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Saturday, 29 April 2017 06:00

Executive roundtable: Craft beverage makers struggle through internal divisions, market forces, threats

Written by  John Wiegand and Joe Boomgaard
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Joining MiBiz for an executive roundtable discussion on craft beverages were: (top row, left to right) Laura Bell of Bell’s Brewery Inc., Adam Bruski of Warner Norcross & Judd LLP, Justin Buiter of Railtown Brewing Co. and  Mitch Ermatinger of Speciation Artisan Ales. (middle row, left to right) Brendan Gary of Alliance Beverage Distributing LLC, Greg Hall of Virtue Cider Co., Nick Looman of Newaygo Brewing Co. and Erik May of Pilot Malt House LLC. (bottom row, left to right) Greg Van Overloop from SpartanNash Co., David Ringler of Cedar Springs Brewing Co. and Andy Sietsema of Sietsema Cider LLC. Joining MiBiz for an executive roundtable discussion on craft beverages were: (top row, left to right) Laura Bell of Bell’s Brewery Inc., Adam Bruski of Warner Norcross & Judd LLP, Justin Buiter of Railtown Brewing Co. and Mitch Ermatinger of Speciation Artisan Ales. (middle row, left to right) Brendan Gary of Alliance Beverage Distributing LLC, Greg Hall of Virtue Cider Co., Nick Looman of Newaygo Brewing Co. and Erik May of Pilot Malt House LLC. (bottom row, left to right) Greg Van Overloop from SpartanNash Co., David Ringler of Cedar Springs Brewing Co. and Andy Sietsema of Sietsema Cider LLC. Photos by Katy Batdorff

With more than 5,300 craft brewers already on the market, and many more scheduled to open in the near future, the craft brewing industry has started to mature.

Along with that process, factions have begun to emerge, even in an industry known for its camaraderie and collegiality. The small neighborhood breweries increasingly have less in common with their large regional counterparts. At the same time, the regional breweries are finding their profits squeezed from large conglomerates entering the craft sector and as more drinkers opt to “drink local.”
Other divisions have emerged over labeling standards, quality issues and pricing pressures, not to mention threats from larger competitors outside the craft sector. 

Those tensions spilled over from presentations at the Craft Brewers Conference last month in Washington, D.C. to a roundtable discussion MiBiz convened featuring executives from craft beverage producers, distributors, retailers and suppliers. Joining the discussion were: 

  • Laura Bell, CEO of Comstock-based Bell’s Brewery Inc., which also operates Upper Hand Brewery in Escanaba
  • Adam Bruski, senior counsel who heads the craft beverage group at Warner Norcross & Judd LLP, the law firm that sponsored the roundtable
  • Justin Buiter, co-founder of Dutton-based Railtown Brewing Co.
  • Mitch Ermatinger, co-owner of Speciation Artisan Ales, a Comstock Park-based brewery focused on wild and sour beer
  • Brendan Gary, director of marketing at Alliance Beverage Distributing LLC, a beer and wine distributor based in Grand Rapids
  • Greg Hall, founder of Fennville-based Virtue Cider Co. and former brewmaster at Goose Island Beer Co. in Chicago
  • Nick Looman, co-owner of Newaygo Brewing Co.
  • Erik May, owner of Byron Center-based Pilot Malt House LLCwho hosted the discussion in his production space
  • David Ringler, owner of Cedar Springs Brewing Co.
  • Andy Sietsema, owner of Ada-based Sietsema Cider LLC 
  • Greg Van Overloop, the beer, wine and spirits category manager at SpartanNash Co., a Byron Center-based grocery retailer 

Here are some highlights of the discussion: 

From a 30,000-foot level, what’s your take on the state of the craft beverage industry? 

HALL: It’s a lot different than it was 30 years ago. In many ways, it’s a more challenging business environment because it’s so competitive, but on the other hand, we have this enormous group of drinkers that we didn’t have 30 years ago, or 20 years ago or five years ago. As competition goes up, I think we’re finally at a position in the industry where there’s a little more supply than there is demand so prices might end up coming down a little bit for the first time, or at least stop going up. 

LOOMAN: I think the average consumer is actually becoming more confused and less educated. The average consumer thinks they’re being educated more, and I think the average brewer thinks they’re helping, but I believe it’s actually a backwards slide. Until we see some real economic downturn that really is the sea that separates all the diamonds out here from everything else, you’re going to have a consumer that’s just going to assume continuously everything new is good.

ERMATINGER: I’m in the position where a very small amount of people buy all the beer I make, and they’re just super crazy about the sour beer. I have a teeny, tiny, infinitesimally small segment of the craft beer drinkers. It only takes 300 people to buy literally everything I make in a month. It’s difficult for me to answer that question, because it’s just a totally different ballgame. 

BUITER: A lot of new alcohol manufacturers are shifting away from either a split business model of 50 percent of distribution and 50 percent taproom in the startup phase to 100 percent taproom. If we could, we’d push every pint we could across the bar, because that’s where the money’s at.

SIETSEMA: I think the cider consumer is actually getting more educated, and they want to know what else is out there. Cider is relatively new to the American craft drinking culture and to a lot of the consumers.  I see our numbers trending towards the drier side, which is good.

RINGLER: There’s a lot more folks coming into the market, but yet the volume’s pretty flat. It’s coming primarily from little guys. The volume is getting spread out across more outlets. I think we’ve all echoed that the local taproom is taking the place of the local pub. Really, they’re becoming your little community watering holes.

VAN OVERLOOP: Michigan craft — we’re still up double digits this year (in our stores). I just pulled the numbers for the first 15 weeks of this year. National craft is the opposite. That echoes what everybody’s saying. I agree totally: The customer is totally confused.

BELL: With the proliferation of how many breweries we have now, and to the point of fact that a lot of the breweries frankly don’t know what they doing, I think the model for small breweries is ‘we’re going to keep doing something different every single time.’ (At Bell’s), you can count on Two Hearted to be the brand that sticks with you to make your money and to make those margins. You cannot count on quality from one-offs all the time. 

What about on the support side of the craft beer industry? 

GARY: For us, (craft beer) was still our largest growth segment in our entire company. Imports might cross that this year for 2017. We’re not sure, but definitely 2016 was probably the first year it’s getting shaky.

MAY: We started five years ago on a pool table in a basement, and now we should turn 300 tons out of here this year. The nice thing about all these breweries popping up is everybody wants to gain some sort of edge, and there’s a decent way to do it with changing up your recipe and your ingredients (which we sell). 

BRUSKI: From a regulatory point of view, with the liquor control commission, you’ve got a setup that just fundamentally wasn’t made to deal with this table full of folks. I think you see some efforts to try and adapt and be a little bit innovative there, but it takes a really long time to catch up on that.

VAN OVERLOOP:  I’m trying to keep the price as high as I can. The tipping point for me right now is price. When Founders came out with that 15 (pack of All Day IPA), a chill went up my back. AB just announced a price decrease and Miller upped it. 

Are the price reductions a market grab or more of a sales strategy? 

VAN OVERLOOP: They’re trying to slow the train down. 

BELL: A word we’ve been using around the brewery is sub-premium craft where we’re heading into two different categories. (With) Two Hearted, we’ve got our price point for that. If we start seeing our craft brethren taking super low price as a volume grab, it echoes to me the premium and sub-premium of macro, and I think that starts to create that customer confusion as well.

RINGLER: I don’t think craft is ever going to compete on price. 

BELL: But we are right now.

RINGLER: I know it’s happening, but, in my opinion, it’s a losing strategy.

VAN OVERLOOP: To me, it’s totally confusing. 

For some of the smaller producers, is distribution and retail part of your strategy? Does it need to be given that shelf space is so crowded? 

LOOMAN: Yes, we distribute. No, it’s not a part of our business model. It’s underwritten as advertising.  

ERMATINGER: Same here. I choose to distribute to select accounts to keep that relationship going for when I do decide to grow a little bit and to expand the brand to make just more people aware of it.
HALL: No one’s going to open a brewery without a taproom, so the pushback is going to get harder and harder from the National Restaurant Association (NRA), because that’s who’s feeling it. 

BELL: It’s not just the NRA either. It’s the wholesalers. It’s us as regional brewers as on-premise (sales) go down because people choose to go to taprooms. 

EMERGING CONCERNS

Last year at CBC, many were concerned about a neo-temperance movement. Is that still a concern in the industry? 

HALL: Utah just passed .05 (blood alcohol content for driving under the influence). In Europe, everybody is either .05 or zero. South America’s all zero. That’s going to happen in the U.S., and it’s going to happen even more so as pot becomes legal. They haven’t come up with a test yet to be able to test people smoking weed and driving, so they’re going to penalize drinking. 

What’s that going to do to breweries in smaller communities that lack public transportation? 

LOOMAN: Think about Newaygo. There’s no Uber. There’s no Lyft. There’s nothing. 

RINGLER: We made efforts already now to get Uber to where we are, because (lower limits are) one of the things to make you start thinking about issues.

LOOMAN: We’ve got community programs to encourage — on weekends and on especially summer weekends — some kind of privately owned public transportation to help with that restaurant business downtown. We still don’t have an answer for it.

CONSUMER TASTES

How are consumer tastes shifting as craft beer becomes more of a mainstay among drinkers? 

HALL: I think the ceiling is approaching, not on necessarily independent breweries or small brewers, but on intense flavors. There’s no record of any consumer product that has the type of intense flavors craft beer has going. There’s a reason why beers like Modelo and Michelob Ultra are growing. Michelob Ultra and Modelo both grew more last year, about three times more than Sierra (Nevada) has grown in their 35 years. If we’re in a craft beer revolution, then what explains Michelob Ultra? 

VAN OVERLOOP: I clustered all my stores (and) the one beer that goes across all clusters as a strong brand is Michelob Ultra. 

BELL: It’s also the lowest calorie.

RINGLER: There’s always going to be that percentage that want the extreme flavor products. (But with the Michelob Ultra example), it’s the same thing happening with craft (and) the session brands. At Founders, I know (All Day IPA, a session ale) has become a big part of their portfolio. 

BELL: I think you’re absolutely right. Oarsman’s taken off for us.

ERMATINGER: I try to tell all my customers I make sour beer, but I prefer to have a pilsner. If I could choose a beer to have right now it would be a pilsner. I tell that to basically anybody who asks me. All my customers are like, ‘Why the hell would you do that? Why would you drink that?’ Because it’s a really good style.

BUITER: I think that comes hand in hand with education. So many people getting into beer need to get smacked in the face with flavor. We’re seeing everything coming back to stylistic brewing. While they’re not exciting, and they’re not a bourbon barrel-aged, vanilla, coconut, cocoa, whatever, they’re enjoyable. You can have more than one of them. You’re not going to get toasted off one bottle and you can appreciate the flavor for what it is. 

VAN OVERLOOP: How do I sell a beer that requires education? 

BELL: When my dad started in 1985, he was trying to sell an amber ale, a style that is now blasé. We’ve jumped the shark to go back to say, ‘Boy, we’ve got to explain why an amber is good to people.’ (That) is really frustrating sometimes.

NEW LABELING GUIDELINES

At the Craft Brewers Conference this year, the Brewers Association announced they were clamping down on sexist and inappropriate beer labeling. What are your thoughts on the use of those labels by brewers?

BELL: I recognize that there’s got to be creativity and humor in beer. A lot of times, though, when it comes to the sexist and potentially racist labels, when I hear, ‘Oh, it’s just a joke,’ well, a joke implies a punchline. Someone has to be a punchline. A lot of times, it’s a woman that looks like me that is a punchline. I’m sick of it. A woman or a person of color, or LGBTQ — if there’s a beer label that’s like Amber Tease, or Double D Blonde, or Bean Flicker, how the hell are we supposed to be enthusiastic and supportive of this industry when we’re second-class citizens and not respected by it? … We’re going to sell more beer when we don’t automatically exclude portions of the population by the label.  

LOOMAN: I’m anti-sexist labels. I agree with you 100 percent, but there is a market strategy in excluding people. Maybe there is a market that thrives upon sexism and racism, and while I hate it, are we really here to regulate it? 

BELL: To me, the idea of craft beer was started as a way to be inclusive of everybody. Craft was started to be the anti-macro. We’re against the big guys. We’re not beer girls and potty humor and boy jokes. Now we are back to craft brands that feel like their only access to market or the way to get noticed is by doing this.  

RINGLER: There’s a history of that kind of advertising in big beer and, for a lot of (craft brewers), ‘Poop Your Pants’ sells. People are going to try it. I agree with you, but people are going to buy that beer because of that name. 

BELL: Is that how we want to be represented as craft?  

LOOMAN: You and I don’t want that, but if somebody else does it, are we to tell them what kind of brewery they can run? 

BELL: Then we get to the further splintering of what craft means. Then we are no longer united like a rising tide raises all ships. Now we are cool with being sexist or racist because we think that sells.

RINGLER: If craft is going to grow, it has to be more than just fat white guys in beards. To your point, when you’re pissing people off, it doesn’t make economic sense, either.  

BUITER: The customer could be very confused. They may not know what our industry stands for, which I think is an important aspect of the BA’s new stance on things.

At SpartanNash, have you ever gotten complaints about a beer name and what’s your course of action on it?

VAN OVERLOOP: To date, we’ve only censored one beer. I grabbed two gentlemen from the mailroom that were African-American. I grabbed two women from merchandising, and I asked them to look at the label and tell me what they thought. All four said, “I don’t like it,” so we didn’t put it out there.

HALL: I don’t know if you guys watched the news at all, but somewhere between 20 and 46 percent of America probably really likes those racist, misogynistic labels, unfortunately. We live in this craft beer tent where everything’s good and everyone should be treated fairly and all that. That’s not really America today.

BUITER: It’s also why we need to be the flagbearers as an industry rather than fracturing who we are as an industry over topics like this. 

INDUSTRY DEALMAKING

There’s a lot of money flowing around the craft beverage industry right now. We’ve had local family investment offices get involved in deals lately. Where do you see the landscape for M&A in the industry right now? 

HALL: I think there’s two paths you can go down. If you’re really small and you want to stay really small — great, god bless you. There’s nothing wrong with that at all. If you want to grow, you’re going to need somebody else’s money. Whether it’s a bank, or a private equity, or public markets or a big brewer partner, it’s always going to be somebody else’s money. (Editor’s note: Hall started Virtue Cider and later sold a 51-percent stake to Goose Island Beer Co., which is owned by Anheuser-Busch.) I don’t know where Bell’s got the money to grow. 

BELL: We’re 100 percent family-owned.  

HALL: You have no debt? 

BELL: Yeah, we work with our bank. … They’ve been a really great partner for us. 

HALL: I’m sure they have, but it’s like if you partner with a big brewery, the big brewery is bad so that’s a bad thing to do. But with the bank, nobody asks which bank you’re working with. I think that I’ve always tried to believe that it is the big tent. We want to grow beer. We want to grow craft beer. Where the money comes from is less important than what’s in the glass. I think the person who’s walking into a store or the person who’s walking into anywhere to buy a pint, they’re much more worried about what’s in the glass than who owns it, or who makes it, or what’s on the label. At the end of the day, Coors sells a lot, and there’s a lot of people who don’t agree with some of the Coors family politics.

RINGLER: One of the things when you’re getting into big craft, though, is that I think a lot of consumers don’t even know that it’s affiliated. To say they don’t care what’s in the glass, I think they may care if they knew, in terms of who actually owns it or makes it. I think there would potentially be more concern for a lot of the consumers.  

SIETSEMA: Going back to your point that you just need money and everything, it’s what I’m struggling with right now. You just have to align yourself with who you think (aligns with you). … You’ve just got to do your homework, especially somebody of my size. I’ve told people no.

MAY: In the last six months, every one of the big malt companies in the world have approached us with varying levels of interest, and it’s completely caught me off guard. It’s weird because the malt business is a mirror image of the beer business. … I think for us it boils down to which of the strategic partners is the best decision for us to align ourselves with. 

BUBBLE AHEAD?

Some recent struggles in the industry have rekindled talk about a bubble in the craft beer industry. What’s your take? Is it just the normal course of business? 

RINGLER: This happened in the late ’90s, too. All kinds of people getting into it are lawyers or doctors who came from entirely outside (the industry). They have no experience in the industry whatsoever, and they’re going to open a place because money’s cheap and it’s hot. That happens in any growing industry.  

BRUSKI: The flip side of that is true as well. You could be the best homebrewer in the world or the best small brewer in the world and make a really great product, but that doesn’t mean you can run a brewery.

GARY: Not to be a smartass, but ‘bubble’ is a valuation term, right? The bubble burst the day Ballast Point sold for $1 billion dollars. Brewery values are never going to be that high again. There is a shakeout going on. There are winners and losers happening right now.  

BUITER: I think (the brewery closures are) a gut check, too, on operating in a hyper-seasonal area. There’s a lot of businesses that can’t make it in a hyper-seasonal area. Breweries have done very well. But it’s going to take some real pencil sharpening to figure out how you’re going to make that work.

OUTLOOK

What keeps you up at night as far as your business or the industry?

ERMATINGER: How to jump from being as small and focused of a brewery as I am to broadening that out just a little bit. Also, I bottle-condition all my beers and they’re all wild ales, so exploding bottles keep me up at night — or flat bottles.  

BUITER: I’m always looking for the next thing, whether that’s finding a new way to contribute to our community, a new benefit for our employees. In my mind, I’m literally kept up all night by just growing.

SIETSEMA: I would have to echo that: Just growing at a reasonable and manageable pace — growing at a quality pace — and getting systems in place to help manage that growth as best as I can.

RINGLER: We opened with a three-phase strategy for what our game plan was, and we’re really kicking the hell out of the end of the first phase, so getting set for that next step is probably the biggest challenge, which is interrupted constantly by just day-to-day operations. 

BELL: My primary responsibility is to make sure that all my employees are safe and happy. As a leader, my job is to make sure that everyone has a satisfying career, that they come to work and they feel really good every day about what they do. … (I think) about how to make Bell’s not just a good brewery, but a really good company to provide that value and worth to every single aspect of what they do. The bigger we get, the more of those things there are, and so you can start down a lot of different paths on how to make that reality.

GARY: In the short term, pricing. Long term, it’s really keeping brand values in beer. I hate to see it go the way of wine where it’s a new label or varietal, and then it changes in a year. 

MAY: For us, it’s the same thing: pricing. We’re small. Primarily, a driving force for our customers is price in most cases. It’s a commodity at the end of the day. As a small business fighting to survive, sales have never been our issue. We work on a lead time, but cash at the end of the day is why I don’t sleep at night. We’re trying to align ourselves with those who pay the best.

BRUSKI: For clients we have, I think it’s the liquor control commission and regulatory overhead and burden.

VAN OVERLOOP: How do I sell more? How do I creatively do that? 

HALL: Weather keeps me up at night this time of year. I worry about all the other stuff, too: How do I make the best decisions for the balance of my employees (and) my shareholders? I’ve still got all the original shareholders at Virtue, and my business partners, wholesalers, retailers. … It’s tough making the right decision for everybody. Usually somebody wins more than somebody else wins in these decisions.

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