Unexpected Strength

March 1, 2006 By Gregg Glaser

There’s a section of the craft beer business that flies beneath the radar. Well, almost beneath. In their home markets, these breweries are well known and selling a great deal of beer—good beer. Despite that, they are still “lurking in the shadows; almost invisible,” as described by Gary Bogoff of Berkshire Brewing (South Deerfield, MA), one of the companies that makes up this challenging segment of the market.

A true testament to the independent spirit of craft beer, such breweries may appear mild-mannered enough on the surface. However, these “little giants” are actually capable of superhuman feats, strong enough to wrestle hometown market share away from much larger rivals. Furthermore, these breweries can maintain a flexibility that allows them to grow strategically when and where it makes sense. It’s a tough act, but one with dramatic payoffs: last year, while bigger players grew moderately or not at all, the mis-sized segment grew faster than any in the entire alcohol beverage field.

“Middle-small” craft breweries often don’t sell much beer outside their home territories, nor do they receive a great deal of attention elsewhere. However, they continue to grow, and in many cases, thrive. Although they might not yet be ready to knock down the largest craft brewers, these smaller outfits brew beers that attract and maintain loyal local support. And there’s something in their fascinating story that’s just as inspiring to the beer enthusiasts who support their products as it should be to the major breweries that are competing against those products.

Size Matters

But first let’s establish our terms. Using the amount of beer brewed in a given year is a reasonable way to define middle-small breweries. At the top of the craft beer spectrum is a brewery like the Boston Beer Co., with annual sales of more than 1.2 million barrels. At the other end are brewpubs and tiny microbreweries that produce only a few hundred barrels each year (and sometimes less). In the middle of the pack are breweries in the 4,000 to 10,000 barrel range.

This mid-range size is not always a benefit. “You get kicked around when you’re this size,” said Brian Baku of Mad River Brewing in Blue Lake, CA. Mad River operates on a “shoestring budget” in rural Humboldt County in northern California. Baku figures his biggest block to growth is a lack of support from the large grocery chains and their consolidation.

Tom Atmore of Butte Creek Brewing in Chico, CA, added: “It’s a hard size of brewery to maintain. You need to be either larger or smaller.” A small brewery has the advantage—if it can be called that—of concentrating on a small, local market with a limited amount of beer to brew each year. A large craft brewery benefits from its ability to purchase raw materials in bulk at a discount and to hire salespeople to hit the streets and spread the word.

How Do They Do It?

Each brewery had its own game plan from the beginning (as do all businesses), but the key for almost all of these brewers was to “keep it local.” Attempting to sell beer across the country (or even across an extended region) right from the beginning simply wasn’t an option. The competition from the major national brewers, imports and the few largest craft brewers would have been too intense. The local market right outside the brewery door was the logical first step.

“The home field advantage is important,” noted Gene Mueller of Flying Fish Brewing in Cherry Hill, NJ. “It’s a matter of taking care of my own backyard. And if I can’t take care of my own market, then something is wrong with my model.” For Flying Fish (brewer of Extra Pale Ale, among others), that backyard is a huge one, because Cherry Hill is only eight miles east of Philadelphia. Mueller notes that greater metro area is the fourth-largest consumer market in the United States. Within that territory, the company concentrates on covering a 100-mile radius from the brewery. Through those efforts, Flying Fish has become the largest-selling local brand sold in Philadephia’s ballpark and hotels.

Another microbrewery with a huge local market is Blue Point Brewing in Patchogue, NY, located in the middle of densely populated Long Island (just 60 miles east of Manhattan). “Long Island has three million people,” said Blue Point’s Pete Cotter, “and we took five years to even think about approaching New York City.” The Big Apple now accounts for Blue Point’s largest area of growth—more than 100 percent last year. Toasted Lager is Blue Point’s flagship beer.

Owning one’s backyard is the guiding principle for Oscar Wong of Highland Brewing (in Asheville, NC), brewer of several beers, the leader being Gaelic Ale. “It’s like in a war,” Wong stated. “If you’re spread out too thin, you’re vulnerable.” Wong has grown Highland “organically outward,” even pulling out of Charlotte (130 miles away) for two and one-half years “because we couldn’t consistently supply the area with beer and pay the attention to Charlotte as we wanted.”

Tim Suprise of Arcadia Brewing in Battle Creek, MI, took a measured and deliberate process to grow his company’s sales. He focused for the first three to four years on his core market in Michigan before branching out into nearby states.

“I followed the Peter Austin [an English microbrewing pioneer] philosophy,” Suprise said, “which is to sell your beer only within the distance it takes a horse and dray to go and return in a day. This allowed us to keep fresh beer in consumers’ mouths, but the flip side is we didn’t sell as much beer.”

The advantage for Arcadia (whose number one seller is Arcadia IPA) and other breweries that adopted this model was that strong local growth gave them the confidence to enter other areas and states. The brand equity first had to be built.

“Before we broke ground, the going belief for us was—and still is—to always be the small local brewer,” said Bill Russell of Buzzards Bay Brewing, based in Westport, MA. Buzzards Bay’s core market is the south coast of Massachusetts, Cape Cod and the offshore islands of Nantucket and Martha’s Vineyard. It was two years before Buzzards Bay approached the big Boston market, just 58 miles north. In order to differentiate itself from other New England breweries that almost exclusively produce ales, Buzzards Bay’s flagship beer is Export Lager.

Russell Klisch of Lakefront Brewery in Milwaukee, WI, owns the brewery himself and sells 80 percent of his beer within a 30-mile radius. It’s just “throwing it over the fence to the people,” Klisch recently commented. The brewery’s biggest seller (Riverwest Stein Beer) and other offerings are sold primarily by word of mouth within a local area, because Klisch doesn’t have much of a budget for marketing and advertising.

Other Scenarios

Sometimes the path to success in a brewery’s home market means first making it far from home.

“New Hampshire is a difficult market to break into for a small brewer,” said Peter Egelston of Smuttynose Brewing in Portsmouth, NH, “because retail is dominated by three big supermarket chains.”

Instead of initially becoming known as the local brewer in Portsmouth, Egelston positioned Smuttynose as a New England regional brewer, concentrating his “local market” efforts in all of New Hampshire, southern Maine, eastern Massachusetts, and parts of Rhode Island and Connecticut. Success in those markets caused local wholesalers and grocers to see Smuttynose in a different light and to begin requesting beer, such as Shoal’s Pale Ale.

“We had to circle back to grow in our immediate local market,” Egelston said. “It’s the opposite of what you would normally expect.”

Imagine starting a microbrewery in Chico, CA—home of Sierra Nevada Brewing, an incredibly well established and successful brewery with annual sales of almost 600,000 barrels. Tom Atmore of Butte Creek Brewing in Chico said he realized that in order to be successful, he had to come up with a new approach.

“After three years we became an organic brewer,” Atmore remembered. “Our specific target was to sell our beer to whole food stores and specialty upper-end food stores, as these types of stores grew across the country.” As a result, Butte Creek now sells its beers (led by Organic IPA) in 17 states, although 75 percent of sales occur on the West Coast and in Colorado.

Sudwerk Privatbrauerei Hubsch in Davis, CA, is an example of a brewpub that became a microbrewery. “Initially, we were a restaurant brewery that became too successful, so we added more tanks and kegging and bottling equipment,” said Jay Prahl. Today Sudwerk sells 60 percent of its beer as a microbrewery, primarily in northern California. The brewery’s Pilsner, Märzen and Hefe-Weizen are almost equal in sales.

A completely different path to becoming a local microbrewery (of sorts) is that taken by Bayhawk Ales in Irvine, CA.

Originally formed as Orange County Brewing, the brewery was part of the now-defunct Microbrews Across America, which included Nor’Wester Brewing, North Country Brewing, Mile High Brewing and Aviator Brewing. Only a few of these breweries still exist. When the Microbrews Across America plan of establishing a network of small breweries across the United States failed, Orange County Brewing re-formed itself as Bayhawk Ales.

Bayhawk is now located inside a McCormick & Schmick’s restaurant, and the brewery specializes in brewing house beers for restaurant chains and pubs throughout California, Arizona, Nevada, Hawaii, Texas and Colorado. Bayhawk writes on its website: “We just might be the greatest beer you never knew you drank!”

Karl Zappa, who took over as Bayhawk’s general manager, said that the brewery sells 97 percent of its beer as draft and 60 percent as private label beers. The 40 percent of sales under the Bayhawk label (such as Hefe Weizen) take place almost exclusively in California, so an argument can be made that Bayhawk is a “local” microbrewery.

Grow or Die

For many “local” microbreweries, there comes a time when it’s necessary to sell beer beyond the home base. “You have to grow or die,” said Jim Schwab of Tommyknocker Brewery & Pub in Idaho Springs, ID. Schwab reports what many owners of mid-size craft brewers have come to realize, that once a brewery grows to a certain size—past the small, local brewery with limited sales—it’s impossible to remain at this new size. A tough business decision has to be made to spend money, time and effort to ramp up the sales and marketing efforts. New territories must be explored.

“We take it one step at a time in new states,” Schawb said. Tommyknocker currently sells in 16 states, with 31 percent of sales at home, headed by its Maple Nut Brown Ale.

A small brewery encounters several problems when it first attempts to sell outside the local market, one of the biggest of which is cost. “You need more money the farther away you go,” said Gary Bogoff of Berkshire Brewing, whose flagship beer is Steel Rail Pale Ale. “We prefer to plow money back into the brewery and the local market.”

According to Bogoff, Berkshire has been successful because he and his partner, Chris Lalli, stuck to local markets and have kept advertising through word of mouth.

Berkshire has recently opened the Flatstreet Pub in Brattleboro, VT (30 miles to the north), where 10 of the 20 draft lines are Berkshire beers.

The cost of a sales person dedicated to a new, far-flung territory is difficult for a small brewery. Jurgen Knöller of Bayern Brewing in Missoula, MT, said that sales reps are hard to find and difficult to fund.

“When you add the annual salary plus expenses for a sales rep,” Knöller said, “you need about $1.5 million in sales.” Knöller added that Montana is a challenge for a small brewery because it’s “a big state with few people.” Bayern sells half of its beer (led by Bayern Amber) in Missoula and up to 80 percent in Montana, with the remainder in nearby Idaho and a small amount in Oregon.

“A happy medium is hard to find,” Knöller said. “We’re a hybrid size—not small enough to stay in town.” Like other brewers we interviewed, Knöller pointed to the fact that, at a certain point, a small brewery must move forward.

At Fish Brewing in Olympia, WA, Lyle Morse said his brewery’s size is too small for efficiencies, but that selling bottles in far-away territories is less profitable. Instead, Fish (which sells in eight states, with 50 percent of those sales happening in Washington), said he’s “refocusing on our organic brands,” such as his best seller, Organic Amber Ale. Fish bought Leavenworth Brewing (all all-draft brewery) in 2001, but has now phased out the Leavenworth brand to concentrate completely on Fish Tail Ales.

Sometimes there’s the problem of whether customers even exist in border states, the first place microbreweries usually look for expanded sales.

Brock Wagner of Saint Arnold Brewing in Houston, TX, said he still sells 75 percent of his beer (led by Amber Ale) in Houston and 100 percent of his beer in Texas.

“Our border states are not screaming for better beer,” Wagner said, referring to Louisiana, Arkansas, Oklahoma and New Mexico. “It would take great effort to sell there, although there’s always a subset of people desiring good beer and this can be rewarding for a brewery.”

Wagner said it’s viable to remain a 5,000- to 10,000-barrel brewery “if you stay local and not try to maintain a far-flung sales force. And if you’re local, your beer is always fresh.”

How much support can a small brewery give a faraway territory? “Not much,” said Eric Wallace of Left Hand Brewing in Longmont, CO. He feels the cost of sales reps is prohibitive, and he’s been slow to add on new states. Expressing the stresses of many small business owners, Wallace said: “We need room to breathe as we move outwards.”

Local Heroes

Some middle-small breweries self-distribute in their local markets, and this can be an advantage for them. “We’re not distributor dependent,” Bogoff said, “so we remain connected to our customer base.” Self-distribution also allows a brewery to service local accounts more easily. “This makes it real for our customers,” noted Mueller of Flying Fish.

The story is the reverse at Left Hand Brewing, where the management decided to sell its distribution company, Indian Peaks (formed in 1998). “The distribution company took too much energy and resources,” Wallace said. ,”That energy now goes into the brewery” and beers such as the flagship Sawtooth Ale.

Advertising for middle-small breweries is almost entirely word of mouth and tasting events at which beer can be poured for the public.

“The consumer needs to drive it from the street,” said Baku of Mad River, brewer of Steelhead and Jamaica brand ales. “This carries more weight than our sales efforts.”

How does a middle-small brewer feel, once he has achieved a level of local acceptance and success?

“It’s pretty awesome to be recognized and loved by the local community, Bogoff admitted. “We sort of feel like Coors must have felt in the 1960s when they were a Colorado cult beer, before they went national. Every day we hear stories from people traveling through western Massachusetts…about how they simply have to bring back some of our beer to their part of the country. And locally, people do things, such as pull up alongside one of our drivers at a red light and give them the “thumbs up” for being part of Berkshire Brewing.”

This local edge seems to be what it’s all about for these middle-small craft brewers. The strategy is simple: brew great beers, get them in the hands of local customers (as fresh as possible) and dedicate all the business’s efforts to that local market. Gaining that “home field advantage” as Gary Mueller put it, is key. Only after the local sales base is strong enough do these brewers have the confidence (as well as the necessary capital) to begin outward expansion. Once that occurs, a successful “middle-small” brewery might just have the luck to grow into a “smallish-large” brewery—the next step up the ladder.