Heads are turning and it’s no surprise considering the remarkable success of the craft beer segment.  A year after the popular press presided over beer’s funeral, allegedly done in at the hands of spirits, craft producers and their double-digit growth rates continue to resuscitate beer’s maligned image.  “One of the things we are clearly seeing is that the American consumer is heading towards more flavorful beers,” says Paul Gatza, director of the Brewers Association (BA), a group representing the interests of American craft brewers. 

Beyond consumers, craft beer’s appeal has also piqued the interest of competitors in the beer industry.  “The large brewers pay attention to market trends and part of that response is paying attention to specialty beers,” Gatza says.  “It doesn’t surprise me that the large brewers are offering specialty beers and getting involved in distribution deals with craft brewers.”  Of the large brewers, industry volume leader Anheuser-Busch, Inc., has been especially quick to address the gains made by craft brewers. 

A History Lesson

More than a decade ago, when craft beer experienced its first meteoric rise in popularity, Anheuser-Busch (A-B) initiated a series of efforts many believed were designed to address gains made by craft brewers.  In 1994, the company created its Specialty Brewing Group to compete with the growing craft segment.  The group developed more than a dozen releases.

The first foray into the better beer market included the Elk Mountain and Red Wolf lines, followed quickly by the Michelob specialty series, including the Amber Bock, and an American Originals line.  The brewery also released the ZiegenBock Amber, to compete with rival Shiner Bock in Texas, and Pacific Ridge Pale Ale in California to compete with Sierra Nevada Pale Ale.

To support its entry into the craft beer marketplace, the normally guarded brewery also decided to court beer writers.  The brewery took a group of nearly 40 journalists on an expense paid trip to watch the hop harvest at its Elk Mountain Farm in Bonner’s Ferry, Idaho.  Anheuser-Busch pampered the gathered writers with meals and samples of its new specialty beers.  According to one report, Senior Brand Manager Bob Franceschelli told the group that A-B’s efforts were designed to provide a one-stop-shop for its wholesalers.  “We think we can satisfy all their demands between our portfolio and our alliances, if not now, then in the future,” Franceschelli said.  Of the specialty beers enjoyed that day, only the Amber Bock and ZiegenBock survived. 

Franceschelli’s comments reflected a well-timed change in the way A-B dealt with its wholesalers.  As A-B introduced its new releases, it also instituted a distribution exclusivity program called the “100-percent share of mind” campaign.  It called for A-B distributors to direct their full attention towards the sale and promotion of the brands of the brewery and its affiliates, to the exclusion of others, including many small brewers.  In a time when craft brewers fought desperately for the attention of distributors, the program effectively slammed the door in their faces. 

In the most controversial component of its defense against the encroachment of craft beer, A-B forged distribution alliances with some of the strongest players in the craft beer segment.  In 1994, A-B announced an equity partnership that gave it a 25-percent stake in the Redhook Ale Brewery in exchange for access to its nationwide distribution network.  In 1996, A-B Chairman and CEO August A. Busch himself traveled to Oregon to strike another equity partnership with the Widmer Brothers Brewing Company.  In return for a 27-percent stake, Widmer also received access to A-B’s nationwide distribution system. 

Déjà Vu All Over Again

When craft beer sales hit a wall in the late-1990s, A-B’s interest in the better beer segment also tailed off.  Fast-forward a decade to the present and A-B is dusting off its old playbook in response to craft beer’s renaissance.  In 2006, A-B revived its relatively dormant Specialty Brewing Group to develop a slew of new products to compete with craft brands.  The brewery resurrected the old Originals and Michelob specialty brand names to house the brands and initiated a seasonal draft beer program.  It held a series of competitions allowing consumers to pick a trio of flavorful new draft beers and developed products targeted at the organic and gluten-free niches.  The brewery even released a few experimental offerings, including its BrewMasters’ Private Reserve and Celebrate series.

To support the release of these beers, the brewery followed the old script and renewed its flirtations with beer writers.  In August 2006, A-B’s employees recruited more than a dozen journalists for a return trip to the brewery’s Idaho hop farm.  In between lunches by the Kootenai River and dinners at a resort, the beer writers learned all about A-B’s latest better beer offensive.

Anheuser-Busch refused requests for a live interview in connection with this article, but agreed to answer three written questions.  When asked whether the new releases were designed to compete with craft beers, Dave Peacock, Vice President of Business Operations, wrote, “Anheuser-Busch has been brewing specialty beers throughout our history.  From our Bock beer of the 1870s to today’s new releases, our commitment to creating beers that appeal to the diverse taste preferences of our consumers will continue.”

Playing With Goliath

Beyond competing with its own more flavorful beers, Anheuser-Busch has also renewed its pursuit of distribution alliances with producers of better beer.  With the ascendance of August Busch IV, Anheuser-Busch looks poised for a new era.  The 100-percent share of mind program has been recast as the “funnel strategy”, which calls for A-B to act as a conduit providing distributors with a diverse portfolio of beers.  Last year alone, A-B signed importation deals for the Tiger Beer, Grolsch, Stella Artois, Beck’s, Hoegaarden, and Leffe brands and purchased Rolling Rock.  A-B also struck a surprise peace treaty in the form of an importation deal with longtime litigation rival Budejovicky Budvar, brewer of the Czechvar and Budvar brands.

A-B also quietly contacted at least half-dozen craft brewers about distribution deals.  Many craft brewers, including the Boulevard Brewing Company, politely rejected A-B’s advances.  Two craft breweries, the Goose Island Beer Company and the Old Dominion Brewing Company, joined forces with A-B and its craft beer partners.  In June 2006, Goose Island announced an equity agreement with Widmer that allowed it access to the A-B distribution network.  Under the terms of the deal, Goose Island sold 40-percent of its business to Widmer, A-B’s alliance partner. 

“The involvement of Widmer worked out really well,” says Goose Island’s brewmaster Greg Hall.  “When we opened the brewery in 1995, we raised money from family and friends. It worked out perfect because we basically swapped out the family and friends portion of ownership for another brewery.” 

Shortly after the Goose Island deal made headlines, word leaked out that the Old Dominion Brewing Company of Virginia had finally found a buyer.  Long rumored to be on the selling block, Old Dominion’s production has languished in recent years despite record sales in the craft beer industry.  According to sources with knowledge of the terms of the sale, the Coastal Brewing Company, a partnership between A-B and the Delaware-based Fordham Brewing Company, purchased Old Dominion for nearly $5 million, including an assumption of debt.  Under the partnership, A-B will own 49-percent of Old Dominion, with Fordham taking a 51-percent share. 

The effect the A-B partnerships will have on the veteran craft brewers remains to be seen. Workers at Old Dominion, who have been largely kept in the dark about the sale, are apprehensive. “The only thing that I do know is that it won’t be good for those of us that have put their hearts and souls into Old Dominion for many years,” says one concerned employee on the condition of anonymity.  In response to a question as to the level of influence the brewery exercises over the alliance breweries, A-B’s Dave Peacock wrote simply, “We do not brew these beers and play no role in their management, marketing or operations.”

“We’ve had some really good growth in the short time we’ve been in their system,” says Goose Island’s Hall.  “They give us zero direction whatsoever, we’re making all of the calls.  We’re the furthest thing from a subsidiary of either Anheuser-Busch of Widmer you could dream of.”

While A-B and Widmer only need focus on whether Goose Island can produce enough beer to meet demand, the Coastal partnership will need to resurrect a wounded brand and rebuild employee morale.  In 2006, Old Dominion’s beer sales were down more than 15-percent, with only contracted brands enjoying growth.  A-B and its partners have made clear that they plan to reduce Old Dominion’s portfolio of beers from nearly 30 offerings down to three to five plus seasonal beers.  The Old Dominion pub will also now stock the A-B products, including Bud Light.

The Next Step

The irony of A-B’s sudden increase in attention is not lost on craft brewers.  “A few years back, we were discussing Anheuser-Busch and the big question was the zero-share-of-mind,” says Tomme Arthur of the Port Brewing Company.  “I think it’s inevitable that if craft beer continues to grow at this rate, the big brewers are not going to just sit back and wait.” 

In light of their recent successes, the craft industry remains sensitive about A-B’s interest in the better beer segment.  While many craft brewers profess a lack of fear over the prospect of competition from A-B’s homegrown products, the distribution side of the equation has always caused their tempers to flare.  In an October 1994 interview with Inc. Magazine, Jim Koch, of the Boston Beer Company, derisively referred to Redhook as ‘Bud Hook,’ called the Redhook/A-B alliance announcement a “declaration of war,” and pronounced that “the cozy fraternal days of the microbrewery business are over.”

While the loss of collegiality was of grave concern then, craft brewers today are responding to the recent Goose Island and Old Dominion deals with a new focus of concern.  “I think the verdict is out about how genuine their interest in our segment is,” says Sam Calagione, president of Dogfish Head Craft Brewery. “I’ll be happy to be proven wrong.  But I know that their goal is to approach a finite number of brands, whether they are craft brands, quasi-craft brands, or imports, and bring them into distribution at the expense of breweries that are not brought in.”

Calagione also challenges the notion that the funnel strategy materially differs from the 100-percent share of mind program.  “Their goal is to make sure they are the only one-stop-shop in beer distribution,” he says.  “It’s up to all of us small breweries and all the non-A-B distributors and the A-B distributors that don’t want to be told by St. Louis what to put on their trucks, to make sure that doesn’t happen.”

Goose Island’s Hall strongly disagrees.  “We haven’t seen that at all, in fact just the opposite,” he says.  “The distributors we talk to want access to more beers they can’t get.  It’s a reality that in most markets, A-B probably calls on as many or more accounts than someone else.  I can’t see where it’s a bad thing that you can get your beer into more people’s hands.”

Hall acknowledges he has encountered some critics of the brewery’s involvement with A-B, but he has a response line at the ready.  “I tell them, ‘Can’t you taste the beechwood in there?  Don’t you think it makes it taste better,’” he jokes.  “We’ve gotten some backlash but we tell them the truth, that the beer is coming is coming on a different truck now, but it’s the same beer from the same brewery and people.” 

Bridging the opinion divide, brewer Tomme Arthur believes brewers should carefully consider their options but understands the decision to join A-B’s distribution network.  “In some ways the change is good because some breweries are going to gain access to the market that they didn’t have,” he says.  “Access to market is one of the biggest concerns for most brewers.”

With the benefit of experience at their sides, craft brewers plan to carefully consider Anheuser-Busch’s renewed interest in the better beer segment.  In surveying the new landscape, Arthur suggests that all craft brewers should maintain their focus on what made them successful.  “How a brewery responds to a larger group giving them access to market, and the integrity of the product, is what matters most,” he says.  “The consumer will be left to decide whether the things being done from here on out still merit their consideration.”

–Article appeared in June 2007 issue of Beverage Magazine.

My desire to comment at greater length on the recent purchase of the Old Dominion Brewing Company by Coastal Brewing, a partnership of A-B and the Fordham Brewing Company, is the real reason I started this Notebook. I’ve had a number of conversations over the last few months about Old Dominion’s future as various deals have come and gone. I’m writing about A-B’s efforts in the better beer segment and its effects on craft brewers in an upcoming issue of BeerAdvocate Magazine, where I write the Defending Beer column. But I wanted to expand on the Old Dominion matter specifically.

The situation at Old Dominion is a complicated one. Old Dominion is a ‘sick brand’ as they say in the industry. The brewery’s production has languished in recent years despite record sales in the craft beer industry. The brewery has barely grown in the last five years and in 2006, Old Dominion’s beer sales were down more than 15-percent, with only contracted brands, such as Tupper’s and New River, enjoying growth.

The situation would hardly be surprising if the beer was bad, but Old Dominion has long made a range of well-respected beers. One clear problem has been the omnipresent lack of leadership at the brewery. As early as 2001, Old Dominion’s principal owner, Jerry Bailey, made it known that the brewery was for sale. A number of craft industry players even received sales solicitation memos from Old Dominion. When no one matched his $15 million asking price, according to the Washington Post, Bailey removed Old Dominion from the market.

During the next few years, the brewery continued to plod along on its unsuccessful path. Despite little regional competition and a defined home market, Old Dominion failed to grow. Even in the last six months, the brewery’s beers are nearly impossible to find in places that you would expect to see them. On a recent beer trip to Charlottesville, I found only a single restaurant carrying the beer and it was in the bottle. Writing in the Washington Post in 2006, Fritz Hahn noted that Old Dominion was largely absent even from the Washington DC marketplace.

Problem is, the brewery’s distribution in Washington is often lacking. Outside of a few beer-centric bars that feature the deliciously smooth Oak Barrel Stout or high-octane Millennium Barleywine Ale, you’re lucky to find much beyond the aggressively hoppy Tuppers’ Hop Pocket Ale, the standard Dominion Ale or Dominion Lager, or maybe Victory Amber Lager. For the past decade, the easiest way to peruse the company’s offerings was to drive to Ashburn for dinner and drinks at the Old Dominion Brewpub, a sparsely decorated bar and dining room attached to the brewery.

Fast-forward to 2006. Shortly after the Goose Island deal made headlines, word leaked out that the Old Dominion Brewing Company of Virginia had finally found a buyer. What followed was two failed attempts by an employee, Terry Fife, to purchase the brewery with his partner, Kip Olson. During 2006, A-B was also poking around Old Dominion at the behest of its local distributors.

After the employee deals fell through, the Coastal Brewing partnership stepped in to negotiate a purchase with Jerry Bailey. In March 2007, the group confirmed the long-standing sale rumors. Coastal Brewing purchased Old Dominion for one-third of the original asking price, according to sources with knowledge of the terms of the sale. The A-B/Fordham partnership purchased Old Dominion for nearly $5 million, including an assumption of debt and moneys kept in escrow. Fordham, which runs the Ram’s Head pub chain, largely financed the deal, with A-B simply agreeing to cover the distribution angle. Under the partnership, A-B will own 49-percent of Old Dominion, with Fordham taking a 51-percent share.

With the deal shrouded in secrecy, workers at the brewery and its attached pub were disappointed by news of the sale, which came in the form of Coastal’s application for a brewing license in Virginia. “The staff of Old Dominion has been kept largely in the dark about what to expect after the closing,” says one employee who spoke on the condition of anonymity. “The only thing that I do know is that it won’t be good for those of us that have put their hearts and souls into Old Dominion for many years.”

So what happens now? Much of what follows remains speculation but there are two distinct areas of focus: short and long term. In the short term, things will remain largely the same minus a few notable changes. After the deal became public, the new owners fired three employees, including two brewers, Dave Hennessey and Greg Spradlin, and marketing director Terry Fife, the employee who tried unsuccessfuly to buy the brewery. The Ashburn brewery and pub will retain the Old Dominion name for now. The new owners, including Kyle Muehlhauser, held meetings last week with both the pub and brewery employees. Workers at the pub were told that the pub was closing for a two-week renovation period, effective immediately. Workers were not provided with any interim pay but were offered $10/hour to come in and help clean during the renovation period. When the pub reopens, with a full liquor license, it will also stock the full line of A-B products, including Budweiser and Bud Light. In the short-term, it is unclear whether the new owners will attempt to rebrand the Old Dominion pub as a new Ram’s Head Tavern.

The long-term outlook is very different. To resurrect the sick Old Dominion brand, the A-B/Fordham partnership has its work cut out for it. In January 2007, former owner Jerry Bailey told the Washington Post that he did not believe the new owners would change the beers. “I can’t imagine anybody buying a place like this and not keeping the only thing we got,” he said. “The brand is the most valuable thing we own.”

Privately, A-B and its partners have made clear that they plan to reduce Old Dominion’s portfolio of beers from nearly 30 offerings down to three to five beers. It remains unclear whether the brewery will continue to contract brew existing brands.

The final long-term concern remains what will happen to Old Dominion’s physical space. While Fordham is a much smaller operation, brewing around 6000 barrels per year compared to nearly 27,000 for Old Dominion, the principals have discussed moving brewing operations to Fordham’s Dover brewery. One person with knowledge of the deal expects the partners will eventually move the brewing operations to the Dover brewery and close the Asbhurn operation.

It is beyond question that Old Dominion needed new leadership in order to survive after years of inexplicably failing to grow. The issue becomes whether the A-B/Fordham partnership is the best way to right the ship without losing what Old Dominion’s remaining customers love about the place, namely its eclectic line of beers. This is the major area of concern cited by consumers who have emailed me about the deal. As one customer, Ron Kobus, told the Washington Post, “It would be a shame to see them shut down the brewery or change the recipes.”

Though it has long been rumored, the sale of Old Dominion is now in its final stages.  I have a lot to report on this topic (including some coverage in the next issue of BeerAdvocate Magazine, but for now, here is the press release. 

New Joint Venture, Coastal Brewing Co., To Purchase Old Dominion

ANNAPOLIS, Md. (March 2, 2007) – Coastal Brewing Co., a new joint venture between Maryland-based Fordham Brewing Co. and minority partner Anheuser-Busch, Inc., announced today it will purchase Old Dominion Brewing Co., a Virginia-based craft brewer and brewpub operator with primary distribution in the Mid-Atlantic region of the United States.

As part of the deal, Coastal Brewing Co. will assume ownership, sales and marketing responsibilities for both the Old Dominion and Fordham brands, including Dominion Ale, Dominion Lager, Oak Barrel Stout, Fordham Copperhead, Fordham Lager, Oyster Stout and others. Coastal Brewing Co. also assumes ownership of the Old Dominion brewery and Old Dominion Brewpub, both located in Ashburn, Va.

Bill Muehlhauser, chief executive officer of Fordham Brewing Co., will serve as managing partner for Coastal Brewing Co. Coastal Brewing Co. has hired Scott Zetterstrom as a vice president of brewing operations to oversee brewing of the Old Dominion and Fordham brands. Zetterstrom previously served as head brewmaster for Old Dominion and most recently worked with Fordham as an independent brewing consultant. Coastal Brewing Co. also has hired Barry Newmiller as vice president of sales and marketing. Newmiller previously was a regional sales manager for InBev USA.

Additionally, effective April 1, 2007, Anheuser-Busch will become the master distributor for the Old Dominion and Fordham brands, giving Coastal the benefit of Anheuser-Busch’s logistical expertise in managing distribution and access to more independent and chain retail accounts in the Mid-Atlantic region.

“I’m proud to entrust the wonderful beers we have brewed at Old Dominion since 1990 to Fordham and Anheuser-Busch,” said Jerry Bailey, founder and president of Old Dominion Brewing Co. “Under Coastal’s stewardship, the quality of Old Dominion brands will be protected and there’s no limit to what they can accomplish.”

Coastal Brewing Co. will be led by Fordham Brewing Co., which holds 51 percent ownership, with Anheuser-Busch holding the minority stake of 49 percent.

“We are eager to expand the distribution of our Fordham brands through Anheuser-Busch’s wholesaler network and are looking forward to working with the company through this alliance,” Muehlhauser said. “We are excited about the opportunities Coastal Brewing Co. will provide to both the Old Dominion and Fordham brands and introducing them to even more beer lovers in the Mid-Atlantic States.”

“Old Dominion and Fordham are two of the leading craft brewers in the Mid-Atlantic region, with a strong following among craft consumers and a tremendous opportunity for growth,” said Dave Peacock, vice president of business operations for Anheuser-Busch, Inc. “Together with our partners at Coastal Brewing and our wholesaler network, we will enhance the distribution and sales support for these exceptional beers and continue to provide new, distinctive products to adult consumers.”

Based in St. Louis, Anheuser-Busch is the leading American brewer, holding 48.4 percent of U.S. beer sales. The company brews the world’s largest-selling beers, Budweiser and Bud Light. Anheuser-Busch also owns a 50 percent share in Grupo Modelo, Mexico’s leading brewer, and a 27 percent share in Tsingtao, the No. 1 brewer in China. Anheuser-Busch ranked No. 1 among beverage companies in FORTUNE Magazine’s Most Admired U.S. and Global Companies lists in 2006. Anheuser-Busch is one of the largest theme park operators in the United States, is a major manufacturer of aluminum cans and is one of the world’s largest recyclers of aluminum cans.

Based in Annapolis, Fordham Brewing Co. was originally founded by Benjamin Fordham in 1703, in what would become Maryland. In 1995, it was reborn in the heart of old Annapolis. Rapid growth resulted in the building of a new brewery in Dover, Del. in the spring of 2003. For more information, visit www.fordhambrewing.com.