Two West Michigan craft brewers operating with vastly differing business models are taking a similar approach to growing their operations by using capacity at other breweries.
Both Sawyer-based Greenbush Brewing Co. and Muskegon-based Rake Beer Project LLC are taking advantage of a production model that allows them to get beer into the market without a significant upfront capital investment.
Greenbush, which opened its brewery and taproom seven and a half years ago in Southwest Michigan, is raising a little more than $1 million to position the company to better serve existing demand for its beer and drive deeper into its distribution footprint, owner Scott Sullivan told MiBiz.
Sullivan initially expects to use the proceeds to build out the company’s sales force and to do more marketing in its existing markets, while relying on an alternating proprietorship with Brew Detroit LLC, a contract brewery, to produce the beers in the near term.
“The single most important thing for any brewery, ourselves included, is not just ending your year with your P&L looking OK, but having good financial health,” Sullivan said. “Extraneous fat is no good for any business.”
For Greenbush, which distributes throughout Michigan, Illinois and Indiana, the move comes after watching other growing breweries struggle with the inefficiencies of investing too much in production capacity only to have it sit idle as they scaled up the business.
Capacity utilization nationally among craft brewers stood at about 55 percent in 2017, according to data the Boulder, Colo.-based Brewers Association presented last spring at the Craft Brewers Conference.
“A lot of people spent a lot of money on building these big facilities and then they just have to push their beer here, there and everywhere in order to fill up their fermenters. If they’re sitting on empty fermenters, it’s just wasting capital,” Sullivan said.
For Rake Beer Project, tapping into excess capacity at local breweries will significantly lower the financial barrier for the company to open its doors in Muskegon, said owner Josh Rake.
In part, Rake is basing the business plan for his company off a production model used by Speciation Artisan Ales LLC in Comstock Park. Speciation co-owner Mitch Ermatinger “ended up helping me in getting my footing” and figuring out how to bootstrap the financials for Rake Beer Project, Rake said.
The model uses excess capacity at other local breweries for the production of wort, or the base of every beer, while fermentation will take place entirely in-house.
“For us, it was really the only way we were going to get a brewery open. I have a super middle class background and I didn’t have access to a whole lot of money,” Rake said. “That’s why we call it a project because, for us, it really is a project to see what we can do with a small amount of capital in trying to bring some world-class beers to Muskegon.”
In December, the company leased 6,500 square feet of space in the garden level of NorthTown 794’s multi-tenant project at 794 Pine St. in Muskegon. Plans call for a 2,500-square-foot taproom plus a large outdoor beer garden, with an opening date targeted for sometime this spring.
Rake Beer Project and Greenbush are embarking on their plans amid a period of decelerating growth for the craft beer industry nationally. The $26 billion craft beer industry grew by 5 percent in 2017, or 1.2 million barrels, marking the third consecutive year of a deceleration in sales growth, and the slowest pace of expansion in the last decade.
Nationally, craft beer garnered a 12.7-percent volume share of the beer market and accounted for 23.4 percent of retail dollars in 2017, according to data from the Brewers Association, which only tracks small and independent breweries.
While acknowledging the intense competition for space on store shelves and for tap handles in bars and restaurants, Sullivan said Greenbush is in the enviable position of already having demand for its products in the marketplace. The latest capital raise will help better meet those demands, as well as strengthen the company’s existing markets first — before the company would look to invest in more in-house brewing and fermentation capacity.
Greenbush already owns a warehouse facility across the street from its taproom where it could expand its capacity in the future.
“Contract brewing makes sense for us until we hit the point where we say it’s feasible to populate the space across the street,” Sullivan said. “I’m using this (capital raise) as the first stepping stone to the eventuality of doing that — and it’s going to be a pretty soon eventuality. When you’re taking capital, part of it is to help you build your infrastructure correctly. You can cash flow a lot of the stuff that you want to do so you’re not just taking on debt all the time.”
As of late December, Greenbush raised $201,000 in equity from existing investors, and “I don’t expect that we’ll have any problem” hitting the $1 million fundraising target as the company opens investment opportunities to outsiders, Sullivan said.
The right investors
Rake, a veteran brewer who has worked at Williamston-based Old Nation Brewing Co., New Holland Brewing Co. in Holland and Dexter-based Jolly Pumpkin Artisan Ales, also tapped into known investors — family members and friends — to get his company off the ground.
Like Greenbush, Rake Beer Project also has no immediate plans to seek out bank financing. Rake said plenty of outside investors came forward with interest in backing the company, but he struggled with getting people to buy into his vision that Muskegon was the right place for the project.
“We had a couple of other investors come to us, but a lot of people wanted us not to be in Muskegon and tried to have us go to different areas,” Rake said. “For a while, it was actually just trying to find the right set of investors that would believe in my vision for what we can do, and believe in Muskegon as a town that could handle something like this.
“That was the surprising thing for me: Finding money wasn’t necessarily the hardest part, it was finding partners that believed in the vision and (were willing to) be silent partners.”
While both Greenbush and Rake Beer Project have eschewed taking on debt, one industry adviser does not see breweries as becoming more debt averse in the current climate.
Brandon Finnie, a managing director at Grand Rapids-based Hungerford Valuation, said breweries, like any small businesses, still seem to be taking open-minded approaches based on their individual situations.
“We’re seeing everything, including breweries taking on debt to buy out investors, borrowing capital and taking on debt to fund growth, and breweries selling the entire thing,” Finnie said. “It’s like anything: One brewery is not representative of all breweries.”
Tapped into taprooms
The Greenbush expansion and the launch of Rake Beer Project come as the number of breweries operating in the U.S. was expected to surpass the 7,000 milestone last year.
Despite the growing competition, Sullivan said the push into distribution is less risky for Greenbush because the market already is demanding the company’s products and it hasn’t been able to react until now.
“The demand that we get and the people coming to us all the time are indicative of the fact that we had to do something to get more beer out into our broader market, and especially in Michigan first, because this is our home state,” he said. “It was never an issue of not having demand for our beer, it was having the ability to supply our beer.”
With many new entrants into the industry and more companies competing for consumers’ attention, many industry experts have reiterated the importance for breweries to build a strong foundation of taproom sales.
Sullivan agrees, noting that 80 percent of Greenbush’s revenues come from sales at its taproom in Sawyer.
“If you’re a brewery in a fairly small town, invest in getting people to come into your place,” he said. “Breweries that (focus on a strong taproom experience), especially if they’re in a small area, there’s a sustainability in that well beyond whether or not you can get on the shelf at Meijer.”
That’s advice Rake is taking to heart in Muskegon, where he plans to sell all of his beer at the taproom, whether pours for on-premise consumption or bottles and cans to-go, and capitalize on the higher margins.
“We think that the taproom model is a model that continues to expand currently, which is why we have no plans to go into distribution. Our goal is to sell everything out of our taproom ourselves,” Rake said. “If you keep everything sold out of your own taproom, you can reinvest those bigger margins to use better ingredients, focus more on the beer itself and not have to worry about stretching a dollar as far as ingredients go.”
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