The Many Reasons Breweries Have to Close | Brewing Industry Guide
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The Many Reasons Breweries Have to Close

Increased competition, slowed growth, and other market forces can conspire to expose weaknesses in otherwise successful breweries. Make corrections early to avoid becoming a craft-beer casualty.

Tom Wilmes January 16, 2018

Ken Lewis, founder of the former Ei8ht Ball Brewing Co. in Newport, Kentucky, doesn’t mince words in his appraisal of how competitive the beer market has become. 

“Craft brewing is in the midst of a serious shake out, and there’s blood in the water,” he says.

Lewis founded Ei8ht Ball in 2013 and shuttered the brewery in early 2017. The company was profitable, Lewis says, but would have required a sizeable investment to keep growing the business and keep pace with demand. Lewis ultimately decided that he wasn’t comfortable injecting that kind of capital given the challenges that independent, mid-sized craft breweries face in the retail environment and in the midst of what he considers to be signs of contraction in the craft-beer market.

“My personal opinion is that the two ends of the spectrum are going to do just fine,” he says. “Those are the really big guys who can muster the marketing effort and put boots on the ground to really go at retail and be in multiple states, and then the owner-operated brewpubs and nanos that are very local and tied to their communities. But if you’re in the middle, attempting to fight for that retail and grocery and tap handles, then man, you’re in trouble. We were in that massive middle, and I chose not to make any kind of further investment to try to scale up.”

Rather, Lewis decided to dedicate the bulk of his resources and attention to his other business, New Riff Distilling, which makes bourbon and other craft spirits. While craft distillation is still in its “honeymoon” phase,” he says, and early enough in its growth curve where supply still struggles to meet a booming demand, the craft-beer market is maturing rapidly and its growth rate slowing.

“It was all well and good when there was double-digit growth and there was room for everybody and everyone was making money and there was plenty of money for expansion,” Lewis says, “but now you’re seeing growth go down to low single digits and maybe stop altogether. And then you’ve got the big craft breweries that have the resources, and they’re working their butts off to continue to grow in however small amounts.”

Competition Increases as Growth Slows

New microbrewery openings hit a recent high around the time of peak growth in the industry. The biggest leap in new microbrewery openings happened between 2013, when more than 300 opened nationwide, and 2014, when more than 600 began operation, according to data from the Brewers Association. As craft beer’s overall growth rate has eased off its double-digit annual gains in recent years, the number of new brewery openings has also slowed slightly, yet still hovers just below 600 new openings annually. The number of brewery closings, however, while still a small fraction of the whole, increased slightly from 2015 to 2016.

As the craft landscape matures and changes, it can be a real stress test for breweries that are undercapitalized, overextended, or otherwise without the infrastructure and resources to adapt.

Jack Hendler is founder and co-owner of Jack’s Abby Craft Lagers in Framingham, Massachusetts, which is among the fastest-growing breweries in the nation. While his brewery has enjoyed robust growth and near continuous expansion since its founding in 2011, he’s well aware of the importance of operating from sound underlying business mechanics and guarding against becoming overextended in a competitive environment. 

“Especially with big buyers, private equity, and breweries trying to battle it out with other regional brewers who have the backing and are able to push things through that we can’t on our level,” Hendler says. “It seems unlikely, from general economic trends, that you can have an infinite number of breweries opening and have them all be successful.” 

No Room for the Unexpected

No one person can control what happens at a macro level with craft beer, but brewery owners can organize their businesses and make decisions to help maximize their success as well as be able to effectively make adjustments when needed. Every brewery is unique, but there are several common potential problem areas that bear careful consideration, including borrowing too much money or overextending investor equity; expanding too soon and too quickly; quality issues; ineffective management; and leaving little wiggle room to deal with the unexpected.

For example, smaller breweries operating on slim margins while reinvesting profits into growth and expansion often leave no margin for error or for unexpected occasions such as when your landlord decides to hike your rent.

Steve Jones opened Pateros Creek Brewing Co. in Fort Collins, Colorado, in 2011. The brewery and taproom, located on the outskirts of Fort Collins’s popular Old Town neighborhood, started off strong and Pateros Creek’s beers were well received. The bulk of the brewery’s profits went toward purchasing new equipment—including a canning line—in order to increase production and expanded distribution. 

“We didn’t want to become stagnant, but at the same time we had to be careful in how we grew,” Jones says. “We probably made a few mistakes, like trying to push too hard into bigger markets when we should have held back a little bit and reevaluated how things were going. But everything was growing so fast that it was hard to tell how things were going to move in the future.”

As the brewery’s debt load increased, so did the competition and, “we were getting lost in a sea of breweries,” Jones says.

Jones decided to sell the canning line, pull his distribution and refocus efforts on the taproom, “but when you’re already backed up with payments on equipment and other debt, and you’re trying to keep the business going when the landlord says that he’s going to raise your rent, it just wasn’t in the cards for us anymore,” he says.

Pateros Creek was given sixty days to vacate the premises, which is not a quick or an easy undertaking for a brewery. Jones auctioned off the brewery’s equipment and focused on moving through his remaining inventory. He also had to be careful in how and when he informed his staff, investors, and customers about the news so that it got out in the right way.

“If we were healthier financially we might have been able to do something, but even so they were tripling our rent, which was pretty substantial,” he says.

Still, even just a few months removed from the process of shutting down the brewery and selling off its equipment, Jones is optimistic about the future of Pateros Creek and is already looking toward a contract-brewing arrangement in order to get a few of his core brands back into production.

Protecting Your Assets

Speakeasy Ales and Lagers, which also closed earlier this year and has since sold its assets, exemplifies the risks of becoming overextended and exposed in the midst of aggressive expansion projects. 

The brewery opened in San Francisco in 1997 and made a big growth push in 2015, right at the height of the craft-beer boom. Speakeasy overhauled its packaging and brand image, built a much larger brewhouse and purchased new equipment, began brewing more seasonal and one-off beers, and began distributing into new territories.

Speakeasy spokesperson Brian Stechschulte says the expansion was spurred by the brand’s massive growth spurt in 2014, which saw a 38 percent increase in business over the prior year. 

“At our peak, we were in fourteen states and about fourteen different countries,” Stechschulte says. 

The expansion was also fueled by large bank loans, and when the brewery was unable to make payments or to purchase enough ingredients to meet the growing demand for its beers, the bank called the loan, and Speakeasy was forced into receivership earlier this year (2017). 

“It’s going to take some time to write the history of what happened here, but it’s a classic scenario that’s been demonstrated in brewing before, where we simply bit off more than we could chew and afford,” Stechschulte says. “To go from a 36,000-barrel capacity brewery to 80,000 or 90,000, along with the accompanying amount of money that we spent to do it, was just too great.”

In mid-May, Ces Butner, former owner of Horizon Beverage Co. and a former distributor of Speakeasy brands, bought the brewery’s assets out of receivership. 

“They expanded quickly and aggressively, got overextended, and couldn’t service the debt load, and ended up upside down on their whole entire balance sheet,” Butner says.  Butner plans to relaunch and reinvigorate the brand locally, at first, and then slowly expand from there while leaning on his experience and relationships with various distributorships.

“It’s like starting all over again,” he says. “We’re most known and most established in San Francisco and the Bay Area, so we’ve got to get those rolling first, and then we’ll go into the rest of California and back into some of the other areas.

“There are a lot of great breweries and they make great products, but unfortunately a lot of times they’re not very good at getting the distribution out, and that’s what I know how to do.”

The Speakeasy team is also looking forward to starting again with a blank slate, while also benefiting from lesson’s learned.

“In retrospect, a more conservative plan probably would have been a more prudent way to go,” Stechschulte says. “To grow at a more manageable pace that you think is more in line with the reality of where the market is headed. But this industry is changing so quickly. It used to be every couple of years something would change, then every year, and now it seems like it’s month to month.”

There will of course be consolidation, closings, and churn in any healthy industry. Hardly anyone is surprised when a sub-par restaurant closes, for example, and the same goes for a brewery. As competition and the number of breweries increase, and as overall growth slows, breweries that are exposed, underperforming, and otherwise poorly optimized will be the first to feel those deficiencies, and those that don’t correct those shortcomings risk becoming yet another cautionary tale.

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