Sep 282017
 

In the summer of 2012, these pages ran a post on the coming tsunami regarding the number of projected new SKUs and craft breweries being constructed.  Now, five years later, it appears that the tsunami has blown itself out.

Last week, Brett Cooper, of Consumer Edge Reports, stated that SKUs have dropped from a high of 13,238 to 12,786, down -3.4%.  That is the overall number of all beer products being produced, and when one looks at the number of craft products produced, that translates to 9,021, this too a negative trend, down -5.7%, from a high of 9,537 SKUs.

Brett calls this drop “a period of rationalization” in beer SKUs which seems to be occurring across the board. The only exception is the economy segment, in which new SKUs are driving this division.

These recent reports verify what many industry pundits have been saying for some time, that the industry is on track for consolidation or even contraction.  More and more, crafts are not selling out, but closing down.  Many are actively seeking buyers.  Just this past week, the 29-year-old taproom, Pacific Coast Brewing, in Oakland, announced it was shutting down, citing uncertainty on future leases.

So the question is, when, or at what point, does a craft brewer call it quits?  Much, if not all, of the PE or even JV money has dried up.  This situation makes it even harder for even an established brewery to find an exit.

In last week’s post, we highlighted a market in Florida in which there are five craft breweries and taprooms, all five are unable to expand, and now actively looking to sell.  If the five breweries were to consolidate into one operation, that operation would be very successful.  Unfortunately, that scenario most likely will not come to fruition as the surviving brewery would not be able to handle the debt incurred in the purchase of all four breweries.

Consider how or what the buyer might do with their taprooms?  The revenue would disappear if the taprooms were closed; the equipment could be sold, but the building leases, if not leased, would have to be addressed.  There are simply too many moving parts.

This is not to say that if one or two of these operations were at the point of no return, perhaps some type of deal could be reached, but would that just be a short term remedy?  Two sick operations combined does not make a one healthy operation.

After decades of ownership, when a family-owned distributorship is sold, the selling family must deal with their emotions.  The same can be said of these brewery owners.  Investors want a return and are simply not willing to continue to reinvest in a craft that has hit a wall.  Many of these investors want out, and are willing to limit their losses in order to accomplish the exit.

The industry’s current situation has been forecasted for some time, and it appears this forecast is coming into fruition. Many now will say, enough is enough, now is the time to close the door.  The end for many crafts is inevitable.

The best way to guarantee a loss is to quit.

 

 

 Posted by at 1:15 pm
Sep 282017
 

To all BBUP readers:   I have experienced an unexpected technical problem with our site.  Unfortunately it will have to be rebuilt which means I will not be able to send out weekly blogs for about a month.  I am sorry this happened and ask all to be understanding until it is fixed.  You can still access all current and past blogs by just logging on.

Again, I want to thank all readers who have so kind to send messages and comments on BBUP posts.  Thank you,

Until later,

Geoff

 Posted by at 7:30 am
Sep 192017
 

The stories coming out of Florida and the deep southeast following the devastation that Hurricane Irma caused, are similar to those from Texas and Louisiana following Hurricane Harvey.  Help is pouring in from all over the world and stories of people helping each other are populating the news.

What you are not going to hear about in the main stream media, however, is how the beer industry continues to do what it does best, help their local community in any way possible.  One such beer distributor, who will remain nameless for the purpose of this blog, exemplifies this philosophy of helping.

A distributor in a mid-size Florida market had, some years ago, built a hurricane-resistant warehouse that could withstand 150 mph winds complete with windows built to withstand 125 mph winds.  When Irma hit, he had approximately 100 people and 20 pets (dogs, cats, etc.) sheltered in his building. A building which did not sustained any damage, with the exception of minor damage to the fence around the building’s perimeter and some trees being affected.

And this is where the story becomes even more interesting. In this particular distributor’s market, there are five small, local crafts, all struggling to survive by dividing between themselves; the volume lost from the major crafts.  These little breweries could not expand their footprint without the resources necessary.  During the hurricane, one brewery, who lost all power, called our hero distributor, desperate for help.  It seems this small craft brewery had $15K worth of keg inventory which would go bad without refrigeration.  Our hero agreed to store the keg inventory for this small brewer, and even sent trucks to pick up the beer, virtually saving the brewery from the potential ruin that Harvey would have caused.

Another local brewer, who also lost power, had $300K of beer in their tanks and no generator.  They called the same distributor who, fortunately, had a commercial generator, and again, asked our hero distributor for help.  The generator was sent, on the distributor’s truck, complete with the distributor’s own electrician, to set up the generator and ensure this small brewer was going to be ok.  The owner walked out of the brewery with a set of jumper cables!  I bet that was a sight!  The electrician was able to set up the generator and save the liquid.

Not too far from this Florida town is another very successful brewer who self distributes.  This brewer, long known for its dislike of distributors, was also able to shelter a number of people in his building, but this brewer ran out of fresh water.  Knowing that our hero distributor had an inventory of bottled fresh water, the brewer called asking for help.  Without hesitation our man again saved the day and sent over his truck with four pallets of water.

Finally, the most amazing event is that in the city where this distributor is located, the city morgue called him asking for aid!  The city had no power and needed refrigeration for their corpuses.  The distributor sent over an old, but workable, draft truck which the city used to store the recently deceased!  Once the power was restored, the distributor thought it would be best to sell the truck.

No doubt the beer industry will continue to have its issues. If, however, there comes a time when the middle tier goes away, it will not be the beer industry that suffers, it will be the local community that will lose.  Distributors are the backbone to their community, and in a disaster; it is often the beer distributors that are the community heroes.

I say, find one true friend that will help you get through the tough times…

 

 

 Posted by at 6:00 am
Sep 122017
 

The University of Texas at Dallas, under the direction of Dr. Richard Harrison, is conducting a semester-long graduate study class on the Texas beer industry, with a focus on the state’s craft beers.  The class is a continuation of what many universities are providing for their students who are desirous in attaining an education and specific skill sets in the beer industry.

This graduate class is scheduled to have 11 guest speakers, three of whom are graduates of UTD and owners of local breweries.  I was honored to be Dr. Harrison’s first speaker and provided the class with the various models currently used in today’s industry, along with a history of beer and a study in how the industry arrived in its current-day state.

Over the years in the beer industry, the most frequently asked question I have receive is: “How big is the craft segment going to get?”  Since this was a class of grad students, the last question was: “If I was going into the business, what model would I chose?”

Instead of choosing the “hop-in-the-box” local brewery, I selected the role of a beer distributor.  After explaining the responsibility and function of a distributor, the class had a more clear understanding of what is required to run a distributorship.

A part of the discussion dealt with last year’s acquisition of Revolver by MolsonCoors and ABI’s acquisition of Karbach.  When comparing the two breweries, Revolver self-distributed and Karbach went with the ABI network.  Self-distribution can be very effective as the brewer recaptures the wholesale margin for themselves.  Though a self-distribution brewer can usually only go so deep into the market, Karbach, with the ABI network, had total market coverage.

When Revolver sold to MC, the first act of MC was to assign distribution rights to Andrews, the local MC distributor in DFW.  As you might expect, Revolver’s distribution and sales increased dramatically with Andrews’ assistance.

Karbach’s distribution was provided by the AB network and the results showed in the speed at which Karback reached 50K bbls. and continued to move upwards.  Revolver is now on track to have a similarly dynamic growth with the MC network.

Most of the students grasped the basic function of building a brewery.  The roll of the retailer is one that is also easy to understand and discuss, but delving into the middle tier becomes challenging in the explanation of the options a brewer has in getting product to market.

Explaining the different functions of the various distribution systems further compounds the clarification of the middle tier system.  For example, AB, MC, W&S, and indie craft function are all quite different. Once the students develop their business model and the components of their brand’s vision, then combining that with the distribution network, will aid the student in achieving their individual goals.

It will be interesting to see how the class finishes the semester and what the students learn from the various speakers.  I hope to have the opportunity to learn how they view the industry at that point and compare it to their views at the beginning of the semester.

By getting into distribution and production, I am widening my base…

 

 Posted by at 6:00 am
Sep 052017
 

In the summer of 1970, my second year as a helper at the Dallas Coors distributor during my college years, Corpus Christi and south Texas were hit by Celia, a category three hurricane.  Hurricane Celia, not unlike Hurricane Harvey, hit Corpus directly during the first week of August.  Damage, at that time, was estimated at just under one billion dollars.  All of Southeast Texas was shut down.

My fraternity big brother, who was from Corpus, had planned his wedding the second week of August in Corpus.  Earlier in the summer I had notified Willowbrook, the distributor, that I would need that weekend off to attend the wedding.  Than the hurricane hit.

The parents of the bride and groom were able to get the Holiday Inn, which was located on the beach, to open just for the wedding party.  Those in the wedding party were allowed to stay on the second floor, as the first floor of the hotel was flooded during the height of the storm.  Somehow, perhaps because of the use of a generator, we had electricity at the hotel, where the remainder of the city remained without power.

Since there was no Coors distributed in Southeast Texas, as Coors was only available in North Texas and West Texas, I loaded up my van with Coors and took off for Corpus Christi.  The National Guard were on every corner in town because the traffic signals were not functioning.  Remains of buildings and palm trees had not been pushed to the sides of some of the major streets, so we had to stop and get clearance from the National Guard at every intersection.  It took forever to get through town.

Other than those in the wedding party, the hotel and the beach were desolate. And like all hurricanes, Celia had cleaned all the trash and debris from the beach, which now was pristine.  We had the beach to ourselves, and with all that Coors beer, needless to say, the wedding went off without a hitch.  While the beer was much appreciated, finding ice to keep it chilled was another challenge.

In the wake of Hurricane Harvey, the beer industry, has mobilized on all levels, supplying everything from canned water, supplies, clothes, and even donations from all over the country.  From ABI to the small craft brewers, all are working hard to help in any way possible to provide relief for those who were caught in Harvey’s wake.

This level of commitment is not a surprise to anyone in the beer industry.  Wholesalers and breweries of all sizes have always been the corner stone of community involvement and support.  Hurricanes, tornados, earthquakes, or simply coming together to help in time of need, it is the beer people who step up again and again, without any hesitation.

When the rebuilding of Southeast Texas is well underway, and all the other groups have returned home, the beer industry will still be there, doing what is necessary to support their respective communities.  People can say what they like, but in these times of need, the beer industry steps to the plate, ready to assist.  That is what makes this such a great industry.

The hurricane flooded me out of a lot of memorability, but it can’t flood out the memories…

 

 

 Posted by at 6:00 am
Aug 292017
 

By 1980, after years of market dominance by Coors in both Kansas and Oklahoma, it was clear that those states had been targeted by AB.  At Coors of Kansas in Wichita, the largest distributor in Kansas, we had a market share of 61+%.  There were markets in Oklahoma and western Kansas where Coors had a share at, or near, 70%.

During this time, Coors Brewing Co. was battling the beginning boycotts of their beer in California, while simultaneously ramping up national expansion.  The expansion was to offset volume losses coming from the west coast.  Being concerned about AB’s push in Kansas, I flew to Denver to meet with Coors’ senior management.  As I laid out my concerns about AB, it was clear that Coors was preparing to increase efforts in both California and Texas, not in Kansas or Oklahoma.

A one percent volume of market share increase in Texas or California provided a volume increase that I could only achieve with a 10% increase which, when sitting on a 60+% share, was impossible to accomplish.  My position for Coors was to protect its backyard.  Coors’ management went the other way, and as a result, within the decade, AB and Coors had reversed market share in both states.

The Coors distributors in these states felt betrayed and abandoned.  Many sold out, some bought existing brands and wholesalers, but all had to make major changes to continue.  It was a difficult time and many people lost their jobs.

Recently, in Bump Williams’ conference, the topic, the industry’s lack of leadership, was in part, a conference on what is wrong with the beer industry today.  Former industry executives, Tom Carmella, Bob Lachky, and Luis Duran, all agreed that breweries need to either focus on brand stories or efficiency.  Breweries cannot be both at the same time.

Another major point which was highlighted during the conference included the rapid price increase for economy and premium brands, an increase which is much more rapid than that of wines or spirits.

It is very clear, after 10 years, that ABI, focusing on ROI and efficiency in the U.S. market, is using their monetary success to develop their global brands, Budweiser, Corona and Stella, in other countries.  There are over a billion people in China and India, so why not develop those markets?  Throw in South America and Africa, both underdeveloped, and which do NOT have a three tier system, and all ABI sees is the upside.

MolsonCoors, for the most part, has just followed ABI’s lead in the U.S. by not jumping on the opportunity provided by ABI to increase volume and share.  Tammarron’s recent survey results, indicate the lack of confidence MC distributors have in MC’s leadership.  “You are what your record says you are,” Bill Parcels.

New Belgium’s recent hire of a new CEO also indicates which direction they intend to head, more of a global or international path instead of focusing on the US market.  The question is: how do New Belgium’s wholesalers feel about this hire?

As Bump’s conference stated, wholesalers should focus on efficiency which seems highly likely given that the leadership void in the industry which will leave wholesalers with no other option if they want to survive.  Similar to what happened to the Coors wholesalers’ in the 1980s in Kansas and Oklahoma; these wholesalers today are feeling abandonment and frustration.  Ask the former Schlitz wholesalers about this from the 1970s.

The definition of leadership is about taking responsibility, not making excuses.

 

 

 Posted by at 6:00 am
Aug 222017
 

The U.S. beer environment during the 70s and 80s was similar to that of craft beers, in that it is similar to the way wholesalers thirty to forty years ago envisioned the future of imports.  Successful European brewers who were importing into the U.S. were, decades ago, highly desirable brands with good margins, despite the fact that finding a wholesaler for the brand was challenging.

It took Diane Fall, Warsteiner’s first U.S. President, over a year to get a wholesaler in Denver where she established the U.S. office for the brand.  This was in 1980.  By the time I took over Warsteiner’s U.S. operation 25 years later, Warsteiner had approximately 260 wholesalers in all 50 states.  Annual volume was 134K+ HL.

My top 10 distributors in the U.S. handled 60% of Warsteiner’s total volume, when one included the next 10 distributors, the volume percent rose to 80%.  Bottom line was that approximately 20% of our U.S. business was done by 240 distributors.  I never considered either leaving or pulling out of any of those markets, ever!

Several weeks ago, Scott Metzler, founder of Freetail Brewing Co. in San Antonio, stated at the Distributor Productivity Conference, that breweries should not expand.  “But for the most part, I think the era of national brands and even regional brands in the scope is long gone…The ship has sailed,” stated Scott.

He continued by stating that all new start-up breweries should have a goal of 500 bbl., rely only on on-site sales, they should have no market distribution and they should “be happy” with that life. At the conference, Scott participated on a panel when he made this statement, a statement which was followed by support from other participants, including some craft distillers.

John Henry, a founder of El Buho Mescal, had this comment, “If you are not going to service a new market like your own backyard, then don’t go.”  That statement alone might be where these owners fall short.

The question is: does the same model used in your home market apply to other markets?  If that were true, then as President of Warsteiner, I might have pulled out of 200 distributors in the U.S. and have only done business with 50 distributions. That would have meant turning my back on 80% of my distributors.

At one time or another, AB, Schlitz, Miller, Pabst, Coors and others were local, but they all expanded nationally.  Even a brand like New Belgium embarked on a national expansion plan, but it was almost 10 years after they started the brand.

Warsteiner put their annual marketing and tactical spending against their volume, but did not forget the other 20% of business.  We focused on off-premise chains and hired experienced and knowledgeable beer pros who managed a number of states and wholesalers.  In some cases, including upstate NY, we used a broker who drove grocery volume thru Wegmans.

It might be that the highly successful local model as it is currently structured does not work for expansion or out of state markets. Perhaps simply developing a market presence in chains managed by experienced beer pros would work.

A local tap room selling 500 bbl. with some food works, the industry knows this, but there are many brewers who have larger dreams.  All they need to do is understand that what works locally will not necessarily work in out-of-state markets, but there is one model which will work.

It is easy to be brave from a safe distance…

 

 

 Posted by at 6:00 am
Aug 152017
 

While the belief is that the beers driving the retro craze are brands that have already died, the reality is, those beers have truly never died, depending on one’s definition of what dead means.  A couple of national brands, Pabst and Coors, have experienced growth for years, while Miller High Life is showing some signs of returning.  Recently, some regionals have managed to come back to life again, including: Rainer, Lone Star, and even Hamm’s.  On the other hand, other beers have yet to see any real life in their comeback.

Coors and Miller High Life simply turned the clock back by using the core themes that made each brand viable years ago.  Coors is again using the Rocky Mountain theme, while Miller is rerunning its classic theme: If you’ve got the time, we’ve got the beer.  Both brands seem to have hit a positive nerve with the consumer.  Pabst, on the other hand, has tapped into the anti-establishment crowd with young drinkers as an alternative to corporate brands.

The other brands, all tap into their regional roots, but also lean back to previously successful marketing and pricing strategies that make sense in today’s environment.

In 1993, Coors Brewing decided to roll out a clear liquid they named “malternative” beer. This was perceived as the solution to consumers who did not like traditional beers.  At the same time, other CPG companies were experimenting with clear liquids, including Crystal Pepsi and Miller, the later of who tried a liquid called Clear Beer.  Neither product proved to be successful.

In 1994, Coors reportedly spent over $38 million marketing against Zima, a figure equal to, or perhaps more than was spent on marketing for its own Coors Light! While it has been estimated that over 70% of America’s regular beer drinkers sampled Zima, most of those consumers were not repeat purchasers.  That year, Coors sold over 1 million bbl. of Zima.

1994 marked the highest sales for Zima, as the brand quickly found that their demographics skewed young female, with males being adverse to the product.  College kids mixed Schnapps with Zima, making the liquid into a cocktail.  David Letterman even picked up on Zima and added it to his top-ten-list of things to chastise in his humorous remarks.

In an effort to attract males, in 1995, Coors introduced Zima Gold, a higher ABV liquid with a bourbon-and-coke flavor.  Zima Gold lasted only a few months.  By 2000, Coors reformulated the brand once again. This time the product tasted similar to Sprite and the brand was advertised as a thirst quencher for the summer.  Interestingly, this reformulated brand sold 600K bbl.

Two more reformulations were attempted, the first in 2004, by once again increasing the ABV to 5.9% and naming the brand Zima XXX with flavors such as Hard Punch and Hard Orange.  This market, however, was now being dominated by Smirnoff Ice.

Three years later, Coors reversed itself and went back to marketing to females.  Zima was reformulated again with lower ABV, fewer calories and several fruity flavors.  Some think the brand might have made it, however, label changes in Utah, along with higher taxes in California, ended any chance Zima could survive.  Zima was officially laid to rest in 2008.

Once again, however, Coors has resurrected Zima, although for a limited time.  Classified as a seasonal beer, with its iconic bottle and a new formula, Zima seems to have found some legs.  If Zima survives this time, it will be the only product that was resurrected from the dead and lived.  The industry will soon know if Coors will decide to continue with the production and sales of Zima.

Perhaps Coors sees a demographic no one else does: millennials and their Rose wine.  Given the condition of the industry today, no one would be surprised.

Reincarnation occurs because we decide we haven’t learned enough lessons….

 

 

 Posted by at 6:00 am
Aug 082017
 

Mike’s Hard Lemonade was founded in 1999 and headquartered in Lakewood Colorado.  At the time, it was a Canadian company and the liquid was spirit-based, however, due to U.S. restrictions, Mike’s was malt-based when they opened the U.S. market.  It was a very unique product for the time with edgy marketing and the brand quickly took off.

While Mike’s was unique and different, which helped get consumer attention, it was Mike’s culture, at that time that was helping to drive sales.  The western half of the U.S. was led by Paul Harvey.  Paul was in his mid 40s and was highly respected by both wholesalers and employees.

Mike’s team in Texas had a state sales manager in addition to six to seven other sales people.  Their numbers rocked.  During this time period Paul, who, after a business dinner in Denver, was conducting meetings with a wholesaler, failed to show up the next morning for a planned meeting.  After many attempts to contact him, the hotel manager found Paul’s body in bed. Paul had passed away during the night as a result of a massive heart attack.

Paul’s passing began a series of changes that culturally altered Mike’s for years.  Paul’s replacement was a wine salesman from Gallo who brought Gallo’s programs and attitude with him.  People started to leave and were not replaced, and sales began to slow.  By now, other breweries had developed RTDs to compete and made inroads into the category.  But the culture at Mike’s was now toxic.  There were other leadership changes that continued to damage sales and their culture until Mike’s eventually hit the bottom.

A recent story on Mike’s written in Beer Business Daily, focused on comments from their current CEO, who took over in 2012.  He gave great insights regarding the challenges a leader has to overcome after years of negative growth.  By focusing on employees, and creating a positive culture, Mike’s has made a great turnaround.

Slowly, and over the years, Mike’s has experienced double digit growth.  Trimming the SKU number down in their portfolio, while increasing their marketing spend by 75%, added to the fact that management was treating employees positively, showed the industry that beer companies can be successful with the right formula.  It is not that complicated.

Mike’s is one company that shows what can happen by making a change in the positive direction.  Mike’s is a positive example in the beer industry that has, of late, seen so many companies move in a negative direction.

The right leadership says it all.  For example, Bill Hackett’s longtime tenure at Crown made that product a monster in the beer segment, whereas Gambrinus gone the opposite direction.  In fact, Gambrinus could be considered the poster child for negative culture.  Simply talk to any ex-Gambrinus employee, especially the ones from the Modelo era, and you will learn of the less than positive culture of that company.

Many top people from AB, Miller, Coors or others, joined Gambrinus thinking they could handle that way of life, only to be searching for another place of employment within six months.  Other companies including Labatt USA or New Belgium, in their early years, had such cultures which fostered positive growth and positive attitudes. But that has since changed.

Mike’s current leadership has once again been an industry example that a company can be highly successful by just creating an environment that puts people first, not egos.

The manager accepts the status quo, the leader challenges it…

 

 

 Posted by at 6:00 am
Aug 012017
 

Hire sales people who are really smart problem solvers, but lack courage, hunger, and competitiveness, and your company will go out of business” – Ben Horowitz.

Hand held devices, IPads, laptops, cell phones, and computers are all tools of the trade for any beer sales person in today’s market.  There is not a major distributor in the U.S. today that does not provide, or have, the tools of the trade, including state-of-the-art warehousing and logistics, all using the most sophisticated software available.  This evolution of the role of the sales person in today’s beer environment has been nothing but dramatic.

Consider that before the electronic revolution in the time of driver sales, each route maintained a route book.  This route book contained every detail the salesman needed, including the address, buyer’s name, manager, phone number, hours of operation, times of delivery and even what door to use.  The book contained the account sales history and enabled the recording, by the route driver, of each visit and the inventory left from the last visit.  Sales were recorded and displays with pricing were also noted.

The driver knew everything he or she needed to know about each account.  The immediate beer supervisor had access to the same information.  In fact, if he driver was out on vacation, it was easy for the supervisor or swing driver to pick up the book and follow the pages which were delineated by day by stop.  The supervisor and salesman usually met every morning to review any goals or targets.  The process was very simple.

Of course, this was the time when beer wholesalers had limited SKUs and only one or two breweries.  The driver had enough time to actually sell, deliver merchandise, rotate, and even clean signs in addition to driving the truck.

The question arises that with wholesalers today representing hundreds of SKUs from numerous breweries, are salespeople as effective as they were when driver-sales was the norm?  When a wholesaler adds three or four new breweries over a year’s time, are these new brands a bolt on to a pad, or does the wholesaler investment spend and add to their sales team.

There have been times when a wholesaler would take on a new brewery while informing the brewery that the wholesaler will deliver the beer, however, the brewery would  have to provide the sales support.  That brewery could be stuck with no other option other to not go into that market.

Plus, there is the financial consideration. While leading Warsteiner, if a certain state or region grew to 5,000+ HL, we started looking into adding a regional sales manager, and once that area hit 7,000+HL, the trigger was pulled on a hire.  In addition, Warsteiner targeted potential markets where people might be added in the future.

We know that the overall industry STRs are not very good this year and while we can speculate, one reason for this might be the expectations and effectiveness of today’s sales person.  Are they really selling or are they just maintaining their business?  Is it fair to hold them to the same standards as the driver salesmen?  There is no easy answer.

Sales may lead to advertising as much as advertising leads to sales.

 

 

 

 Posted by at 6:00 am