Many thought they were crazy to launch a brewery with saison as their flagship, back in 2010, but for Colorado-based Funkwerks, the old mantra of “do one thing well” is a guiding philosophy. Their narrow focus on Belgian-style beers, compelling brand, and methodical approach to brewing award-winning beer put them on the radar of bigger breweries (including some “macros”) as a potential acquisition target years ago, but the announcement of their recent minority equity sale to Brooklyn Brewery and the marketing partnership that comes with it keeps them within the “craft” fold and firmly in control of their own brewery. We sat down and talked to Cofounder Brad Lincoln about the history behind the investment, and what the future holds.
CBB // From your perspective, what pushed Gordon and you to the point where you started looking for a larger partnership, funds to expand, or the support from someone with additional business expertise to continue growing the brewery?
FW // About two years ago, we started talking about expanding out into other states and the successes and failures we’d had, and it became apparent to us that we always fit really well into distributors’ portfolios because we do different styles of beer that are underrepresented. So they’re always game to have us. But that doesn’t mean that they support us afterward because they have to support their bigger players who are making them more money. But also, part of it is that we weren’t always doing our best to support them, and it became clear that we needed to make some changes in that area. Since that time, we’ve been approached fairly regularly by other breweries and brokers who’ve asked if we’re interested in selling, but the problem with that is that we didn’t really want to get out of brewing or leave the brewery—that didn’t feel right. At the same time, you realize that if they don’t buy you, they’re going to buy your competitor and resource them, so you risk being marginalized even more. There’s been a general industry trend of ABI buying up players, which certainly hasn’t stopped since that time. Acquisitions by ABI and other large globals will most likely continue to grow. Because of that, we started thinking about what we wanted to do and discussed it with many different people. One of those people I discussed it with was [Dave] Duffy of Brooklyn, whom I’ve known for almost as long as the brewery has been open. Another was JB Shireman [of First Beverage Group], who lives here in Fort Collins and whom I’ve known just as long. So we discussed it with Brooklyn, and JB helped us out, and we ran through the potential options that we had.
CBB // You mentioned other players sniffing around. Was there ever a potential for acquisition by a non-craft, big beer suitor?
FW // There’s only so much I can say due to the [nondisclosure] agreements we’ve signed, but there were other people we were seriously talking with, and they were large.
CBB // In that context, why go with a craft brewery such as Brooklyn if there were bigger players who might have brought more resources to the table?
FW // If a brewery outside the definition of craft buys you, are they going to get you, and be able to support you? Sure, they have the resources, but are they going to put them in the right places within your business and trust you? What happens in these situations is that they either boot out the founders, or they keep the founders on and put them in a cage, or the founders just leave because they’re so frustrated. We wanted to make sure that that didn’t happen. You know Gordon and me pretty well—I think you can say that there’s always a possibility of that happening to us, given who we are. So that was a bit of a concern, but Brooklyn gets us. That they’re independent is part of it, but they also like us being independent from them, and that was a big part of it for us, too. We have the best of both worlds — we get very sizable resources, they understand us and can put them in the right areas, and they trust us to know that. That’s huge.
CBB // You’ve told me before that some of the investment will be pushed back into capital expenditures to expand the brewery. What are the immediate goals for Funkwerks now, and what are the more long-term goals that you are looking at?
FW // We envision immediately expanding fermentation capacity within the brewery. We’ll likely invest in a new bottling line to improve our quality and shelf stability across a wider territory. That will take some time. We’re not going to go out and buy a brand-new shiny brewery or anything along those lines. It’s still going to be Funkwerks. Gordon and I always joke about the Funkwerks way, which is usually “what can we do, and how do we do it the best with what we’ve got?” Now, what we’ve got is better than what we had before, and that’s a big plus, but we still feel like that little brewery in the garage … only it’s a bit nicer garage now. From a sales perspective, a lot of people are asking if we’re going to expand into all thirty-eight states of Brooklyn’s footprint, and that is definitely not the plan. I think we’ll be fairly methodical about what we do. Do I see going into another state this year? Yes. Will it be twenty new states? No. Do I expect us to grow in 2018? Yeah, I do. Some of that will be territory. We have to be careful, too—when we have sales reps in these outside states, we’ll see business pick up from that, and we don’t want to bite off more than we can chew. There have been times when we have. We grew 100 percent year over year a few years ago, 70 percent last year. The idea of doing something like that again sounds painful. We want to avoid that. In the short term, we’ll keep on the same path with some better equipment, making sure we have all our ducks in a row. Long term, I’d like to go into more territories, but only where it makes sense, only where our brands translate. I don’t want to pick up territory just for the sake of picking up territory. We still have to be very careful about what we do. It’s just a lot easier for us to do it now than it has been in the past.
CBB // I visited the new-ish 21st Amendment brewery right after they opened up in that former Kelloggs factory in San Leandro. It’s a big, gorgeous facility with a lot of capacity. It has to be a little tempting to think about moving some production, and that has to be on Brooklyn’s mind as well. Is there a scenario where you might do that?
FW // There’s no plan to do it right now, but I could see doing that. I think it makes sense for us to grow up where we are right now, and we don’t have any plans to do any contracting or anything along those lines, but I can envision doing that in the future. I think that a tight supply chain, especially on the East or West Coast, really starts to make some sense. But that’s not something that’s going to happen tomorrow. We’re going to continue growing in our space in Fort Collins before we look elsewhere.
CBB // I know you can’t talk about ownership percentages, but is there anything in the contract that might allow Brooklyn to take or purchase majority control, or are they happy playing a minority role?
FW // They’re happy playing a minority role. It would be a different contract if something like that would happen. There’s nothing in there that says after five years we’re on the streets or anything like that. In perpetuity, Gordon and I are there. Obviously, you never know what the future may bring, but there are no plans on the table. We want to stay in control.
CBB // Any product lineup changes that might come of this or new products to appeal to new markets?
FW // I don’t think so. Our portfolios line up well. The great thing about Funkwerks as a brand is that we don’t cover a lot of the stuff that other people do, and we have a fairly tight [distribution] network, too. So we dovetail nicely with them. There are going to be changes to our 2018 lineup, but that’s because it’s what we’ve been planning on, and it’s independent of any of this stuff. The only thing I’m really looking forward to from a product perspective is having access to more lager.
CBB // Is that in your contract? A monthly supply of Brooklyn Lager?
FW // You know what? I didn’t put it in there, and I’m regretting it now that we’re having this conversation. Where were you three months ago when this thing was being negotiated?
CBB // What are your biggest fears now that you’ve taken this step and committed the future of your brewery to a partner? While you do have some experience with them, it must still create some uncertainty going forward?
FW // Having spent enough time with them, I’m not too concerned. You never know how partnerships are going to go—obviously, everyone gets into everything with the idea that it’s all going to work out perfectly, but that’s why you have contracts—to prevent negative things from happening. I’m very excited about it and not worried about anything to do with the partnership. The concerns I have on my mind are how fast and how reasonable is it for us to ramp up, and how do we not bite off more than we can chew from a production standpoint? Even if we buy new fermentors and build out the rest of our current facility, will we still be able to meet the demand we’re going to have? We’ll need to get the territory aligned with the amount of production we’re capable of. That’s a bit of a concern. One of my initial concerns was how our employees would respond, and that’s somewhat been answered. They’ve known for a few weeks now—we told them ahead of the general announcement—and I was expecting a couple of people to say, “I don’t like this,” or ask, “what’s going to happen?” Instead, it’s just been viewed as a tremendously positive and exciting thing. So that concern has been alleviated. Now I’m most worried about the next steps. What are the fundamentals of us doing this and getting this right with our current partners—because I don’t want to overextend into new territories and not be able to supply them, and have to overrun production or do a recall, or let quality fall because we’re rushing. I really want to prevent that from happening. We’re making an effort to be methodical in our approach.
CBB // Some folks in the industry have made the analogy that craft beer is falling into a game of musical chairs and breweries are trying to align themselves with powerful friends in case the music stops. Was that a part of your motivation? How bullish are you on the future of the craft-beer sector, and how important is it to have friends with some scale that can help ensure you stay front-of-mind with the business side of the craft-beer world?
FW // I’d say the musical chairs analogy is pretty decent. It’s not as abrupt as the music stopping all at once—for the most part that doesn’t happen—and slowing down wouldn’t be the right term. But the market is definitely changing. That’s definitely on our minds as we’re making decisions. I wish the craft-beer business were roaring, but that’s not how business goes. It goes through cycles. The flipside of that is I don’t expect to see demand change. Demand is going to continue to rise. The craft-beer revolution is still in effect and has changed not just the beer industry, but the face of many different industries. I do think that who [the demand] goes to is going to change, and I want to make sure that we’re one of the players it goes to, along with our partners, and this is a way to do that. I don’t envision demand falling. The music isn’t stopping due to consumer demand; it’s just oversupply and buyouts and access to market. The things we’ve been screaming about for years now, only they’re coming to a head.
CBB // Were there any partners in Funkwerks who were bought out or won’t be going forward with the business?
FW // No. Gordon and I owned all of Funkwerks. It was just us. That’s why I lived in our warehouse a few years ago—there are downsides to it, too. But now we have the resources and security to continue growing the business in a way that stays true to our original vision.