The Big Little Guys

November 1, 2003 By Stan Hieronymus

They began showing up at Washington liquor stores in July, and at grocery stores, and convenience stores, looking like they were preparing for a beer run a la Smokey and the Bandit. One man bought 22 cases of Olympia stubbies.

He didn’t get them to peddle on eBay.com after the public supply was gone. He bought them to drink. “He was adamant that he wanted his favorite beer to last another year,” said Sarah Edenstrom, wine and beer manager at Ralph’s in Tumwater, where Olympia beer was brewed and packaged until June.

The brand lives on—like Ballantine, Lone Star, Lucky Lager, Schlitz, Natty Bo and so many others that survived the death of the breweries where they were made—but with production moving to a Miller Brewing plant in Irwindale, CA, there’ll be no more stubbies. Those oddly shaped bottles would only slow the production lines. Olympia will be sold in cans and possibly long-neck bottles.

Years ago, scores of brands such as Olympia brightened the American beer landscape, together forming what was known as the “second tier” of brewing (regional breweries smaller than the country’s giants, but larger than today’s rising regionals). Their disappearance left holes in their collective communites that went beyond beer.

Tumwater was the latest victim.

There are sadder parts to the story. Until near the end, the brewery employed about 400, with an annual payroll of $26 million. Because a ripple effect created an estimated 2.4 jobs for each employee, Thurston County’s economy will take an even harder hit. Residents hope that another manufacturing company will buy the sprawling complex from Miller for the $15 million price tag, but they hold little hope that it will be another brewing operation.

Built in 1896, the plant was known nationally for producing Olympia, brewed beside waterfalls on the Deschutes River, making the slogan, “It’s the water,” famous. But it was a dinosaur that still would have been judged woefully inefficient had it approached its 4 million barrel per year capacity instead of the 1.7 million barrels brewed in 2002.

With the closing of Rainier in Seattle, Blitz-Weinhard in Portland, and the Tumwater plant, the Northwest has lost all its old regional breweries. That makes the Redhook Ale Brewery in Washington, a microbrewery started just 21 years ago and now producing 226,000 barrels a year, the largest in the region.

“A lot of capacity has been removed,” said Redhook founder Paul Shipman, talking about more than the Tumwater brewery. In fact, about 18 million barrels of brewing capacity at old-line brewers has been eliminated since 1997. “I’m sorry for the people who lost their jobs. I regret the loss of pieces of history and tradition. At the same time, there wasn’t room for them. This sets the stage for something good to happen, specifically for microbreweries.”

Grown Up, but Still Growing

What’s good for the brewers of American specialty beers generally is good for American drinkers of specialty beers. Just think back to when there was almost none of the former.

A mere 21 years ago, Michael Jackson wrote in his first Pocket Guide to Beer: “The overwhelming majority of beers produced in the United States are of but one style: they are pale lager beers vaguely of the pilsner style but lighter in body, notably lacking hop character, and generally bland in palate. They do not all taste exactly the same but the differences between them are often of minor consequence.”

Quite simply, breweries—whether they were small regionals, large regionals or wanna be nationals—that tried to compete based not on the beer in the bottle but on price, efficient distribution, and marketing during the second half of the 20th century were steamrolled. Yet most went down selling that same basic American pale lager.

Breweries, most but not all of them new, that have since risen to the top of brewing operations not known as Anheuser-Busch, Miller or Coors sell something different. In the process, they’ve given America back a diverse beer culture. Many have grown steadily for 10 years or more, and grown up as businesses. While stories about breweries stitched together from old dairy tanks and other found materials make great reading, today’s not-so-microbreweries are some of the most modern brewing operations in the world, no matter the size.

Understand that “big” is a relative term—Sierra Nevada brewed 10 times the beer that Great Divide Brewing (Denver) made in 2002, while Anheuser-Busch’s production was 180 times Sierra Nevada’s. It is the big little guys who put most of the beer in our collective specialty beer fridge. They’ve broadened our choices not only with what they produce but also by building the ballroom in which all brewers—including the ones using small and sometimes funky systems—can dance.

New Belgium Brewing co-founder Kim Jordan made that point earlier this year in a rousing keynote speech at the Craft Brewers Conference in New Orleans. “It seems clear to me that we are all part of a single industry, and we must work together to thrive. Just as each of us stewards brands within our breweries, we have a collective brand, the Craft Brewers of America,” She said. “Whether a brewery is a leader, a surging upstart, a niche player or even one struggling, everyone pulls the same amount of benefit from a strong category.”

Jordan’s speech provoked plenty of discussion within the industry, particularly when she challenged its members to triple their share (now 3.4 percent) of the American beer market.

“Four years ago at this conference in Phoenix I was on a panel. Our topic was ‘How can we achieve 10 percent nation-wide market share?’ We said we can’t,” she said. “I look back on that and I am amazed at myself. That is contrary to everything I believe. Because I think that in order to be great, you have to aspire to greatness. If we, as an industry, want to achieve 10 percent market share, we need to see that as our destination, plan what we’re each going to do to support making that happen, and then get after it.”

A Bit of Perspective

The playing field isn’t nearly as level today as it was in 1950. Then, the three largest brewing companies in the United States (Joseph Schlitz, Anheuser-Busch and Ballantine) produced 17 percent of the beer brewed in the country. Last year, the big three brewed almost 85 percent—and imports accounted for another 11 percent of domestic sales.

Should the members of the second tier today expect a better fate than Schaefer, Falstaff and Pfeiffer (all top 10 breweries in 1950)? Sierra Nevada vice president Steve Harrison offers a bit of perspective. “We’ll see in 100 years,” he said. “I can’t say when we’re going to stop (growing). We’re in a unique niche, and we don’t sell to everybody.”

When Ken Grossman and Paul Camusi founded Sierra Nevada in Chico, CA, the business plan called for production to max out at 3,000 barrels (a barrel is 31 gallons) per year, using a 10-barrel brew house. “We figured we could make money at that; we wouldn’t get rich but we’d get by,” said Grossman, now the company president.

“Jack McAuliffe (New Albion Brewing) had done a barrel and a half and that didn’t seem like enough. I was homebrewing that much.”

Sierra Nevada produced 1,500 barrels the first year (1980) and passed 3,000 in its fifth, 20,000 in its 10th and 150,000 in the 15th. This year the brewery will sell about 570,000 barrels. Today the main brewing kettle holds 200 barrels, another, 100 barrels. Grossman is in the process of putting in a 10-barrel pilot brewery that will be used to do everything from testing the quality of grain to making special beers for limited distribution.

“It will have more brewing capacity than we started with,” he said.

Grossman owns enough property in Chico to continue spreading out, so another expansion is always possible. Will it be necessary?

“We really don’t know. The marketplace is evolving so quickly,” he said. “The consolidation that is taking place at both the distribution and retail levels is affecting the ability of even players our size to get to market.”

What are hurdles for Sierra Nevada may be roadblocks for smaller breweries. “I think access to market is endangered now—and will worsen unless, as a segment, we grow our market share,” explained Tom McCormick, a former pioneering distributor who edits BEERWeek, a newsletter for the specialty beer industry. “Bigger distributors, through consolidation, tend to be less craft friendly and tend to carry fewer SKUs [brands]. The more we can increase market share collectively, the greater attention we will get both at the retail and distributor levels.”

Who’s in It for 10 Years?

Tom Potter, CEO of Brooklyn Brewery, sat on the 1999 panel in Phoenix. Speaking first, he laid out facts and figures that made it apparent craft brewers couldn’t reach a 10 percent share of the market within 10 years. In retrospect, it looks even clearer, because share has barely advanced in the four years since.

“Looking strictly at the numbers, it’s a loaded proposition,” he said. Potter, a banker in a former life, is a numbers guy. “But I’ve got two hats,” he said. “When I was in college I was a poetry major. When I got married and had a child, I went back and got an MBA and became a banker.”

He was wearing his poet’s hat for Jordan’s keynote.

“I thought Kim’s speech was the single best speech anybody has ever given about our category,” he said. “It was inspiring to hear her talk about our vision.”

He finds good reason to look at the numbers another way. “We all talk about volume, but what if we talk about dollars?” he asked. After all, Heileman and Stroh tried competing on volume. Because specialty brewers sell six-packs for more and a larger percentage of their beer is on draft, the dollar share of sales is higher than the share of volume. And every time one consumer walks out of a store carrying a $7.29 six-pack of specialty beer while another buys an $8.99 12-pack of mainstream beer, that share increases faster than volume grows.

“Also, who’s in this for 10 years?” Potter asked. “I’ve been doing it 15, and I feel like we’re just getting started. The real question is, can you get there doing it right? I think you can. Take away the artificial time restraint, switch the measurement from barrelage, then setting a goal of 10 percent can be a positive.”

Redhook’s Shipman is in the 10 percent camp. Redhook (owned in part by Anheuser-Busch) brews on both coasts and has the capacity to make almost twice the beer is now sells, but looking at slow growth at his breweries since 1996 hasn’t dimmed Shipman’s optimism.

“We can continue to grow by addressing the needs of the consumer that are not addressed by the Big Three,” said Shipman. The brewery enjoyed record second-quarter sales, while nationally beer sales were flat because of the weather and economy.

“In order to have a thriving industry, you have to have a variety of players with a variety of approaches being the leaders,” Shipman said. “It may not be my company at the time, but the benefits are accruing to all of us in some special way.

“The dream of 10 percent will cease to be possible when you can’t find somebody who is growing.”

Who Are These Guys?

So who are these big little guys? More important, what breweries might we be talking about in 10 or 20 years? A story in this magazine four years ago stated, “There are perhaps 30 such (regional independents) in the United States and Canada.” Expect more. Will it eventually take 100,000 barrels for admission to the club? 300,000? Perhaps we’ll talk about sales instead, and rather than discussing a “second tier,” it will be a $20 million tier.

It’s obvious that Boston Beer, Sierra Nevada and New Belgium belong, but would we have predicted it when each was only a few years old? When these five brewpubs—Deschutes Brewery, Goose Island Brewing, Great Lakes Brewing, North Coast Brewing and Rogue Ales—opened in 1988, who knew each would grow to be a nationally recognized distributing brewery?

Will some of today’s breweries with buzz, such as Stone (up 44 percent in 2002), Victory (28 percent) and Dogfish Head (45 percent) continue to grow; or will Hawaii’s Kona Brewing (with growth and barrelage numbers much like Stone’s) quietly surge ahead?

Quite honestly, not even the owners of these breweries can say.

“A year and a half ago, we set a goal to get to 70,000 barrels in 10 years,” said Abita Brewing president David Blossman, whose brewery sold 39,400 barrels in 2002. The Louisiana brewer recently installed a new, highly automated Merlin 100-barrel brewing system, so there’d be room for even more growth.

“We could do six brews a day. Do I think I’m really going to want to? No,” he said. “When we get to a point where we are comfortable with what we are doing locally, we might look again. The potential might be there, but I don’t think we are going to want to.”

Abita is available in 30 states and the District of Columbia, but that doesn’t mean Blossman wants to see it become a national brand. Seventy percent of sales are in Louisiana, and he’d be happy to see that number go higher.

“We are part of the culture. In Louisiana we make our lifestyle around the cuisine. We brew beer that goes with the food, the nightlife,” he said. “If the culture gets exported, so do we. When a restaurant that serves our beer in Louisiana opens up out of state, they expect our beer to be available. To try to do more would take an investment we’re not willing to make.”

Boulevard Brewing, based in Kansas City, has taken a similar go-slow approach. Focusing on the states contiguous to Kansas and Missouri, it hadn’t opened any new territories in five years until heading into Minnesota this year. In the first half of 2003, sales were up 16 percent, and July was the single best month in the 14 years since Boulevard opened.

“When we started out, we wanted to get to 7,000 barrels in seven years, grow 1,000 barrels a year,” president John McDonald said.

Goals change. Expansion could boost capacity to between 500,000 and 750,000 barrels. “We’d like to think there’s still plenty of growth where we already sell,” McDonald said. Eventually, plans are to enter Texas and Colorado and go beyond the St. Louis suburbs in Illinois, but that’s it.

Endearing and Enduring

Regional breweries in the 1950s, ’60s and ’70s weren’t focused on growth, but on survival. “The ’50s were really the toughest time,” said Dave Casinelli, executive vice president of the Yuengling Brewery. Yuengling, the oldest brewery in America, will brew more beer than anybody but the Big Three in 2003.

Despite attention because of the 1976 Bicentennial, Yuengling was still a struggling brewery when Dick Yuengling Jr. took charge in 1985. Since then, the company has built a new brewery and acquired one of the shuttered Stroh breweries. Its capacity is three times current sales of 1.2 million barrels. Casinelli expects to grow into it.

“Most regional brewers were going out of business because they couldn’t find a way to be successful beyond their immediate local market,” said Casinelli, who joined the company in 1990 when sales were 125,000 barrels. “It was a process. First, we looked at our distribution network. Second, internally, we took a look at our packaging. We needed to make changes in the way we presented our beers. After that, it was a matter of reinvesting, continuing to do things one brick at a time.”

Yuengling’s products are not counted as specialty beers because they aren’t all-malt products. However, beers such as its Porter, Black and Tan, and Lord Chesterfield Ale aren’t in the pale lager mode, and Yuengling competes with specialty beers for tap handles from New York to Florida.

In fact, 40 percent of Yuengling sales are draft, about four times the average of mainstream products. Draft has always been a strength for specialty beers—and a weakness.

“I have never heard a bar customer say, ‘Gee, this bar does a lousy job of maintaining and cleaning their lines,’” Jordan said in her speech. “They say that the beer they ordered is lousy.”

“It’s a problem. A lot of the new retailers aren’t educated about cleaning lines,” Casinelli said. “In our home state (Pennsylvania), you are required by law to clean your lines once a week. We know that’s not happening, and I think it has to come back to us to see that it is done.”

McDonald seconds that at the top of his voice. “It depresses me how deplorable the state of draft lines has become,” he said. Boulevard has put an employee in the field, working alongside sales representatives but answering to the brewing side. He deals with distributors, wholesalers and retailers, showing them how to clean lines and talking about how beer is dispensed.

The quality of draft beer is a top priority at Boulevard—understandably, since 58 percent of sales are draft. “There are obvious things all of us can do,” McDonald said. “It is getting better in some places. New Belgium is out there working at it, other brewers are talking about it.”

Boulevard is poised to be one of the leaders of the emerging second tier, but as important, if you value diversity in your glass, is that McDonald, Jordan and a growing number of others talk like we want leaders to talk.

“To put it simply, to succeed as an industry, we must work very hard to be both enduring and endearing,” Jordan said in New Orleans.

Oly stubbies? Still endearing.

Olympia, the brewery? No longer enduring.