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Craft brewers grapple with growth 'problem'

There’s a pesky issue facing San Diego’s craft beer industry: an unceasing, massive growth rate.

As problems go, it’s a good one.

But as craft beer market share continues to increase year after year, even while the overall beer market is in decline and as new breweries continue to open, the established brands from San Diego, one of the country’s most recognized beer communities, are beginning to wonder when the market’s due for a correction.

“The business has changed so much in the last 18 months, no one can accurately predict where it’s going in the next five years,” said Tomme Arthur, co-founder and director of brewery operations at Port/Lost Abbey Brewing Co. “Five years ago, you could have said it’s going to do this, this and this. You don’t really have the ability to come to the table today and with clarity say you know what’s going to happen in the next three to five years.”

During a recent Daily Transcript-hosted executive roundtable on the business of beer, industry members repeatedly voiced parallel concerns facing different aspects of the craft beer community: How does unmitigated growth change what they’ve built?

Jack Leer, a lawyer with Seltzer Caplan McMahon Vitek, the roundtable's sponsor and who represents both new and established breweries, said his presence at the table alone was a signal that the business was changing.

Real estate agents, lawyers and bankers have recognized the industry’s growth and are offering specialized services that are creating more sophisticated startups, he said.

“Instead of just friend and family money, you’ve got people who are opening up breweries with tasting rooms from day one that are selling a lot of beer, making a lot of money, and not doing it the old-fashioned way,” he said. “When you’re looking at expansions and bicoastal operations, a lot more goes into it.”

In 2011, the craft beer industry grew 13 percent in volume and 15 percent in sales, following respective growth rates of 12 percent and 15 percent in 2010, according to the Brewers Association. About 250 breweries opened in 2011, while 37 closed.

Through the first six months of 2012, the industry grew 12 percent in volume and 14 percent in sales. Meanwhile, the nation’s total brewery count reached a 125-year high of 2,126. There are another 1,252 in planning.

And as a signal of the industry’s maturity, the California Craft Brewers Association this week released its first ever economic impact report.

The report said craft beer delivered $3 billion to California’s economy while creating 22,000 jobs. It generated $400 million in local and state tax revenue.

Those growth numbers and economic effects speak directly to San Diego, where there were just over 50 breweries at the beginning of the year and will soon surpass 70.

One national growth trend — large craft brands opening secondary locations thousands of miles away to cut down on transportation costs — is present in San Diego, too.

Four of the country's most recognizable craft brands this year announced they were opening production facilities on the other side of the country (one, Lagunitas Brewing Co., is splitting the difference with a Chicago location). It's cost-effective, environmentally friendly, and provides customers with a fresher product, they say.

Now, San Diego's Green Flash Brewing Co. is doing the same.

Lisa Hinkley, the company's co-founder and VP of marketing, said the new mid-Atlantic location, probably in Maryland or Virginia, will allow for easy distribution from Maine to Florida.

"At the end of this year we’re going to be at 60,000 barrels production," she said. "The following year, 80,000, and then 100,000. We have to expand anyway, so we can copycat the same footprint over there and then have the freight efficiency on the other half of the country."

But not everyone thinks current growth is a good thing — or that it’s sustainable.

“If you have a lot of money coming in right now, flipping houses isn’t a very good idea, turning apartments into condos isn’t going to happen, so … start a brewery!” said Lee Chase, owner of North Park’s Tiger! Tiger! and Normal Heights’ Blind Lady Ale House, which also houses its own nanobrewery, Automatic Brewing Co. “That’s an industry that’s taking off. Let’s go for it.”

He said many of the new entrants, which weren’t launched with the same boot-strap mentality as the generation of breweries that put San Diego on the map — Stone Brewing Co., Pizza Port, Ballast Point — are ill-fated.

“I’d like to see those failures happen,” he said.

Melani Gordon, CEO and co-founder of TapHunter, a craft-beer finder app that not only brings consumers to new beers but in doing so also generates business-friendly data on consumer behavior, agreed that she’d like the industry to purge its lower quality new breweries more quickly.

“We’re a tech startup, and we see failure with tech start-ups at a high rate, but that hasn’t really happened yet in the brewing industry,” she said. “It’s inevitable, and it will ultimately help.”

Hinkley said the market hasn't reached that part of the cycle yet. Fifty percent of small businesses fail within five years, and most of the new breweries haven't been around that long yet, she said.

Arthur summarized the problem: San Diego's mentality toward beer distribution largely grew out of Stone Brewing's distribution operation, and the ethos that came with it. San Diego brewers don't undercut each other on prices or give things away to bars and retail stores, as is common elsewhere. It ensures fairness and guards against slipping quality. But a new business that answers to investor money might need to make different decisions in order to make rent. Doing so leads to chasing suboptimal accounts that will leave beer on the shelves too long, giving customers a sub-par product that damages San Diego’s quality-first brand.

Shawn DeWitt of Coronado Brewing Co. said he's been responsible for virtually every element of the business at one point, from cleaning kegs and brewing beer to managing a brewpub and taking care of sales. Many of the new brewers lack that bottom-up experience, he said.

“I see people come in and they have a full sales team, and the best logos, and what ends up being in the bottle ends up they say 'well, we surveyed 200 people and they said this was the style that they wanted,'" said Brian Jensen, owner of Little Italy’s bottle shop and tasting room Bottlecraft. “Where is the passion for the product? It seems like the new startups are a little more focused on getting into the industry, and they see it as an exciting industry, not working for the man essentially, but their principles are different.”

There’s also a major shift coming to the local beer scene: L. Knife & Sons Companies, one of the largest craft beer distributors on the East Coast, is coming to San Diego.

That means a number of top East Coast breweries currently unavailable in the county will now be fighting for shelf space. It also means there’s going to be heavy competition between younger breweries to sign distribution agreements with the new carrier.

One of the local industry's best tools for growth — San Diego Beer Week — is, in many ways, a microcosm of the industry itself. The week of beer events has grown in scale so quickly, it's hard for many of its early participants to recognize what it's become.

DeWitt also serves as president of the San Diego Brewers Guild, which is responsible each year for organizing the second largest beer week in the country.

He said there's conversation within the guild about whether the event has strayed too far from its roots.

"Maybe this is just how things change as they grow," he said. "We're trying to keep a nice cool vibe while we grow it. It’s a struggle."

Whatever the struggle, the event is certainly a success. It's been given just under $75,000 per year from the tourism and marketing district to promote the event outside of San Diego, but needs to demonstrate a three-to-one return on that investment, or $225,000 in hotel revenue over the course of the week. Last year it brought in $463,000.

DeWitt said Coronado's brewpub made roughly $100,000 in the week before and the week after beer week. During the week itself, it made $180,000, just by offering nightly keep-the-pint-glass promotions.

Gordon said beer week grew up last year, but other members of the community are free to start new festivals and events if they want to retain the close-knit feel beer week used to provide.

"We see it on social media: people are planning their vacations and honeymoons around San Diego Beer Week," she said. "It's bringing people to San Diego."

The week of events also validates San Diego's reputation, according to Arthur.

"If people want to say this is a Napa Valley of brewing then you have to have events, energy, participation, and buy in," he said. "It all exists. It’s incredible."

*****

Roundtable Participants

* Tomme Arthur, Co-Founder & Director of Brewery Operations, Port Brewing Co.

* Lee Chase, Owner, Blind Lady Ale House

* Shawn DeWitt, Director of Brewing Operations, Coronado Brewing Co.

* Melani Gordon, CEO/Co-Founder, Taphunter.com

* Lisa Hinkley, Co-Founder & Vice President of Marketing, Green Flash Brewing

* Brian Jensen, Owner, Bottlecraft

* Jack Leer, Firm Member, Seltzer Caplan McMahon Vitek (sponsor)

****

Related Content

Video: Melani Gordon, Shawn DeWitt on the craft beer business

Article: Growing craft beer industry creates demand for lawyers, business consultants

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Coronado Brewing Co.

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170 Orange Ave.
Coronado, CA 92118

Coronado Brewing Co. Executive(s):

Rick Chapman

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Ron Chapman

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2013