As more generations become exposed over time to the craft beer industry, brewers will face new opportunities to find growth and challenges to their existing business models.
Add in a healthy dose of regulatory uncertainty and shifting market dynamics that could easily catch breweries off guard financially if they scaled up too large, too soon and it’s easy to see that the craft brewing industry remains in a state of constant flux.
Those were among the observations shared during a recent craft brewery executive roundtable convened by MiBiz earlier this month. Participating in the discussion along with this writer and Staff Writer Jessica Young were:
- Chris Baker, partner at Varnum LLP, a Grand Rapids-based law firm that sponsored the roundtable
- Michael Brower, co-founder of Muskegon-based Pigeon Hill Brewing Co. LLC
- Edwin Collazo, co-founder of City Built Brewing Co. in Grand Rapids
- Mitch Ermatinger, co-founder of Comstock Park-based Speciation Artisan Ales LLC
- Vincent Lambert, co-founder of Grand Rapids-based Creston Brewery
- Mike Stevens, co-founder and CEO of Grand Rapids-based Founders Brewing Co.
Here are some of the highlights from the conversation.
At the Craft Brewers Conference (CBC) in Denver, the Brewers Association detailed a leveling off of growth in the craft beer industry at 4 percent for the second year in a row. As well, 1,049 new breweries opened last year, further ratcheting up competition in the industry. What’s the 30,000-foot view from your perspective?
Brower: I certainly think that’s accurate. The amount of beer being sold may be growing slowly, but the number of breweries opening doesn’t seem to slow nearly as much. As a result, even if the pie grows, the number of people taking a piece of the pie is certainly growing at a faster rate. Here in Michigan, we’re already seeing that. We’re certainly seeing decreases in growth if not decreases in overall sales. We’re seeing breweries that were once major players who are struggling and losing significant sales. Some of the folks that started out who three years ago might’ve experienced exponential growth are instead finding themselves gaining a couple of points a year.
Ermatinger: It’s just going to be super tough, especially at the retail level. Retail’s going to hurt no matter what sized company you are. It’s going to be difficult. That’s why we’ve been hearing it for years that the taproom or direct sales is the only way to go really. Not the only way to go, but if you’re a new brewery, you really have to build that in your plan.
Stevens: The retail move right now is definitely taking its toll on a lot of us. Our business retail-wise is for the first time kind of starting to flat line. … If you’re getting into the distribution model, the days of trying to bring a national brand to center stage I think are long gone, unless you’ve really done something unique and special. For us that maybe got through that door before it started to close, we’re seeing significant competition. … The challenges aren’t anything we can’t overcome, but I think those who put a real serious focus on the distribution side will be the winners.
Lambert: We’re obviously still a startup company, we’re so new to this. We’ve got very limited distribution, so that really hasn’t even been part of our philosophy or part of our strategy. I think it’s a testament to our success that we have focused on our taproom. We opened this Creston Brewery so we could basically try to galvanize the neighborhood, try to organize and try to revitalize Creston. I think we have to continue to focus on that.
Baker: As a consumer, I love it. I love to see all the additional brands, love to see all the innovation that’s going on. As an attorney, I shake my head more on how you guys are dealing with the 4 percent growth. It’s incredibly difficult.
Collazo: I think we’re seeing these breweries that are producing 10,000 to 20,000 barrels that are starting to really have a hard time. Their branding is awful, their model’s really old, and they are unwilling or unable to pivot because they’re just big enough that it’s hard for them to pivot.
These days, startup breweries seem more pragmatic in planning to serve a neighborhood rather than opening with a massive system and dreams of immediately making it big in distribution. Is there still room in the craft beer industry to grow rapidly from a small local brewery into a statewide brewery or even to a national scale?
Ermatinger: It’s unlikely but still possible. If you’ve got the right brand, I can see it happening, but then maintaining that is going to be really difficult if not impossible. That’s the hard part. … It’s also not very profitable. Your profit margins are very small, and you have to start to try and do that instead of focusing on your pub as a small brewery.
Stevens: From what we see with the regional plays, they’re few and far between now. It seems like just gutting it out and hard work isn’t what necessarily pays off anymore. You need a little bit more juice behind it, meaning you’ve got to come up with something unique, or you’ve got to be from a unique place. … You got to create the hazy IPA, or you’ve been first to the market to bring out session IPA. We wouldn’t be who we are if we didn’t kind of beat everyone to that game. It’s like whatever leads the pack gets the right to maybe expand a little further. … You’ve got to have a combination of a lot of things to get there now. You can’t just expect that you’re going to work hard and have enough investors behind you.
Brower: We looked at going out of state about a year ago. We started exploring it, talked to other breweries — even Vander Mill (cider) — that were within reason similarly sized, just to get their opinions on it. We did market studies on some of the surrounding states, and at the end of the day decided that it wasn’t worth it. We were better to invest our money in Michigan because the market in surrounding states tends to be just as competitive for shelf space and tap handles as it is here. … From our perspective, it was smarter just to stay in Michigan and focus on this territory. … For a lot of us, it’s going to end up that we just need to be smarter, to grow naturally and not try to push beyond the bounds of what we can still call local, because the consumers are really focusing on local.
Does it seem like those breweries stuck in the middle tier now face some unique challenges?
Stevens: Financially, we saw harder times when we were at that smaller regional level. I remember sitting with our group and saying, ‘We are now too big to be local, we’re too small to be national, and that window (of growth) is open and if we don’t up and go through now, we’re toast. We’re going to be stuck with debt and not enough size.’ That’s when we just put the hammer down and opened in other states. Luckily, we knew we had All Day coming and had a pretty good feeling about it. Two years later, that came out and just (exploded).
Ermatinger: I feel like we actually might be going backwards. More of those breweries that were that mid size seem like they haven’t changed anything. They’re like, ‘Well shit, now we’ve got to start shrinking.’ And I think that’s a lot of breweries.
Brower: I don’t know that it’s by choice.
Ermatinger: It’s not.
At CBC, the retail discussions still hinged on this notion of ‘rotation nation,’ or the constant churn of brands to stay fresh in distribution. How is that playing out for you?
Stevens: In distribution, the conversation is we’ve got to constantly get in seasonals and (new beers). It’s hard because we come from a place where we’ve got to focus and we’ve got to build brands, and how do you do that when you’re constantly coming out with new products? That’s the space I think a lot of you guys live in, in terms of having to just constantly innovate. That’s where I think you get to a certain size, a certain scale, and it’s (difficult). We’re nowhere near the size of these big domestics that have no mobility. We still have mobility, but you get to a place where rotation nation just doesn’t work as a business model because all you’re doing is you’re spinning your wheels. But it works brilliantly at a local or even a smaller regional level.
Ermatinger: It’s a double-edged sword depending on how big you are. I feel like the expectation is for a small brewery to release four brand-new brands a month. That is what people want. People that are 30 years old who are drinking craft beer and paying $20 a four pack, that’s what they expect, a new brand a week. That’s impossible to do if you are bigger than 1,000 barrels. It’s hard enough for me to do, and I do 550 barrels.
Baker: I can remember my grandfather and my dad, and they were just happy to order their Stroh’s or their Pabst. What do you mean switch beer?
That brings up a good point. How do you see the beer industry changing with new generations of drinkers?
Stevens: You’ve got two generations now entering into this phase that never saw mom or dad drinking Bud, Miller or Coors. … When you think about what does beer look like 30 years from now in America, I have a hard time thinking that it’s Bud, Miller, and Coors. They might be owners of some of the new brands, but I think there’s a real good shot that craft could be in that place. … Why can’t America’s next greatest brewery come from craft? I think it fully can, you just have to figure out how to make that connection with that consumer on an emotional level, and then develop beers and consistency on a larger scale that can touch a bigger audience.
Collazo: One of our hashtags is City Built is for the Kids … because we have a kid area. Families come into our space all the time. I’m seeing kids grow up, even if it’s only been two years. But I’m hoping dad is excited about our beer for that reason. I remember reading an article when we were raising money how there’s a generation of young people 20-25 who’ve never had a Budweiser. That’s who’s coming up and that’s who’s going to be seeking our product.
Michigan breweries have been involved in a handful of recent acquisitions, including small-scale deals like ROAK Brewing Co. partnering with Right Brain Brewery or Saugatuck Brewing Co. buying Gonzo’s BiggDogg Brewing Co. As well, Founders acquired a minority stake along with Mahou-San Miguel Group in Boulder, Colo.-based Avery Brewing Co. Will the pace of deals continue in the years ahead?
Collazo: I think it’s inevitable.
Ermatinger: That’s just a part of business. It’s going to happen. People are going to form strategic partnerships, they’re going to partner up. That’s going to happen on a small scale, it’s going to happen on a large scale. It’s not a bad thing. It’s part of business.
Brower: I know from experience, now we have smaller breweries that are putting out feelers, trying to find someone who will come in to be their strategic partner, a.k.a. savior, which I think is a sign of the times that we’re in. M&A is going to certainly grow as part of our industry. It’s the only way a lot of our smaller players can really get the leverage, the buying power, and in some cases the skill sets that they need to survive. Not every brewery was started by people with business acumen. Not every brewery has a real understanding of the industry. These partnerships are the way that a lot of breweries are going to survive the coming storm.
We’ve seen Comstock Park-based Perrin Brewing Co. get acquired by Oskar Blues Brewery as part of its private equity-backed Canarchy Craft Brewery Collective LLC. Are there more opportunities for those kinds of buyers in West Michigan?
Ermatinger: I’d say it’s a certainty — 100 percent.
Brower: I’m just wondering who’s first. We’re all taking bets.
Stevens: There has to be a value proposition though. I’ll openly say we’re looking, and we’re looking for deals that align with more about long-term strategy plays than flips. We don’t care if it’s a minority deal or a majority, but we want the people to be basically like-minded and in it for the good reasons. … To buy just to buy I think is a really bad move. We’re looking at bringing back of house synergies in and keeping breweries autonomous on the front side. … Then with the back of house, your HR is one, your finance is one — things like that. All of a sudden your efficiencies financially become really, really powerful. That’s the survival of the fittest, and we’re going to have that need at the regional play level, a local play level, and then a national level. I can survive, obviously, but you’re much safer with numbers.
The craft brewing industry is producing at around 50 percent or 60 percent of capacity, according to the Brewers Association. How can companies find ways to use some of the excess capacity rather than invest hundreds of thousands of dollars in new equipment?
Stevens: That’s how the deal with Avery started. We started brewing All Day out there. We could brew some of our western needs for just All Day 15 packs out there, and that saves us $5 a case just with transportation.
Brower: That’s why we’re busting into RTDs (ready to drink cocktails). For me, depending on the time of year, yes, I’ve got excess fermentation space. But what I really have is a canning line that’s not running as often as it could. By doing RTDs, all I really need is a 10- or 20-barrel blending tank and a couple of hours. With licensing agreements, all of a sudden, we’re utilizing that excess capacity. For a lot of us who invested in equipment that we’re using and can justify, but we’d like to see our bottom line look a little bit better, it’s going to be a necessity. For the smaller brewers, it’s a great way in.
The state Legislature passed new laws last year that limit the viability of the satellite taproom and centralized production business model, especially for new companies that aren’t grandfathered in under the old laws. Does that significantly alter opportunities in the industry?
Lambert: Yeah, because (of the requirement to install) a 3-barrel system. That’s expensive. We considered it. We were like, ‘Hey, owning a pub and being a pub owner has been fun. Maybe we could open another taproom and … just sell some beer.’ Maybe that’s in our 15-year plan now when we can afford a 3-barrel system, but we don’t even consider that anymore. We were disappointed to see it.
Collazo: Yes. There’s no reason for it.
Ermatinger: We were literally talking to a property owner about leasing a space, and it was the perfect size for a small taproom. It only had about 200 square feet for production and it was impossible just because of this law that just changed. For us, it would have been a smaller, more centralized location for a taproom. It just went out the window with the completely unnecessary changes pushed by the wholesalers and retailers because they see that as the missing piece of their sales. It’s very frustrating for me to see that happen. It impacted us immediately.
At CBC, the Brewers Association’s economist mentioned the success of the brewery taproom model has started to put a target on breweries’ backs because other companies want in on that game. Do you see other regulatory threats coming down at a statewide level?
Baker: I say the biggest problem you guys truly face is just the ambiguity and inconsistency. I spend more of my time trying to figure out what it is it that (MLCC) is really trying to get to. They’re trying to determine a way around it or to work with it, and we end up two months later and it’s a new one — a new issue, a new response. It can be incredibly frustrating. I end up doing nothing more than dancing with the commission all day long. … You’re talking about innovation on the one hand with the state holding you back on the other hand. That’s where I see a problem with MLCC, is they cannot keep up attitude-wise or legislatively with the growth that you need to undertake, with promotion, with advertising, with relationships.
Brower: Enforcement is kind of on a rampage lately, not necessarily under direction from the administration, which has been extremely unfortunate and difficult to deal with. Even the AG’s office is disagreeing with some of the things enforcement is doing. … When I present to my partners, I explain: Here’s what the law says, here’s my interpretation. Here’s what I think the AG would do, here’s what enforcement might do. If we’re all wrong and enforcement disagrees and we end up in a hearing, here’s the penalty. Let’s make a decision.
Stevens: I will say that they don’t have all the answers, we don’t have all the answers, and at the end of the day, they do work with us to try to get to where it is. If we were wrong … they’ll fine you, but they’ll fine you $100 bucks and say, ‘OK, now we both know.’ They’ve been respectful, it’s just tough when they don’t even know their playbook.
Lambert: They were really nice to us. We had a violation with our small winemakers license. We went through the process, we lost, and they showed back up and were like, ‘All right, I’m glad we’re through with that. We love you guys, love what you’re doing for the community, let’s figure this out.’ I don’t really have that much bad to say about MLCC, it’s just I do wish we had a clear playbook. That’s the stuff that keeps me up at night: Are we going to get a knock on the door tomorrow for something that’s stupid? Because we’re not trying to break the law.
Ermatinger: Clarification would be good either way. Just give me the playbook. I need the rules.
What are some of the other things keeping you up at night?
Brower: We’re about a week away from installing our brewhouse in a new $2 million facility, and I need to make sure that thing is online in two weeks and that my orders don’t go down.
Stevens: Right now, I would say the state of the industry and a lot of the concerns going on with the diversity and inclusion elements. We obviously ran into some concerns there, and it’s difficult because you have 600 employees and you get two that go south, and it can really bring down a lot of good people. We saw that firsthand. We learned a lot about social media crisis management. That’s one thing in the policy handbook you don’t have until it happens. … I would also say beware and be careful, because big or small, we as an industry seem to be getting hit on the whole question of this. Certainly, I think the diversity angle is skewed and we can do better there. We have to. It’s interesting to me because as you look around, we’re all in that boat together. I think that we’ve got to step up as an industry and realize that we’re in that boat together. To throw darts at any one (brewery), even a select handful, isn’t really paying dividends.
Lambert: It’s difficult because white guys in beards are still the most excited about the most innovative craft beer out there. We really have to think of ways to try to bring the whole community in and be a reflection of our city.
Ermatinger: I’d say you guys (at Creston) have done one of the best jobs that I can think of in all of craft beer at that (inclusion).
Lambert: We rely on our people like Bri Ross. She is instrumental in our taproom, and we make sure she’s always at the table, and she challenges us all the time. She’s like, ‘Vince, you’re a white guy. Trust me on this.’ I’m like, ‘All right, you’re right, I am.’ I think we have to be willing to listen and engage our community and take some chances. It’s not easy.
EDITOR’S NOTE: This story has been updated to correct the spelling of Edwin Collazo’s last name.
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.