The Changing Face of the Craft Beer Industry…

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In the early 1980s, American craft beer pioneers dreamt of nothing more than producing a few beers that broke through the monotony of humdrum, mainstream lagers. A group of men and women who had traveled through Europe and had their eyes and mouths opened by local beers or who had adventured to brew their own beers. For these early entrepreneurs, the future was uncertain but filled with hopes of building a few hundred or even thousand barrel brewery.

Fast forward two decades and things have changed beyond anyone’s greatest expectations. Once top of the pops, America’s largest breweries are now reeling on their back heels. Once considered little more than a gimmick, craft beer has enjoyed startling success.

As the beer industry has aged, it has both matured and evolved. From its slow infancy to its turbulent teens, craft brewers are now experiencing the complications of adulthood. What started as a fun experiment for some has led to some pretty high stakes. From hobbyist basement systems costing a few hundred or thousand dollars to gleaming new brewhouses costing a few hundred thousand, the craft beer business is hardly just fun and games.

Times are changing quickly in the American beer marketplace and they’re not going to slow down anytime soon. In response to double-digit growth, breweries recently producing 10-15,000 barrels per year suddenly produce 75,000 barrels per year and have tank space capacity for many times more. To meet market expectations and changes, these brewers have traded sore backs for aching pocketbooks.

We are thankful that times are good right now and that despite a weak economy and financial hardships, craft brewers are not yet seeing a reversion to old buying habits.
But the nature of the industry itself is also changing in other ways. Many craft beer pioneers are now elder industry statesmen. Fritz Maytag bought Anchor Brewing 43 years ago; Ken Grossman started Sierra Nevada 28 years ago; Jim Koch toted his briefcase from bar to bar 24 years ago. Beyond these well-known figures, many founders of regional breweries have been in the business for 20 years or more now. And as with any other small business, many are owned by one person or a small group of aging entrepreneurs who’ve long been toiling in the brewhouse, glad-handing distributors, and hawking product every weekend at beer festivals. For these hard working individuals, vacations are few and downtime almost non-existent.

And as with any other hard driving profession, it eventually wears you down. With high debt levels and decades dedicated to building up their companies and employees, these brewery owners can’t just walk away. Not to the mention the disappointment felt by their loyal customers who they’ve worked so hard to gain. And so we must look to an uncertain future but one where we can be certain of corporate shakeups and where change will be a constant.

The Old Dominion Brewing Company of Ashburn, Virginia, for example, is representative of stories we will continue to hear. Founded by Jerry Bailey and other investors in 1989, the brewery was a pioneer in the Mid-Atlantic region. After nearly two decades of work, however, Bailey and others were ready to leave the business. They tried for years to sell to other craft brewery owners, but with no success. Then in 2007, they sold Old Dominion to a joint partnership of the Fordham Brewing Company and Anheuser-Busch. After making a run at it for a year, the group recently announced it will close the brewery’s pub and its future operations as a stand-alone brewery remain in question.

The Old Dominion case, while extreme, is a cautionary tale for the industry and consumers alike. Craft breweries are run by people not corporations and these folks can’t continue in this tough business forever. Shareholders eventually want their initial investments back, owners want to retire, and if they don’t have kids ready to take over the business, end game options remain limited. Consolidation, either with other craft breweries or with larger brewing concerns, will be the norm not the exception. And while we can all appreciate how far craft beer has come since its early days, it’s time to contemplate the business realities that lie ahead.

–Article appeared in Volume II, Issue IX of BeerAdvocate Magazine.

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The Other Shoe Finally Drops On Old Dominion…

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The news of Old Dominion’s impending closure has finally hit the Internet beer sites and I doubt many are surprised. For several months or more, the question of closing the brewery’s Ashburn location has only been one of when, not if. And the only sub-question was, “How long is the company’s lease?” Not quite two months ago I wrote of the closing of the brewery’s pub:

I think at this point the real question for Old Dominion fans is what will become of the brands and the brewery in the future. As Coastal runs another brewery in Dover, Delaware*–one that is large enough with expansion to cover all the company’s brands–the inefficiencies of running two small facilities will inevitably lead to a consolidation of production. As the company’s corporate parents are located in Annapolis, and the pub is now closed, it’s not difficult to see where things are headed. I don’t know how long Old Dominion’s lease on the property runs (a sufficiently long time I would venture from Coastal’s attempt to salvage the pub) but I wouldn’t expect Old Dominion’s Ashburn brewery to remain open any longer than Coastal can control.

So today it was announced that in a “consolidation” of brewing operations, co-owner Coastal Brewing Company will move all brewing operations to the company’s facility in Dover, Delaware, in 2009. At least for the moment, Coastal claims that its full line of beers, including brands under both the Old Dominion and Fordham names, will continue to be brewed, marketed, and distributed throughout the Mid-Atlantic region. This position isn’t likely to continue and the deal, which gave Coastal access to the distribution system of its new partner, Anheuser-Busch, is even more of a head scratcher now then when it went through last year. In the press release, Coastal specifically name-checks the Dominion Ale, Dominion Lager, and Oak Barrel Stout, so I’d expect to see these continue. And Coastal may continue a few seasonal products, perhaps the Octoberfest and the Millennium Barleywine, but I’d get ready to say goodbye to more than 3/4’s of the brewery’s products.

With the closing of the Ashburn facility, Old Dominion’s story really comes to an end. I’ve enjoyed many good times and beers in Ashburn and am sad to see the brewery go, although the passing was a slow and painful one. One thing is clear out of this situation: Virginia is in strong need for a regional brewery and it’s open season for brands from Pennsylvania, Maryland, and other nearby states.

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Anheuser-Busch, InBev, and the Changing Face of American Beer…

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The King is dead, long live the king. After more than a year of rumors, analyst whispers, and convenient press leaks, corporate brewing giant InBev finally made its move on America’s largest brewery. Founded as a small St. Louis brewing operation in 1860 by a German immigrant, the Anheuser-Busch Brewing Company would in less than a century grow to become the country’s dominant brewing business and one of its most iconic brands.

In the days following InBev’s offer for A-B, even otherwise detached Joe Sixpacks tipped their recliners forward and took notice of history being made before their damp eyes. The unthinkable had occurred; the American eagle had fallen prey to a foreign hunter. Once laying claim to half of the American beer market, A-B has long served as a national monolith, imposing its 100-percent share of mind campaign from the Atlantic to the Pacific. The brewery’s television ads dominated the airwaves, its brands omnipresent on the taps of every neighborhood bar and in the cooler at the corner gas station.

A-B’s executives, including the recently installed August Busch IV, tried to put a brave face on a fight they knew they would lose. Wielding xenophobic appeals and feeble court actions, the tough, “not on my watch? rhetoric quickly crumbled in the face of a stagnant stock price, a failure to embrace international expansion, and a tumbling dollar that made the giant brewing company affordable.

What happens after this anti-climactic, first round knockout is anyone’s guess. While InBev has publicly stated that it will not immediately sink its cost-cutting teeth into A-B’s bloat, including its twelve American breweries, this pledge rings hollow for the long term. Ironically, America’s loss may very well turn out to be the world’s gain as Budweiser is now set to become the combined brewery’s international flagship brand. Dethroned as America’s king of beer sales by sibling Bud Light and then later demoted by Miller Lite, Bud will enjoy a renewed focus in a bevy of new markets around the globe. Cousin Stella Artois will inevitably take a backseat to an international icon known even in the world’s smallest villages.

The bigger and lesser understood concern is how the deal, which will create the world’s largest brewery, will affect smaller outfits. We know that Pabst and the Boston Beer Company are left to fight over which brewery is now the country’s largest American owned brewery, but the toll on craft breweries is difficult to determine. While Anheuser-Busch InBev will undoubtedly continue to wield considerable distribution power, better beer fans can rejoice that this deal happened in 2008 and not 1998. A decade ago, craft brewers fought fruitless daily battles for the attention of wholesaler and beer buyers. Today, many craft brewers can’t find the time to field calls from people lined up to bring their flavorful and well-priced beers to new markets.

While hard core beer geeks would argue to the contrary, the loss of Anheuser-Busch should also be seen as a setback to the cause of better beer. Driven by the success of craft brewers, A-B has been a high profile advocate of flavorful beer in recent years. Through its highs and lows, A-B’s attempt to elevate and enhance beer’s public image with its “Here’s to Beer? campaign was a welcomed addition to the good beer praising craft chorus. And while this campaign was scheduled to end within the next year, it’s difficult to picture InBev replicating the promotion in the future. We can also expect the company to reconsider the future prospects of the newly formed Michelob Brewing Company and its line of flavorful beers.

One final consequence of the deal, assuming it survives regulatory review, is that breweries such as Old Dominion, Widmer Brothers, Redhook, and Goose Island will become distant members of the global InBev family. In InBev’s drive to focus on its core brands, these historic craft brands may find a cool reception in the boardrooms of Leuven, Belgium.

–Article appeared in Volume II, Issue VIII of BeerAdvocate Magazine.

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The Ominous Lesson Behind The Old Dominion Pub Closure…

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I know that things have been pretty quiet, what with no posts this almost finished month. I’ve been traveling quite a bit, including several weeks in Seattle and Alaska (including interviews with Geoff Larson and Dick Cantwell). And my return has been filled with legal catch-up. And so it was the news today that Old Dominion Brewing has closed its on-site pub that punctures the silence.

I’ve written quite a bit about Old Dominion and its pub over the years as I’ve long enjoyed the place. I had one of my first tripels here about a decade ago and can remember the experience. I’ve returned many times since then and have shared the trepidation felt by other Old Dominion fans over the brewery’s roller coaster last year-and-a-half. In the beginning, the changes experienced after the sale by Jerry Bailey and investors to Coastal Brewing (51/49 split of Fordham Brewing and Anheuser-Busch) were actually smaller than expected. The pub closed for a while and underwent some needed cosmetic changes. Staff were required to wear uniforms, loud live music was added, and Anheuser-Busch’s product line appeared in the bar. I was even impressed during a visit this summer to see how the brewing staff, which is made up of many new faces, exuded a sense of excitement over future projects (including special weekday releases, small batch offerings, and perhaps the longest lagered Octoberfest in the world).

Long time regulars, however, never really got over the changes, however small they might have been. Attendance at the pub slowed to a crawl and the writing was on the wall. The departure in July of Scott Zetterstrom, Coastal’s vice-president of Brewing Operations who had a long history with Old Dominion, was a sign portending recent events that many of us missed.

So it was with mild surprise but not shock that I learned of the closing this morning. I think at this point the real question for Old Dominion fans is what will become of the brands and the brewery in the future. As Coastal runs another brewery in Dover, Delaware*–one that is large enough with expansion to cover all the company’s brands–the inefficiencies of running two small facilities will inevitably lead to a consolidation of production. As the company’s corporate parents are located in Annapolis, and the pub is now closed, it’s not difficult to see where things are headed. I don’t know how long Old Dominion’s lease on the property runs (a sufficiently long time I would venture from Coastal’s attempt to salvage the pub) but I wouldn’t expect Old Dominion’s Ashburn brewery to remain open any longer than Coastal can control.

Beyond the physical brewery, the future of the Old Dominion brands is another questionable issue. Reports on the availability of the brewery’s products following the Coastal acquisition have been mixed. Old Dominion has always had distribution problems and a real inability to grow, despite substantial, industry-wide success in the craft segment. According to statistics provided by the Brewers Association, Old Dominion produced 24,306 barrels in 2003, 26,827 in 2004, 27,517 in 2005, 22,421 in 2006, and an anemic 19,000 in 2007, a 34-percentage drop in the last two years of production despite double-digit growth among its craft competitors.

Coastal itself may have some issues to deal with as well. As I write about in the next issue of BeerAdvocate Magazine and elsewhere on this site, craft beer partners of Anheuser-Busch have to be concerned about the effect the merger with InBev will have on their operations and place in the corporate pecking order. In a business sphere where the corporate parent is producing several hundred million barrels of beer per year, how much interest do you think the company, especially one with InBev’s track record towards small breweries, will have for a measly 19,000 barrels? Or even for one with 88,000 barrels (Goose Island), 253,000 barrels (Widmer), or 206,000 barrels (Redhook)?

We now live in an era where craft consolidations, either within the niche or outside of it, will become the rule rather than the exception. From the biggest breweries to the smallest nano-outfits, corporate and estate transitions will require greater discussion and consideration in the near future. Change is coming; Old Dominion is just an early warning.

*Correction: The article originally referenced Annapolis, Maryland, instead of the Dover, Delaware brewery.

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Anheuser-Busch and Craft Beer…

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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. 

Goose Island…“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.

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