“Terrapin is our first formal relationship where we are a minority shareholder. For the most part, the relationship is one of ‘How can we help you build this business in the Southeast?’ The southeast is significantly underdeveloped in the craft world. What Freddy [Bensch, co-founder] has done with SweetWater is just magnificent but when you look at the Southeast, at 30,000 barrels, Terrapin is one of the larger craft breweries in that part of the country. The ability for us to use our scale and resources to help them build the business the way they want to build it is kind of what that relationship is all about.
“That is really important to us. We are a minority shareholder. It’s not about how much money we are going to make or how much market share we are going to get from Terrapin in the next year. It’s more about helping them build this thing over the next ten years or twenty years.
“So, part of our strategy is to continue to look for other partners that want to capitalize on our scale but do it in a way that pretty much allows them to maintain their independent operating approach and, above and beyond all else, make sure the essence of what they have created is protected.”
On challenges and opportunities in the distribution and retail tiers:
“The thing that I think is really going to create a sea change is the distribution tier and the retail tier. Every conference you go to, every meeting you’re involved with, whether it be one on one with a distributor or a panel discussion, there is just a complete chaos and congestion at the distributor level and at the retail level. To me, those are going to be big barriers to entry for incoming brewers. However, because the consumer is not going to stop demanding increasing proliferation of flavors and styles, the demand is going to be there.
“The industry is doing a lot of great things to educate the consumer and the difference between just about everyone else and us is that I’ve got the scale to be able to learn and push that education to a greater extent. I’ve got this vision that six months from now, we’ll give a plan to the MillerCoors chain guys for the Krogers in Cincinnati and we’ll be able to go in and not only give them a beer section schematic but an entire store schematic that literally provides specific fact-based merchandising solutions that aligns different styles of beer with materials that justify free-standing displays.”
On growth of regional craft breweries:
“I don’t think there are going to be a lot of national players twenty years down the road. I do think that New Belgium and Sierra Nevada are positioning themselves to be national players. Outside of Boston Beer and Blue Moon Brewing Company, I don’t think anyone else is positioned to be national players.
“There is going to be an emergence of larger regional players and there already is. The last time I looked at the top 50 brewers list, those 50 brewers represent over 80% of craft volume. Even more than that if you include NAB, CBA, Blue Moon and Leinenkugel’s. So, out of over 2,000 brewers, you have 50 doing over 80% of the business.”
On mega expansions:
“The paradigm for smaller brewers has always been that you sell until you have no capacity and then build capacity versus being in a position of building capacity ahead of growth. I just hope that doesn’t screw up the model. For the big guys like New Belgium and Sierra Nevada, I don’t think it will. Even when you look at Terrapin, 100,000 barrels is more along the lines of a three-or-four year growth plan but they have also positioned themselves with someone that can really support them. If you look at the capacity in Athens, we’re maxed out at 30,000 barrels. I think Spike and John could be selling 80,000 or 90,000 this year if not for capacity constraints. I do think it is a bit risky when smaller players put so much capital into a new facility [ahead of demand].”
On contract brewing:
“When you add up the capacity from some of the recent announcements, you could be looking at a couple million barrels of spare capacity in the market. That’s not all bad based on the fact that there are a lot of people that want to brew beer that can’t. I can think of six or seven smaller guys I’ve talked to that have expressed interest in having us brew for them. We really can’t [due to lack of capacity]. The good news is that there is probably opportunity to fill all that capacity. Brad Hittle with Two Roads has an interesting model in that he is funding the growth of his brand with contract brewing. I think it is a brilliant strategy. More broadly, the bad thing about contract brewing is that the margin structure obviously isn’t as good [for the contract client] as when you’re brewing for yourself.”
On the future:
“I guess this is kind of a bellwether year. If the industry can eek out a 12-13% growth year, which is what I think it is running at right now, it will still be on track to double within six to seven years. At the end of the day, it is all about the beer drinker. If the beer drinker continues to do what they are doing, I think there is a tremendous upside yet in [the craft segment] of the business.”