A year and a half after launching Railtown Brewing Co. in Dutton, Justin Buiter and Gim Lee realized their craft brewery needed to expand well ahead of schedule.
The first indication came from the standing room-only crowds that showed up Thursday through Saturday nights for live music. Then people started approaching Buiter when he was in the community to tell him that they had stopped into the brewery, but left without ordering anything because it was so busy.
“Our hand got forced a little bit,” Buiter said of Railtown’s growth strategy.
The brewery just started construction on a taproom and brewhouse expansion at its location at 3555 68th St., about 20 minutes south of downtown Grand Rapids. The 1,100-square-foot project will give the brewery about 40 percent more space and add 30 seats, plus an elevated stage for bands.
“It will give us some breathing room,” Buiter said. “Right now, we’re packed to the gills.”
Railtown considered three options to grow, but chose the most conservative strategy to scale up, a nod to the bootstrapping model Buiter and Lee embraced after they left their I.T. jobs at Family Christian Stores to launch the business.
“We want to take it one step at a time and not bite off more than we can chew,” Buiter said. “We don’t want to take the poison pill.”
Railtown Brewing was one of more than 250 producers of craft beer active in Michigan last year, including companies licensed as breweries, microbreweries and brewpubs. Statewide beer production reached 519,896 barrels in 2015, a spike of 27.4 percent compared to the previous year, according to an MiBiz analysis of Michigan Liquor Control Commission data.
The year-to-year growth of nearly 112,000 barrels was the equivalent of adding two breweries the size of Founders Brewing Co. in the state.
“We’re still in the boom years,” said Joe Infante, a Grand Rapids-based attorney and chair of the alcoholic beverage practice at Miller Canfield Paddock and Stone PLC.
Nationwide, more than 4,200 breweries were in operation last year, the most for any year since Prohibition, according to the Brewers Association, a Boulder, Colo.-based trade group for small, independently owned craft breweries. The craft beer market also grew 16 percent in 2015, reaching $22.3 billion, or more than double the size of the U.S. office furniture industry.
Nationwide, production increased nearly 13 percent in 2015, a slower rate of expansion compared to 18 percent in each of the two prior years. While still healthy, that slower growth could signal a maturing of the industry, which is currently sorting through key challenges ranging from an influx of investors, an acquisition strategy by the world’s largest brewers and the need to plan for succession.
For new entrants and those looking to start breweries, it’s a matter of setting realistic goals in an industry that continues to evolve.
“There’s still so much room for craft, but startups have to have realistic expectations,” said Brandon Finnie, managing director of Hungerford Valuation in Grand Rapids. “You will not become a Founders.”
At Railtown Brewing in West Michigan, the owners want to continue growing, but they eschew the idea of becoming a massive operation, opting instead to keep the business manageable “so everyone is having a good time,” according to Buiter.
The company hopes to leverage the additional space to expand output to fulfill demand from distribution, now that the company has signed with Henry A. Fox Sales Co. to cover the state outside of a handful of counties in West Michigan where the brewery works with JY’s Distributing LLC.
The expansion also will allow Railtown to increase its brewing capacity to about 1,000 barrels, up from 700 currently. Its output reached 260 barrels last year and is on track to hit 500 barrels in 2016, Buiter said.
The partners believe they should be able to achieve, if not exceed, the company’s measured growth strategy given their focus on maximizing available resources while concentrating on the quality of the beers to ensure repeat orders from retailers. While selling beer via the taproom has the best margins for any brewer, Railtown wants to get its products into more beer bars statewide to help drive recognition and branding, Buiter said.
“It’s marketing, and we want to get our name out there,” he said. “We feel good about our quality and what we’re doing locally, and now we want to get a reputation on a slightly larger scale. There’s just something about packaging: It’s the stripes on your shoulder.”
NOT ALL WILL SURVIVE
While most brewery owners share the approach Buiter and Lee have in delivering quality products to their customers, that’s not always the case, according to industry insiders.
Given the industry’s growth trajectory, it’s attracted a handful of people who are getting into the business to make money rather than to make quality beer, and that’s starting to show, according to Dave Ringler, who founded Cedar Springs Brewing Co. six months ago after dabbling in the industry off and on for a couple of decades.
Ringler, whose brewery focuses on German-style beers, expects to see a shakeout in the industry like what happened in the late 1990s when a handful of “first wave” breweries folded. Those companies were started by doctors and lawyers, not people passionate about the beer, he said.
“Are there people getting into it who shouldn’t? Yeah, but you can’t suck,” he said. “Some are not going to survive, and that’s true in every business.”
With craft beer accounting for 12.2 percent of all beer sold nationwide, the industry has continued to attract the attention of outside money — whether from banks who’ve developed an appetite to lend to companies in the industry or from private equity funds looking to break into what they see as a sexy market — because it still has room to continue growing, according to industry watchers.
People who get into the business expecting to scale up rapidly to the size of a regional or national brewery like Bell’s Brewery Inc. or Founders Brewing Co. and ride the wave of explosive growth they’ve witnessed in the past few years will be caught off guard, Ringler said. He cited the long hours, cost of equipment and difficulty of accessing the market, and noted the days of explosive growth are likely over. On top of that, people often forget the long runway Founders and Bell’s needed to get to where they are today, he said.
“I’m almost 50 years old, and I have no illusions of becoming a Founders,” Ringler said. “We have a little product niche and we might get to 5,000, 10,000 or 15,000 barrels in my lifetime.”
Craft breweries that have been around for 10 years or longer face another major hurdle in the coming years in determining an exit strategy for the owners, said Infante of Miller Canfield.
The craft brewing industry is like any other business in that owners need to plan for a day when they’re no longer working in the companies they started. It’s a key step in ensuring the longevity of their brands, he said.
“As you’re getting older, you need to figure out who will take over the business, and a good chunk of them don’t have an estate plan,” Infante said. “You don’t want to be like Prince. You need to figure out now how to leave it to your kids or someone else.”
Indeed, industry publication Beer Business Daily found that only about half of the top 50 craft brewers participating in a recent study had a succession plan, according to a presentation during the Craft Brewers Conference. Of the respondents, 28 percent said they planned to strike a strategic partnership with a multinational brewer, while another 34 percent looked for an exit via a private equity fund, family office or beer-related fund, or another similar consortium.
However, Infante warns against most owners banking their retirement on their ability to attract a multinational brewer with a fat wallet for a buyout.
“The money is there, but it depends who you’re talking about,” he said. “Who will get the money and the AB buyout, that’s there for the bigger breweries. But the money is not there for the smaller brewery.”
Ryan Buckley, managing partner of Livingstone Partners LLC, a Chicago-based M&A advisory and investment banking firm, thinks the need to have a succession plan and the push to continue growing could lead some of the regional craft brands that haven’t accepted private equity deals or buyouts to explore instead a form of strategic partnership with another craft producer. In particular, he sees breweries striking alliances with like-minded companies on the other side of the country to brew each other’s beers, save on shipping and ensure the freshness of the product.
“There’s a reason why they’re not trading. It’s that the major players aren’t interested or they themselves are uninterested in pursuing a private equity partner or a strategic buyer,” Buckley said. “They want to remain independent … but they want to continue to grow and continue to support their brand and the market is forcing them to do so.”
For smaller craft brewers in West Michigan, the push to expand serves more to fulfill demand in their taprooms and local or statewide distribution. At Railtown, for example, the investment in growth will give the company room to continue to innovate its beer, develop packaging and perhaps start a barrel-aging program.
“We’re thrilled with where we are now,” Buiter said. “We’re not in this for the money. We’re in it because we love beer and we love our local community.”