It’s an unprecedented time for craft beer. The industry continues to gain market share from domestic big beer (nearly 18 percent and rising), and a historic number of craft breweries of all sizes are in operation across the country (more than 4,100 and counting).
By many estimations, the craft-beer industry is nearing an adolescence marked by rapid growth and change—in baseball terms, Upland Brewing Co. President Doug Dayhoff likens it to somewhere around the fourth inning—but is maturing rapidly as more veteran and rookie players alike get in the game. For those who are bullish on beer, it’s a tempting proposition to try to claim some of the action.
Developing and running a brewery, however, is more involved than your average enterprise. As with any business, there are critical junctures in the lifecycle of a brewery that affect how effectively and at what rate it grows. That equation tends to be more complicated, however, given the number of moving pieces involved.
There’s the manufacturing and distribution side—infrastructure, raw materials, the brew system, fermentation space, and packaging, as well as sales and marketing—and, often, a hospitality component in the taproom or restaurant. Not to mention the various licensing, tax codes, insurance, trademarks, and other considerations at both federal and state levels.
Everything needs to line up just so in order for an operation to run smoothly. But stress points can easily arise when aspects of the process are thrown out of balance, most often when growing consumer demand or an owner’s ambition starts to outpace a brewery’s capacity.
“The evolution of a brewery is an extraordinary journey—it’s constantly changing,” says Firestone Walker Cofounder David Walker who, over the past twenty years, has helped shepherd his brewery for a small start-up to the nation’s sixteenth-largest craft brewery.
“I think that you go through more chapters taking a brewery from a notion to 100,000 barrels than you do taking a brewery from 1 million barrels to 10 million barrels,” he says. “It’s like growing up.”
Plan for healthy growth
When crafting an initial business plan, very few would-be brewery owners aspire to be the next New Belgium, Sierra Nevada, or Firestone Walker—at least not within the first few years or even decades of operation. Most have more modest, reasonable, and conservative ambitions, such as brewing enough beer to service a tasting room, town, or region.
“I don’t think any craft brewer was dreaming this big,” Walker says, when reflecting on how far Firestone Walker has come over the past two decades. “Our original business plan was based around, I think, 10,000 barrels of beer and whether we could make it hunt, pay the owners a salary, and be a worthwhile enterprise. We went through a huge learning curve until about year twenty (laughs) and have just sort of been repeating the same riddle.”
Walker and Cofounder Adam Firestone largely bootstrapped the brewery through private financing, growing in leaps and spurts along the way. One of the brewery’s first major tests was when it invested in a new facility in 1999. The owners purchased an existing brewing facility, equipment, and land that were in receivership. The move immediately increased Firestone Walker’s capacity from about 10,000 barrels annually to, at the time, a facility capable of producing 30,000 barrels, but it was also a capital-intensive investment with no immediate return.
The owners successfully navigated the transition through strong leadership, an organized approach, and buy-in on the mission from everyone involved. Most importantly, Walker and Firestone remained true to the tenets of their partnership.
“Quite early on, Adam and I realized that you have to have separate disciplines with a true partnership. If a partnership is a disproportionate one, then it’s very easy for the majority owner to make the decisions,” Walker says. “But when you’ve got a true partnership, it’s a collaborative experience.
“You have trust each other and, within the framework of some guiding principles, go to work. And that’s essentially what we did.”
Firestone Walker built around the framework of its facility, reinventing itself and reinvesting regularly to grow the brewery to where it is today. A key to that steady, sustained growth has been to hold its debt to a very conservative level while always keeping up with production.
“It’s one of the reasons why we’re still in less than 40 percent of the states in America,” Walker says. “But what’s happened to us over the past three or four years is that our growth has been so strong—30 percent plus a year—that our ability to keep up with it very quickly became difficult, which brought us to where we are today.”
Thanks to a recently inked partnership with Duvel Moortgat, Firestone Walker is poised to embark on the next phase in its evolution. Walker says the brewery’s current expansion strategy is still centered on measured conservative growth—although at a much larger scale. The next expansion phase will require at least twice the investment over the next three years as the owners have made in the past twenty, Walker says.
“Building breweries on this scale is extraordinarily capital intensive—I’m not talking about turning the heat up, I’m talking about exponential leaps—which is why we chose to seek a well-connected and strong financial partner,” he says.
“That’s also why you’re seeing some of these acquisitions and mergers [within the industry]. These breweries are at a point where they can’t borrow money from banks, give up equity, or cash out.
“The only way we were going to do it was by essentially what we did with Duvel,” he says. “Obviously that changes the dynamic of the partnership that Adam and I had on our own because now we have another partner in the room. But the thought and structure that went into our partnership worked very well and will continue to do so. I would say the single most important element remains trust.”
Fuel for the engine
Along with a high degree of trust, it takes a strong, financially astute leader to uphold the company’s vision and ensure that it’s consistently executed. And that doesn’t always mean the owner or original founder.
Upland Brewing Co., for example, was founded as a brewpub in late 1988 in Bloomington, Indiana. The business was successful and profitable by its standards, but when frequent patron Doug Dayhoff learned that the owners were looking for an exit strategy, he recognized the growth potential and purchased the brewery in 2006.
“They did a nice job growing it,” says Dayhoff, whose business background includes experience growing small businesses in high-growth, niche industries. “They had a nice brewpub and were doing some packaging, but they realized that they didn’t have the ambition or the capital to grow the business beyond their current model.
“I’ve always found my place at the point of coordination among different disciplines,” Dayhoff says. “That’s why I love the beer business. There’s so much creativity, smarts, and ability within the craft-beer industry. It floors me how this industry has attracted some of the best and brightest people.”
There’s no doubt that the craft-beer sector is filled with extremely bright, motivated, and creative individuals who are passionate about their businesses and innovating within the industry. That high-involvement culture creates a healthy spirit of camaraderie, as well as a healthy amount of competition.
“To succeed, you’ve got to be able to keep reinventing and pushing yourself and your team,” Dayhoff says. “Or else other guys will show up and eat your lunch.”
Dayhoff began by working to build sales and marketing for Upland’s existing portfolio, as well as by increasing capacity as “incrementally and inexpensively as possible,” he says, primarily in fermentation capacity and the size and speed of the bottling line. He soon reached a critical decision point, however, where it became clear that adding capacity to the existing facility was not going to satisfy his long-term ambitions.
“We were trying to get as much blood as we could out of the original stone, but there comes a day when the expense of trying to build a marginal amount of additional capacity doesn’t make sense if you think your business is going to grow dramatically beyond that capacity,” Dayhoff says. “That’s the moment when you have to look at yourself in the mirror and decide, ‘Am I committed for the very long term and to getting larger over time?’”
Dayhoff decided that owning its own facility, rather than leasing, was important to Upland. He broke ground on a new 40,000-square-foot production brewery in 2011, which began operation in 2012. It was a gut-check decision that tested the ability of the business to support itself over time.
“We’re very conservative when it comes to our balance sheet, so we’re almost entirely equity financed, but you don’t earn back the cost of the facility anytime quickly,” Dayhoff says. “It’s a moment, in terms of conflicts as you try to grow, where you’re going from the most capital efficient that you’ll ever be to the least capital efficient you’ll ever be.
“You either have to have investors who are willing to make that sort of investment and be committed to the long term, or you take an awful lot of risk to borrow money to build the facility.”
Want more best-practice advice and instructive examples? Order the complimentary _2016 Brewing Industry Guide _from Craft Beer & Brewing and learn more about how to right-size your brewhouse, how Surly built their brand through taproom design, how the European hops harvest will affect your business, how to grow bigger by getting smaller, how to find success with sours, how to define your sensory process, and much more.
Seeing the forest for the trees
The way forward is rarely easily defined and linear. It will no doubt be fraught with anxieties and uncertainties, false starts, unrealized potential, and other challenges and compromises. Many owners find it difficult to project two steps ahead, much less what ultimately lies at the end of the journey.
“My biggest struggle [in opening a brewery] was going from being a creative-oriented person to having to think about our distribution strategies, or managing employees, making money, and managing banks—all that fun stuff,” says Patrick Rue, founder of The Bruery in Placentia, California.
A former homebrewer, Rue was studying to become a lawyer when he changed course and opened The Bruery in 2008. His high-gravity, flavor-forward beers quickly gained favor with consumers. As a result, he also faced some tough decisions from the outset.
“The very first one was whether or not to build a tasting room,” Rue says. “This was before they were popular, and it was more of a marketing opportunity than a revenue-generating opportunity. We wanted to provide a great experience for our customers and quickly learned that’s where the money is made for small craft brewers.”
Encouraged by the success of the tasting room, Rue decided to invest more heavily in retail, including a retail store at a separate location, a beer bar, a bottle shop, and a beer-and-cheese store.
“I learned the opposite lesson there, which is don’t get in over your head on projects,” Rue says. “It’s easy to have success in one area and think it’s going to translate to success in every area that you endeavor, but that’s not always the case.”
Along with maintaining focus on your core business, ensuring that your product meets or exceeds your standards as you grow is also a primary concern, especially during an event such as incorporating new equipment into your brewhouse or relocating to a new facility.
“That’s always been a concern: How do we grow without sacrificing the flavor or quality of our beer?” says Todd Haug, head brewer at Minnesota-based Surly Brewing Co. “And also, how do you minimize any noticeable differences when you do change your process?”
Haug estimates that some element or another with potential to affect the beer has changed in Surly’s process at least every three to five months over the past decade, and especially as the brewery worked to open its new destination brewery last year.
“I don’t think people realize how often those sorts of things happen—changes like a new malt mill, new fermentors, raw materials, adding a new centrifuge—all those things have the potential to affect your flavor profile immensely,” he says. “Given all those different things, I think we’ve handled it well. With [Founder Omar Ansari’s] support, we’ve never tried to make our beers cheaper or cut corners on anything.”
While it may be tempting to make compromises in the short-term for potential long-term gains, Haug emphasizes that the quality and consistency of your beer is paramount, as is remaining in direct control of your process.
“Some breweries need to grow, but the brewery isn’t ready yet, so they’ll hire a contract brewery to increase capacity, and there’s been some bad results lately with that,” he says. “A lot of contract breweries can make great beer, but they’re still not you making your beer. We’ve had our fair share of issues, too, but at least we have our fingers on it. We know what’s wrong and can react faster and get our processes dialed in quickly.”
Greg Engert, beer director at Bluejacket restaurant, bar, and brewery in Washington, D.C., underscores another primary and profoundly simple maxim that brewer owners should heed—which is to never forget why you got into the business in the first place.
“We don’t just make beers that are quick because we need beer to sell—we opened up the brewery so that we could brew the beers that we wanted to make,” Engert says. “Stick to your flavor game plan and what’s gotten you the name that you have. Don’t adjust your approach just to be able to sell more beer or to get beer to people who are asking for it.
“If you make great beer, people are always going to want it.”