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Sunday, 29 May 2016 11:42

Navigating a shifting market: Beer braces for eventual plateau, retail challenges; cider and spirits see room to grow

Written by  Joe Boomgaard, John Wiegand and Josh Veal
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Joining MiBiz for a craft beverage roundtable were (top row from left) Laura Bell of Bell’s Brewery, Ian Kennedy of Warner, Norcross & Judd LLP, Scott Newman-Bale of Short’s Brewing Co. and Jon O’Connor of Long Road Distillers LLC; (middle row from left) Seth Rivard of Rockford Brewing, Steve Smith of Henry A. Fox Sales Co., Jason Spaulding of Brewery Vivant and Mike Stevens of Founder’s Brewing Co.; (bottom row from left) Brian Tennis of Michigan Hop Alliance LLC and Paul Vander Heide of Vander Mill LLC. Joining MiBiz for a craft beverage roundtable were (top row from left) Laura Bell of Bell’s Brewery, Ian Kennedy of Warner, Norcross & Judd LLP, Scott Newman-Bale of Short’s Brewing Co. and Jon O’Connor of Long Road Distillers LLC; (middle row from left) Seth Rivard of Rockford Brewing, Steve Smith of Henry A. Fox Sales Co., Jason Spaulding of Brewery Vivant and Mike Stevens of Founder’s Brewing Co.; (bottom row from left) Brian Tennis of Michigan Hop Alliance LLC and Paul Vander Heide of Vander Mill LLC. Photos by Jeff Hage

As the craft beverage industry matures, it’s attracted new entrants who may be more concerned with making a quick profit than with the quality of the liquid. 

For people who started in the industry with a dream and a passion for making the best beverages possible, that’s a considerable challenge, especially as the industry starts to level off from the unsustainable growth rates of the last few years. 

To understand the state of the industry, MiBiz gathered a group of craft beverage producers — including representatives from the three largest craft breweries and the largest hard cider maker in the state — and suppliers to discuss issues and challenges the burgeoning sector is facing. Participating in the discussion were: 

  • Laura Bell, vice president at Galesburg-based Bell’s Brewery Inc.
  • Ian Kennedy, an attorney in Kalamazoo and chair of the craft brewery practice group at Warner Norcross & Judd LLP, which sponsored the roundtable
  • Scott Newman-Bale, partner at Short’s Brewing Co. in Bellaire and Elk Rapids
  • Jon O’Connor, co-founder of Long Road Distillers LLC in Grand Rapids
  • Seth Rivard, co-founder of Rockford Brewing Co. in Rockford, Mich.
  • Steve Smith, craft beer specialist at Henry A. Fox Sales Co., a Grand Rapids-based distributor and broker of beer, wine and spirits
  • Jason Spaulding, president of Brewery Vivant in Grand Rapids
  • Mike Stevens, co-founder and CEO of Grand Rapids-based Founders Brewing Co.
  • Brian Tennis, president of Michigan Hop Alliance LLC of Omena, Mich.
  • Paul Vander Heide, owner of Spring Lake-based Vander Mill LLC, a hard cider maker who hosted the discussion at the company’s new production facility and taproom in Grand Rapids. 

Here are some highlights of the conversation: 

The beer industry continues to grow, but the rate of expansion is slowing, hitting 13 percent last year compared to 18 percent in the previous two years. When might there be a shakeout ahead and what will cause it? 

Spaulding: The early breweries were all passion started. You certainly didn’t start down that path in the late ’90s because you thought you were going to get rich. It was passion driven. Now I think people are being attracted to this business for various reasons and they don’t have that long view, where some people see it just as a financial opportunity first that just happens to make beer. It seems like a fun industry to get into (but) they don’t necessarily care about the health of the industry and things like that. It’s potentially more selfishly motivated where they want to start something up, flip it and make a lot of money fast. 

Vander Heide: Part of that is because they watch breweries exploding and buying all sorts of cool toys. Any industry that’s experiencing that kind of growth, there are always those people that are going to say, ‘Holy s**t. I want to get into that.’

Bell: I think they take it for granted, and I mean this with respect to some of the newer folks in the room. When we started no one knew what an amber ale was. Now it’s like the lesser appreciated style. Trying to convince someone to drink an amber and the hard work that the pioneers had to go through to get to where we are today, and now it’s this expectation of, ‘Well, I make an IPA — why am I not in all the Krogers and Meijers?’ 

Stevens: That access to market is what’s going to get shut down in a hurry and that’s what’s going to cause some problems. If there is a shakeout, I’m not saying that everyone is going out of business, but your access into the real volume-moving side of the channel is going to become extremely difficult, I think. 

What do you see as the opportunities left in the industry?

Bell: I feel like if people want to make money, open a brewpub, make really nice beer and food. Sell that keg of beer over the counter for $800 instead of selling it to your wholesaler for $150. The minute you start putting beer into a package and shipping it out your door for someone else to sell it, it changes things.

Stevens: You can satisfy a local market. I think you can do that still no problem, but if you put in a 50-barrel system thinking you’re going to hit 60,000 (barrels) in production right away, it’s a problem.

Spaulding: Ego comes into play there. People want to be that big regional brewery. We have homebrewers come in who want to start their own brewery and I always tell them, ‘For Pete’s sake, just start a f***ing brewpub, please. Don’t buy the packing line and do all of that at once. Build your brand first and if the market wants it, then expand.’ I think there’s room and safety in that, but most people ignore me and do it anyway. 

Bell: If you’re just starting a brewery and you are expecting to ship 60,000 barrels your first year and you’re putting it into a can or a bottle, my guess is that if you have no experience with running a canning or bottling line, that beer is not going to be the way you intended. 

We have the three largest breweries in Michigan in the room. You have all done major expansions recently. Is there any pull to build an out-of-state satellite brewery at some point?

Bell: We’re finishing up a 210,000-square-foot addition right now, and it’s a lot of money. If you look at the way the industry is going, things are slowing down. The idea of planning on spending another $150 million somewhere else when we haven’t even built out our current facility to its capacity seems a little risky to me. I think that there are other options for growth that don’t involve a brick-and-mortar facility somewhere else. 

Stevens: We’re building a new facility, but it’s right in town. We’ll just distribute until something — math — tells us … you should build something out there. Frankly, we haven’t seen that yet. If you really start to think about it, all these secondary breweries are all west coming east. It’s a lot more difficult for them to get product for the majority of the country where the majority of the population is, so their math tells them to do it sooner than our math tells us to do it out there.

Newman-Bale: When you look at their land costs, all of sudden, you think, ‘Should I expand the brewery here or should I build a brewery at half the cost over there?’ The math probably makes more sense over here, where land is somewhat plentiful.

What are your major bottlenecks right now? 

Newman-Bale: The one I’ve heard going, which we didn’t have any issues with because of our size and volume, has been with Ball and Crown and cans. They changed the minimum order size and cut off a lot of smaller brewers from orders. 

Bell: Even as someone who works with them all the time, (we deal with) the lead times and the challenges of getting in on their schedule and (being) made a priority. It’s something you need to keep on top of. 

Spaulding: We’re fairly small and we used to get split trucks with cans, but that’s out the door. We can get full trucks of single brands now. For us, just for this month, I just received three trucks with three different brands and the cost is huge. You know, $50,000. 

Stevens: And the question is, where do you put them all? 

Spaulding: I had to get a new warehouse and front that money up-front. Last year, we had beer left in tanks waiting for cans to arrive. Each week that ticked by put us further and further behind, and it’s just not worth the risk, so we’re fronting the money to do that.

Vander Heide: We had the same thing last year. We had no word from Crown that lead times were getting bad so I called at about three weeks away and said, ‘Hey, I’m ready for some more cans.’ And they said, ‘Well, it’s going to be seven weeks.’… And then, by the second time I called back, they said, ‘Now it’s 12 weeks.’ I just had to kick and scream and say I’ll be out of money and business in 12 weeks if I don’t have cans. When we did have the opportunity to order, I just bought six months worth of inventory. I thought that is the last thing I need to run out of something like that.

O’Connor: (With spirits), I know the market for stills is quite competitive right now. If you want a still made by one of the high-quality manufacturers, it’s been, ‘Get in line and wait.’ … We were fortunate to have access and get a second still before we opened. … Barrels have been harder and harder to get, especially early on. … They wouldn’t even talk to us in the beginning. Now that we’re established for a year, they realize we’re not some fly-by-night guy who’s looking for two barrels and we’re not a waste of their time. 

CAPITAL OUTLOOK

How’s access to capital right now? 

Stevens: I would think the climate is pretty strong, regardless of size. Credibility has to be there. The fundamentals of a financial statement have to be there. But assuming that, it seems like banks like breweries now. Ten years ago, it was a different ballgame. … We never had a line of credit until probably eight years ago. We functioned for the first 12 years without them, but now it seems pretty simple. 

Kennedy: Banks are more comfortable with brewing in general. I think they’re viewing it as manufacturing now. …  I’m also hearing interest from venture capital and PE firms, which is encouraging and some of it is from local PE firms. There’s a developed PE market in Grand Rapids and I’m starting to hear local interest in breweries, which is nice. 

Vander Heide: There’s got to be cash flow. Banks aren’t interested in, ‘Hey, I opened a brewpub and now I want to open a production facility and borrow a million dollars or a couple of million dollars without the revenue.’ Banks aren’t in the business of speculating like that.

Spaulding: I think existing people in the industry have an easier time. It’s that startup that the banks won’t talk to. Startups are always complicated because there are so many breweries opening that now, banks are starting to worry about a bubble or are there too many and are we going to get caught. 

Kennedy: I’m also hearing the same rumbles about is there a bubble and is it starting to get saturated. No one wants to be that last person in when the bubble pops.

Spaulding: The craft brewer has a great presence now, but I think it’s actually starting to hurt startups because they’re wondering if this is going to be the one to put them over the edge. … For us, we’re having an easier time. We’re having to turn bankers away who want to work with us now. 

Given the challenges at the startup level, some brewers are going the crowdfunding route. Do you see that as a viable strategy thinking back to when you all started? 

Stevens: It might be viable but it sounds like a f***ing nightmare. [Laughter]

Bell: What I worry about is that you’ve taken money from all of these fine people, and what if things go wrong and you don’t open? How do you deal with that? 

Stevens: It’s easier to explain to your dad that you screwed things up than it is a bunch of strangers.

Bell: It creates expectations and the minute you create expectations for somebody, you open them all up to disappointment when you don’t meet it. … If your neighbor wants to give you $1,000 and you’re like, ‘This is great, I’m going to take it, here are some shares,’ how do you get rid of your neighbor and make sure your neighbor understands how he will be gotten rid of?

Stevens: It does set a different set of standards on those expectations when you have a lot of strangers. There are probably agreements in place that talk about ROIs and what the payback looks like. When we raised funds from private investors, it was from friends and family and there was no promise of paying anything back. 

Spaulding: The most I’ve seen people raise in a realistic area is like $30,000 to $50,000. To open a brewery you’re going to need at least $500,000 if you skimp. Even doing that you still have to work with a bank and financing. 

Tennis: (Crowdfunding) just seems like a desperate plea for money.

Kennedy: It’s scary because if you fail, you have 1,000 people (to deal with). But I’d throw out the converse, where it’s also scary if you succeed and suddenly have 1,000 people who are your investors and think they have a voice at the table too. 

If you could change one thing that would help you get more liquid out the door or hire more people tomorrow, what would you do? 

O’Connor: I’d change the state excise tax. The way it’s calculated in the state of Michigan, we’re taxed at a percentage-based tax rather than a gallons-based tax like the federal government. … That puts us at a very competitive disadvantage compared to people that can make things at a lower cost because they’re making it at a much higher volume. 

Vander Heide: I think the whole regulatory landscape is completely f***ed. … A lot of it’s so complicated that it’s hard for the regulators to understand what they’re even supposed to be doing. … A lot of it is literally just box checking. Nobody really cares. 

Tennis: I think we’ve been lucky on the hop side because we’ve been actually working with the Michigan Department of Agriculture and Rural Development, kind of helping write the rules. When we started eight, nine years ago there were no rules whatsoever. We could process hops in our own barn. Now everything has to be in a food grade facility. … As long as we can be in on that conversation, we’re writing the rules so it makes sense to everybody.

RETAIL CHALLENGES

Shifting gears to the retail side, what’s more important for your brands and sales: big box locations or specialty stores? 

Spaulding: My suspicion would be that the number of independent stores isn’t going to get lower, but that growth would come through those bigger volume movers. My guess would be that those independent stores are always going to be important. It’s just going to be that as this pie gets bigger for craft beer, a lot of that is going to come from those larger areas where access hasn’t been available up to this point.

Smith: The rate of sale is slower in the independent space than it is in the chain space, so naturally you just triple your output in one chain account versus one independent account. … In looking back 20 years, the chain channel was not an option. Now we look at it and there’s nothing wrong with buying a great six-pack of beer at a Meijer or Spartan. … We kind of started looking at it and saying, ‘The craft shopper is at those stores and they buy good beer.’ It just took those stores a while to catch on to the fact that they should carry them.

Have you experienced any backlash from the independent stores as you grow your chain accounts? 

Stevens: We felt that. We went through a period where local retail bars weren’t real in favor of us and this is when we were maybe of medium size. Then when we went into the big box, maybe the party store down the road didn’t like it. But once you get over that hump and get to a certain scale, then everybody kind of joins in. 

Vander Heide: That transition from independent to bigger retailers is really what precipitated this expansion for us, because we’re 90-percent independent and we’ve really felt that we’re on that cusp of getting statewide with one of the big chains. With the facility we were in, one chain could have completely killed us. 

Bell: And if you say you’re going to go for it but then you’re out of stock, they’re not going to think about you again if you can’t supply them. 

Vander Heide: We actually waited a year intentionally with Meijer. It’s important to be able to stop and say that we want to be a good partner to the retailer and it’s better if we wait so that we’re 100-percent certain that we can supply the store.

Given the proliferation of breweries and brands, are wholesale and retail customers looking for core brands or specialty products these days? 

Stevens: I think as you get larger, specialties become a means to market and flex a little muscle, maybe. Our specialty lineup is 10 percent of our volume. You will find, as you get larger and larger, that you will have one really core brand, but maybe two or three that are really 80 percent of your volume. All those specialties allow you to show off and still position with retailers and wholesalers to hold your ground on your year-rounds and try to protect your territory. 

Rivard: We’re in a little but different situation where we’ve really finally been establishing our core brands and flagships. We almost have an exact 50/50 mix between core brands that people expect and 50 percent coming up with new and interesting stuff that keeps people interested. It does seem like we’re going down the road of the more distribution we do, the more we have to solidify our core brands, but there is definitely a core audience out there that wants the new stuff, wants the creative stuff. 

Vander Heide: It’s a little bit different in the cider world. … Even though the real estate in total for tap handles and things like that are getting more challenging for beer, we still see a lot of room. We’re still kind of stuck at that one tap handle of the whole set.

O’Connor: We’ve only been in distribution about six months now. … There’s such competition. You walk into a liquor store and see a vodka display and there’s 700 bottles of vodka. We’ve had some success early on in making some products that are a little under-appreciated in the market. … We’re the first one to make a Michigan-made aquavit, and the on-premise folks, people who are mixing cocktails and trying to elevate the craft cocktail scene, they’ve been clamoring for something because they just haven’t had options. 

WHAT’S AHEAD?

What’s keeping you up at night these days?

Newman-Bale: I would say the one thing that gets me is variability. It used to be that I could sit there and say, ‘OK, in two months time, I’m going to sell between 5,000 and 5,200 cases of Huma,’ and I was pretty much always dead on. That was even with the crazy growth rates. Now it’s like, OK that number could be between 4,000 and 8,000. It blows my mind.

Stevens: It’s absolutely crazy. It used to be 3-percent variability.

Newman-Bale: Exactly. We used to miss it by a pallet, now we miss it by a truck. That causes massive supply chain issues. … I don’t think we’ve ever had a month where we didn’t grow 30-percent until last September, and now it’s like zero, 40, 10, it’s everywhere. Thankfully, it’s always positive. 

Tennis: I think our biggest problem is dealing with proprietary hops that we can’t even get the rights to grow. … We grow one or two proprietary hops but not like the Simcoe and Citra, the real rockstar hops. If we could get those hops, we would literally put in hundreds of acres tomorrow. I know we could sell it. They’re just not licensing those hops out of the Pacific Northwest because it doesn’t really fit their business model. … Michigan’s in the long-term plans. … Michigan’s definitely on the radar but right now we’re trying to get those contracts for those hops. 

Smith: For me, and I don’t know about the other distributors that are larger, but something I think about a lot is doing right by your brand, knowing you’ve made a good partnership and relationship. For me, especially, I’m the pointman. If the brand fails, it’s on me. Do (distributors) worry about brands they take in, or is it like, ‘We’ll take in 20 brands this year and probably only five of them will last?’

Bell: There’s certainly some that are brand collectors and sign breweries before they’ve even made beer — which blows my mind — but I think people have found that they’re going to be more successful when they have a cohesive book of things they can sell and they’re going to sell a family of beers versus trying to take on everything.

It’s interesting that no one is talking about a fear of an industry plateau. Do you think you can manage when industry growth levels off?

Bell: We don’t have a choice, right? I think the best thing you can do is focus on what you do and try to do it to the best of your ability. We’re going to take it as it comes. That’s what keeps me up at night — (not having a) crystal ball. 

Rivard: And these things evolve slowly over time. I don’t think there’s one major event that happens at once and we all throw our arms up in the air. So we have time to adjust and transition for the most part.

Newman-Bale: The ones who are going to have to worry the most are the ones who’ve come in building these gigantic facilities that are nicer than some of the larger breweries. Having to hit 10,000, 20,000 barrels just to make it is going to be impossible even in the best of times. When we went from 3,000 to 8,000 when we opened our facility, we almost tripled in size in one year. That was the most painful year and we had years of experience and years to plan. 

Spaulding: People are also right now investing in growth and not equally so in the quality of the beer and what you do if there’s an issue. I think that’s the next thing that’s going to be hugely important. 

John Wiegand and Josh Veal also contributed to this story.

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