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Saturday, 29 April 2017 06:00

As competition heats up, Michigan craft brewers focus on business practices, taproom sales

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Rather than work to spread its beer far and wide, Brewery Vivant wants to solidify its position as a local brewery with a small distribution footprint, according to co-founder Jason Spaulding, shown here in the company’s foeder room, where it makes sour beers. “Brewers that want to grow are going to have to have a terrific product, have the sales team to deliver the message, and the infrastructure to push their beer into the market to succeed,” he said. Rather than work to spread its beer far and wide, Brewery Vivant wants to solidify its position as a local brewery with a small distribution footprint, according to co-founder Jason Spaulding, shown here in the company’s foeder room, where it makes sour beers. “Brewers that want to grow are going to have to have a terrific product, have the sales team to deliver the message, and the infrastructure to push their beer into the market to succeed,” he said. Photo by Katy Batdorff

Thirsty Michigan craft beer consumers bought the equivalent of around 59,000 more pints of Brewery Vivant’s beer in 2016 than they did the year before. 

The 5.7-percent increase in in-state sales capped what was essentially a flat year overall for Grand Rapids-based Brewery Vivant, which is known for its Belgian-inspired ales. The brewery sold 4,433 barrels of beer in Michigan, an increase of 238.6 barrels, but experienced slower sales in the Chicago area last year amid growing competition from local producers in that market, said co-founder Jason Spaulding.

“It’s definitely not easy anymore,” Spaulding said of the highly competitive craft beer market. “A lot of breweries that are new to the business are used to making beer, throwing it out there, and it’s selling. I’ve always been waiting for the other shoe to drop, because it’s been too easy.”

A 20-year veteran of the craft beer industry, Spaulding believes the market has entered a more normal part of the business cycle compared to recent years when craft breweries seemed almost universally successful. 

“You actually have to sell your beer, you have to make good beer,” he said. “When we were duking it out in the early 2000s, this is what you had to do. It’s going to come as a shock to some newer people.”

Michigan’s breweries and microbreweries sold nearly 524,338 barrels of beer in the state last year, an increase of 9.9 percent or 47,413 barrels, according to year-end data from the Michigan Liquor Control Commission. That figure — which was well off the more than 25 percent expansion in 2015 — excludes brewpubs, which cannot distribute their products outside of their own taprooms. 

Nearly 58 percent of the volume growth last year came from the state’s top two producers, Comstock-based Bell’s Brewery Inc. and Grand Rapids-based Founders Brewing Co., whose in-state sales spiked 11.1 percent and 15.6 percent, respectively.

For the rest of Michigan’s brewers, 2016 was more of a mixed bag. Six of the top 10 brewers reported sales decreases, as many shifted their focus to out-of-state sales and increasingly felt the squeeze in various markets from local producers, according to industry insiders. 

Nearly one-third of Michigan breweries reported declining sales by volume last year, according to an MiBiz analysis of MLCC data. 

One of them was Bellaire-based Short’s Brewing Co., which posted a 17.5-percent decline for the year. But according to Scott Newman-Bale, a partner in Short’s, the dip can be explained by the brewery adopting best practices that will help the company deal with an increasingly “screwy” market and deliver fresher beer to consumers, thereby improving their experience with the brands.

Newman-Bale said the brewery implemented a $1.8 million inventory-reduction plan that cut the beer Short’s sends to its distributor by 73 percent. On paper, sales by volume declined, but depletions — which measure what the distributor actually sells — increased by 8 percent in Michigan, he said. 

“Now we can adjust,” Newman-Bale said of the inventory-reduction plan. “The volatility in the market has definitely increased, and obviously we want to guarantee freshness on the shelf and at our distributor. The only way to do it was to bring inventory down. If you see a low month, you’re not heavy (with beer sitting on the shelf). 

“We brew much tighter, which is a little risky sometimes. We are seeing some out of stocks, but at the same time, we’re shipping everything within a couple of weeks. People are getting a fresher product. … We’ve spent a lot on just getting consistency down and product down and that allows us to see deviations and waste and correct things and make it more consistent. It’s been a crazy eight months, but I think it’s showing how much easier life is on our end.”

SLOWER GROWTH

That market volatility played out nationally last year in the $23.5 billion craft beer industry, particularly for regional breweries which grew less than 1 percent year-over-year, according to data presented by the Brewers Association last month at the Craft Brewers Conference in Washington, D.C.

Nationwide, 5,301 breweries operated during 2016, 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 beer production increased 6 percent last year, the industry’s slowest pace of growth since 2011. However, that figure was skewed by the removal of several regional producers who were acquired by international brewing conglomerates and therefore no longer met the Brewers Association definition for independent ownership. 

According to the trade group, craft beer holds a 12.3-percent share of volume in the overall beer market, but makes up 21.9 percent of beer sales.

Despite the challenges and heightened competition, Scott Graham, the executive director of the Michigan Brewers Guild, still thinks the industry has room to grow, even in a craft beer-heavy state like Michigan. 

“I think we’re going to see 500 to 600 breweries open and operating in Michigan in a few years,” Graham said. “The marketplace is certainly getting more crowded and competitive. That doesn’t mean that it’s not going to continue to grow, it’s just that growth is going to be harder to get. … It’s just more developed. It’s not a surprise to see this happen.”

As of March 31, the Alcohol and Tobacco Tax and Trade Bureau (TTB) had issued 402 federal brewing permits to producers in Michigan, according to data Brewers Association Chief Economist Bart Watson cited in a presentation. In the TTB data, Michigan trailed only California, Washington, New York and Colorado for the number of permits. 

Twenty-three breweries or brewpubs in Michigan received federal permits in the first quarter of 2017 alone, according to the TTB.

Graham believes the state’s craft breweries have concentrated into two major business models. Few companies have opted for what Graham calls a production model that hinges on widespread distribution to achieve volume. More often, breweries that have opened recently have started small with a plan to serve their local neighborhoods, operating more like a restaurant.

Indeed, serving as a neighborhood gathering spot formed the cornerstone of the plans for Creston Brewery, which opened on Aug. 10 in Grand Rapids and sold 280 barrels of beer through the end of the year. 

“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. But for now, we just want to make amazing beer and focus on a neighborhood,” said co-founder and CFO Vince Lambert. “It’s just this cool, living and breathing local business. We’re not thinking about the Chinese beer market, like Founders is.” 

‘CLOSER TO HOME’

As competition heats up for shelf space and taphandles, Brewery Vivant plans to focus on “keeping more relevant, closer to home” at its Grand Rapids taproom, according to Spaulding. So far, that’s included “pushing the boundaries” by brewing new styles of beer, like a New England-style IPA, that might not fit in with the company’s traditional ales. He’s also starting to drive traffic with more brewery-only releases.

Aside from the need to stay relevant in their hometowns, brewers’ own taprooms also serve as the most lucrative sales channel for the beer they produce.

“The way of the present is open a local taproom and make your 80 percent across the bar, as opposed to your 30 percent by selling it through a distributor,” said Joe Infante, principal at Miller, Canfield, Paddock and Stone PLC in Grand Rapids and head of the firm’s alcoholic beverage regulation team.

As such, business at craft brewery tasting rooms has been on the rise in recent years, growing from 7 percent of sales in 2015 to 9.4 percent of sales last year, according to Brewers Association data. 

That all highlights the push for new craft breweries to open neighborhood-focused businesses, rather than expect to get into widespread distribution and compete with larger, well-established brands, Infante said. 

TAPPING COMMUNITY

In Grand Rapids, part of Spaulding’s motivation to focus on Brewery Vivant’s taproom is to reinforce the company’s community roots, something that cannot be claimed by regional breweries like New Holland Brewing Co. and Atwater Brewery, both of which opened satellite operations in the city last year.

“We were actually started here, and we’re trying to remind people of that,” said Spaulding, who also co-founded New Holland in 1997 and later struck out on his own. “We’re a local brewery and we’re based here, we started here. We’re looking to go deeper rather than wider. Grand Rapids is a high focus for us rather than try to push out to other places.”

Lambert at Creston Brewery shares Spaulding’s view of outsiders setting up shop in the Grand Rapids market.

“Grand Rapids is a pretty collaborative and supportive city for local businesses, so I think people here, better than most places, definitely want and seek out the more authentic Grand Rapids experience,” he said. 

According to New Holland Brewing VP of Marketing Joel Petersen, the brewery wanted to find a way to participate in the Grand Rapids market for some time, in part because consumers in the city embrace craft beer and craft spirits. 

He remains a believer in the “rising tide/all ships cliche” when it comes to more craft brewers opening in West Michigan, including in Grand Rapids. 

“Our intention in going into the market is that everyone would see more business,” Petersen told MiBiz in March at an event announcing New Holland’s distribution agreement with Pabst Brewing Co. “The more traffic that goes to Grand Rapids on brewery tours, the more brewery vacationers, the more people seeking out unique brewpub experiences, the better for all of us.”

FOCUS ON FUNDAMENTALS

As industry insiders look ahead to the coming years and brace for continued market volatility, they’re reminded that breweries are no different from any other enterprise. To succeed, they need to execute from a solid business plan, offer good customer service and sell a quality product. 

“If you’re not making high-quality, good, interesting beers and then running your business well so you are competitive, you might have a problem,” said Graham of the Michigan Brewers Guild.

That need to focus on running a strong business drove the inventory-reduction plan for Short’s Brewing last year, according to Newman-Bale. 

He said he’s willing to deal with the perception issues of the raw numbers showing declining in-state sales last year because the plan is “doing good things” for the future of the business. 

“We’re lucky right now,” Newman-Bale said. “We’re back up to running 24 hours a day, seven days a week brewing. We’ll be running at around 100-percent capacity for the rest of the year. It’s definitely intense, and way more dangerous to manage because if you make a mistake, it shows up really fast. But at the same time, it’s really allowed us to get back to the creative side and rapidly making decisions and getting things to the market faster than anyone else. … We’re running way more efficiently.” 

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Joe Boomgaard

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