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Posted May 2014

Honey, I think I’ll open a brewery

U.S. craft breweries | With almost 2,800 craft breweries operating in 2013, up 15 percent over 2012, and perhaps 1,700 more in various stages of planning, you’d have to be a real old miser to warn that this kind of growth cannot be sustainable. When Kim Jordan, the owner of New Belgium Brewery, predicted back in 2003 that craft beer will eventually garner 10 percent of the market – it had 3 percent then – Bob Weinberg, the eminent beer industry sage, retorted: “Not possible”. He obviously got it wrong. In 2013 craft beer’s market share was 8 percent. But if craft beer continues to rise to say 20 or even 30 percent of the market eventually, where is that kind of growth going to come from? Most likely, it’s going to come from those neighbourhood breweries that are springing up all over the United States.

For sentimental reasons I have kept a purple tea-towel which I bought in England some time in the 1980s. It reads: “You start by sinking into his arms and you end up with your arms in his sink.” Those were the heydays of the feminist battles and the tea-towel was meant to serve as a warning that if women did not watch out, they would end up as “her indoors”. Fast forward thirty years and nothing could be further from the truth. Today, it should read: “You start by falling into his arms you could end up in wellies in your own brewery.” This does not sound so much like a warning as like a promise. How many husband-and wife-teams are there in the U.S., who think they could be another Jeff Lebesch and Kim Jordan? Mr Lebesch, a brewer and Ms Jordan, a social worker, founded the New Belgium Brewing Company in Fort Collins, Colorado, in the early 1990s, doing Belgian-style beers out of their basement. As Steve Hindy has the story (in his recent book “The Craft beer Revolution”), “Jeff, being a practical guy, I really think he thought I could help him start the brewery,” Jordan said. “I could be the front of the house, doing the marketing and the selling. He could be the brewer.”

Within a few years, their beer - Fat Tyre Amber Ale - took off in a big way. The rest is history. In 2013 New Belgium produced over 900,000 hl beer and ranked third amongst the leading U.S. craft brewers, behind Boston Beer (2.7 million hl) and Sierra Nevada (1.1 million hl). To keep up with rising demand, New Belgium is currently building another brewery on the East Coast, in Asheville, North Carolina, at an estimated cost of USD 100 to USD 175 million. When the brewery is finished next year, it should add an extra 500,000 hl to total capacity.

In 2012, Ms Jordan, 55, decided to sell her controlling 59 percent stake to the company's employees for a sum rumoured in excess of USD 100 million. The brewery is now 100 percent employee-owned with Ms Jordan acting as CEO.

Ms Jordan and Mr Lebesch divorced in 2009 but this should not deter starry-eyed lovebirds from embarking on a career as brewing entrepreneurs. On Valentine’s Day this year, craftbeer.com published a list of “craft beer couples”, most famously among them Sam and Mariah Calagione of the Dogfish Head brewery, chirping “they are proof that at the end of the day, when you work hard to create something you love, it’s incredible to be able to enjoy the rewards with someone you love.” There is one proviso: they should make sure they don’t end up mortgaged to the hilt like Fritz Maytag, the founding father of the U.S. craft beer movement, who in 1977 had to tell his wife after a particularly hard day at his Anchor Steam brewery: “You realise, we may lose everything.” To which his incredibly supportive wife replied: “I know, I could sleep in a tent.”

It’s the business model, stupid!”

Luckily, those days are long gone. While the craft beer pioneers all know a thing or two about financial hardship, recent entrants into the industry have taken the lesson to heart that starting a brewery or a brewpub is primarily about getting finances and operations straightened out. As Keith Lemcke of the Siebel Institute commented: “Craft brewing has been such a success because of the greater awareness of its business side.”

Indeed. Over the past five years the craft beer category has witnessed phenomenal growth. It expanded by almost 8.2 million hl, or 75 percent, whereas total beer declined 9.4 million hl, or 4 percent, according to Beer Marketers Insights, a trade publication. There are now 14 craft brewers doing over 200,000 barrels (234,000 hl) each. Among those craft giants, Lagunitas Brewery, which ranked sixth, was the one that really barged ahead. Its output rose to 470,000 hl in 2013 from 67,000 hl in 2008. Brooklyn Brewery, the company Mr Hindy co-founded, also registered impressive volume growth over that period: to 250,000 hl from 87,000 hl. No wonder that in 2013 the top 14 craft brewers, in fact, controlled 49 percent of the craft segment. But while that may look awe-inspiring, it was really the local and regional brewers that made the segment explode last year. Beer Marketers Insights estimates that two thirds of last year’s increase came from players smaller than the top 14.

It’s hardly surprising that U.S. craft brewers of late have been bursting with pride - as if their success had been all of their own doing. That’s only partly true. In all honesty, their rise is mostly owed to the Three Tier System, the U.S. alcohol distribution system, which compels producers to sell their products only to wholesale distributors who then sell to retailers. As Mr Hindy writes, one of the main reasons for the incredible growth of craft beer since the mid-2000s has been the willingness of large distributors across the country to take on craft brands. For many large AB-InBev distributors, deciding to sell craft brands next to Bud and Budweiser required a leap of faith or a leap over the fence (a “jailbreak” from their exclusivity contracts with the major U.S. brewer).

The rest of this report is reserved for subscribers to Brauwelt International. Read on

 

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