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Wednesday, October 28, 2015

Paradise by Buyout Light

There's nothing like a junket to the tropics to improve mental and physical dexterity. Wishful thinking, you know. These trips are more or less a regular thing, which means I've talked about the beer scene out here on many occasions. "Out here," of course, is code for Kauai. And it's a veritable desert in beer terms.

Looking at my social media and blog feed, I can't help but be amused and annoyed by some of the reporting. There are those in the blogging and writing community who continue to pander to and coddle breweries that are wholly owned by Anheuser-Busch. They know who they are and you know which breweries I'm talking about. This isn't rocket science.

I take a dim view of buyouts and sellouts and of AB's efforts to leverage its position globally and in the United States. Not everyone agrees or cares, but I think these buyouts are bad for craft beer, whatever that is these days. Anheuser-Busch hopes to purchase enough breweries and distributors to squeeze craft beer out of the comfort zone it enjoys today.

Upon arriving in Kauai, I got a firsthand snootful of what a buyout looks like to consumers. This happened at the car rental joint. I reserved a car several months ago via a website that offers options from among all or most of the car rental vendors here. I've used this approach to rent a car here for many years. This time, we rented from Thrifty.

It was pretty apparent we were in trouble the instant we got to the rental office. There was a line of customers and only two people behind the counter. Outside, a skeleton crew prepped cars that were going back out. Nearby, folks who had checked in and were ready to go waited patiently their vehicles. And waited.

As I reached the front of the line, a gent appeared from outside the ropes and told the agent he would need another car...that the car they gave him had a mechanical problem.  The agent smiled and said he would take care of that momentarily. There were a lot of vacant stares on the faces of people waiting in line. Expectations for a positive experience took a dive.

The agent taking care of my reservation had been to Portland a year or so ago and we struck up a friendly conversation. As he was finishing things up, I discreetly asked him what the hell was going on with Thrifty. I'd rented from them before and never seen a disaster like this.

"We were bought out by Hertz," he said. "A few weeks ago, they came in and switched us to a new computer system, cut staffing and made a mess." He had told me at the start that he had to access another site to find the details of my reservation. The entire process took nearly an hour, for something that typically takes 15-20 minutes in Kauai. Not good.

Of course, there's more to the story. The Hertz buyout of Thrifty didn't just happen. It happened in 2012. But Hertz has been busy dealing with the anti-trust issues that came out of its purchase of Thrifty and Dollar. Hertz had to offload domestic locations of subsidiary Advantage. It evidently took them a while to bring the various locations into the Hertz orbit. Small favors.

In fact, only three companies–Hertz, Avis and Enterprise–control 94 percent of the car rental industry in America. Recent consolidation in the industry, including Hertz' buyout of Dollar and Thrifty, has led to dramatic price increases, as discussed here. Funny how reduced competition leads to fewer choices, higher prices and less attentive service. Huge surprise.

Could this kind of scenario occur in the beer world? Maybe not. But Anheuser-Busch's strategy of buying craft breweries and distributors is alarming. It will enable them to limit access to the market for non-AB brands while their owned "craft "brands, brewed in factory breweries, become readily available. If there's an upside, I don't see it.

Obviously, the significant question is how many people know or care about what's going on in the beer wars. Here on Kauai, I see plenty of people drinking Bud Light or similar garbage. I wonder if they know or care what that choice means. Sounds like a topic for future discussion.


Sunday, October 25, 2015

Oregon's First Brewpub Turns 30

Today marks in important milestone in Oregon history. But you aren't likely to see any coverage in the mainstream media. Why? Because it has nothing to do with the Kardashians or Star Wars or Back to the Future or a mass shooting. Nope.
Mike and Brian with Ron Wolf

Thirty years ago today McMenamins brewed the first batch of beer at their Hillsdale pub. Why is that significant? Because it made Hillsdale the first brewpub in modern Oregon history. The Brewpub Bill, passed in June 1985, paved the way for them to establish a brewery in an existing pub.

It may be instructive to recall that Bridgeport and Widmer were both brewing at that point. Bridgeport was actually selling beer by late 1984. The Widmers were right behind them and began selling beer in April 1985. But neither had a pub. Hillsdale was the first.

Those early Hillsdale beers were brewed with malt extract and other suspect ingredients. Not the best approach and, in fact, the beers were not especially good. Don't take my word for it. I didn't get here until 1989. Brian McMenamin provided his thoughts during a 2013 interview.
We weren’t really sure what the Brewpub Bill meant at first. Did it mean cooking beer on a stove in the kitchen? We knew we could use old dairy equipment. So we went down to Tillamook and found some tanks, jerry-rigged some stuff and it worked. We started making beer and it wasn’t good beer. We hired some people to help with it and we eventually had some decent stuff.
One of the people they hired was John Harris, who would become one of Oregon's iconic brewers at Deschutes and Full Sail before launching Ecliptic in 2013. By 1985, Harris had done some homebrewing, but had no pro experience. There were very few pro craft brewers in those days.. Head brewer Ron Wolf hired him, anyway. Harris recalled his experience in 2013.
On my first day at Hillsdale, I was supposed to bring rubber boots…but I forgot to buy them. I had to wear my hiking boots, which didn’t work very well. Fortunately, they didn't fire me. The system was tiny…about seven kegs. We had no temperature control and we used open fermenters. Consistency was a problem. Beers sometimes got a little sour. The whole concept of small breweries was revolutionary. The brewers at Henry Weinhard considered us renegades because our brewery was so primitive. We got some respect and the beer got better after we started mashing. 
The brewpub concept didn't take off instantly. But combining food with beer produced in tiny, on-site breweries eventually became a thing. Bridgeport established a pub and Portland Brewing opened on Northwest Flanders in March 1986. McMenamin's eventually established breweries in a number of their pubs, which became destinations because you could always find good beer there.

In the greater scheme of things, brewpubs were crucial to the development of our beer culture because they exposed people of all ages to craft beer in a friendly environment. If not for brewpubs, craft beer would have been relegated largely to the dark shadows of taverns and bars, and it's visibility would have suffered. We would not be where we are today.

To celebrate 30 years, a commemorative version of Hillsdale Ale will be poured at all McMenamin's locations today. No, this won't be a malt extract beer. They've examined the brewing notes from that original beer and recreated it to the best of their ability in an all-grain format. Pints of Hillsdale Ale will go for $4. Growler fills will be $8.

As most who follow the local beer scene know, the McMenamins pursued a different course than virtually all of the other craft or micro breweries. They never had any desire to distribute their beer beyond their own pubs and assorted properties. Their plan was wildly simplistic.

"Instead of buying it from someone else, we wanted to brew the beer to sell in our pubs," Brian McMenamin recalled. "If you haven't figured it out, we're stubborn Irish people. We like doing things ourselves."

You might say that stubborn, do-it-yourself approach has served and guided the brothers well over the years. And if you did, I'm pretty sure you'd be right.

Monday, October 19, 2015

Local Relevance: the Latest Catchphrase in Craft Beer

It can easily be argued that local appeal was a huge part of what got the craft revolution off the ground. The demand for locally grown and processed food was underway by the 1980s and it extended to beverages, including coffee and, yes, beer.

The way the movement presented itself early on, at least in beer terms, was a vibrant homebrewing culture. The beers being made were local and that became a big part of their identity when those homebrewers opened breweries. You know who they are.

It's largely a forgotten detail now, but Portland's early craft (then known as micro) breweries leaned heavily on the local angle to sell their product. Doing so fit nicely with the highly provincial nature of Portland. Customers, drinkers in this case, were increasingly attracted to local beers.

As time went by and the early breweries became successful and grew, they looked outside Portland and the Northwest. We saw this with Widmer, Portland Brewing and Bridgeport. In fact, the urge to explore lucrative markets outside core areas has been a theme in the craft beer industry of late. These efforts are not without risk and they don't always pan out. But they are a reality.

So I have to admit I was surprised when I interviewed the folks at Bale Breaker Brewing a couple of months back. They were determined, as part of their business plan, to own their core market in rural eastern Washington prior to chasing the lucrative Seattle-metro market. Some told them there were nuts, that people "out there" don't drink craft beer.

As it turns out, Bale Breaker has been highly successful with their core market strategy. They were unable to keep up with demand for their beer from the day they opened in 2013, and the great bulk of that beer was sold locally. They've since moved into Seattle and the rest of Washington and Oregon is on the horizon. But they say their greatest strength is their home market.

It seems some of the larger breweries are starting to come full circle on the local concept. There's some definite irony attached to that notion, given the fact that all of these guys started out small and local before expanding into distant markets. But never mind.

For many years, Portland Brewing/Pyramid largely ignored its core market on the West Coast and focused on building its brands elsewhere. Those efforts netted mixed results for a variety of reasons. Now they're shifting direction.

When I interviewed Rob Rentsch, the new general manager at Portland Brewing/Pyramid, he talked about the strategic importance of reviving the relevance of his brands in the local and regional market. He was hired specifically to make that happen, and it's a difficult task given the extent of the neglect over so many years. We'll have to see how it goes.

Now I see, via an article in Brewbound, that the Craft Brew Alliance is also focused on the local angle. As you likely know, the CBA is comprised of Widmer, Redhook, Kona and Omission, as well as some partner brands. In the case of Widmer and Redhook, both legacy Northwest brands, the CBA hopes to achieve greater local relevance.

This is a fairly interesting development. Recall that CBA brands enjoy access to the nationwide Anheuser-Busch distribution network. You're app to find at least some CBA beers almost anywhere in the country thanks to that arrangement.

What they've evidently learned is that only Kona has broad national appeal. Perhaps this is because so many smaller breweries are opening up and attracting locals. In that scenario, the people buying Kona are buying an image. It's similar to Corona, which sells well due to its connection to place. Anyway, the CBA will continue to support Kona nationally via a strong advertising campaign. Makes sense.

Widmer and Redhook are where the big local/regional action is. The approach to seasonal releases will be refined with both brands. Widmer Hefeweizen will hit Oregon shelves in cans next March, a move they hope will boost interest in their flagship beer. There's no hint of it in the article, but Widmer will likely do more with its specialty program, which is under-appreciated.

Redhook is a more substantial challenge. Established in 1982, it is the oldest surviving Northwest craft brand. And it has been neglected and mismanaged for years. Part of the plan to revive the brand is retro packaging, an effort to remind consumers of what Redhook once was. Lipstick on a pig, if you will. Then there's American Pale Ale, set to be released nationally. What?

As with Widmer and Portland Brewing, Redhook's path to local relevance will demand effort on the specialty front. Today's vibrant brands are built in beer bars and at festivals and tap takeovers. You cannot reach that audience with mainstream brands. And you have to understand that grassroots marketing like this is intended to generate buzz and credibility. Sales will take time.

Do the established brands have the dexterity and the commitment required to execute the kind of plan that will result in renewed local relevance? I have my doubts, But we shall see.

Tuesday, October 13, 2015

Kurt Widmer's Departure and the Future of the CBA

Yesterday's big news on the impending retirement of Kurt Widmer from the Craft Brew Alliance hit like a ton of bricks. The story popped up on the news wire in the late afternoon and mostly took the form of a regurgitated press release with little or no analysis. It's the "new" journalism, you know.

End of an era
Kurt Widmer will step away from his role as chairman of the CBA board at the end of the year. He expects to spend more time with his wife and family and hopes to write new chapters while there's time. He's a young 63, so there is certainly time for a novel or two.

For a while now, I've been wondering when something like this might happen. Believe me, I have no inside sources at Widmer or the CBA. I'm not even on their media list, so I didn't receive the press release. But I've been thinking this might be a good time for one or both of the brothers to move on. More on why in a minute.

This is a big deal. If you're making a list of the most important folks in Oregon brewing history, Kurt Widmer is on it. He's right there with names like Saxer, Weinhard, Coury, Larrance, Ponzi, McMenamin, Bowman, Eckhardt, Younger, Fish, Joyce and, of course, Rob Widmer.

When the Widmers launched their little enterprise back in 1984, their expectations were modest. Like most of the early craft brewers, they didn't expect to make a lot of money. They were doing something they enjoyed and hoped to make a living at it. It sounds quaint and naive looking back, after they've made millions, but that's how it was in the beginning.

Kurt Widmer was the idea man. He's the one who had experience with European beers, having lived there. He's the one who saw the rising popularity of imports and thought that market could be tapped with beers made here. He's the one who got Rob on board, which took about a nanosecond. And he was at the helm navigating the significant challenges during the formative years.

Things are much different today. The partnership with Anheuser-Busch, announced in 1997, and the formation of the CBA in 2008, have pushed Widmer and affiliated brands Redhook and Kona into markets around the country. This ceased to be a small, self-contained business many years ago, but the transition to a highly structured corporate organization occurred in just the last few years.

When you look at what they've built and what Widmer and the CBA are today, you really have to wonder what Kurt and Rob have left to accomplish. Nothing, I think. That may be particularly true of Kurt, the thinker and idea man who directed traffic for so many years and now finds himself watching as others call most of the shots.

The press release says Kurt will stay on until the end of the year and help identify a successor as chairman of the board. Rob Widmer, who has never held a spot on the eight-person board, has no plans to leave the organization and the brothers will retain their ownership stake in the company. Together, they own nearly 12 percent of CBA common stock. 

Given the current pace of buyouts and mergers in the beer world, I can't help but wonder if the CBA will be fully absorbed by Anheuser-Busch in the near future. Could Kurt Widmer's departure be a precursor? AB owns roughly a third of the CBA and holds two seats on the board. How many of the remaining board members favor a sale? I don't know, may not want to know.

It seems to me the CBA brands, particularly Kona and Widmer, fit perfectly with AB's strategy. If it acquires the CBA, AB can mass produce those beers in factory breweries and flood the market, undercutting independent craft brewers around the country. If that's what's coming down the pike, I'd say this was exactly the right time for Kurt Widmer to get out. 

As with so many things, time will tell.

Wednesday, October 7, 2015

No Safety in Numbers: Understanding the Buyouts

The recent announcement that Golden Road Brewing is being acquired by Anheuser-Busch raised some eyebrows, but didn't produce the flood of negative responses that we saw with 10 Barrel and Elysian buyouts. Like mass shootings, we're getting used to these things.

There were a number of comments made by Golden Road co-founder, Meg Gill, who got a fairly soft grilling by the media. Reading through the quotes, I began to gain a new perspective on why these buyouts are happening...and why they will continue to happen.

This isn't a situation where Gill is cashing out. Even though Golden Road was built to sell, as one article suggested, she isn't going anywhere. It also wasn't a scenario where they needed an infusion of capital to expand production. Golden Road has access to private equity capital.

It's quite clear that she was looking for security. She sees big advantages in being part of the AB family, which she describes as the "winning team in craft beer." There are decent reasons for this. Being on the team gives Golden Road access to a supply chain that will reduce production and packaging costs. The extensive AB distribution network factors in, as well. Gill described AB craft CEO Andy Goeler as a "brilliant marketer." Seriously.

Not to get too far afield, but I'm not sure I would describe anyone at AB as brilliant when it comes to craft beer marketing. Building craft brands isn't and hasn't been their claim to fame. They're mostly good at cutting costs through economies of scale and leveraging advantages built since the end of Prohibition. But never mind. Be my guest if you think these guys are brand builders.

In fact, it appears Gill decision to partner with AB may have been driven by the escalating craft brewery count. She sees an increasingly crowded marketplace where competition is getting brutal. She came to doubt Golden Road's ability to stay relevant in that environment on its own. So she phoned Anheuser-Busch, the only entity she deemed capable of providing the needed help.

Many assumed AB would target a California brewery this year. The surprise with Golden Road is its size...projected around 45,000 barrels this year. Most thought AB would go bigger. There's also the price. Experts believe they paid $100 million ($2,000 per barrel), significantly more than they are thought to have paid for 10 Barrel or Elysian.

But there's a method to AB's madness. They wanted a presence in the LA market. With this buy, they will own breweries in the nation's three largest metro areas...New York (Blue Point), Chicago (Goose Island) and LA (Golden Road). Add the top two craft beer cities to that list with Portland (10 Barrel) and Seattle (Elysian) and you've got a nice little collection. With more to come.

It may not have been on Gill's mind, but AB is leveraging its position in ways that go well beyond standard marketing. As discussed here in the past, the company is actively working to enable vertical integration of markets similar to what existed prior to Prohibition. Demolition of the three-tier system is part of that effort.

For now, this is happening primarily in states where the laws are flimsy. The Golden Road deal, once finalized, means Anheuser-Busch will operate in all three tiers (owning brewers, distributors and retailers) in California, Oregon and Washington. Only California, via the DOJ and state attorney general, is looking into AB's activities. Oregon and Washington are, so far, mum.

You really can't fault Meg Gill for selling Golden Road. I've seen a number of reports suggesting Golden Road's beers aren't that great. If you want to improve a mediocre product and push it out to an increasingly competitive market, maybe leaning on AB's distribution network and supply chain efficiencies is exactly the right move.

Given the state of craft beer, where new breweries continue to open virtually by the day, I expect to see more established breweries looking for ways to insulate themselves from the brutality of the marketplace. Selling to AB is one way to do that so there's no telling how many of these folks will wind up in the hands of big beer. To be continued...

Friday, October 2, 2015

Bale Breaker Brewing: Supplemental

The October issue of BeerAdvocate magazine includes my profile of Bale Breaker Brewing, which is located on a hops farm in the Yakima Valley. As is always the case, the published version of the story leaves out a few details that may be of interest here.

Bale Breaker opened in 2013, the creation of three siblings who grew up on Loftus Ranches hops farm, and another partner who married into the family. The kids had gone off in their own directions after high school and returned to the farm when it occurred to them that a craft brewery might go over well there.

More than a few people thought they were nuts. Even though the Yakima area produces hops that fuel brewers all over the world, rural areas like eastern Washington have been slow to catch the craft beer wave. Enough people in the industry told them they would fail that it caused a bit of self-doubt.

Nonetheless, they forged ahead. The team of Patrick Smith, Kevin Smith, Meghann Quinn and Kevin Quinn (married to Meghann, the sibling of Patrick and Kevin Smith) put together a business plan that included some interesting details.

The brewery would share ownership with the hops farm, but be operated as a separate business. They did not want either business to be tied to the success or failure of the other. As well, they did not want other craft brewers to see Bale Breaker as competition.

As it turned out, they needn't have worried about competition. Craft brewers don't operate like that and never saw Bale Breaker as competition. Keeping the businesses separate was mostly designed to insulate the successful hops business from the brewery, which might well fail.

Due to their rural location, many assumed Bale Breaker would focus on building their brand in the lucrative Seattle market. They rejected that thinking. Instead, they were determined to build their brand in the local area and expand out from there.

A few industry friends recommended that path. Kevin Quinn had worked in the franchise business and got a firsthand look at the problems associated with being spread out and not having a core market. He was convinced that they should start local and build from there.

Cans vs Draft 
It's pretty common for new craft breweries to focus on draft sales. Bale Breaker had other ideas. Early on, they decided their flagship beers (two brands) would be packaged in cans and that packaged product would be their main focus.

Looking out on the bar landscape, the Bale Breaker kids saw rotating tap handles as a dead end. A keg blows and something else goes on, no matter how fast the beer sold. They came to see shelf space in stores as the new permanent tap handles. If your beer moves, you keep your spot. Thus, filling cans is their priority, even if that means not filling kegs.

The proof is always in the results. Bale Breaker has been embraced by the rural community. The distributed beers, Top Cutter IPA and Field 41 Pale Ale, sell so well that they are challenged to keep up with demand...despite expanded production capacity.

If you're wondering, Bale Breaker beers are now available in most of Washington. Portland residents can find Top Cutter and Field 41 in many Vancouver stores and pubs. An in-progress expansion project at the brewery may allow them to tap Oregon in the next year or two. Hopefully.

The full story is in the BeerAdvocate piece. There's no online version, though you can buy the issue on Google Play if you don't subscribe and don't want to. Cheapskates will seek copies in local pubs.