. And so because of that, we don’t have a salesperson because we have all these little salespeople everywhere. The problem (with social media) is it’s soul-draining and you always have to do it. That’s kind of the downside to it. We’ve built this business around my ridiculous personality and sometimes that’s a problem when I’m like, ‘I don’t want to be on social media for a month.’ But it has to be done and I have to be into it and it has to be my voice. I can’t just pass that part of the job off to somebody.

How does the continued consolidation of the distribution tier affect your business?

RIVARD: To me, it seems like another opportunity for brand burying — distributors picking up brands and basically burying them. They’re focusing on the cash cows and throwing bones to the guys that are in the middle and just burying the ones that are on the bottom.

FRITTS: They have a different business model than we do. We’re worried about one brand and they’re worried about spreading risk across a number of brands so that if one fails there’s no problem with regard to their cash flow. Exactly how they should do business is how they’re doing business. To us, it seems impersonal and horrible because they’re not understanding our passion and our story.

LOUGHLIN: They’re also protected by the distribution laws in almost every state that were written by them 100 years ago, sent down on tablets from the Lord above to these families that are going to own them for the rest of eternity. Try and be a brewer in the distribution system and have a problem. Really, the only way that you can get out from underneath that (distributor) agreement is if there’s literally fraud in what they’re doing and you caught them at that.

FRITTS: It’s up to you to drive your brand. And there’s so many breweries for so long … that are gnashing their teeth because the distributors aren’t helping them. Of course they’re not f***ing helping them. That’s not their job. … It’s incumbent upon you to make your brand work.

SUPRISE: That’s wherein the rub lies because the historical model for brand building was a shared equity, a joint-equity value proposition. The consolidation factor and what it does, it consolidates the channels to distribution for craft brewers, but it also becomes the clearinghouse then. This is what the distribution tier has had to face because of the sheer number of brands that they acquire as a part of the consolidation process.

LOUGHLIN: Then you’ve got to find the alternative distributor that’s willing to go to bat for you and buy your brand away from (your existing distributor). That’s the only reasonable way that you get out.

FRITTS: So we’re back to ‘it is what it is.’ So you have to find a way to work around it. … But if you in your business model depend on a distributor to do anything in particular for you outside of delivering your beer to certain points which you designate — or designate in conjunction with them — then you are selling your company short going forward.

At the Craft Brewers Conference, former Bell’s Brewing CEO Laura Bell brought up this notion of price segmentation in the craft beer industry. While breweries like Founders Brewing are putting out 15- and 24-packs at a slight premium to the macros, Old Nation seems to be selling a lot of M-43 at $15 per 4-pack. How will that two-tiered pricing strategy shake out?

ERMATINGER: I think (Founders) is operating in their own kind of world, but as a whole, craft beer needs to work on increasing the price.

SUPRISE: What Founders is doing with Solid Gold and/or the 15-pack package in general … (is) reflective of a rather long-term investment in production capacity that I don’t have to worry about. I’m not a 15-pack operation. I agree with Mitch and increasing the value proposition of our products.

SPAULDING: Where you are seeing a lot of this (sales) growth is coming out of chains and you have to be situated in a certain way to really give chains what they want. … I am concerned. I’m not a 15-pack brewery — I can’t play that game. I know I can’t play that game and that’s what these chains want. It’s the volume mover. So we try to keep finding ways. We need to appeal directly to the people that want the beer and find ways to make beer and find ways to get it to them.

RIVARD: The lines definitely have been blurring over who’s small, who’s medium, who’s large, who’s really large. Every year it’s a little more blurry. I think the consumer base still recognizes the price points of each size and what they pay and they’re willing to pay that. But as the lines get blurrier and blurrier, I think there’s a potential problem there. Why would I pay that much for a small craft beer when I can get this?

SPAULDING: There’s a place for all these breweries in craft, but I think it’s amazing that there’s 15 packs in Rite Aid and they’re buying great-tasting craft beer in those stores where it wasn’t before. We can’t all follow the same business model. I think we need to defend our small business models and continue to find other avenues. They’re opening doors in places where people are looking for those beers, and I know eventually, they’ll find my beer because they moved from Miller Lite to All Day IPA to now, when they’re in the store, they might be open to trying someone at this table’s beer.

On the flip side of the pricing question, have craft brewers established a price ceiling yet?

FRITTS: There is a commodity priced food product and there is a specialty item, essentially. In the past, your Anheuser-Busch products and Miller products would be the commodity food product. If you want some beer, you can go get ‘some beer.’… My brand requires me to spend a great deal of money making the beer and bringing in thousands of dollars of fresh yeast and hops … in order to make this beer the way it’s supposed to be. That’s expensive and so I charge folks for that. If they don’t want to pay it, they don’t have to. Right now, it seems like they want to pay it.

ERMATINGER: Back to the brand-building thing, (customers) come in here and are like, ‘Oh yeah, they make it here. Those are barrels I’ll taste someday, maybe, if they’re good.’ Especially with what we’re doing, that’s why we charge so much for our beer. First of all, we dump a lot of beer and also we put a lot of labor into a small amount of beer and it takes a long time to produce.

SPAULDING: We need the smaller breweries to keep innovating, keep bringing new things to the table, make wonderful and expensive beers and f***ing charge for them. I don’t want to see your beers in a 15 pack, Mitch.

ERMATINGER: I wouldn’t be open. We sold 173 barrels last year, and we have three full-time employees and two part-time employees. If we were doing that, we would not be in business.

SPAULDING: You just need to keep making the best beer you can make and charge what you have to charge for it.

Let’s end with one question we always like to ask executives: What are some of the issues going on in your industry right now that are keeping you up at night?

BUITER: I’ve got a lot of things keeping me up, but they’re pretty near term. Overall, I’m fairly confident in the market. We’ve got a growing consumer base in terms of not only education in craft beer, but a desire to pay more for that product. I think we’ve seen a real generational shift away from quantity and moving to quality. … We’re seeing a leveling-off, so to speak, we’re seeing saturation, so to speak, but I think it’s going to strengthen us. I think it’s going to move us forward in a better, stronger way as a group. You’re going to see the cream rise to the top and you’re going to see some thinning out, which is going to be a little bit painful but I think overall it’s going to be a good thing for us.

LOUGHLIN: For a while, there was ‘stupid money’ out there, especially for this industry because it was deemed to be kind of unique and cool and it attracted a lot of people that were interested in investing in it. There were some aberrationally high multiples. But I think the window is incrementally, gradually closing. I don’t think we’re setting ourselves up for a harsh landing like we did with the recession, with the bottom following out of the market. But we’re far enough into the cycle of investment where they’re seeing some of the results of their investments. Then kind of the flip side is with all of these startups (and the need to be) adequately capitalized. That’s like the big thing. It’s easy to get into this and open your doors and just not have enough cash to get to the next level.

SPAULDING: For us at Vivant … we were in a larger footprint with Meijer and got consolidated into a smaller footprint, so it feels not as good to shrink. Knowing you’re going to have an ability to sell in a 20- to 30-mile radius from your brewery, I think that’s good to know. But I was at one point in 120 stores and I got retrenched with no one actually telling me that that was happening until much later. So I’m trying to figure out how we stay relevant and what big grocery needs. … What we’ve found is we have to work harder for less volume. Going door-to-door, building relationships, things like that, I feel like that’s a stronger business model and we enjoy that work, but we’ve had to work twice as hard for half as much volume, just being a brewery that’s sevenplus years old. We’ve had to retool our strategy.

SUPRISE: I don’t want to get on a soap box and start decrying who’s independent and who’s not, but I can tell you that the lines, in fact, are blurring relative to a number of the breweries that have been acquired by some rather major brewing conglomerates. … It ends up sucking away some of the advertising and/or the display opportunity for those local brewers in some regards. The other thing is … if the state of Michigan decides, in its wisdom, this November in a referendum to legalize the recreational use of marijuana — what does that do to our industry? … I’m a little concerned about what that does to our future because we don’t have any past experience of what it’s like if you can go buy weed and beer. I don’t know what that means for future growth and development of market share for craft beer.

RIVARD: There’s a lot of opportunities, and that’s what keeps me up at night: Analyzing what are the opportunities. The industry just keeps changing and to figure out what the next best opportunity for me and for my company is is difficult. … The natural growth of breweries and what everybody has done in the past 30 years has been pretty predictable. But now it’s not so predictable, and diversification — whether it’s with the product or the diversification of the business and niches — definitely seems to be where the opportunities are.

ERMATINGER: What keeps me up at night is bottle-conditioning beer. We are so, so insanely small that we’re kind of outside of the concerns of pretty much everybody else in the room, in some ways. … For us, if a batch goes bad, that sets us back a ridiculous amount of money — enough to make things different for us the next month and the month after that. That kind of stuff — literally the ‘first couple of years in business’ problems — keeps me up at night. What happens if this $20,000 worth of beer goes bad? Because it’s totally possible and has happened multiple times.

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EDITOR’S NOTE: This story has been changed to correct the spelling of attorney Dennis Loughlin’s last name. 

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