expr:class='"loading" + data:blog.mobileClass'>

Tuesday, November 28, 2017

Orchestra Taps into Craft Beer Biz Blind Spots

It's no secret that the rapid growth spiral of the past 10 years has created new challenges in the world of craft beer. Once upon a time, it was relatively easy to enter this industry. You didn't have to be great to succeed because there wasn't much competition. Not rocket science.

Brad Windecker
Today, the equation has flipped. The rising brewery count means craft breweries are often competing with each other in a variety of ways. The incursion of big beer, discussed here on many occasions, is squeezing independent craft brewers out of revenue streams that were once robust.

The result of that evolution is that breweries and brewpubs need to be better organized and managed. Places that wing it and hope for the best are going to experience tough sledding. The current scenario demands reliable systems that can help manage all aspects of the enterprise.

Enter Orchestra Software, a Beaverton company that develops software designed for the needs of the craft beer and craft distilling industries. Orchestra, the brainchild of CEO Brad Windecker, was established in 2008 and has more than 300 clients, including many in Oregon. The company has 50-plus employees and is growing rapidly.

Along with a short list of local beer media, I recently attended a portion of Orchestrate 2017, the company's annual user conference. Some 500 attendees descended on Portland to learn more about Orchestra's software and to get a peek at what they have in the development pipeline.

Orchestra's principal driving theme, shared by Windecker in a conversation with beer media, is that breweries are businesses. Seriously. It's hard to believe, but the concept is often lost on brewers. Indeed, I can think of more than a few breweries that operate without any apparent semblance of a business clue.

"The reality is that we've been through a period in which it was very easy to enter the industry and succeed," Windecker says. "Not everyone who did so had good business sense. With growth rates flattening and competition stiffer, it's getting tougher. If you don't have systems to help run your business efficiently, you're at a big disadvantage."

He's right, of course. High growth has created instability. Windecker reckons that perhaps 25 percent of U.S. craft breweries are not professionally managed. With the market tightening, there figures to be a shakeout and a lot of used equipment on the market in coming years as poorly run breweries fall by the wayside. Not a great scenario.

To help, Orchestra has solutions for large and small brewing entities. It's core customer is a growing craft brewery or distillery in the US that is best practice and technology driven. No surprise. Because integrating management software into your business requires some level of interest in best practices and technology.

"We have customers who aren’t growing," says Windecker. "We also have customers in Scotland and elsewhere in the world. And some of our customers aren’t best practice or particularly tech driven. Those folks typically use fewer of our tools than clients who are more fully immersed in technology and best practices."

What Orchestra provides is an all-in-one management solution that helps breweries make the most out of their profit center, which is typically their pub. The majority of their clients are small. Besides running their breweries efficiently, they need support for a broad range of traditional and non-traditional activities (see graphic).

"We’re always asking customers what problems they have that we aren’t solving," Windecker says. "Once we get past the basics, the first thing we hear is retail. The generic systems out there haven't been very good. We’ve been working on addressing that challenge for several years. We're also looking at ways to build social media and related marketing functions into our platform."

A related part of the challenge is meeting the needs of customers who typically have little or no experience with bulky, complex software. Historically, that meant onsite implementation and ongoing training and support. But that's not where the company is headed.

"We have to innovate to work with a generation of brewers and brewery owners who are familiar with mobile apps," says Windecker.  "Many of these people have never seen software like ours. We have to make our platform more user-friendly, and we're doing that by moving to apps that can be run on phones, tablets or computers. We'll do a lot less training in the future."

Up until now, there's been very little out there on how to run the business of a brewery. When Windecker speaks at a PSU accounting course for craft beer, he sees a room full of students yearning to learn more about the business aspects of the industry.

"It's funny," he says."Outside that classroom, it’s hard to learn about the business. There’s a lot of information on the science of making beer and almost nothing on how to actually run a beer-related business. Orchestra is working to provide technology-based solutions that help these folks run their businesses effectively."

If you think about the trajectory of craft beer, Orchestra makes perfect sense. We once had an industry comprised of a relatively small number of boutique businesses loosely competing for customers. Today, we have thousands of breweries competing with one another on many levels. Being good at business is going to be a key to survival in this scenario.

Which means the potential upside for Orchestra Software is huge.

Monday, November 20, 2017

The Fate of Hedge House and More

Yesterday's news that Lompoc's Hedge House in Southeast Portland is closing comes on the heels of last week's featured stories regarding the overnight closure of Widmer's Gasthaus and the final day of operation at The Commons. The last day at the Hedge House will be Nov. 28.

The announcement was met with shock. Maybe it shouldn't have been. We've been cruising along in unlimited craft beer growth mode, watching countless places open and assuming there was room for everyone. Market saturation is today's reality. And there is a price.

During last week's media preview of Lompoc's holiday beers, with the Widmer news fresh, I asked owner Jerry Fechter about the challenges presented by growing competition and saturation in the restaurant and pub business.

The reality, he said, is that all the Lompoc pubs have been affected by the seemingly endless number of similar businesses that have opened around the city. There's no longer any limit on how many places can open in a given area. He made no mention of impending closures, but confided that the situation had him frustrated and worried about the future.

As we were reminded in the press release announcing its closure, the Hedge House resided in a quaint and underdeveloped location for many years after it opened in 2003. It wasn't fancy and it was beloved by many precisely because it was a simple place where you could relax with your friends, your family or your dog.

In fact, the Hedge House surely benefited by being in a sort of rundown area where rents were cheap. That was a common theme in Portland craft beer for several decades. Southeast Portland and what is now the Pearl District were once littered with vacant warehouses and busted up storefronts perfect for breweries and related businesses. It's flipped now, of course.

As the area around the Hedge House was flooded by a virtual tsunami of trendy bars, restaurants and related establishments, sales slowed and its prospects dimmed. Even if it had been idyllic in terms of service, food and beer, the Hedge House was an old school place ill-prepared to compete with the barrage of fresh new choices.

The situation we face is odd. After several years of double-digit growth, craft beer will likely see low single digit growth for 2017. Yet new breweries, pubs and taprooms continue to open. There isn't room for everyone. Established places like the Hedge House appear to be at greater risk than shiny new joints that are more marketable to the young crowd that spins craft beer's disco ball.

There's no way to change course. The market will sort out which places will survive and which ones won't. I think older, established spots are most vulnerable, though poorly run newbies aren't immune to market forces by any means.

Monday, November 13, 2017

An Ugly Week for Craft Beer

It's been a rough week for Portland-area craft beer fans. We learned a few days ago that Amnesia Brewing will close in a few weeks. On Saturday, The Commons greeted patrons for the last time on Southeast Belmont. Today, Widmer announced big changes at its Gasthaus Pub.

These are local signs that the industry is slowing down, which has been widely reported in numerous places this year. Double-digit growth that gave breweries the confidence to invest in new locations and expanded brewing capacities is flattening. Alarms are going off.

I first visited Amnesia years ago when it was on Mississippi Avenue. This was pre-trendy Mississippi and Amnesia was a destination. The pub was grubby and the food list dank, but the beer and maybe the patio was good enough to draw regular crowds.

For reasons of their own, Amnesia's owners decided to let go of the space on Mississippi and move to Washougal in 2014.. My recollection is they wanted a larger production space so they could make more beer, much of it to be sold in packaged form. They also wanted out of rent increases.

It didn't pan out. The Washougal pub was a work in progress. I visited a couple of times and found the food and service sketchy. In theory, the pub should have been able to attract a following in that underserved area. That apparently never happened.

If they truly hoped to make a living selling packaged beer in Vancouver and across the river in Portland, they were delusional. Amnesia's beers were decent enough. But they were lost in the flood of packaged beer that found its way onto area shelves in recent years. The market for their beer collapsed.

Earlier this year, The New School reported that Amnesia was for sale and looking for contract brewing partners. They had unused capacity. Many were shocked. Amnesia's owners and others denied the story. But the evidence was clear. They were just hoping to buy some time.

It's tough to know all that went into this failure. Amnesia, even when it was on this side of the river, was not a particularly well-run operation. As it struggled in Washougal, Stormbreaker moved into the former Amnesia space on Mississippi and built a solid following of its own. Sometimes, a prime location is the most important thing a business, any business, can have.

The Commons
A flock of local fans descended on The Commons as it's final day approached. Looking at social media posts, it appears the place was packed for much of the afternoon and evening on Saturday. Then, all the laughter and fun came to an end, at least for now.

The story has a lot in common with what happened at Amnesia. Except that The Commons always made excellent, interesting beers. They developed a strong following with those beers, but it was never a mainstream following. The beers appealed to a niche audience.

Nonetheless, they reached the point where they could not keep up with the demand for their beer from their leased space on Southeast Stephens. Owner Mike Wright concluded that a larger production brewery and pub space were the keys to continued growth.

He subsequently bought a building on Southeast Belmont and spent a boatload of money installing a larger production system. A significantly bigger pub space was part of the bargain and patrons initially reveled in the openness of the new place.

Of course, it didn't work out. Demand for The Commons' niche beers in distribution flattened. The new pub space, not as warm or intimate as the place on Stephens, failed to bring in the additional business that would have justified the investment. Construction in the area around in the area around the pub almost certainly contributed to that.

Wright has said the demise of The Commons was the result of cash flow problems. Indeed. Like many in the industry, he believed wild growth would continue. It was a mirage. He incurred a pile of debt to buy and renovate a building. The debt led to cash flow problems and collapse of the business.

Modern Times is leasing the vacated space. That's good news for Wright, who will now collect rent. The Modern Times approach will be substantially different on several counts. For his part, Wright will likely restart The Commons on a smaller scale down the road. We shall see.

The announcement that Widmer is closing its restaurant and transitioning that space to a tasting room with light snacks hit like a ton of bricks. Heads were spinning. The impact likely would have been greater if the announcement hadn't been made on dead news cycle Sunday.

The plan is to turn the former pub space into a place where Widmer can show off it's innovation brewing program. Strange, eh? As they've pursued massive national distribution of the CBA brands via the Anheuser-Busch network, they've been troubled by their inability to attract attention to the speciality beers they make. Very frustrating.

There's more, of course. For a while now, the Widmer and Redhook brands have been in decline pretty much everywhere. As discussed here many times, Kona is the only CBA brand that's growing, reaching near-double digit growth in the US according to the company's Q3 earnings report.

That report also includes news that overall net sales were up just 3 percent; but gross profits were up 14 percent. How so? Well, you either cut the cost of making your beer or you sell it at a higher price. Care to guess which is true in this case?

The answer is that the CBA has expanded its brewing footprint at AB factory breweries, thus reducing cost per barrel and increasing profit per barrel. It's an ingenious business move, though one that might not sit particularly well with dedicated beer fans if they knew or cared about it.

Also embedded in the Q3 report is news that increases in net sales and gross profits were partly offset by decreases in brewpub sales and lower pub gross margin. In fact, the Gasthaus pub had been an awkward drag on profitability for quite some time. But not any more.

Closing the pub and re-purposing the space will cost roughly 65 jobs. Clearing those salaries and benefit packages from the CBA balance sheet will warm corporate profitability. The idea that they're going to reinvent the Widmer brand by showcasing a few specialty beers is largely a ruse. The geeky crowd that chases specialty beers declared Widmer irrelevant long ago. But that hardly matters. The CBA is profitable and wants to be more so. The pub was an obstacle and had to go.

You may fairly wonder why the CBA, which saw its gross margin expand to nearly 35 percent in Q3 (per report), needed to boost profits further. This is a company that, despite some challenges, expects to deliver in the neighborhood of 5 percent revenue growth this year. What's the deal?

The answer may lie in the contractual agreement the CBA has with Anheuser-Busch. The CBA brass wants to sell to AB at the optimum share price. Between now and next August, the minimum offer price is $23.25. The CBA's stock price closed at nearly $20 per share last Friday, well short of the required offer price. The brass wants (needs) to get closer to the minimum offer price as quickly as possible because they know $24.50, the minimum offer price after August 2018, is unrealistic given unstable market conditions. That's why they unloaded the pub now.

So the people whose jobs went away in the downsizing of the pub were sacrificed so the CBA can sell at a higher price, which will benefit shareholders and line the pockets of folks in high level positions within the company. Nothing personal, if you lost your job. Just business.

Big Picture
As bad as this news is, we're probably going to get more of it in coming weeks and months. The crazy growth of the last few years has resulted in a saturated market that is increasingly unstable. There's just too much beer out there.

The failures we see with Amnesia and The Commons are directly related to the situation we have with debt, unused capacity and flattening sales volumes. What happened at Widmer is a little different because it's largely related to cutting costs and increasing profits quickly.

In the overall scheme of things, the news points to the fact that craft beer has become a big, heartless and volatile business. Fasten your seat belts. Craft's bubble is bursting and things are going to get worse before they get better.

Friday, November 3, 2017

OBF Grapples with Attendance Drop, Uncertainty

One of the bigger surprises on last week's beer news radar screen was news that attendance at the Oregon Brewers Festival declined dramatically in 2017. I guess a lot of us probably assumed attendance was declining for the last few years. But the actual number shocked me.

For many years, OBF organizers have been saying the event attracts 80,000 fans to Waterfront Park. That claim was repeated in the promotional materials for this year's event. Then we learned that 2017 attendance was 49,000, an astonishing number.

That information came to light at a Tuesday night briefing at Cascade Barrel House. Jeff Dense, professor of political science and craft beer studies at Eastern Oregon University, gave his annual talk on the OBF's economic impact and other findings.

In case you're wondering and unaware, Dense has been studying the economic impact of OBF since 2011. He and a team of students completed more than 900 on-site interviews this year. As in past years, he used that information, along with data provided by event organizers, to build conclusions.

Some of the findings are intriguing. Nearly half of attendees were from out-of-town this year. Almost the same percentage were attending for the first time. Women accounted for 44 percent of festival attendance. But the drop in attendance is a sore spot, in part because it contributed to an 18 percent decline in economic impact, according to Dense.

Art Larrance, co-founder and director of OBF, stepped forward and said hot weather may have hurt attendance. He also said the sheer number of summer festivals is creating serious competition for the event that launched the festival concept in Oregon 30 years ago. When it started, OBF was the only show in town. Now, beer festivals are an everyday thing, he said.

In response to declining attendance, Larrance said they will eliminate the Wednesday session and reduce the total number of beers to about 80. They also expect to fold up the Specialty Tent, occasionally known as the Buzz Tent or International Tent, and go to a smaller 12 oz mug (four tokens) and 3 oz taster (one token). Oh, and they'll offer cider and wine for the first time ever.

There's a lot going on here, so let me dive into the detail. I spoke to Larrance by phone to get additional perspective on some of these issues.

Attendance is a complicated issue, Larrance said. Even he doesn't fully understand the 49,000 estimate. It's a bit of a mess, actually. The 80,000 attendees organizers have been touting was based on wristbands. But one wristband isn't the same as one attendee because some people visit the festival multiple times. They handed out 70,000 wristbands this year. The 49,000 is an estimate of "unique visitors" based on information collected in the surveys and an equation.

In fact, the attendance numbers aren't as shocking as they first appear. Look at the graphic below, provided by OBF. Of the three years shown, only 2016 exceeded the standard estimate. This year was definitely the low ebb, but it isn't as if they're in multi-year freefall if we go by wristbands. And that's what we have to look at if we want to make a fair comparison.

Hot weather and beer event saturation. Sure it was hot. But we've had heat at this event many times and never heard about draconian attendance declines. Event saturation is certainly an issue. There are beer events happening year-round in this city. The pace intensifies during the summer. I suspect the combination of heat and event fatigue probably kept some locals away. Still, the dropoff isn't a disaster if you look at year-to-year wristbands.

It's something no one wants to talk about in detail, but declining revenue, not attendance, is the true reason behind the panic and push for change. They're selling fewer tokens and less beer, while expenses are staying the same or rising. Larrance talked about the need to cut expenses, which are substantial when you factor in park rental, security, police, etc.

Some of the revenue loss is their own fault. The 2017 glass had a 4 oz taste line, reportedly a mistake. It had been a 3 oz line in recent years. A 2017 taste, for one token, was a great deal for attendees and probably discouraged folks from laying out five tokens on a full mug, 14 ounces this year. In recent years, when tastes were smaller, there was more incentive for folks to fill their 12 oz mugs for four tokens, a boon for organizers. As noted, they'll go back to the smaller glass and taster size next year, thus encouraging more people to pony up four tokens for full glasses of beer. Shazam!

Kicking Wednesday to the curb is an odd idea. Look at the graphic again. Wednesday attendance, which funnels out of the brunch, has been pretty steady. Sunday, on the other hand, is a consistent loser. It looks like Sunday is the day that needs to go. There must be more at work. Perhaps Wednesday, which is heavy on industry and media attendance, is a money pit. Of course.

The Specialty Tent is an easy out. It's mainly an attraction for geeks and it occupied a shady area that might be better-used for seating in hot weather. Since it was comfortable, Larrance said traffic was static and people who hung out there didn't buy all that much beer. Which means it was part of the revenue hit. Losing it isn't a huge deal, except to the geek crowd.

They've offered more than 90 beers under the big tents in recent years. Cutting it to 80 sounds worse than it likely is. Contrary to some claims, OBF organizers actually spend considerable time curating the list of what pours. They actually turn a lot of applications down. If there's a flaw in that process, it may be that they're too loyal to longstanding friends and supporters.

Larrance told me they get frequent requests for gluten-free items. Since there's a lot of good cider and wine in Oregon, he thinks it's reasonable to provide some options outside beer. Bringing in wine and cider will make a few people happy. Will those folks outnumber those who are unhappy about losing the Specialty Tent and Wednesday session? Seems unlikely.

As we talked, Larrance offered up that maybe the OBF has seen its best days. "All events run their course," he said. "With so many choices out there, we can't blame folks who choose to attend other events around town. We're trying to come up with ways to evolve with the times to make this a viable event going forward. It isn't easy."

Indeed, it isn't. The entire face of craft beer has changed since the first OBF in 1988. As I've discussed here before, events and event marketing are driving a lot of what happens in today's industry. I believe an increasing number of modern craft beer fans are looking for a more intimate and personal experience than the OBF provides.

This is much less about the beer than the experience. People enjoy going to smaller events where they can mingle with brewers, brewery owners and others connected to the industry. Check your social media feed for upcoming release parties and tap takeovers. Look how many of those events feature the opportunity to talk with folks who have something to do with the beer.

By comparison, the OBF is impersonal and not at all intimate. The volunteers pouring beer typically know nothing about it and there's rarely anyone around who does. The OBF can and should commit to offering the best possible beer list. But that won't remove the stigma of it being a huge, impersonal drunkfest at a time when more and more folks are looking for something more.

Larrance is thinking outside the box in response to the challenges. He's toying with the idea of bringing in a group of brewers from outside the US and essentially building a mini-fest around them. That's something he tried with brewers from the Netherlands and Japan in recent years, but it sounds like this will be a more serious effort, if it happens. Give him credit for creativity.

I honestly wonder if we're not entering a difficult period for larger, older beer festivals. When I was at GABF in early October, it became clear to me that some of the best action was outside the Convention Center at smaller events. Maybe that's going to happen with OBF. Maybe it will morph into a cluster of smaller events at parks, breweries and pubs around the city.

Craft beer's future is full of intriguing possibilities.