rss icon

Sunday, 05 July 2015 22:00

Staying True: West Michigan craft brewers, distillers seek to maintain culture while balancing push to grow

Written by 
Rate this item
(7 votes)
Participating in the MiBiz craft beverage industry roundtable were, clockwise from upper left, Larry Bell of Bell’s Brewing, Bill Welter of Journeyman Distillery, Mike Babb of Kalsec and Kalamazoo Valley Community College, Jason Spaulding from Brewery Vivant, Ian Kennedy from Warner Norcross and Judd, Erik May of Pilot Malt House, MiBiz Managing Editor Joe Boomgaard, Ric Gillette of Saugatuck Brewing, MiBiz Staff Writer John Wiegand, Jeff Steinman of Hop Head Farms, Rob Sirrine of Michigan State University Extension and Nate Hukill of Bitter Old Fecker Rustic Ales. Participating in the MiBiz craft beverage industry roundtable were, clockwise from upper left, Larry Bell of Bell’s Brewing, Bill Welter of Journeyman Distillery, Mike Babb of Kalsec and Kalamazoo Valley Community College, Jason Spaulding from Brewery Vivant, Ian Kennedy from Warner Norcross and Judd, Erik May of Pilot Malt House, MiBiz Managing Editor Joe Boomgaard, Ric Gillette of Saugatuck Brewing, MiBiz Staff Writer John Wiegand, Jeff Steinman of Hop Head Farms, Rob Sirrine of Michigan State University Extension and Nate Hukill of Bitter Old Fecker Rustic Ales. PHOTO: JOHN LACKO

The craft beverage industry in West Michigan is looking quite frothy these days.

As capital starts to pour into the industry from opportunistic investors and deals are made, craft brewers and distillers realize they must become more sophisticated business operators to manage the growth and the complex finances that come with it. But they also need to find a way to balance that with the desire to stay true to their founding principles and do-it-yourself culture.

While executives insist the industry maintains its well-publicized camaraderie, they’re much more wary these days of who’s getting into the industry and for what reasons. They say they’re happy to provide advice and offer support to their fellow entrepreneurs, but they’re doing so realizing that they may one day be locked in a fierce competition against one another for shelf space, tap handles and consumers’ attention.

MiBiz gathered a group of executives in the craft beverage industry and its supply chain for a roundtable discussion of the challenges and opportunities their businesses face in the highly competitive market. Participating in the conversation with this writer and Staff Writer John Wiegand were:

  • Mike Babb, hops research fellow at Kalsec Inc. and curriculum director for the Kalsec Center for Sustainable Brewing Education at Kalamazoo Valley Community College
  • Larry Bell, founder of Galesburg-based Bell’s Brewing Inc. and Upper Hand Brewery in Escanaba, Mich.
  • Ric Gillette, president and CEO of Saugatuck Brewing Co. Inc.
  • Nate Hukill, “head fecker” at Bitter Old Fecker Rustic Ales LLC in Chelsea
  • Ian Kennedy, partner in the Kalamazoo office and chair of the alcoholic beverage practice at Warner Norcross & Judd LLP, which sponsored the roundtable discussion
  • Erik May, owner of Byron Center-based Pilot Malt House LLC
  • Rob Sirrine, Ph.D., county extension director of Leelanau County at Michigan State University Extension in Suttons Bay
  • Jason Spaulding, president and owner of Grand Rapids-based Brewery Vivant
  • Jeff Steinman, co-founder of Hop Head Farms LLC in Hickory Corners
  • Bill Welter, owner and operator of Three Oaks-based Journeyman Distillery LLC

Here are some highlights of the discussion.

As the craft brewing industry matures, how has it affected the access to startup or growth capital, or even funding for a liquidity event?

Gillette: Capital is probably our biggest frustration — trying to grow our brand. It’s very difficult. We’ve reached the stage where at least we have banks talking to us. Banks are much more interested now.

Spaulding: We just got our first loan that was a non-SBA note from our bank, and that was a huge deal. I had to sign two papers instead of stacks and stacks of documents. It was much better, but even with that, it was like the bank was doing us a huge favor by letting us squeak by. Our numbers are strong, they’re really good. It still feels unbalanced a bit.

Steinman: We just merged with one of our investors. One of our investors bought out the rest of the investors, and it is a larger pool of money. These people have a longer term vision for how hops can support both the state’s craft beer industry, as well as the rest of the country.

May: We started two years ago with 10 acres and a pipedream. It was a haggard operation that we bootstrapped along the way. We finally got a bank loan and things are rolling at a bigger scale, (at least) for us.

 photo WNJ_banner 1_zpsveohjfhl.jpg

Bell: My experience right now on capital is that capital is pretty darn easy and competitive. I’ve been able to play banks off of each other and get extremely cheap money these days. That’s probably going to end at some point here. At some point the fed is probably going to start raising rates again.

Industry watchers have tracked more than a dozen deals for craft brewers nationally in the last year to 18 months. Two major deals were in West Michigan with Founders Brewing selling a 30-percent stake to Mahou San Miguel and Perrin Brewing getting acquired by Oskar Blues in a deal backed by Fireman Capital. Do you see that pace of deals continuing?

Bell: As we go through the cycle, we’ll probably start seeing less M&A activity. I think two years from now, we’ll see higher interest rates and a lot of the M&A activity that’s going on right now will slow down quite a bit. … We’re going to continue to see deals. I think we’ll see some deals in Michigan. It’s just the nature of the beast as people want to retire or move on to other endeavors.

Spaulding: I think it’s inevitable that some deals will happen. People are throwing money at companies and I think some people are going to take it. I don’t think it fits the craft beer vibe very well, but things will happen, I’m sure.

How might the nature of those deals change?

Bell: There’s going to be more craft-on-craft acquisitions. … We were offered one that we decided not to pursue. … I think you’ll probably see more mergers of craft too as people look at the market and as it gets more competitive, which it will. People will certainly think they need to get together.

Will the macros like Anheuser-Busch/InBev play a role in deals in Michigan?

Bell: They’re looking for smaller, fast-growing breweries. They’ve probably got three more deals and they’d like to get them done in the next 12 to 18 months. But I don’t think it’s in the Midwest. They already have their acquisition here with Goose Island (in Chicago). I think you’ll also look to see Constellation Brands make an acquisition. They certainly have done it in the wine world and the spirits world. And who ever heard of Mahou San Miguel before the Founders deal, so who knows who else from a global perspective might want to come and play in the States.

The Perrin deal is just one example of private equity firms buying into in the craft beverage industry. Do you see more PE firms actively seeking Michigan brewers?

Bell: They’re certainly looking. I don’t have a week that goes by where I’m not getting a proposal or proposals or getting contacted by somebody that’s looking to do something. Everybody is shaking the trees to see what they can find out there. Even guys who know that you don’t want to do a deal, they still want to come visit.

Welter: I talked to a guy in the distilling business and he mentioned investor fatigue. Some of the guys who’ve invested in these projects now for five, six, seven years, they’re starting to put pressure on them to get a return, a dividend — something coming back to them.

Bell: The thing with the private equity is, in the beer business, they may go a little bit longer than they’d go in other industries. But they’re still there with a fund that they need to flip in five to eight years and move on. And who do they sell it to? They’re either going to sell it to another private equity fund, or they’re going to sell it to a big brewer.

Or go public, right? Fireman Capital and former Harpoon CEO Rich Doyle with Enjoy Beer LLC seem to have a roll-up strategy of assembling a portfolio of brands.

Bell: You’ve got to have $25-30 million in EBITDA before you think about going public. You’ve got some of these guys, like Fireman Capital with Oskar Blues and Perrin and their breweries in Utah — I think they’ll make a couple of more acquisitions and maybe get to that. … Going public isn’t cheap. It takes a lot of resources.

The $19.6 billion craft beer industry has experienced some heady growth in recent years. At what point do you need to look at the level of management sophistication in your company?

Kennedy: Getting to that second stage, (breweries) are getting to that point to where they’re beginning to look at succession issues. … There’s a need to clean up that initial batch of corporate documents that were done when they were still in the startup phase. How do we manage the change when the original owner or original founders are looking to retire or slow down and recoup some of that reward and still stay true to the original vision of the brewery?

Gillette: It’s a constant thought. We have a couple guys that we’re working with to bring up (in the business). The main three of us who are running the company are over 60, so we want an exit plan and we’re actively pursuing that. I really want to retire.

Steinman: On the hop farm end of it, there’s not a lot of hop farms out there that are operating as true businesses. Many of them are hobbyists or second job type of things. With us, we found it extremely important to get some good accounting skills behind us. … We’ve grown from 30 to 40 clients in our first year to over 200 and we’re across 20 states and now exporting to Taiwan and China. The complexity is growing quickly, so it’s very necessary.

 

SUPPLY CHAIN

Shifting gears to the supply chain, how important is it for your companies to source local ingredients?

Spaulding: If we could source ingredients locally, customers like that. If I have to charge a little bit more to have more ingredients from the state in that beer, especially if it’s over the counter at my pub, maybe I just have to charge 25 cents more and it offsets the extra cost and we can do that because it’s part of the story.

Bell: People are certainly more and more interested in locally grown products. But I would say in the same breath, we have to have quality product. It’s got to be good. On the beer side of things, too, there’s been a mantra of local, but just because it’s local doesn’t mean it’s good. If it’s local and it’s quality — awesome. That’s double bonus.

Steinman: It’s very true. It can be local, but if it’s not good, then they’re not going to buy it. The other aspect of that: You have to have the quantity, you have to have the mass there that’s reliably available year after year.

May: From day one, I realized somebody would buy from us once if we’re just local. But I don’t want Jason to buy from us once, I want him to call back.

What could be done to help grow the Michigan hops and barley supply chain?

Steinman: With Hop Growers of Michigan, we’re looking to create some local standards and some (standard operating procedures) for our industry — having just been formed in February of 2014. We’re really starting to pick up steam in working with Rob and MSU Extension and some of the other federal programs that they can apply for grants for the entire industry.

Sirrine: We’re pretty darn small. I think there’s 400 or 500 acres in the state that’s strung for harvest this fall. It’s real hard to get a grasp on how much hops are even used each year because the numbers of breweries keeps going up, (breweries keep growing), and hopping rates per barrel keep going up.

Where might industry look for funding for additional research?

Bell: It’s always been a bit of a rub for me. Every manufacturer and wholesaler of alcohol in the state of Michigan, when we pay our license fees, those are earmarked dollars that go directly to the Michigan Grape and Wine Industry Council. So as brewers, we’re funding grape research. … We could probably use some funding to help us out. … There’s a lot that we don’t know. We’re really still in the infancy of knowing about what we can do with hops (and barley) here.

What other challenges do you see in the ingredient supply chain?

Sirrine: The Brewers Association is predicting 20 percent (craft beer market share) by 2020, but where are all those hops going to come from? There’s definitely some potential for growers in Michigan. Processing capacity is where we’re going to need to make some serious investment. … But the issue is the throughput in the harvest of the hops … and the capacity utilization is so low because that (harvest) window is so short.

Kennedy: What’s really exciting to me about this industry right now is that we’ve got a good market building up with craft brews, and now we’re looking at backfilling the supply chain. … We’re really at the ground stages of building out a supply chain for an industry and if we do it right, I think it could be built to last.

On the equipment side, is there much Michigan-made equipment available?

Hukill: I would like to see as much come from Michigan as possible. I’m kind of always looking for ways to spend my money as close as possible. All aspects, from ingredients to equipment, I would like to see as much as possible from Michigan.

Spaulding: There’s more suppliers popping up and there’s more people paying attention. … It’s easier than it used to be (to buy locally).

Bell: But for some things, you’re just going to have to go out of state to wherever that established manufacturer is located.

Steinman: That’s Germany, in my case (for hop-harvesting equipment).

May: There’s no malting equipment — it doesn’t exist. We had to custom fabricate and work with engineering firms just hoping it’d work.

Michigan is a manufacturing state, after all. Why don’t we have more equipment suppliers in the state?

Bell: It’s the engineering and having proper shop floor and being able to do really good welds. Early on, I was buying tanks that were being made up in Charlevoix, but I wouldn’t buy those tanks today — I was getting a deal.

Gillette: In our case, it’s relationships. I’ve built a good relationship with a manufacturer, so I rely on them for help and information, although our next two tanks are over a month late right now. But we’ve got a good relationship. That’s important to me.

We talked to a couple of brewers in West Michigan lately who didn’t want to deal with the wait times so they got some equipment from China.

Spaulding: It’s half the price and less time. It’s something that’s at least hard not to take a look at.

 

ECONOMIC DEVELOPMENT

In April at the Craft Brewers Conference (CBC) in Portland, economic developers from several states were actively seeking out new business. Look around Asheville, N.C., where breweries from out west — Sierra Nevada, New Belgium and Oskar Blues — have invested hundreds of millions into massive production plants that employ hundreds of people. Is Michigan missing an opportunity?

Steinman: We’ve got Haymarket (Brewing Co. from Chicago planning a site) in Bridgman, but that’s coming along slowly and they’re not that huge. But they are creating a production facility.

Bell: I think one of the problems for Michigan for somebody looking is logistics. We’re a peninsula, so you’ve got to come in and go back out. If you have your choice from a logistical standpoint, Michigan isn’t the greatest because of where we’re situated.

May: We were at CBC as well, and in a matter of a few beers, I end up talking to the Secretary of Ag at a particular state and hashed out a deal so when we’re ready for a second location — and this is not for a long time — (but) when we’re ready, they’re willing to fund (us). It was a fluke thing … but it was interesting to hear and see states and agencies and organizations that were there offering incentives for little guys like me. It was like, where was our (state)?

Does it hurt existing brewers if the state lured an out-of-state company to open a satellite operation here? The Michigan Economic Development Corp. does it all the time with the auto supply chain, for example.

Bell: Here’s the thing: Michigan is pretty darn provincial. Michigan consumers love their Michigan brewers. … (In retail sales), some out-of-state craft brewers are taking it on the chin pretty bad while a lot of us in-state are doing well. If you’re an out-of-state brewer and you come here, do you get labeled as a carpetbagger by coming here?

Spaulding: It’s a tough state to crack from what I understand from people that have done it.

Do you feel lawmakers are paying attention to the craft beverage industry?

Bell: I think, absolutely, we have the ear of legislators because there’s so many craft brewers. There’s someone in every district, and they’re great stories and local brewers tend to help out with local charities and fundraisers for groups. It’s entrepreneurial — everyone likes that.

Welter: From the distilling perspective, we’re kind of in the dark ages when it comes to some of the legislation. For instance, at the federal level, we’re taxed at the same basis as Jack Daniels or Jim Beam. There’s no craft distilling tax. We’re paying the same tax as a large manufacturer on a federal level. On a state level, Michigan has one of the highest taxes for distillers.

Steinman: I think they’re just waking up to the hop industry in Michigan. There are a handful that know it and support it and have visited … the hop yards because the craft beer industry is so strong. They see that starting, but I think we’re behind the curve about them caring that much at this point — so far.

Sirrine: At the federal level, Jeff, you had Senator (Debbie) Stabenow visit the farm. She gave the welcome at our (Great Lakes) Hop and Barley Conference.

Steinman: That’s one of two that I would mention: Senator Stabenow and (Congressman Fred) Upton, who’s not in my district, but he’s in my neighboring district. (Editor’s note: Hop Head Farms is located in Michigan’s Third Congressional District, which is represented by U.S. Rep. Justin Amash.)


SALES & MARKETING

As the number of craft breweries doubled in the last five years to 3,500 and that growth shows no sign of stopping, how do you ensure you can reach customers given that retail space is not getting any larger?

Bell: Everybody is getting a higher level of sophistication when they’re going in and talking to the retailer. In certain states, retail is much more chain-driven than in others, so it’s important to get to the headquarters of that chain operation and get an appointment. You need to be in there and talk their language and use the numbers to make your case for why you should be in there. You have to keep that retailer in mind and you have to help them build their business.

Spaulding: That’s the hard thing to get those placements. There’s new breweries opening all the time. I think that’s the battleground — the retail shelf. That’s what I worry about: Startup breweries coming in with 50-barrel brewhouses thinking they’re going to take over the world on the distribution side right off the get-go. … They’re going to have some problems, and it’s going to get even tougher.

Welter: When we started our distillery, there were less than 300 distilleries in the U.S. There’s roughly 900 now. We’re currently distributed in 13 states and it’s getting very competitive. Everyone’s got their local distillery now, so why would they necessarily want to buy product that’s out of Michigan?

Does that competition for shelf space or tap handles ever lead distributors to pay to play?

Bell: We’re in a situation right now with our brewery up north (Upper Hand Brewing in Escanaba, Mich.) and the main market in the U.P. where we’ve got a wholesaler that is buying off our tap handles. They’re out there giving stuff away — illegally — and they’ve decided to target us. It hurts. And it’s a hard thing to catch. And the state doesn’t police it. … That sort of thing is going on out there, and it’s not confined to the large brewers.

Switching gears, there are only so many beer- or spirits-related names out there. How do you avoid trademark or intellectual property issues?

Welter: Talk to your trademark attorney before you’re going to name something — I know now.

Hukill: How difficult has it been to not change the name to a smart-ass slight to the person who sued you?

Welter: Well, ours is called the Last Feather, and that’s basically the only thing they left us with.  (Laughter). With our Ravenswood Rye Whiskey, Ravenswood Winery — owned by Constellation Brands — sends a cease and desist. … We changed the name to Last Feather and basically just told everyone up front that we got a cease-and-desist letter and we had to change the name. … At first, you’re upset and angered by it, but then you come to the realization that people like the whiskey and ultimately, whatever name you put on it, people will think it is good.

Spaulding: It’s hard to know when you launch a brand. You don’t know if people are going to like it or if I’m going to make this again, so why would I spend four grand registering a trademark and it may just be a one-and-done beer? You try to manage it the best you can.

From a legal perspective, what’s the best way to handle these trademark disputes?

Kennedy: How you handle that in this industry requires a little bit different touch than how you handle it if you’re just working with the automotive industry. … If someone is infringing on your mark or infringing on your territory, then you don’t have to be the 800-pound gorilla. I don’t think, in this industry, you want to go out with the garden variety cease-and-desist letter and just start out with a nastygram. If you can negotiate co-existence agreements, if you can negotiate some peace, I think that has more credibility in this industry.

 

WORKFORCE

As your companies grow, you need to bring on new people. Let’s discuss some of the workforce challenges you have.

Babb: I’m really interested in hearing what issues you have, whether that’s manpower issues or labor issues and training. Do you have what you need? … I don’t know what to tell students is the outcome for them once they get some education. Hopefully, it is something that meets your needs.

Spaulding: If there’s someone who’s put some effort into some schooling … that would go a long ways. They need to have realistic expectations, but it’s really the passion that drives us to hire people.

Gillette: We’ve had our best experiences just growing the employees up through the system and becoming production managers or cellar managers and so on. They really started out at the bottom and worked their way up.

Steinman: The only people we have that last see the end game with a passion. They’re coming because they think it’s cool to work on a hop farm. But 80 to 90 percent of what we do is hard work. We’re a very small company, but we’re growing very quickly. And those positions will materialize, but they have to be passionate and patient and teachable.

Welter: We’re in an area (Three Oaks) where it’s pretty sparsely populated. … It can be a challenge to find people. But I think generally, we try to get people in that don’t know a whole lot about distilling and try to just bring them through the process one step at a time.

 

GROWTH

Are we approaching a point where the craft beverage industry runs the risk of being in a bubble?

Gillette: We’re at around 200 brewers now (in Michigan). I just can’t imagine how that many brewers are going to survive. If anyone asks me, brewpub versus distributing, I tell them brewpub. There’s an unlimited number of places in the state where you could have a brewpub and it would work.

Spaulding: That’s where I think people’s ambitions are in front of reality and where they’re going to have some problems. If you’re a brewpub in an unserved area, great. You’re going to do awesome. At some point, if you only sell 1,000 barrels at your brewpub, that’s a lot of beer. Why do you also have to go try to make that jump to 10,000 barrels? Make your business fit reality and I think you’ll be all right. 

--
Editor’s note: This story has been updated to correct a typo of Mike Babb’s name. 

Read 9251 times Last modified on Monday, 06 July 2015 15:28

Breaking News

September 2018
S M T W T F S
26 27 28 29 30 31 1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 1 2 3 4 5 6

Follow MiBiz