Published in Food/Agribusiness
In-state beer sales for Old Nation Brewing jumped 121 percent last year, based largely on the popularity of the company’s M-43 brand of hazy New England-style IPA. Co-founder Travis Fritts credits the consistency of the company’s beers and its use of social media to communicate with customers as contributing to Old Nation’s success. “I think that we’ve been really lucky. I also think that luck is the intersection between being prepared and having an opportunity,” he said. In-state beer sales for Old Nation Brewing jumped 121 percent last year, based largely on the popularity of the company’s M-43 brand of hazy New England-style IPA. Co-founder Travis Fritts credits the consistency of the company’s beers and its use of social media to communicate with customers as contributing to Old Nation’s success. “I think that we’ve been really lucky. I also think that luck is the intersection between being prepared and having an opportunity,” he said. PHOTO: Jena McShane

Craft brewing industry growth stalls as competition heats up

BY Sunday, April 28, 2019 06:22pm

In the hyper-competitive craft beer industry in which growth has started to level off in recent years, Old Nation Brewing Co. proves the exception to the rule.

The Williamston-based brewery has garnered a name for itself with its M-43 brand, a popular New England-style hazy India Pale Ale that carries a suggested retail price of $13.99 per four-pack of 16-ounce cans.

Old Nation’s in-state beer sales exploded in 2018. The brewery sold 17,002 barrels of beer in Michigan last year, a 121-percent increase of more than 9,300 barrels compared to 2017, according to data from the Michigan Liquor Control Commission.

That equates to in excess of 2.3 million more pints of beer sold to Michigan consumers in 2018 than in the previous year, not counting the beer Old Nation sold in other states — it distributes to seven states currently — or that it exported to other markets.

Co-founder Travis Fritts said the company’s growth was a mix of being “really lucky” and seizing an opportunity as one of the first breweries to enter the market with a hazy IPA that resonated with consumers.

“I think we were in the right place at the right time with the right New England IPA, and we had the right facility to accept it because we built a really big facility,” Fritts told MiBiz. “We didn’t have any expectations that we’d be running that facility at capacity in three or four years after we opened.”

Still, Fritts strikes a pragmatic note when it comes to forecasting the future of Old Nation.

“My thought is that we’ll sell some more beer in Michigan than we did last year and a little bit more next year, but it’s unrealistic to think that there would be that kind of stratospheric growth year after year,” he said. “We’re not going to live forever. This is just something that we’re really happy to have had happen.”

The explosive growth for Old Nation contrasts with an overall craft beer industry in which sales expanded by about 7 percent to $27.6 billion last year, according to the Brewers Association, a Boulder, Colo.-based trade group that tracks small and independent producers. The nation’s 7,346 craft breweries produced more than 25.9 million barrels of beer in 2018, up about 4 percent from the prior year.

The 4 percent growth in the craft brewing industry for the last two years is a marked departure from the rapid double-digit expansion the sector experienced from 2010 to 2015. As well, the industry’s growth is being split among more players: 1,049 new breweries opened last year, according to Brewers Association data. Meanwhile, 219 breweries closed in 2018, an all-time high.

The changes led Brewers Association Chief Economist Bart Watson to advise attendees of the Craft Brewers Conference earlier this month in Denver to “reset expectations” for the industry in the years ahead.

“Four percent growth isn’t what we’ve seen in the past, and I think there’s going to be a lot of challenges going forward,” Watson said during the conference. “This is not a blip; it’s the new normal.”

How exactly the industry fared last year in Michigan is tough to discern because of a rule change that allowed producers the option to shift beer tax payments to distributors, thereby rendering year-to-year comparisons moot for those companies.

The state’s two largest breweries, Comstock- and Kalamazoo-based Bell’s Brewery Inc. (188,700 barrels) and Grand Rapids-based Founders Brewing Co. (115,178 barrels) told MiBiz in-state shipments of beer increased last year.

For the more than 250 licensed Michigan microbreweries, in-state sales grew 7.7 percent to 311,472 barrels of beer, according to MLCC data, but that doesn’t account for companies that may have opted to shift their tax payments to distributors. Sales for brewpubs, which do not distribute and are not subject to the rule change, slid 7.5 percent to 21,194 barrels.

According to MLCC data, the overall market for beer in Michigan declined 0.3 percent, out-performing the nation, which saw sales slide 1 percent.

Growing the pie

Similar to the national trends, the number of breweries in Michigan continues to expand. According to data from the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB), Michigan ranked fourth nationally in 2018 with 510 permitted breweries, behind California (1,236), Washington (540) and New York (532). The numbers could include breweries in planning or companies that received permits but never opened.

Michigan Brewers Guild Executive Director Scott Graham pegs the actual number of operating breweries in the state as somewhere north of 350.

“I expect to see breweries keep opening at the rate of 20 or 30 or 40 a year, at least for this year,” Graham told MiBiz. “I think there’s room for that, if they know fundamentally what they are. Many communities can support one or more taproom model breweries that are neighborhood establishments to gather and socialize and enjoy a beer.”

While the change in beer tax payments affects the ability to track sales of Michigan-made beer in 2018 and going forward, Graham believes it has continued to grow from the 10-percent market share it achieved in 2017.

Nationally, craft beer made up 13.2 percent of the overall beer market by volume and 24.1 percent by spending, according to the Brewers Association. However, the trade group’s stats do not include companies like Founders Brewing, which is about 31-percent owned by Spanish brewer Mahou-San Miguel Group, or brewers of craft beer nationally that have sold to global conglomerates like Anheuser-Busch InBev SA, because they do not meet its definition for independence.

For its part, the Michigan Brewers Guild has a goal of Michigan-made beer reaching 25 percent of the statewide market.

“I would argue that in general, Michigan and the craft beer scene in Michigan is not going to be on par with the average nationally. It’s going to trend above average, even though it probably lags the West Coast,” Graham said.

Headaches in distribution

As the number of breweries continues to grow, competition in the industry has ratcheted up accordingly. Nowhere is that trend more evident than on retail store shelves or bar tap handles, where a growing number of producers are jockeying for a limited amount of space.

That’s led to stagnation for the country’s regional breweries that rely on a distribution model to sell their beers. The subsector of the craft brewing industry remained flat last year, according to the Brewers Association’s Watson.

“2018 was the clearly the slowest growth for distribution for craft in a long time,” he said during the Craft Brewers Conference.

Even so, a handful of Michigan breweries proved there’s still some runway left in the distribution model. For example, Bellaire-based Short’s Brewing Co. (40,974 barrels), Detroit-based Atwater Brewery (22,481 barrels) and Marquette-based Blackrocks Brewery LLC (7,500 barrels) posted in-state sales gains of more than 10 percent last year.

As Grand Haven-based Grand Armory Brewing Co. expanded distribution of its beer portfolio to the entire Lower Peninsula, including Southeast Michigan in January 2018, the company saw its sales grow by 78 percent, or more than 2,250 barrels, to 5,126 barrels last year.

“2018 was a great year for us,” co-founder Ben Tabor told MiBiz, noting the company signed seven new distribution agreements last year. “The whole state just kind of caught wind of our brand.”

The growth follows significant investment in Grand Armory’s quality systems and brew house, which has been “constantly under construction.”

“When we opened in 2015, we had six tanks that were all about head height, and now we have 24 tanks that reach up to the top of an 18-foot ceiling. It’s been dramatic (growth) every month,” Tabor said, noting the company continues to read the market as it gauges whether to invest in additional capacity. “With our system, we should be able to produce over 8,000 barrels of beer this year, so we’ll really test the waters and see. This will be the first year we can actually meet (demand). We’ve always been working to catch up.

“We didn’t know the market was even going to allow this kind of growth, so we’re just going to keep pushing and do what we do making high quality, attractive looking beer, and hope the consumer continues to love our beer.”

Moving markets

As distribution becomes more competitive, brewers have taken a closer focus on selling beer in their taprooms, where their margins also are the highest.

Nearly 3.1 million barrels of beer were consumed at a brewery last year, according to the TTB.

Watson of the Brewers Association said that brewery taprooms now account for about 15 percent of all U.S. draft beer sales. As well, taproom sales continue to be a growth segment for craft brewers, expanding at a rate of 40.2 percent last year, he said.

That growth opportunity has left many brewers with a conundrum of “how to balance distribution growth with taproom growth … (when) we see the challenges in broader distribution,” Watson said.

In Michigan, the shifting growth patterns suggest the craft beer market and the appetite for consumers “has become more diverse than just the ‘big two’” breweries, or Founders and Bell’s, said David Ringler, founder and director of happiness at Cedar Springs Brewing Co.

“The challenge for many of the new entrants will be to build a loyal, local following and any type of toehold on a distribution market that grows ever more competitive,” he said in an email to MiBiz.

Building a fervent following formed a key tenet in Old Nation’s business strategy, according to Fritts. To that end, the brewery upended the traditional distribution model that relies on wholesalers to communicate about brands to retailers, who then translate that to end consumers.

Instead, Old Nation cut out the middle men, taking its message directly from Fritts to the consumers by leveraging the power of social media.

When Old Nation started to develop M-43, the business was in a much different place, Fritts said. The company, which opened in 2015, initially intended to move away from aggressively hoppy IPAs to make more traditional styles of beer, but struggled to find acceptance in the market.

That’s when the company decided to change tactics and take its message to the consumers to see what they wanted to drink and find a way to make that product in a high-quality way, Fritts said.

“It’s hard as hell to do that,” he said. “I can tell you from experience in 2016, it’s hard as shit to do that when you’re under the gun and you’re not selling as much beer as you need to in order to keep your company going much longer — to relax and be like, ‘Let’s just shoot the shit with these folks and see who comes around.’ But that’s what we did and it worked.

“Instead of pushing this (beer) onto people, we’re talking directly to the folks through social media and then they’re going and seeking it out. We know where the demand is. Social media allows us to track that demand nationwide and in some cases globally and respond to that demand more effectively.”

Using available capacity

Fritts said Old Nation continues to react to demand by scaling up production to nearly 20,000 barrels, and is in the process of adding distribution agreements in several additional states. Old Nation also has a “surge protector” to deal with any potential wave of demand by being able to tap into Detroit-based contract brewery Brew Detroit LLC, where Fritts has already tested making M-43 to ensure product consistency.

“If there’s a surge in demand, then we can turn that facility on and produce as much as we want out of there. If there’s a decrease in demand, we can turn that spigot off. And that’s a healthy place to be in,” he said. “Whether or not we double or have 15 percent growth or whatever, it would be foolish to predict.”

In an industry in which capacity utilization stands at about 50-60 percent — “well below the national average for all manufacturing industries,” Watson said — it could make sense for companies to increasingly consider off-site brewing or contract agreements rather than investing in their own capital equipment, sources said.

“If you’re thinking about an expansion, you should really question about whether you need to own that capacity or whether there are other opportunities to grow your brand in the market with lower risk and lower capital costs, particularly given the competitive environment that’s out there,” Watson said.

Indeed, some breweries have started to leverage contract brewing facilities or alternating proprietorships rather than make large capital investments as the industry remains in flux. As well, Comstock Park-based Speciation Artisan Ales LLC pioneered a model locally that uses excess capacity at other area breweries to produce the liquid base for beer, which it then ferments in-house, saving the company the investment in its own brew house.

“It only makes sense,” said Speciation co-founder Mitch Ermatinger. “Most breweries are not operating at 100 percent, so why not utilize that? It’s a win-win for both parties.”

Reaching out

Fritts at Old Nation said he plans to continue to reach out directly to consumers to talk about the company, its brands and processes to further bolster the brewery’s fan base, as well as listen to consumers about what they want.

“There is an entire world out there of folks that don’t even know whether or not they like the beer that Old Nation makes. Maybe they will and maybe they won’t. Our job now is to talk to them and to reach them and to figure it out. You go where they say, ‘We want you,’” Fritts said. “That makes lawyers and traditional B school graduates shake in their boots because that takes your control away. I’m telling you, in a context where there’s this much competition and this much subjectivity, control is an absolute f***ing illusion.”

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EDITOR’S NOTE: This story has been updated to note that Bell’s Brewery is based in Comstock, Mich., not Galesburg. 


MiBiz food and agriculture news coverage is supported by Dan Vos Construction. For more information, visit danvosconstruction.com. This sponsorship is advertising. It has no effect on editorial consideration in MiBiz.

Read 4700 times Last modified on Monday, 29 April 2019 11:53
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