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Sunday, January 15, 2017

Kauai Beer Company Grows Up

I first visited the Kauai Beer Company back in the fall out 2013. They had opened their doors about a month earlier and the place was pretty stripped down. Owner Jim Guerber had a plan to build the business piece by piece, and that's exactly what he's done.

Back in those early days, they were pouring only four of their own beers. The flagship Black Limo, a schwartzbier, was at the top of the list, and a nice interpretation of the style. Except for a crock pot containing some chili or stew, there was no food. That and more beer was yet to come. The original post is here.

I returned to KBC the following April, commissioned to cover the brewery for a BeerAdvocate piece. That's when I had the chance to sit down with Guerber and his compatriots...his son and head brewer, Justin, marketing director, Larry Feinstein, and brewer, Eric Burda (who recently left the building).

I don't know how many times I've listened to brewers describe grandiose plans that sounded totally delusional. More times than I want to think about. But I never had that feeling with Guerber and his crew. Their plans to brew more beer, bring food into the mix and expand the operation in various ways sounded pretty reasonable.

That was likely because I could see Guerber was taking a cautious approach to the business. An accomplished homebrewer and owner of a custom software company, he thought his brewery could be successful. Having made the substantial original investment required to get the doors open, he was determined to build things out as the business grew.

When I next visited in late 2015, it was clear that things were evolving. There were more house beers pouring and they had expanded from food trucks (which appeared on special nights) to an in-house kitchen serving lunch and dinner several days a week. The space still had something of an unfinished look, but they had made good progress.

This week's visit confirmed what I suspected all along, which is that these guys would build a thriving business. I walked in during a weekday lunch hour. The place was buzzing with activity, many of the tables and most seats at the bar taken. The place now looks like an established brewpub, with a good selection of beers, a locally-sourced menu, friendly ambiance and schwag.

Most KBC beers are designed for the tropical climate. They tend to be fairly light on the ABV scale. The flagship Black Limo (5.0%) continues to be a favorite of locals and tourists. Lihue Lager (4.9%) is essentially a co-flagship with a strong following. My clear favorite from the rest of the list this time around was a robust India Pale Lager (6.5%), loaded with hop flavor and aroma.

The menu is island fare, a mix of sandwiches, salads, soups, entrees and appetizers. Lunch and dinner options are slightly different. They also have Truck Stop Thursdays, in which two or three food trucks pull up out front and sell their stuff to patrons. This is how KBC initially brought in food, considered a special event. It continues on in that form and is well-supported.

I didn't expect any special treatment. But Jim and Justin came round to talk and gave me a renewed tour of the facility. They revealed new plans for expanded brewing capacity, a larger kitchen and a beer garden, all of which will require removal of the current roof (Jim owns the building) and considerable renovation. These upgrades will undoubtedly happen in due time.

My comment to Jim when he initially stopped to talk to me at the bar was that his little brewery has grown up. And it most certainly has. From nothing more than a shell several years ago, Kauai Beer Company has evolved into a solid business. My guess is it will continue to move forward as each upgrade is considered, planned and implemented.

In case you're wondering, Kauai is still very much the beer desert I described in earlier posts. It isn't easy to find authentic craft beer here. The big beer companies seem to have a lock on the market, particularly in the resort areas. Which makes Kauai Beer Company an oasis for locals and tourists, mostly grown up and ready for future adventures.

Thursday, January 12, 2017

Tracking Craft's Emerging Mass Market Status

It's vacation week for me. While my Portland friends are stuck shoveling snow and braving treacherous roadways and walkways, I'm enjoying a week in the tropics. It's a tough job, but I guess someone has to do it. Might as well be me.

These respites away from the real world give me a chance to think about beer, something I seem to spend less and less time on these days. I've been trying to connect the dots between two articles I read on this trip. One by Andy Crouch, the other by Jeff Alworth.

Crouch's piece is in this month's BeerAdvocate, a publication I read sparingly these days. (There is no current web version of the article that I can find.) His basic premise is that our fixation on chasing multiple exotic beers at pubs and bars has ruined the simple experience of enjoying beers with friends. He describes a setting outside the U.S. in which all patrons are drinking one beer and having great conversations unrelated to beer.

Alworth's piece appeared on the Beervana blog, though it probably should have appeared in formally published form somewhere. His premise is that stratification is occurring in craft beer and that the largest brewers, though they continue to pander to the specialty audience, are aggressively going after an emerging mass craft market with trendy, disposable brands.

I'm not really sure Americans can ever return to a situation where we're satisfied drinking a single type or brand of beer in an evening. That was certainly the reality 40 or more years ago, when most of us drank tasteless industrial lager. There were a lot of different brands, but we were drinking basically the same beer and there wasn't much conversation about it.

Even in the early days of craft, there was nothing like the promiscuous market we see today, with folks striving to drink exotic variety. In those days, people were often satisfied to spend an evening drinking pitchers of the same beer. Breweries and bars typically had only four or five brands, so options were limited. It was a different world.

The specialty craze ramped up over the last 10 or so years, driven by breweries in an increasingly crowded market wanting to differentiate themselves and by a small, but aggressive crowd of geeks that became virtually addicted to exotic beers, pretty much regardless of cost. This crowd, though small, helped push craft dollar volume growth into the double digits in recent years.

What the large craft brewers have come to realize is that the specialty crowd is not the future. They recognize that the mainstream popularity of craft beer has created a huge pool of consumers who enjoy good beer, but aren't really interested in chasing exotic styles. That mass market is craft's future and that's where the large brewers are turning.

There's nothing, really, to add to what Jeff wrote in his piece. His notion that large brewers are targeting the mass market with trendy, disposable brands is absolutely correct. Consumers currently demand zesty IPAs and that's what brewers are delivering. They will easily move on to the next trendy thing when it comes along with new disposable brands. And so on.

Will we ever get to a scenario in which consumers drink a single type of beer, such as Crouch describes? Some might argue we've already crossed that bridge in some sense with the popularity of IPA. Even here, there's demand for numerous brands...Lagunitas, Ballast Point, Goose, etc. Spoiled Americans will probably always demand multiple brands of any trendy style.

The most intriguing thing about what's coming will be seeing how the big craft brewers implement a mass market strategy. My guess is the tactics will look something like those used in the past by macros to tap broad regional and national audiences. Irony abounds.

This transformation is gonna be comical and messy, I suspect. I look forward to watching it unfold.

Sunday, January 1, 2017

The Sketchy Beer Year Ahead

We can all agree that 2016 was a tough year. That was particularly true in the entertainment world, where we lost a number of high profile folks. You know who they are. It's also been a tough year for craft beer. I've talked about that in several posts and it's been talked about by others.

Recent reports suggest the slowdown we saw for most of the year continued into the holiday season. Volume growth continued its downward spiral. There was very little good news in the beverage industry as a whole, and beer is obviously part of that.

Everyone in the know wonders if the trends will continue into 2017. That would be fairly bad news for a lot of brewers, but especially for those who hope to score big via distribution. I continue to believe brewpubs and smaller breweries that serve local clienteles will mostly be fine. Retail distribution is another matter.

Softening Market
Now that Anheuser-Busch's merger with SABMiller is complete, many believe brewery acquisitions will slow. Or stop. Heightened DOJ scrutiny is part of that logic. There are also those who think AB and MillerCoors have carved out geographic territory and will now go about the business of building those brands out.

My view is that there will almost certainly be additional acquisitions. DOJ isn't going to be much of a drag on deals. They already waved through a buyout that happened as Mega Brew was being finalized. In the loosened regulatory schematic of the Trump era, it seems unlikely that DOJ is going to be active in blocking mergers and buyouts.

Another factor is overall market weakness. As recently noted here, craft dollar growth dropped dramatically in 2016. It is now barely ahead of volume growth. That means much of the volume growth we are seeing is the result of discounting. The growing popularity of cheaper imports is more evidence that craft beer is hitting a wall on price.

What does that mean? In an overcrowded, increasingly competitive marketplace, breweries that counted on double digit growth and easy profits are vulnerable. They will struggle to make it in a soft, discount-driven market, and be more likely to sell to big beer or private equity. Not all who want to sell will be good targets, so I suspect we'll see closures increase in 2017.

Brewery closures, if they happen, will have an impact similar to the housing market crash a few years back. All of a sudden, we may see breweries (and brewing equipment) available for pennies on dollar of initial investment. That's not good news for the equipment market. We certainly don't want that to happen, but it may be the logical result of an overheated, bloated market.

There is relative safety, if not independence, in selling out. That was surely part of what motivated the folks who sold out to big beer in recent years. If you want to insulate yourself in an overcrowded market, partnering with the deep pockets of big beer isn't a bad idea. Those who sold may have been among the first to see the prospect of oversupply, overpricing and a softening market.

Other Concerns
Despite the probability of more buyouts and consolidation, there are other serious concerns out there. On the distribution side, Anheuser-Busch has been buying up distributors much faster than craft brands in recent years. The ongoing plan is to leverage the power of distribution in every way possible.

That means cutthroat pricing of AB-owned High End brands via AB branch distributors. That type of vertical integration is actually illegal in some states. Where it is legal, like Oregon, the idea is to undercut independent craft brewers and gain access to tap handles and shelf space. It's not a bad strategy in a market where rising prices are a concern. Worry.

There's also the brewpub angle. Reports say AB intends to greatly expand its brewpub portfolio in 2017. We've already seen this with 10 Barrel, which now operates pubs in several cities. Word is, AB plans to take Goose Island national and international. The big idea is to compete with independents and build credibility in key markets everywhere.

What of the IPA craze? Craft's most popular style shows really no signs of slowing down. The downside of that fixation is it has overflowed into other styles, which have gotten hoppier. That's the result of brewers chasing consumer tastes. It's gotten tough to find beers that aren't hoppy.

Now comes news that non-craft IPAs (Goose Island, among others) saw stupendous sales growth last year. Some of that is undoubtedly the result of distribution reach and leveraged pricing. That tactic on the part of big beer will surely escalate. To maintain their edge, independent brewers are finding new ways to differentiate their beers, leading to wilder interpretations of the style.

Specialty beers are a final area of interest. High-priced, specialty beers have attracted a huge following in recent years among geeks, a crowd that has shown a willingness to pay exorbitant prices for a rare experience. Brewers pander to that crowd because it's easy money. Will it continue? Undoubtedly. These beers seem pretty immune to price pressures for now.

Whatever happens, it's sure to be a wild year ahead. Get ready.

Monday, December 19, 2016

Bumps in the Road for Craft in 2016

As previously discussed here on more than one occasion, 2016 has been a tough year for craft beer. On the heels of several consecutive years of double-digit growth, there was a significant decline this year in the all-important retail channel.

Recent stats for grocery (in proprietary publications) show craft up just over 7 percent in dollars and 4 percent in volume for the year. The picture is worse for the 12 weeks through late November, which show dollar growth up less than 4 percent and volume under 2 percent.

There are reasons for everything, of course, and part of why craft is suffering in grocery is surely the brewery explosion. Local beer is more readily available to folks who didn't have easy access to it before. But that's only part of what's going on, I think.

Seasonal beers are another part of the story. Those beers are typically strong in retail and grocery stores between October and December. Not this year. Seasonals are down 8 percent for the year in multi channel retail, and down well over 9 percent in recent weeks.

The reality is that seasonals don't carry all that much weight these days. In our wacky craft beer world, "seasonal" is code for beer that is "old and tired." It's specialty beers consumers are chasing, beers that are rare and unique in some way. Tried and true seasonals are old hat.

Another pesky piece of the puzzle is imports, which have seen increased dollar and volume growth across all retail channels this year. That momentum accelerated throughout the year and reached double-digits in some retail channels over the last 90 days. Right where craft ought to be.

Could price differences be the reason for craft's decline and imports rise? Interesting idea. The average price per case (from a proprietary publication) of imports across a wide retail spectrum is about $30, compared to craft at about $36 per case.

I can't think of many mainstream imports I'd choose to buy instead of well-known crafts from places like Sierra Nevada and Deschutes. Even at a lower price point. I get that imports suggest more flavor and specialness than domestic macros. But most of the imports I see in grocery and convenience stores are seriously lacking.

If consumers really are turning to imports, maybe craft prices have gone too high. It's something I've wondered about since I saw six-pack prices at my local Fred Meyer pass through the $10 and $11 barriers. The notion of a $36 per case craft beer is pretty sketchy for non-sale beer. Seems low.

It's a pretty good bet that rising prices are a drag on craft growth. The gap between dollar and volume growth was fairly wide in recent years. Dollars stayed well ahead of volume because consumers accepted rising prices. But that's changing. The gap has narrowed, suggesting some (perhaps much) of current craft volume growth is fueled by discounting.

We face a lot of unknowns as we close out 2016 and move into the new year. That's as true of the beer industry as it is of the transition in Washington, D.C. Hang on.

Monday, December 12, 2016

The Trap of Large Scale Distribution

The Brewers Association recently announced that the US brewery count has surpassed 5,000. That's a new record, topping the previous high of around 4,100, set back in pre-Prohibition 1873. Most breweries were small in those days and we seem to be returning to that general theme.

Nonetheless, the bulk of the craft beer sold today is made by a few large breweries. No need to name names. These are mostly well-known brands that joined the craft movement long ago and have built strong followings via regional and national distribution.

If you've been reading along here, you know some of the larger craft breweries have been struggling of late. The stats are quite clear. It appears that, with a lot of breweries opening in places that never before had local beer, locals are buying local brands instead of national or regional ones. Go figure.

Improved access to local beer is actually a wonderful thing. And we aren't done, yet. Despite significant overcrowding in the retail sector, we haven't reached peak brewery count. There's still room for small breweries that target underserved local clientele. Seriously.

That applies even in Portland, which has (too) many breweries concentrated in and around the city core. My guess is some of those breweries will struggle in coming years. But there are still neighborhoods in the metro area that would proudly support a local brewery or brewpub.

What we don't have room for, I think, is breweries that enter the market with plans to extend their reach and profitability via large scale distribution. Stiff competition for limited retail shelf space and taphandles makes that an increasingly problematic strategy for most, though some have certainly succeeded.

That's why I find it odd that so many breweries, even relatively small ones, try to navigate the distribution angle. Sure, a bit of local distribution is good marketing. Being seen on store shelves can be good for business. But reaching beyond local distribution makes sense for only a few.

Industry sources tell me some Oregon breweries are reconsidering their commitment to extended distribution. These are breweries whose beers are distributed in Oregon and around the Northwest. They're starting to wonder if the strategy is worth the time, effort and investment.

It's a good question because distribution on that kind of scale is a different challenge than selling beer in your pub and in local retail channels. Once you cross the threshold into distribution outside your home market, you're walking into a brutal numbers game where the cost of entry is high and the margins are extremely low. Moving a lot of beer is just one piece of the puzzle.

Most who enter into serious distribution invest heavily in infrastructure. But that strategy also requires an ongoing investment in marketing and support. Besides good beer, you need a solid image and a viable marketing plan. And you need boots on the ground, folks who live in or travel to remote markets to create the buzz that generates brand recognition and sales.

I honestly don't understand why successful brewpubs, in particular, get caught up in the distribution gambit. It seems to me they would be well-advised to stay tightly focused on running their pubs well. That's where they get the greatest margin on their beer. Going deep locally typically offers a much better return than going wide regionally or nationally.

It's fair to wonder why, when faced with the reality of high entry costs, low margins and stiff competition, so many attempt to distribute beer outside their home markets. Possibly it's ego. Possibly owners and brewers experience success at home and assume they can and must duplicate it outside their area.

It often turns out to be a fool's errand and a trap. No offense to the mangled egos.

Monday, December 5, 2016

The End of an Error

Today marks the official anniversary of the end of Prohibition, the failed experiment that lasted far too long in the United States. We've made a lot of mistakes in our history and we continue to make them. But Prohibition was a disaster by almost every possible measure.

The end came on Dec. 5, 1933, when Utah (irony) became the thirty-sixth state to ratify the 21st Amendment, which repealed Prohibition. Recall that there were then 48 states and amending the Constitution required ratification by 36 of them.

People tend to forget that Oregon, which was the seventeenth state to ratify on Aug. 7, 1933, had been wallowing in Prohibition longer than many states. Statewide prohibition was approved by voters in the 1914 election and went into effect on Jan.1, 2016.

In fact, prohibition was largely a rural phenomenon. Portland and Multnomah County narrowly approved statewide prohibition in 1914. By the time Oregon voted on national Prohibition in November 2016, those same folks had seen enough and rejected it by nearly 10,000 votes. But rural Oregon went the other way and national Prohibition arrived on Jan. 16, 1920.

The stench of the Prohibition era rubbed off fully in Oregon. Most breweries closed. Those that remained converted to sodas, syrups and near beer. But beer was never the problem. The problem was liquor. During Prohibition times, that included local moonshine as well as whiskey brought in from Canada via speedboats up the Columbia River.

There was little interference with the movement of contraband. Portland became a hub for liquor distribution, supplying establishments that consumed vast amounts of alcohol, often with the knowledge of paid off local police. Some speakeasies were paying $100,000 a month for police protection. When they did conduct raids, police typically targeted small time operators who couldn't afford protection. Confiscated liquor often found its way into the hands of high ranking officers and city officials. As was the case in many cities, Portland never accepted Prohibition.

Most Americans knew by the late 1920s that the grand experiment was not working. Corruption was everywhere, infesting public and private institutions. Gangland killings were a regular occurrence. To many, prohibition laws appeared to be unenforceable. Still, the end didn't come as soon as many hoped and expected.

Anticipating repeal of the 18th Amendment, Portland's largest breweries, Henry Weinhard and Portland Brewing, merged in 1928. Arnold Blitz, owner of Portland Brewing, was named president of newly formed Blitz-Weinhard Brewing. The company had jumped the gun on the end of Prohibition by five years.

In the end, it was the Great Depression that finally tipped the balance in favor of repeal. In tough times, Americans decided the country needed the economic stimulus provided by legalizing the manufacture and sale of alcohol more than they needed to continue on with a failed law.

Franklin Roosevelt, running on a wet platform in 1932, won all but six states and beat Herbert Hoover 472-59 in the Electoral College. In Oregon, Roosevelt won by 75,000 votes out of 350,000 cast. Just as important, Oregonians voted to repeal state prohibition by 70,000 votes. Multnomah County accounted for 40,000 of those votes.

Although the end didn't officially come until Utah ratified the 21st Amendment, more immediate relief arrived in the from of the Cullen Bill, passed by Congress and signed by Roosevelt in late March 1933. The law legalized the production and sale of low alcohol (3.2% ABV) beer and wine and took effect on April 7, 1933...fondly referred to today as National Beer Day.

In Portland, brewers were woefully unprepared to meet the expected demand on Beer Day. Congress and Roosevelt had given them just two weeks to ramp up production and it wasn't enough. As a result, thirsty Portlanders consumed every available drop of beer. Blitz-Weinhard, tapped out completely, was unable to fill orders for two weeks.

Most of this story is lifted from Portland Beer. One thing I don't address in the book is why Prohibition failed. The main reason, I think, is that it's difficult to legislate and enforce morality. The other is Americans like to drink and most of them didn't stop drinking during Prohibition. They simply ignored the law, which led to a lot of arguably more serious problems.

Sunday, November 27, 2016

The Escalating Obsession with Rarity

With the passing of Thanksgiving, we have more or less officially entered the holiday season. It can be an awkward time of year. But we also know it's a time when many fine beverages will be consumed and shared. Something to look forward to.

What folks will be drinking and sharing is another matter. As Aaron Goldfarb's a recent article in Punch suggests, tastes are increasingly driven by rarity and extreme presentations. We have reached the point where a beer isn't likely to be considered great unless it's rare and racy.

This aligns with what we've seen in recent years, as rare, high-priced beers have established a strong presence in beer shops and many premium grocery stores. Total beer inventories have been rising, but a lot of old standards we used to know and love are gone, displaced by specialty beers.

That trend is a good reflection of the actual beer world. Fans chase rare and crazy stuff and want to be seen drinking it. They aren't going to show up at a bottleshare or similar gathering packing something that's readily available and moderately priced. Perish the thought.

In effect, we've achieved stratification in beer. That may not have been inevitable, but it was the logical result of the growing popularity of craft beer and the rise of super fans in recent years. While the brewery count was exploding, so was the demand for special beers. Examples include barrel-aged, fruit-infused, wild and even ultra hoppy beers.

Meanwhile, many of yesterday's best beers are forgotten. Even if they're still good and highly drinkable, they're too common and made in breweries that are far too big. As Goldfarb says, "There’s nothing 'cool' about [those beers] —no remote brewery to travel to, no can release to line up for, no rarely-seen, iconoclastic brewer to idolize."

Retailers have contributed to what's happening and it's hard to blame them. If you're a retailer, your prime directive is to maximize return per square foot. It's easier to do that with high priced specialty beers than it is if you're selling mainstream craft beer in any form. Breweries have jumped on the bandwagon, as well, offering specialty beers via spendy fan clubs.

Festivals have piled on, too. They strive to offer as many one-off, arguably rare and often extreme beers as they can. Organizers fully realize potential patrons are more likely to attend and pay premium admission prices if they think they're getting something unique, as opposed to tastes of broken down standards.

I tend to look for historic parallels in these trends and there's a feasible one here. As I was reminded while watching the Soundbreaking series on OPB, 45 rpm singles became highly unfashionable once LPs became the artistic standard in the late 1960s. I think we're seeing something similar to that in craft beer, as speciality beers push old, uncool standards into the background.

The trend is supported by a lot of the data we're seeing, data that generally shows many older, larger breweries losing momentum while many newer, smaller breweries gain share. Some of that is probably more closely related to the image new places are selling than the beer, but never mind. Rare and arguably innovative is the current cool.

Where does this lead? I have no idea and I don't think anyone else does, either. Some say beer is simply becoming more like wine. Maybe so. But there's also a chance this is an unsustainable, generational fad that won't last. We shall see.