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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.


  1. I do feel the need to point out one thing that wasn't mentioned regarding The Commons, as personal as it is. Since moving into the larger space Mike Wright and his wife divorced. From what I've heard, that had a pretty big impact on The Commons. I don't know details and no one but Mike and his ex-wife need to be privy to those details but it should be mentioned that the split had an impact on the business.

    1. True, of course. I acknowledged that aspect of the situation there in the earlier piece on The Commons, posted a while back.


Keep it civil, please.