Craft Beer Brewers Taste Success As Team

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BOSTON (TheStreet) -- Craft beer brewers may look like small, easily picked-off minnows to their big-brew competitors, but they're deceptively dangerous when grouped into a school of nearly 1,700.

Cooperation and collaboration among craft beer brewers is perhaps the biggest reason their sector grew 11% by volume and 12% in revenue last year after a 7.2% spike in production and a 10.3% jump in the overall craft beer take in 2009, according to the Brewers Association.

That growth is more impressive in the context of a 1% decline in overall beer sales by volume last year, according to the Treasury Department's Alcohol and Tobacco Tax and Trade Bureau, compounded by a 2.2% loss in 2009. The craft beer brewing industry's biggest players, Anheuser-Busch InBev and MolsonCoors, each saw shipments drop 3% last year as their market share fell by nearly a percentage point apiece. A-B's recent acquisition of the Craft Brewers Alliance's Goose Island Beer Company and television chef Anthony Bourdain's recent accusation that "big beer" threatened to pull ads from the Discovery Channel unless it pulled a documentary series featuring Delaware-based craft brewer Dogfish Head have only further demarcated the disparate fortunes of the two beer sectors.

"There's no question that the 'little guys' are scaring the bejesus out of the macro beer companies right now," says Matt Simpson, also known as "The Beer Sommelier" and editor of TheBeerExpert.com. "I also wouldn't say they're scaring the big producer off; I think it's more akin to waking them up."

While the big boys were sleeping, the biggest of the little guys at Samuel Adams, HardCore Cider and Twisted Tea brewer Boston Beer and 182-year-old Pottsville, Pa.-based regional brewer Yuengling saw shipments improve 11.8% and 6.6%, respectively and inched their market shares up to 1.1% and 1%. Craft beer's entire market share is still only 4.9% by volume compared with A-B and MillerCoors' combined 78.4%, but its upward trajectory is something the big brewers aren't matching.

"We've always been the underdog from when I started brewing in my kitchen to today, when the Sam Adams brand is not yet 1% of the U.S. beer market," says Jim Koch, chairman of Boston Beer, which he co-founded in 1984. "That gives you sort of a different mentality about things, and I think there's a realization among craft brewers that we're are all of us small and we will all be better off if we help each other, because all 1,700 of us make up just 5% of the beer business."

A hand up

Koch and Samuel Adams' sizable portion of that 5% gives Boston Beer more largess and leverage than some of its smaller craft siblings. Since 2005, Boston Beer's output from its Boston, Pennsylvania and Ohio facilities bulged from 1.35 million barrels to nearly 2.26 million last year while its share price swelled from $26 to nearly $100 in that same span. Even before it became a company of nearly 780 employees, however, Boston Beer tried to help other craft brewers through its annual LongShot brewing competition. Since that program started in 1995, it's spawned craft brewers in 1996 winner Bob Gordash's Greenville, S.C.-based Holy Mackerel Beers and 2006 winner Don Oliver's Turlock, Calif.-based Dust Bowl Brewing.

When weather in Europe and reduced production in the Pacific Northwest endangered the supply of hops -- those sweet flowers that give beers much of their flavor and just about all of their aroma -- Koch and Sam Adams stepped in to lend a hand by giving away 40,000 pounds of its surplus hops to 200 small brewers. Koch says the small brewers could have saved themselves some trouble by contracting out their production to hops growers as his company does instead of buying hops on the "spot" market, but that going a different way shouldn't allow larger competitors such as Samuel Adams to crush their business.

"The normal reaction is 'Great, this is a chance to put our competitors out of business,'" Koch says. "My attitude is that our real competitors are not our fellow craft brewers, but ignorance and apathy -- people who don't know about beer and don't care about beer -- and if we craft brewers as an industry can make people more knowledgeable about beer and more interested in drinking good beer, we're all going to grow."

Yuengling hasn't been brewed in a kitchen during anyone's lifetime but still finds itself a willing -- if, at first, unwelcome -- member of the craft brewing community. Yuengling Chief Operating Officer Dave Casinelli joined the company in 1990, five years after owner Dick Yuengling Jr. took control. At the time, Yuengling was cranking out 40,000 to 45,000 cases in its original brewery in Pottsville and not straying too far from its home base in Schuylkill County. Once it hooked on with a wholesaler in Philadelphia and got restaurant chains such as Ruby Tuesday and Applebee's to give them tap space, however, Yuengling saw demand skyrocket in Pennsylvania, New Jersey and Delaware and demand increase to nearly 3.5 million cases. The brewer initially pulled back from broader markets but, after opening two breweries in Mill Creek, Pa., and Tampa, Fla., in the late 1990s and early 2000s, saw shipments soar from 1.35 million barrels in 2005 to 2.16 million in 13 states last year.

"If there's one thing I've worked hard try to do, it's to get the craft guys who look at Yuengling and its success and get them to see that we were one of them not long ago," Casinelli says. "We're still nothing more than a big regional brewery, but Dick Yuengling is a throwback to the old regional brewers and the brewing families who cares about the little guys."

Yuengling has made a point of sharing the wealth with some of its counterparts in the state industry group Brewers of Pennsylvania -- which helps regional and craft brewers throughout the state address logistical and political obstacles to their business. It has given such brewers as Philadelphia-based Yards and Wilkes-Barre-based Lion Brewery access to its labs and has made production capacity and parts available to its fellow brewers.

"If the Lion Brewery or the (180-year-old St. Marys, Pa.-based) Straub Brewery has a problem, breaks down or needs a part or equipment, we're always there to help those guys," Casinelli says. "We don't see them as competition, we see them as community brewers like us."

Peers in production

Even on the brewery-saturated West Coast, where Symphony IRI Group says craft and import beer share is as much as 56% (including 25.5% craft beer share in Seattle and 30% craft share in Portland, Ore.), cooperation is key to the craft sector's success. Sierra Nevada in Chico, Calif. -- the nation's third-largest craft brewer after its production jumped from 613,000 barrels in 2005 to 724,000 two years ago -- produced 45 brands last year after not altering its lineup between 1992 and 2009. That growth helped it start growing its own hops -- starting with a half-acre in 2003 and expanding to nine acres in 2009 -- and producing its own energy through a solar array it began building in 2005 and biodiesel-fed fuel cells that generate 85% to 100% of the brewery's power on site. Instead of squirreling all of those resources away, however, founder and owner Ken Grossman has encouraged other breweries to come tour the site, take notes and even leave with some of Sierra Nevada's innovations.

"As far as ingredients, equipment and lab analysis, that's something we have over other craft brewers," says Sierra Nevada spokesman Bill Manley. "We have a pretty sophisticated lab, so we run a lot of lab analysis for other, smaller craft brewers just as a favor. Even our proprietary research on things like hop flavor and bottle cap liners, for example, go into white papers that are available for everybody."

That cooperation has nearly as much impact on Sierra Nevada as maintaining a private hops field for research and development and introducing varieties like Kellerweiss and Torpedo IPA that reduce its popular pale ale's share of production from nearly 90% to little more than 70%. Production capacity, distribution and innovation are just some of a big brewer's worries; bringing craft beer into the marketplace is as much about politics as it is about presentation.

Politics bubble up

"We are members of the California Small Brewers Association and have a lot of contact with people who are working to change not only California law, but federal law to make a better business environment for craft brewing," Manley says. "There are a lot of small things like municipal nickel-a-drink taxes that can affect the beer industry as a whole and add dollars to the price of a six pack."

After facing a flurry of legislation aimed squarely at their businesses, craft brewers have determined it's in their best interest to protect their special interest. In Massachusetts, Boston Beer joined smaller brewers including Ipswich-based Ipswich Brewing, Southampton's Opa-Opa and the rest of the Massachusetts Brewer's Guild in a bid to let small brewers switch wholesalers to better promote their beer -- amending a law on the books since 1971, when the state had only one local brewery, compared with the 40 it has today. That same guild was influential in getting Sens. John Kerry, D-Mass., and Mike Crapo, R-Idaho, to craft legislation that, if enacted, would reduce excise tax rates on brewers producing 6 million barrels or less.

The House has offered up a similar bill, with the California Small Brewers Association and the Brewers of Pennsylvania's influence evident from the inclusion of co-signers including Reps. Jim Gerlach, R-Pa., and Duncan Hunter, R-Calif. Bill Covaleski, co-founder and co-president of Downingtown, Pa.-based Victory Brewing and president of the Brewers of Pennsylvania, has spent the past 15 years growing his brewery from a small operation trying to sell itself out of a brewpub to one that increased its maximum capacity to 100,000 barrels just last year. That has given him a lot more interest in legislation that affects not only him and his fellow craft brewers, but the 185 employees dependent on their jobs at his brewery.

"We're kind of in a bright, shining moment because we're a locally based, American manufacturer with jobs, so we're a lot better able to get the attention of legislators than we were a few years ago," Covaleski says. "Conditions are still pretty good for brewers to be respected as employers."

The new economy

It's also making disparate brewers more respected as colleagues. Yuengling's Casinelli remembers his brand being "ostracized" from craft beer events such as Philly Beer Week as craft brewers formed their own subculture and looked at Yuengling "like we were Anheuser-Busch, Miller or Coors." Because many craft brewers went into business at the same time and, as Covaleski says, "we envied the big guys to some extent because of what they had accomplished and they just sort of mocked us because we were never going to amount to anything," there was a greater sense of kinship among the newcomers.

"We helped one another when somebody's yeast died, we sold used equipment to one another, we transferred each other's beer to beer festivals and helped each other out at beer festivals, so it was like a bunch of kids who grew up together and were just happy to do what they did, which is make beer," Covaleski says. "I think the camaraderie on the craft level cause the large brewers to take a different look at how they might play with their brethren."

In reality, mutual interests helped bring regional brewers into the craft fold and created an alliance where Covaleski says there were once two noncommunicative sides "from seemingly different worlds." Two years ago, a bill moving through the Pennsylvania legislature that threatened to take away small brewers' right to self-distribution helped bring those two sides together.

"In December 2009, I got a call from Dave Casinelli, who I never spoke with before, and he left a message saying 'I have something I think you may or may not know about that I'd like to share with you, give me a call,'" Covaleski says. "It was this House Bill 291 here in Pennsylvania that I hadn't been paying attention to at all, and he was reaching down to say 'I don't know if you read this, but it could be significant to you.'"

With such legislation now going national with the help of the Community Alcohol Regulatory Effectiveness act, craft and regional brewers are fighting not only for the growth of the sector, but for the closet economy craft beer has become. Craft brewing accounts for more than 100,000 jobs in the U.S., according to the Brewers Association, but ancillary benefits broaden that a bit. Yuengling's Casinelli says that his brewery's success brings more than 50,000 visitors a year into Pottsville for tours of Yuengling's original facilities. That visitor base is more than triple Pottsville's population and is a boon for shops, restaurants and other area businesses.

Paul Gatza, director of the Brewers Association, says that with more than 1,700 breweries operating in the U.S. -- the most since 1905 -- the majority of Americans live within 10 miles of a brewery. That gives the breweries a sphere of influence that expands from the workers at the facility to the farmers that Koch and Casinelli say have come to their Pottsville and Boston facilities to pick up trailer loads of Yuengling and Boston Beer spent grain (and the 70% of its remaining food value) to feed their slightly tipsy dairy cattle. Craft beer site RateBeer's owner Joseph Tucker says his local Whole Foods in Sonoma County, Calif., uses Russian River Brewing spent grain to make bread.

"The basic economic benefit of the local brewer is that profits stay local," Tucker says. "Portions aren't sent to multinational headquarters located on another continent."

In Boston Beer's case, that profit's benefit could extend well beyond his local bases in Massachusetts, Pennsylvania and Ohio. In cooperation with microloan provider Accion USA, the brewer launched the "Samuel Adams Brewing the American Dream" microfinance program in its brewing markets in 2008 and just expanded them nationwide this year. Already among its success stories are Voltage in Cambridge, Mass., which started with a $2,000 loan to buy an espresso machine for a catering business that grew into an eight-employee coffehouse and art gallery near the Massachusetts Institute of Technology. While the program has also helped start and grow a Venezuelan restaurant in Astoria, N.Y., Koch says he'd really like to see it produce the next Sam Adams -- even if that beer takes 20 years to succeed just like his did.

"That's what I would envision for the craft brewing component of Brewing the American Dream: Somebody who has a small brewery but, with a $10,000 loan, can buy a fermenter and some kegs that will enable them to grow their business 50%," Koch says. "Hopefully they'll do that, pay the loan back and we can give them a bigger loan."

Giant temptations
Patience can be a problem, however. Even big craft brewers acknowledge there's often a small window for success. The Craft Brewers Alliance and its Red Hook, Widmer and Kona breweries came about largely because of a distribution deal that gave Anheuser-Busch InBev part ownership. As Goose Island discovered, the price of that big distribution can be a buyout of the brewery. Seattle Pyramid Breweries, meanwhile, was bought by Vermont-based Magic Hat, which was then bought by private equity firm North American Breweries -- which also owns Rochester, N.Y.-based Gennessee and Dundee brewing companies and rights to U.S. production of Labatt's. Former executives of Campari Group's Skyy spirits, meanwhile, bought San Francisco steam beer mainstay Anchor Brewing last year with promises to boost production and increase distribution. Koch cautions that such moves can increase sales, but change the spirit of the brewer until "it becomes just a business."

"There are two ways to get that kind of distribution range: One is to earn it year by year, which can take decades, and another is to sell out and get it automatically," Koch says. "Sometimes it can be very attractive to sell out and get millions of dollars."

For those who remain independent, however, the pint of craft brew is more than half full. Along with increased U.S. sales, craft beers are seeing a change that a precious few American industries can boast of -- increasing exports. The amount of American craft beer sold overseas increased 28% by volume, according to the Brewers Association, with demand in some regions increasing 90%. While that may draw even more players into the craft mix, veterans such as Casinelli cautions that not every brewer's strategy will work for someone else. When he started at Yuengling "there were a lot of people who thought everything we did was wrong." Even within the craft brewing community it seems accepted that if a colleague can offer ingredients, equipment or a hand with formulation or brewing, it doesn't mean they'll necessarily offer great advice.

"Maybe we've built the ivory tower strong enough, but people don't show up on our doorstep asking questions unless they're in the industry," says Victory's Covaleski. "Business success attracts people who think you know something -- boy are they fooled."

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