Year-over-year growth in the craft sector may have eased off its double-digit pace in recent years, but craft still represents the biggest gainer in the overall beer category (a fact of which big beer and craft brewers are both very well aware), and many craft brewers continue to enjoy robust demand for their brands. Some skeptical prognosticators say that breweries should do their best to grow to their respective right sizes before the music stops and everyone scrambles to find a seat, but the craft market shows no signs of hitting a ceiling anytime soon. Rather, it seems many breweries are in an enviable position of attempting to forecast production needs and expansion projects in the midst of continually rising demand. A reasonable, consistent, and conservative approach is sound business sense in a mature market marked by smaller but consistent gains, but it’s much trickier to forecast financials, construction projects, and production needs when the sales charts lead nowhere except up, but the future is fuzzy. How can you also hedge against any unexpected dips while still aggressively growing?
Home Court Advantage
Jack Hendler, founder and co-owner of Jack’s Abby Craft Lagers brewery in Framingham, Massachusetts, has navigated a seriously steep growth trajectory since the brewery opened in 2011. Jack’s Abby invested in a new 130,000-square-foot brewery in January 2016 and is among the fastest growing breweries in the country, according to stats collected by the Brewers Association. While its overall growth has been nothing but up, variances within brands have made it tricky to accurately dial in production schedules and volumes and keep everyone supplied without creating a bottleneck.
“We have challenges with day-to-day forecasting,” Hendler says. “If we run out of a brand, it can be a long time before the next batch is ready. But we can usually see it coming and, hopefully, are able to take steps to make changes. We spend a lot of time with our distributors forecasting, planning, and making sure that we’re brewing the right amount of beer so that we don’t have too much if sales slow down short term or vice versa. It’s a critical relationship.”
Their distributor relationships are critical not only for tracking sales and for forecasting, but also in Jack’s Abby’s ability to successfully enter into new markets. The brewery’s distribution strategy hinges on first serving its home market and then slowly growing outward with a few brands at a time, and only as the numbers support it.
Sam Hendler, Jack’s brother, oversees sales and operations, and is also a co-owner in the brewery, along with a third brother, Eric Hendler. Especially during periods of flux and in unproven markets, Sam cautions against thinking that a blitzkrieg approach to growth will result in a lasting presence and sustained support for your brands.
“I think trying to grow as fast and as far as possible, if that’s you’re goal, can result in some really unhealthy decisions for the business,” he says. “There are times in our six years where maybe we were swayed by that, but we feel like growth in our home market is the safest, most sustainable growth we can have.
“If your eyes are open and you’re looking around the world of craft beer right now, there are going to be challenges for people coming down the pipeline,” he says. “In our mind, the best way to be immune to those challenges is to be really, really strong at home.”
Because Jack’s Abby’s sales are so heavily weighted in favor of its home market, keeping track of wholesaler inventory in Massachusetts on a daily basis offers a fairly accurate snapshot of what’s happening with the bigger distribution picture and with demand for individual brands.
“We’ve gotten a lot better about forecasting,” Sam Hendler says. “Things we did by the seat of our pants a year ago are now being done with a lot more structure. It’s not perfect, but I can tell you we’re certainly getting a whole lot better about it.”
And while riding a wave of extreme growth is as exhilarating as it is challenging, the brothers are more focused on the long term and positioning Jack’s Abby to operate efficiently through periods of rapid expansion as well as any unforeseen slow downs.
“Our goal is to become financially stable and make a profit where it’s actually in our bank account versus being spent on every other project we’re doing,” Jack says. “We’re talking about being able to grow at a more reasonable rate versus 100 percent every year, but we’ll see how we’re able to balance that.”
Narrowing the Divide
Denver’s Great Divide Brewing Co. began as essentially a one-man operation in 1994 and has grown steadily for twenty-three years and counting. As one of the country’s original modern craft breweries, Great Divide has seen more peaks and valleys in the market than most. Buoyed largely by the craft boom of recent years, Great Divide embarked on an ambitious, multiphase expansion project a few years ago. The first phase, recently completed, includes a new packaging and warehouse facility with a high-speed, high-capacity canning line. The second phase, which is scheduled for completion in about two years, will add a new, much-larger showplace brewery and tasting room to Great Divide’s assets. Great Divide’s current brewery, near Coors Field in Denver, will remain in operation as a pilot brewery and taproom.
Capital investment at this scale creates a lot of exposure, but Great Divide has learned to mitigate these risks with cautious optimism and a studied approach. It’s one thing to trust your gut, but you’d better be able to back it up.
“When we make gut decisions they’re usually on the right track, but I always run the numbers on it and make sure that they back the decision,” says Bryan Slekes, senior director of finance with Great Divide. “We try to look both short and long term. Obviously long term is a little harder to anticipate, but we do our best to build those models out at least five years.”
And while past trends and data points don’t offer a crystal-clear picture, they at least provide a starting point from which to build a reasonable plan.
“We have to do our best with the historical data we have,” Slekes says. “We all know our businesses as well as anyone, and we know our brands and our employees and how we’re structured, which all helps when trying to anticipate what the future holds. Put all that together, run your numbers, and figure out where they need to be and whether the capital expenditures are justified as a result.”
No matter whether market conditions are bullish or bearish, Great Divide is always looking for ways to keep a close eye on expenses, control costs, and increase sales. When challenges or changes arise, management also strives to be proactive in making corrections.
For example, when sales plateaued in some of Great Divide’s more competitive distribution areas outside of Colorado, the brewery looked at opportunities closer to home to help make up the difference, such as creating a new position in the Denver metro market to focus solely on servicing major off-premise accounts. Efforts such as a “beer of the month” promotion and working with larger retail accounts to drive volume and revenue locally have helped everyone’s bottom line.
The brewery also bolstered support for its own retail business, “which is not as small as it once was,” Slekes says. “A large component of sales comes from both [Great Divide] retail locations and continues to drive foot traffic and revenue.” The brewery launched its Local Knowledge series of taproom-only beers, which are one-off recipes that debut about once a month. Brewed on a pilot system in 7-barrel batches, once they’re gone, they’re gone. “That has generated a lot of excitement,” Slekes says. “People come in to get the beer and stay for more.”
Great Divide has also created enhanced training opportunities for out-of-state sales representatives to continue to improve upon their skills—and to become more of a presence in competitive markets.
“We’ve had to get a little more disciplined over the past couple of years where the sales revenue forecasts weren’t coming to fruition, but our bottom line still remains healthy,” Slekes says. “At the end of the day, we have bank covenants and expectations for EBITDA (earnings before interest, tax, depreciation, and amortization), and that’s really what we need to be focused on. And when we identify a potential gap, we do a fairly good job of finding ways to close that gap.”
A diversified base is another strategy that can help fend against the impact of unexpected shortfalls. While not every brewery is positioned to do so, Denver’s Crooked Stave Artisan Beer Project launched a distribution arm of its business, Crooked Stave Artisans, that represents and distributes a variety of craft-made goods throughout Colorado, including ciders, kombucha, non-alcoholic beverages, and domestic and international craft-beer brands. Since its founding in 2013, owner Chad Yakobson says Crooked Stave’s distribution business now operates roughly on par with the brewery in terms of size, staffing, and operations.
In recent years, Crooked Stave has also introduced clean beers into its portfolio, along with the pure-culture fermented sour beers for which the brewery is known. All of these efforts fall well within Crooked Stave’s mission and Yakobson’s vision for the company, he says, with the added benefit of creating several diverse but interrelated revenue streams.
Similarly, the founders of Jack’s Abby Craft Lagers are capitalizing on the space and resources afforded by its new facility to launch a sister brand, called Springdale, that will focus on barrel-aged beers and sour ales. With thousands of oak barrels in its facility, The Springdale Barrel Room is promoted as the largest barrel room in New England. By creating a distinct brand around Springdale, the Hendler brothers both protect the Jack’s Abby Craft Lagers brand from dilution and from any confusion among consumers while also branching out into new beer styles and establishing a source of income that’s independent from the parent company.
Every circumstance and every brewery is unique in its approach, but the chance of an unexpected change in plans is a constant. By hewing close to the core fundamentals of the business plan, gathering and analyzing past data and trends, taking proactive and often creative measures to shore up any gaps, and exploring ways to diversify product offerings, owners can effectively hedge their bets while still working to sustainably grow their company.