First off, it is clear to me that the current rate of brewery openings is unsustainable. An odd sentiment for a guy opening a brewery perhaps, but I’m confident that what we’re seeing right now is the result of high unemployment–which has led many laid-off professionals to make career changes (and what could be more appealing than trading finance for brewing?)–and an actual increase in consumer demand for craft beer, due to its superior quality along with a current fad for the “local.” Please note the combination of cynicism about some motives and a strong belief in the actual value of great craft beer.
There is another macro-economic factor influencing craft beer at the moment, and that is the credit market. Following the spectacular combustion of the financial markets in 2008, banks have notoriously had to change their lending practices. This has led some people to call the credit markets “tight”, but this is incorrect. Loans are still being made, but the requirements for receiving them have become substantially more stringent, as banks mired in bad PR have tried to distance themselves from the fast and loose lending practices of mid-2000s. Simultaneously, financial institutions are under political pressure to continue making loans, and this has led them to make more debt available to businesses that can prove they’re good for it.
And who is better equipped to take advantage of this lending environment than established, profitable craft breweries looking to expand in a growing market? Breweries are exactly the kind of all-American, bricks-and-mortar main street businesses (with safe cash flows) that banks love to tout as loan recipients (and indeed several have been featured recently in bank advertising.) And thus we’ve seen many of the Top 50 craft breweries take on ambitious expansion programs costing tens of millions of dollars.
But as I mentioned, this means that less money has been made available to start-ups and weaker businesses. So how do you start a brewery? There are three main routes: self-financing, private investors, and contract brewing.
The first option has led to the explosion of nanobreweries, which basically cost as much as you want them to, and which make up a large portion of the new breweries being opened. Long thought to be a profitless folly, nanobreweries are starting to prove that they can be profitable by selling what they produce directly to consumers, potentially giving them the positive cash flow necessary to eventually secure a loan, or to just continue as small bars with brewing systems.
The second option is the traditional route. Raise hundreds of thousands of dollars, or more, from friends, family, or rich angel investors, and build a moderately sized brewery. There are still plenty of people doing this (like me), but it’s a long, difficult process with loads of risk and no shortage of frustrations. That said, having a deep passion for great craft beer is not a requirement for jumping these hurdles, and some breweries that have opened by this route seem more interested in marketing and profit than brewing great beer.
The third option, contract brewing, offers a low barrier to entry: with a relatively small amount of cash, you can get your beer brewed by someone else and out into the marketplace. As a short term test of the market, I don’t find it totally objectionable because some brands that have done it have gone on to become excellent breweries. But too many contract brewed brands offer sub-par beer, and worse yet, attempt to hide their origin (I recently saw two beers on the shelf in San Diego prominently labeled “local” that are, in fact, brewed thousands of miles away.)
It is elements of these second two options that concern me the most when I think about the future of craft beer. I believe contract brewed beers and profit/marketing obsessed breweries are the sub-prime mortgages of the craft beer world. By borrowing against the goodwill generated by other breweries, they have become the growing structural weakness that will eventually harm the entire industry.
Well put Jacob! I’m looking forward to your contributions to the field.
Great post, dudes. Well thought-out, painfully honest and something many of us in the industry have been saying to each other on many bar stools across this country.
I love his comparison of bad contract brewed beer to bad mortgages and loans. It erodes the faith, stability and credibility of the whole industry.
There is a lot of sub par beer going around this days. I think newcomers to the craft brew industry are confused by all the choices available to them. There are too many fake microbreweries out there and they need to be called out for what they are. This brewery will be a success if it focuses on great beer and less hype. The beer will sell itself. Congrats!
Thanks for the comments and feedback, folks. My hope is that articles like this one bring some of these issues into the realm of public discussion. As Andrew said, these issues get discussed with some regularity between friends at industry events, but I think it’s time the entire craft beer community chime in. The democratic quality of craft beer culture is its biggest asset, and I’d like to see beer drinkers have a say in the industry’s future. Sometimes that requires calling shenanigans when things go astray, but ultimately that leads to a stronger industry as a whole.
While I absolutely do agree with much of what you have to say, I believe that the desire to create an excellent product is not nearly adequate in maintaining a sustainable business model in the craft brewing industry. I would even be so bold as to say its secondary to sustaining profit margins and feeding growth. It would not take a world class brewer to produce a quality beer with an infinite budget. However, it takes an adaptable and business-first mentality to create a great product within the constraints of a start-up brewery. Now, if you deem that an excellent product is a necessity in creating a profitable company, then that in itself is a business fueled decision. (And I do agree that now an excellent beer is a necessity)
best of luck to you. i hope your brewery make beer that matters.
Fair point Josh, but I never claimed that making great beer is all it takes to run a successful brewery. My point is that making great beer should be what motivates people to get into the business.
And in my experience, size and budget have nothing to do with the quality of beer. I’ve had beer made on basic home brewing equipment that was much better than some beer made by well-financed commercial operations. That’s not a common experience, but the point is that anyone can choose to make great beer. They just have to make it a priority.
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Jacob,
Congratulations on taking that VERY scary step of moving down the path of opening your own brewery. I applaud your passion for quality craft beer. That comes out strongly in your article. However, after having walked this path for almost two decades (working in several micros and brewpubs before opening my own production brewery), it is my professional opinion that strong marketing (labels, twitter, product stories, etc) is as important as a high-quality beer. If the consumer is not excited by your marketing on the outside of the bottle, why would they give the beer inside a chance? Don’t get me wrong, brewing quality beer is also key but you need to hook them to show them how great your beers are.
Any commercial brewery is a business. It is started (or should be) to make money; for the owner, the investors, the bank, etc. If a brewery is opened to “just make great beer” without a fierce eye always on the financial bottom line, that brewery will not be around long enough to make a positive impact on the local beer scene never mind the industry as a whole. Breweries are capital eating monsters: like a wild horse with a tapeworm!
Again, very good article. I enjoyed reading it.
Best of luck to you, keep pushing that boulder up the hill!
Prost!
Dave Ayers
Dave,
Thanks for kind words. I don’t disagree with you for the most part. As the guy who used to run the social media for Stone, I’m keenly aware of the value of marketing. It’s huge, no doubt. But I suspect a lot of people would agree with me when I say that I would buy Pliny the Elder even if it were sold in zip lock bags with a label hand written in sharpie. Same goes for anything from Cantillon; neither brewery does any marketing. My point is not that marketing doesn’t matter, only that beer quality has to come first.
And yes, good business decisions and financial management are essential, as they are for any business. Simply being passionate for beer won’t make you a good accountant. So we agree 100% there.
Cheers & thanks again,
Jacob McKean
@ModernTimesBeer
Jacob,
I truly appreciate hearing from you. If you are ever in northwest Montana, please stop into my brewery, Glacier Brewing, in Polson. I would love to buy you a beer!
Prost!
Dave
Glacier Brewing Company
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I don’t know if I agree re: contract brewing. Contract brewing, done as “gypsy brewing,” seems to be working out rather well in Copenhagen and Baltimore for the time being. It might even make sense from an environmental stand point. I don’t see them as any less passionate about craft beer than yourself.
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