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Monday, March 25, 2019

The Widmer Way: Boys Make Good

In an annals of Oregon brewing history, there are a few names that come instantly to mind. Henry Weinhard is automatic. He wasn't the first to brew here, but he was so significant that his legacy endured for more than a century. Arnold Blitz is another icon and a part of the Weinhard story. Then there's Kurt and Rob Widmer.

The Widmers were members of the group that launched the craft beer revolution in Oregon. They might well be the most successful of the founding brewers. It's a tough call only because the McMenamin's collection of properties is sprawling. Kurt and Rob Widmer built a beer brand that captured the imagination of mainstream craft fans in Oregon and beyond. None of the others managed that.

Jeff Alworth's new book, The Widmer Way: How Two Brothers Led Portland's Craft Beer Revolution, charts the Widmers' course from their relative youth to the conception and realization of their brewery to the partnership with Anheuser-Busch, Redhook and the formation of the Craft Brew Alliance.

I might have chosen a different title. The Widmers no more led the craft revolution here than did Bridgeport or Portland Brewing or McMenamins. Each of the founding breweries played a unique role. Widmer's key contribution was Hefeweizen, which set a standard in bars and popular restaurants, lending the craft movement an aura of status and credibility at a crucial moment.

Much of the story reported here is not new to me; I knew some of it thanks to my work on Portland Beer. But Jeff's book goes into much greater detail, which figures since Kurt and Rob are the main subjects. Their story is intriguing and instructive. Nothing came particularly easy for these guys. They meticulously built their business on hard work and remained true to that value long after they had achieved great success.

Putting together a craft brewery in the early 1980s was no easy task. The challenges were significant and are fairly well appreciated today. Jeff outlines issues the Widmer's faced as they assembled their brewery and began brewing. The makeshift system was a menagerie of pieces that weren't designed to function together. That meant brewing was arduous, requiring extensive time and labor. It meant jumping through a lot of hoops to get the job done.

Kurt and Rob were young, hardworking and dedicated to quality. Having started out as homebrewers, they put up with crappy ingredients and somehow managed to make decent beer. The initial batches of beer produced in their brewery were much better than their homebrew. But they sewered the first 10 brews, anyway, considering the beer not good enough to sell.

It's a pretty good guess that the Widmer dream would have failed had it not been for their father, Ray. Ray grew up on a farm and knew how to fix things and solve quirky problems, the kinds of problems you're apt to find in a cobbled-together brewery. He was retired by the time Kurt and Rob began working on their brewery. But Ray joined the fun and provided crucial assistance as the boys navigated numerous challenges.

A prime feature of the story is the cautious approach the Widmers took to everyday business. Once they landed on Hefeweizen as their flagship beer, orders poured in so fast they couldn't keep up. A small brewery at B Moloch's in downtown Portland provided brief respite. When they finally moved to Russell Street, they installed a 30-barrel brewery. Incredible. That brewery should have been at least twice as large...just one case of the thriftiness wired into the Widmer DNA.

The most fascinating part of the book involves how the partnership with Anheuser-Busch was formed in 1997. At the time, the Widmers needed to expand again, but were also looking for a partner that could help them reach a wider audience. They discovered they had a lot in common with August Busch III, then the CEO of Anheuser-Busch. The AB partnership evolved largely out of a shared set of values. The Widmers were widely criticized within the growing craft community at the time, but the partnership with AB was one of the smartest decisions they ever made. More than cash to finance expansion, they got access to the nationwide AB distribution network.

Out of the arrangement with AB (which purchased 27 percent of Widmer) eventually came the partnership with Redhook and formation of what became the Craft Brew Alliance in 2004,  as well as the decisive purchase of Kona in 2010. Jeff covers these developments nicely, but wisely avoids investigation of the modern CBA, which is run by sociopaths and only indirectly germane to the Widmer story. Small favors.

If there's a weakness here, it involves the circumstances under which the book was written. Kurt and Rob trusted Jeff to accurately tell their story and paid him to do so. The problem is that paid-for biographies often tend to be too friendly to their subjects. While he was writing the manuscript, Jeff asked me to read several chapters and provide comment. Knowing me to be an honest asshole, he figured I'd provide an honest assessment. I did.

How much of my advice he took is unclear. The flaws in this book are largely related to words here and there that might have been chosen differently. What those occasional words do is create a more friendly, pandering picture than is needed. You'll see what I mean. That approach explodes Aliens-style in the final chapter, the Legacy of Beer, which is full of loving anecdotes from friends and family, and way too syrupy. I would have dispensed with that chapter or toned it down.

Another shortcoming involves the photos, which are small and murky. The Widmer archive contains a lot of photos and it's unfortunate that they aren't handled better here. It's not clear who made the decision to present the photos in this way. Jeff didn't have access to them, so this isn't his doing. Either the publisher, the Ooligan Press, or the Widmers, who negotiated to have the manuscript printed, made the call on the photos. This isn't a disaster, just an opportunity lost.

Even with the noted flaws, I give this book very high marks. The occasional bits of pandering are offset by a story that is expertly written, illuminating and essential reading for fans of craft beer and Portland history. Hiring Jeff to write their story, similar to their decision to partner with Anheuser-Busch, was a wise move on the part of the Widmers.

The book is available through area bookstores and on Amazon. There's an audio version in the works, but I don't know when it will drop. I urge interested readers to purchase a copy at a local bookstore. Doing so won't help Jeff, who got his money up front. But it will help those retailers and let the publisher know that books like this do have an audience. For those who want to read the book without owning it, the Multnomah County Library has 21 copies that can be checked out.

For hardcore fans, Jeff has set a local launch event for Tuesday evening, April 2, at the former Widmer pub on Russell Street. He'll do an introduction, possibly a short reading, and Kurt Widmer will be on hand to talk. Rob is unavailable, apparently hiking the Pacific Crest Trail, which is perfectly appropriate. A list of related events can be found here.

You can indirectly support your local beer writer/author and historical inquiry in general by buying a copy of this book. Just do it.

Tuesday, March 19, 2019

Plight of the Oregon Beer Growler

The recent demise of the Oregon Beer Growler wasn't a huge shock. It was the victim of a changing culture, a culture in which print publications are having an increasingly difficult time surviving. Attention spans are short. Smartphones are king.

A little background. I wrote a number of articles for the OBG during the past two or so years. Under Andi Prewitt's editorial leadership, the Growler made significant progress. The focus and content sharpened over what it had been prior to Andi's arrival. Well, that was my perspective.

Writing for the Growler was never a lucrative proposition. I wrote mainly because I liked working with Andi and thought the publication might evolve into something bigger and better than what it was. I thought it might turn into a publication that paid. Supporting it seemed reasonable.

When Andi left for Willamette Week last fall, I initially figured I would continue to write for the Growler. I had never met incoming editor, Matt Meador, but he had the background to carry on in Andi's sted. I figured to connect with him and continue to write occasional articles. Then I saw the new format, which they introduced just as Matt took over. Instead of the semi-tabloid newspaper, they squished the thing into what looked like some sort of pamphlet. It looked like a big step backward to me. I took a wait and see attitude, didn't pitch any story ideas.

The announcement that the Growler was closing up shop did not come as a surprise. Print is in trouble. Beer-centric publications may be more vulnerable than mainstream vehicles due to the nature of the beer culture, which is younger and fully immersed in the digital space. Many publications are moving to digital and scaling back or eliminating print production.

One of the problems for print is that people no longer read. We've become accustomed to consuming snippets of written and visual content, as opposed to detailed presentations. Social media didn't start that process, but it has made things worse. The Smartphone, of course, has made it possible to access information about breweries and beers and events from anywhere at any time. As a result, a lot of breweries have turned to social media as their primary means of advertising.

That reality definitely hurt the Growler. A popular storyline swirling around its demise is that the industry failed to support the publication by purchasing ads. That was a deal killer for the Growler, which relied almost completely on advertising revenue to pay its bills. Don't get caught up in the notion that being a subscription-based publication would have saved it. Ask the folks at BeerAdvocate how their subscription-based model is working out for them.

Keep in mind that the OBG was always mostly a promotional vehicle. It sold ads on the premise that it was promoting breweries, events and beers. There was never any attempt to offer controversial or critical content. That kind of thing doesn't sit well with the people paying the bills. So the Growler read like an industry PR rag, which is what happens when you don't want to offend anyone.

In the articles I wrote for the Growler, I never made disparaging comments about breweries, beers or whatever. If I repurposed story content here, which I did a few times, I generally added a prying question or comment to give the story some edge. Readers expect that here and I don't have to worry about advertisers getting bent out of shape.

Thinking about what happened with the Oregon Beer Growler, I considered the possibility that it lost readers because the content was too fluffy. But that's not what happened. Because the OBG never pretended to be anything more than a promotional publication, dependent on the industry's goodwill for survival. Edgy content was never part of the plan and readers didn't mind. What happened is that promotional content moved to different channels.

In effect, the industry deserted the Growler because the beer crowd that once read it moved on to social media and sites like UnTappd. Seeing that, the industry shifted its focus and the Beer Growler was a casualty. That's how these things work.

The people who published the OBG are apparently looking to sell it. But to whom? There's no viable path forward as a print publication. I suppose you could go digital only, but there are blogs, websites and social media channels that cover much of what a digital Growler would cover.

So this looks like a dead end. It's unfortunate because the OBG was really the only print piece that covered Oregon craft beer on a regular basis. There are no winners now that it's gone. None.

Sunday, March 10, 2019

CBA Positioned for Whatever Comes Next: 2018 Report

The Craft Brew Alliance issued its Q4 and overall 2018 financials the other day. There's good news and bad news if you absorb the full report. Mostly, though, the numbers paint a fairly positive picture of the CBA's position moving forward.

The bad news in the report, which I shall get to, apparently cooled investor interest in the CBA. Its stock price opened the week at over $17 and closed Friday just above $15. Investors may be missing the boat. Because there's a chance the CBA will be gobbled up in its entirety by Anheuser-Busch at $24.50 per share by next August.

Much of the CBA's good news relates to Kona, which grew 8 percent for the year, 11 percent during Q4. There's a bit of bad news associated with that growth, which is that Kona made up 63 percent of the CBA's total shipments. It's a little scary to be so dependent on one brand, although Kona is thus far proving itself to be immune from the fragmenting, flattening craft market.

The bad news involves the CBA's problem child brands, Widmer and Redhook. The former declined 20 percent, from 123,300 to 98,700 barrels. The latter lost 24 percent, from 94,200 to 71,200 barrels. Imploding sales of Widmer Hef and Redhook Longhammer IPA and ESB were identified as the primary reason for the decline. The two legacy brands, once strong growth engines, are losing the competitive battle in a market increasingly driven by smaller local breweries.

A few juicy tidbits from the report:
  • Despite the continued success of Kona, total CBA shipments, including beer produced under contract at its facilities, declined by 700 barrels, to 747,600 barrels in 2018 versus 2017. Nonetheless, net dollar sales increased 1.3 percent, to $182.2 million, the result of stronger pricing.
  • Total net sales were $206.2 million, a 1 percent decrease from 2017, primarily due to a $3.4 million shortfall in contract brewing fees received from Pabst in 2017 that did not recur in 2018. The decrease also reflects lower 2018 pub sales, mainly due to the absence of the Woodinville pub, which was closed at the end of 2017.
  • As part of its agreement with AB, the CBA can brew up to 300,000 barrels a year at AB's plant in Fort Collins, Colorado at a net savings of $10 per barrel. They evidently came closer to realizing the $3 million in annual savings that arrangement could have brought in 2018.
  • Partially as a result of production shifted to Fort Collins and other AB factories, capacity utilization at CBA facilities declined to 57 percent over the last two years. That's a lot of underutilized tank space and it happened despite the fact that Goose Island beer and Virtue Cider is being produced by the CBA in Portland and Portsmouth.
  • Like its parent-apparent, the CBA is fixated on cost cutting and improving gross margins.Through strong revenue and rabid management, it delivered a 2.6 percent increase in total revenue per barrel, which led to a 5.6 percent improvement in beer gross profit and record full-year beer gross margin of 36.8 percent.
  • Finally, shipments of the Omission, Square Mile Cider, Appalachian Mountain Brewing, Cisco Brewers, and Wynwood Brewing families grew by a combined 4,700 barrels to 93,200 barrels. That portion of the CBA’s portfolio now accounts for some 13 percent of total shipments.
What the CBA has effectively done by leveraging its arrangement with AB and aggressively tightening up underperforming aspects of its business is improve its position for the future, regardless of whether it becomes a fully-owned subsidiary of Anheuser-Busch. Investors, for the moment, appear to be too fixated on the bad news in the 2018 report to see that the prospects of a buyout at $24.50/share remain quite strong.

CEO Andy Thomas set an aggressive tone in comments made during the conference call, reminding shareholders that the CBA position is strong even if the possible takeover by AB doesn't happen. In the absence of a qualifying offer, he noted that the CBA will be entitled to a $20 million international incentive payment and AB could not terminate any part of the current agreement.

Further, Thomas went on, if AB fails to make a qualifying offer, CBA could continue to operate independently or come under the control of another entity. In either case, AB would be required to honor all agreements, including payment of the $20 million international incentive, continuation of the master distribution agreement at $0.25 a case, continuation of the international distribution agreement and fulfillment of the contract brewing agreement.

It's difficult to fathom the extent to which the current contract, signed in 2016, favors the CBA. What were the folks at AB smoking when they signed a deal that would allow the CBA to be taken over by another entity while Anheuser-Busch is forced to fulfill the terms of the agreement? The likely answer is the people who negotiated the agreement believed the CBA would be purchased during its term. There can be no other explanation.

Of course, the craft beer landscape has changed dramatically since 2016. Competition is fierce and most large craft breweries are suffering. Yet Anheuser-Busch recently reported that the High End (craft line) is its top growth engine, accounting for 30 percent of the company’s worldwide revenue growth and 10 percent of its total revenue in 2018. Why would AB want or need the CBA?

The answer is Kona, which continues to thrive in a flat overall market. Keep in mind that Kona beers, unlike some of craft's more nuanced offerings, can be brewed virtually anywhere, even in a factory brewery. Acquiring Kona, of which AB already owns nearly a third, would cost around $300 million. That's pocket change for a brand that has apparently unlimited potential.

Flies in the ointment are the CBA's declining brands, Widmer and Redhook. Anheuser-Busch, should it make a qualifying offer, will have no interest in salvaging those brands. They might be killed or sold in a buyout. In fact, you have to wonder what would become of CBA properties in Portland and Portsmouth. Those breweries, not as big or efficient as AB's giant factories, might well be closed and sold in the wake of a buyout to recoup some of the investment in Kona.

Inquiring minds keep asking what's so special about Kona. In my mind, there's nothing particularly special about any of the Kona beers. But Kona is a lifestyle brand with a strong connection to a place consumers identify with. It hardly matters that Kona beers have been brewed in Portland and elsewhere on the mainland for years. The brand is Hawaiian.

Honestly, there's a lot not to like about the CBA, an organization whose leaders appear to be fixated on numbers. This company ceased being about craft beer long ago. By cutting costs and leveraging their agreement with Anheuser-Busch to the hilt, executives have positioned the CBA to be bought lock, stock and barrel. The chances of that happening look to be better than 50/50 from here.

Then the fun begins.