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Insightful opinions and timely responses to the most important business issues facing the craft beer industry. Crafting A Strategy members have access to additional blog content from our founders and from industry experts in marketing, financial modeling, economics, and business strategy.

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Craft beer is NOT depressed, but the Brewers Association may be...

By CAS Member Thad Fisco and Portland Kettle Works

Late last year my team and I had a chance meeting with two Brewers Association (BA) executives in a brewery. This is not the start of a bad joke -- it is how I learned about a serious problem with the BA and the huge opportunity I see in the craft brewing industry.

 

After a couple of beers and some serious conversation we understood that the BA is not focused on the +80% of beer drinkers that don’t drink craft beer, and that protecting craft beer’s 12.7% of independent market share from AB-InBev is their primary goal. According to these BA folks, Anheuser-Busch is absolutely determined to put independent craft breweries out of business.

 

We believe this vision is flawed and out of sync with reality. It is based in empty rhetoric and fear that harms rather than helps independent craft breweries and keeps good ideas from finding the light of day. Below we describe why this is true, and we start by getting quite blunt about what craft beer is and who is making it.

 

What is craft beer? We all know it’s not fizzy, yellow water. Instead, it’s the “Premium Beer” that we all love as beer drinkers, regardless of who makes it. A “craft brewer” is someone or some firm that is engaged in producing it. This is not the BA’s “definition” which seems to change subject to political or economic necessity. Our inclusive definition of craft beer provides a view of the industry landscape from a broad and open perspective, and here is what we see:

 

Anheuser-Busch, Heineken, Constellation Brands, MillerCoors, Mahou San Miguel, Kirin, Asahi and the other big players, are fully invested and very engaged in the business of craft beer. Collectively they have likely invested over $2-billion into the business of premium beer. That investment will continue. They are also in competition with the mounting number of world-wide independent craft breweries, and they are strong competitors in a space that they have traditionally owned. The competition is healthy and helps to drive innovation and quality throughout the industry.

 

AB InBev and the other large breweries that have invested in premium beer offerings are helping raise all boats

 

The evidence shows that the big brewers are not out to destroy craft beer, craft beer drinkers, or craft breweries.  Last year Anheuser-Busch became the nation’s largest dollar volume craft beer producer surpassing both Boston Beer and Sierra Nevada in craft-derived revenue. 

 

The systematic plan that Anheuser-Busch has implemented in buying independent craft breweries between 2011 and 2017 is likely over.  Adding to their portfolio through the acquisition of SABMiller makes Anheuser-Busch the undisputed king of craft.  Yet the craft beer community is needlessly being led into battle against AB InBev who is actually helping the industry make headway toward what we need most: growing the premium craft beer market share. Should we follow the BA, industry in-fighting and craft maxing out at 18-20% market share, or should we instead push craft forward toward 50% market share of the beer market?

 

Portland Kettle Works isn’t the only company that thinks the Brewers Association has painted themselves into a corner. The members of Crafting A Strategy (CAS), a global online community of beer business entrepreneurs of which PKW is a member, recently spoke out against how the ever changing and narrow definition of “craft” from the Brewers Association is misleading and potentially dangerous. In an October 2018 blog, CAS President Sam Holloway and V.P Mark Meckler noted that AB InBev, Heineken, and Mahou San Miguel were using their vast resources and marketing expertise to convert the 85% of non-craft drinkers in the USA into craft drinkers. These breweries are working hard to bring in more craft beer drinkers, but their contributions to the overall premium craft beer market share are not counted in the BA definition. CAS suggests that we are closer to a 20% craft market share and this is a tipping point where we can quickly accelerate market share toward as much as 50% by 2025. CAS’s logic, borrowed from innovation diffusion logics, is depicted in the figure below. Whereas the BA’s definition of craft suggests we are maxed out, CAS and PKW believe we are on the cusp of widespread market growth if we are wise enough to keep our eyes, and our strategy, looking forward.

 

Growth in business is a measure of success.   Stagnation and shrinking market share eventually lead to failure.  If craft beer does not grow as a market segment we, meaning craft brewers including AB InBev, put ourselves under siege as we fight over a non-growing business with increasing competition. It is therefore incredibly dangerous to narrowly under-define the craft beer sector.   The stakes are high.  While the BA is engaged in protectionism, AB InBev is experimenting and redefining the market in an effort to remove barriers to entry for the 80% of non-craft beer drinkers.  Independent brewers have a lot to learn from their efforts to grow demand in an increasingly competitive business.

 

Using BA statistics, 3,743 new breweries opened between 2014 and 2017 which translates to a 116% growth rate.  During that same period, market share for craft beer, as defined by the BA, grew just 4.9%.  This is equivalent to 30% growth per year in brewery openings against 1.3% growth in market share.  This is a serious problem, but only because of definitions inadvertently designed to depress the business of craft beer.

 

...equivalent to 30% growth per year in brewery openings against 1.3% growth in market share. 

This is a serious problem...

 

Portland Kettle Works makes continuous efforts to define trends that affect our business. While the most recent annual numbers are just now becoming available, they are almost certainly supporting recent historic trends.

 

Here are some recent findings:

  • Using publicly available data from the BA, we calculated from 2014 to 2017 approximately 1.5 million barrels of craft beer were removed from the craft market sector as big breweries bought small breweries
  • At the end of 2017 the breweries previously defined as “craft” controlled roughly 4.9% of the overall market share 
  • When this 4.9% is added to 12.7% “craft” beer share, the more widely defined craft/premium sector becomes 17.6% of the overall market
  • AB InBev and the other large breweries that have invested in premium beer offerings are helping raise all boats

It would not be at all surprising to find that craft beer, as defined in this article, is now, in 2019 controlling over 25 and possibly as much as 30% of market share. This number feels better.  However, it needs to continue growing. 

 

At a recent brainstorming session, our team along with Crafting A Strategy examined what success should look like in the future.  Framed in terms of market share, we decided that 50% for craft/premium is a worthy goal.  In this moment, the Brewers Association has chosen to lead us into a battle, armed with a well-intentioned campaign of “independence”.  We absolutely stand with the BA’s effort to promote the importance of American entrepreneurial innovation, grit, and an undying determination to succeed.  Given time and enough money, the independence campaign may well move the needle a bit as a small minority of the public that cares to identify and buy our beers over those of large breweries becomes educated.  However, in our opinion, this is a misuse of BA resources. This effort will not grow the craft/premium market share one bit.  We will remain besieged.  Growing craft market share should be our collective and undisputed priority.

 

About 196 million barrels of beer were produced in the US in 2017.  According to the BA definition and statistics, craft beer accounted for about 25 million barrels of that production (12.7%).  Adding the premium sector increases that craft/premium piece of pie to 34.5 million barrels in 2017 (17.6%).  This means, at 49 million barrels, craft/premium owns 25%, and at 98 million barrels, it is half of the market.   How can that not be good for independent craft brewers, even if Anheuser-Busch and other big breweries help to get us there?

 

This is a future that we can look forward to.  A robust environment with a huge, inclusive base of enthusiasts, willing and eager to enjoy high quality, flavorful beers from thousands of innovative independent breweries across the US and, if trends continue, tens of thousands worldwide.  A lot of collaborative and rewarding work lies ahead.  Rewarding work beats the blues any day.

 

Cheers.

Nailing the Basics: Inventory for a Brewery

By Steve Waters, CEO Backwoods Brewing Co., Carson, WA USA

For most brewery owners, just operating the day to day aspects of the business absorbs all of your time. When you do get a little extra time to spend on figuring out the best way to keep good records and ensure that you’re not making costly errors, it’s easy to feel like there are so many things you could be doing that you’re not sure where to start.

As with anything in life, sometimes you just have to start with what’s “good enough” and then work toward making it great. Brewery inventory is one of those topics that can seem daunting at first, but when you break it into smaller pieces and attack it with the time that you have, you’ll find that improvements can come quickly. The key is to follow the below steps, work through more of them as you have time, and don’t beat yourself up if it’s not perfect – just make it better every time you work on it.

 

Step 1 – Start counting!

If you paid for something that gets used up in production and it sticks around for longer than a week, go count it and write down what you find. Have too many items to count all at once? Go count your most expensive stuff (i.e. the highest value hops, some of your specialty malts, and easy to count packaging materials). Still too much? Go count half of it and plan to count the rest in a week (pro tip: large companies do this all the time, they just give it the fancier name Cycle Counting; more on that later). You might feel like you have an idea of how much you have in brewing inventory, but you also probably have your mind on dozens of other aspects of your business on any given day. Taking a count and writing it down is a good first step in getting a baseline of inventory that you hold at any given time.

Step 2 – Commit to a counting schedule

Alright, you’ve done the deed. Maybe you’ve even done it a couple of times and you’re starting to get pretty good about it. Most importantly, you are getting a feel for the level of inventory that you keep, and some of the reasons it might fluctuate up or down depending on your production needs. Now it’s time to commit to a schedule so you don’t lose sight of it, and so you can compare it to sales over the same period (later on – don’t worry about that just yet). Monthly is an easy starting point, and coincides well with monthly financial review. Semi-monthly can be helpful too because it gives you a point midway through the month that you can say “There’s a lot of waste of our base malt compared to sales this month. Are the brewers following the right recipe? Can I adjust and come close to budget before the month is out?” As mentioned above, if there are too many materials to count all at once, consider cycle counting. Count a quarter of all of the materials once a week and by the end of the month you’ll have a fairly recent true count of everything on the floor.

Step 3 – Set up a pricing sheet for all raw materials

Once you know what you have on hand, the next step will be assigning dollar amounts to your inventory. Setting up a bible for what each item costs you is good to do early on. Giving everyone who orders product access to this bible will help ensure that it stays up to date. Making someone responsible for keeping these prices updated will be the real silver bullet to making sure it stays up to date and accurate. A production manager can easily fit this into their day, or even a brewer or cellar worker.

Step 4 – Multiply item costs by the counts of materials

This is the part that starts to add real value, because it’s easier to make decisions when you break it down to dollars and cents. By this step you’re able to calculate a snap shot of your costs in raw materials.

Step 5 – Combine raw materials costs and labor for work in process/finished goods

This step can be tougher because there are a lot of moving parts, so don’t get caught up if your method for counting work in process and finished goods isn’t perfect at first. Combine all of the “ingredients” (this would include packaging materials, though not kegs as they are reusable) into a pile. Now that you have dollar figures for each of your materials, simply multiply the quantity used by the cost per unit to arrive at total cost of each item in the recipe, and add it up. You will also want to add labor associated with production into each item, which often varies each time you produce something new, but an estimate or average will work for now.

Notice that we combine work in process and finished goods for our purposes here. The reason for this is because the distinction between the two can be slight, and it means different things to different people. When is beer finished? After fermentation? Once it is kegged? What if the beer is pushed from a full keg to three pony kegs because there is more need for smaller kegs than larger kegs at the moment? Obviously this distinction can get tricky, and it’s up to you to determine where you draw the line and how useful it is for your business to treat this too granularly.

Step 6 – Use your next count to adjust

Whatever process you use to manage amounts going into inventory, it will never be perfect. It isn’t perfect even at the largest, most well-managed manufacturing companies out there. Use your scheduled counts to compare your actual balances to your expectations based on production reporting, and adjust any differences to your cost of goods sold account on the profit and loss statement.

 

Brewery inventory can be a burden to manage, but keeping a keen eye on it is integral your success. Following the steps above has made the process less daunting for many of the breweries who have taken it on. Keep in mind the suggestion to start by doing what you can and building on it as you have the time. With a little work, you can develop a highly functional, low cost inventory system and stop worrying so much about what might be idling on your shelves.

Has the BA Become Too Big to Succeed?

By Sam Holloway, Ph.D. & Mark Meckler, Ph.D.

 

Frustration with the Brewers Association (BA) is reaching a boiling point within the membership at Crafting A Strategy.

 

Crafting A Strategy (CAS) is an online community of craft brewery entrepreneurs and the allied trade members who serve them. With brewery members spread across 15 countries and four continents, our community rallies around each other, helping brewing entrepreneurs solve the problems they currently face and also helping them avoid problems they didn’t even know to look for. Sensing the growing frustration with the BA, we started a forum thread to get the issues out into the open.

 

Here are some member comments:

 

If I were as large of an organization as the BA with such a diverse group of constituents, I feel like I'd be paying more attention to the portions within that are struggling instead of trying to support the ones that are slowly trying to redefine their way out of the original mission of the group.

 

It is clear that the BA has once again shown its true allegiance. They repeatedly take actions to support its minority members like Boston Beer Co. The 6000 “small” breweries may see some benefit from altering the BA’s definition of “traditional,” but the clear winner is Boston Beer Co. as this change allows them to remain “Craft.”

 

Part of our role as leaders of this community is to listen to our members and help them find solutions. Reading some of their comments, I was reminded of a discussion on a Harvard Business Review discussion board titled: Should CEOs worry about companies being too big to succeed? 

 

In an era when companies are deemed “too big to fail” perhaps the Brewers Association (BA) has become too big to succeed. Next, I will insert 3 ”Too Big to Succeed” company characteristics discussed at the Harvard website as they ring very true with our members’ frustrations.

 

1.   "Toobigs are enormously complex, with massive, self-defeating strategies at war within, producing a lower return."

 

Here are some member comments:

 

It must be tough to be the organization tasked with trying to be "everything to everyone", but that is the role they took on and it certainly feels like the small brewers are being left in the lurch of late. I have spoken with a number of our customers who feel the same way.

 

Instead of changing their mission, maybe the BA's time and resources would be better spent trying to support the struggling members that make up a significant number of their base. It's simple ops management - wherever there are bottlenecks in your system, you spend time and resources trying to make that part of your system more healthy. How much would people's perception of the BA improve and how much would the true, core industry as a whole benefit and increase our likelihood of survival if the BA took time to address the struggles that are really going on in the industry right now instead of trying to be more accepting of the companies that are trying to diversify their way out of the industry?

 

2.   (For too big to succeed companies) Size has to be considered alongside such things as "conviction … focus … ability to create a culture of belonging."

 

Here are some member comments:

 

And what about independence? Don't get me started - circular logic. Independent brewers are those that are not owned by not-independent brewers. Got that?

 

We need support, we need education, and we need a community that provides us more than one big party every year in exchange for our annual dues.

 

I've been a devout supporter of the BA. We've bought very expensive ad space in their magazine, we've overpaid for floor space at their tradeshows, and we've shelled out big money for sponsorship opportunities. I've worked with some nice people there, but I've never worked with anyone who cared to ask me how they could help me as a small allied trade member (aside from offering to sell me more ad space, etc..).

 

3. "Success and growth (for too big to succeed companies) depends on a variety of factors of which greed is not one."

 

Here is a member comment:

 

I also have a general concern for an organization that puts on the largest beer festival in the world and charges brewers to attend, doesn't buy their beer, requires an army of unpaid workers to pull it off, and disrespects the product by putting it in a plastic cup. It really seems like it is all about the money.

 

In conclusion, it’s tough to explain the BA’s decisions without seeming overly critical. I think there are good people at the BA who in trying to be all things to all breweries, they have lost sight of the unique challenges, needs, and goals of small breweries. Unfortunately, small breweries make up the vast majority of their membership. The researcher in me also knows the BA may be falling victim to what Clay Christensen called “Good Management.”

 

In fact, many companies get into trouble precisely because they follow the principles of good management. They listen to their best customers, innovate to meet those customers' needs, charge higher prices, report record profits and miss a transformational change innocently incubating at the fringes of their respective markets. - Clay Christensen (Forbes, May 24, 2006)

 

Last week, several news outlets and industry magazines loudly questioned the latest change to the 'traditional' pillar in the BA's definition of craft. A diverse group of critics from The Motley Fool, to Food and Wine, to Brewbound all chimed in with direct and veiled critiques of a move to keep Boston Beer Company part of the BA's dataset. We felt we needed to respond in our forum. The floodgates opened, anger and emotion surfaced... so we wrote this blog to share our views with the wider industry.

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Making Sense of the Revised Craft Brewer Definition

By Mark R. Meckler, Ph.D. & Sam Holloway, Ph.D.

Summary

Outrage, confusion, hurtfulness, desperation … these emotions flooded online forums as small breweries all across the USA tried to comprehend why the BA would alter the definition of “craft” to include seltzers and (seemingly) whatever Boston Beer Company needed. We admit we were hurt, too. It was like when your parents tell the teenage version of yourself that you need to grow up and take care of yourself more, they want time for “other things,” so make your own breakfast and lunch and by the way, there won’t be anyone waiting for you when you come home from school anymore.

With a week to cool off and try to reconcile how our former beacon of hope, the Brewers Association, could seemingly turn on us in favor of only the largest craft breweries we came to a sobering realization: The Brewers Association is doing the right thing. They’ve grown up, the industry has grown up, and the problems the BA needs to concentrate on are more grown up. We certainly think they made a mistake on how they communicated this change, but we all need to get used to a new reality. The BA is no longer centrally focused on the needs of the smallest breweries – and that is exactly what they should be doing. Read below to learn our argument in favor of these changes and a new future for our industry leaders and ourselves. Note: We have not spoken to anyone at the BA, just consoled ourselves over some strong winter ales and management theory.

The Proposal to Alter the Definition of “Craft”

Recently, the Brewers Association board of directors proposed to alter the definition of a craft brewery to make it more inclusive. The current definition of “craft” includes three pillars: Craft breweries must be small (less than 6 million barrels), independent (not owned more than 25 percent by a non-craft brewery), and traditional (a majority of its total volume must be derived from traditional or innovative brewing ingredients). As reported by Chris Furnari and Justin Kendall (Brewbound), the “traditional” pillar in the current definition of craft may be changed: “It’s the last pillar, traditional, that is under review, in part because an increasing number of craft brewers are already experimenting with non-traditional beer offerings such as flavored malt beverages and hard seltzers. A growing number of BA members have also expressed interest in creating beverages infused with THC and CBD…”

The motive behind this change to the ‘traditional’ pillar is being vociferously questioned by smaller traditional breweries, who mostly think it is just a way to keep Boston Beer Company defined as a craft brewery. Beervana creator, Jeff Alworth, presents a compelling argument that supports this viewpoint.

We agree that the BA has screwed up in its communication and messaging on this. At the same time it is possible that the BA still holds strong to its core values to support all craft, not just large craft. Sometimes leaders need to solve new problems to sustain the same mission.

We’d like to first comment on the broad feeling of betrayal that small craft brewers are feeling. A core belief of craft brewers is that “local” and “small” is the core, the heart and the soul of craft. We agree completely. However, this also can lead to irrational thinking that that “non-local” and “large” mean not-craft. We disagree with that conclusion. Two things may be true at the same time: a) the core of craft breweries are small, independent and local, and b) a craft brewery can get very large and still craft their beer beautifully with similar values and passion as any other craft brewery.

So is there no betrayal, nothing to be upset about?  Yes, there is at least a bit of betrayal here by the Brewers Association. They have decided to focus their attention on big issues, big goals and formidable tasks, seemingly at the expense of focusing attention on their traditional core members. Also, they have disrespected traditional core members by communicating poorly and disregarding the importance of how small traditional brewers might feel. This is where a lot of the hurtful emotions come from.

If you are feeling bad or completely betrayed by this re-definition of craft, try looking at it this way. The BA finds itself in a position to exert power and influence in the name of craft brewers, and push back on the practices of the multinationals / marketing giants. It had its first major success at the national level by influencing excise taxesBy expanding to keep large craft brewers on our team, we keep and grow that power. In this sense, the BA is positioning itself to get positive work done that none of the rest of us can do. We say go for it BA, get big, powerful, get bad-ass and go kick some corporate butt for us. That is work state-level guilds and we small breweries cannot do.

But what about us? It feels awful when an organization or a club that was “ours” changes and seems to leave “the little guy” behind. Is this abandonment? I hope not, and the Brewers Association needs to step up and let its members know. Small brewers need a lot of help and a lot of support. Small brewers are the soul of the craft movement. The Brewer’s Association has to learn how to grow without abandoning their base, traditional microbreweries, brewpubs, and tasting rooms.

Let’s craft a counterargument with a little thought experiment. What happens if a small, 500-barrel brewpub gets really popular and starts selling 51 percent burgers and fries and 49% beer? Are they off the list too?  Is Dogfish Head less craft or less important to our industry simply because they took money from private equity to grow? What about CANarchy, Enjoy Beer, or Artisanal Brewing Ventures who make sound business decisions to expand their ability to make well-crafted beer: are they no longer one of us? We didn’t think so either – we should and do celebrate our friends who’ve decided to get big in the right ways.

Craft Brewing has grown exponentially. Formerly small breweries have turned into regional and national breweries. This has not stopped local micro, nano and pub breweries from entering the market and succeeding. The “rising tide floats all boats” theory offers logic to the argument that the growth has helped everyone.

Advice for the Brewers Association

  1. Know what you are know why you are. Know what you are not and why you are not. When you have decided this, please broadcast it loud and clear, and stick with it. This is what binds leaders and followers, organizations and communities. Let everyone know, so that we can affirm or deny that at the core we (mostly) share common beliefs, expectations, assumptions and values.
  2. Give us ability to make sense of things in a similar way through that common lens. The BA may have reasons for this decision that would resonate with many members large and small.  The BA’s failure to explain and make senses of this redefinition for its members is a major failure. This can be corrected. The BA should immediately engage membership at all 3 Levels of LeadershipExplain how this proposed change is a pursuit of an opportunity rather than just problem solving for Boston Beer Company. Explain why this is right and good for the enterprise and for all members.
  3. Be especially clear with membership by affirming values, beliefs, assumptions, and expectations. Perhaps some of these are re-affirmations, and perhaps the BA is affirming some new values, beliefs and expectations. Just clearly declare where you stand on principles, and move away from awkward definitions. This will allow each member the ability to listen, reflect and decide if they still want to follow and support the BA or not.

A lesson for all of us. All change is loss and loss must be mourned. Then we move forward, together, onward, and upward. The Brewers Association has grown a lot. Much of the effort and attention now goes to breweries that are larger and more powerful than the vast majority of breweries. But you have not been abandoned! Now is the time to look to other organizations for the specialized support that the BA can no longer provide. Join Crafting A Strategy. We are here to help all breweries.

Two Weeks That Changed My Brewery's Strategy

By Tim Hohl, Founder, Coin Toss Brewing (Oregon City, Oregon) 

Please Join Me As A CAS Member

 

I admit to you that I didn’t really use the value that CAS and Sam Holloway offered for two years. I only recently logged in again because I was finally ready for help. In just 14 days, I was able to tap into the real power of CAS. I can’t believe it took me this long, but I don’t want you to make the same mistake. This is the best $99 you can spend as a brewing entrepreneur. Join now!! Don’t wait!! I’m ready to be your colleague, your confidant, and share a few beers while we grow and learn together.

 

When I stopped relying on hope and reached out to CAS for help...

A Brief Recap of My Situation

 

I’ve been a member of Crafting A Strategy since June of 2016 when I asked Sam Holloway to use my brewery as a case study in his undergraduate business policy and strategy class.  I learned about Sam via my former career as a morning news host on the radio, which featured a weekly craft beer segment called “The Beer Geek.”  My station managers reached out to The University of Portland when they learned of Sam’s growing reputation as a beer industry researcher. Sam and his students developed a growth strategy around the core elements of our brand and mostly reinforced what we already knew. I felt good giving these students a glimpse into a real company, but their analysis wasn’t a real game changer. I kept with my basic strategy and enjoyed a couple years of slow growth and fun while I kept my day job on the radio. 

 

I ran my business on fun, hope, high quality beer, and a commitment to build a community of breweries in Oregon City, a suburb of Beervana (Portland, Oregon). I also had a lot of hope and a dream to someday leave the radio booth and make this my full-time job. What I didn’t realize was that hope would become reality faster than my wife and I expected. I was let go by the radio station ten months ago. I no longer had the safety of making this brewery my side hustle. With a kid headed to college next year, I could no longer rely on hope and I needed help. The rest of this blog shows a daily path through the community at CAS and details how in only two weeks, I’ve asked for and received help.

A Two-Week Timeline That Changed Everything

September 12, 2018 – My First Ask For Help

I emailed Sam Holloway (Co-founder and President of CAS) because I needed a ‘reality check’ on my strategy to expand Coin Toss Brewing. I had worked up some financials, though that isn’t my strength. My initial plan was to expand my self-distribution business to points of sale outside our local area.  Sam wrote back within one day and we scheduled a lunch.

September 19, 2018 – Lunch, New Ideas, & Connections

Sam and I met at the Barley Pod, a new and innovative expansion project of another CAS member, Baerlic Brewing Co. Sam wanted to show me other ways to expand my self-distribution business and one that was very successful. I learned it was also near Sam’s house so he was maybe a little biased. I did a mental download about everything. My daughter going to college, my dismissal from the radio station, my excitement over our success at Coin Toss, and my strategy moving forward. Sam listened and basically said he didn’t like the strategy. We talked a bit more and Sam offered to make introductions to two other Crafting A Strategy members whom I could bounce ideas off of and also a CPA firm he really liked to help me with my financials. The CAS members were spread across the west coast of the USA, but all of them offered to help:

  • CAS Member, Randall Behrens (Santa Rosa, CA) Live Oak Bank Senior Loan Officer
  • CAS Member, Steve Waters (Carson, WA) Backwoods Brewing Company CEO
  • Irvine & Company CPA, Karly Tell (Portland, OR)

September 20, 2018 – CAS Content For Me to Review

One day after our lunch, Sam responded with seven content pieces from the CAS website that could also shape my thinking. Sam knew I was a busy beer entrepreneur, so he only sent me webinars & podcasts that I could listen to while driving around to make my sales calls. It turned out several CAS members had already discussed the pros and cons of expansion; I just hadn’t engaged with the content – I was too busy running my brewery. Without judgment, Sam sent me the seven content pieces and then went to work setting up meetings for me. Here was the content he sent:

 

Webinars:

Podcasts:

September 24, 2018 – New Canning Line Quote

I sent Sam a link to the canning line I was interested in, which we had discussed over lunch. We agreed to keep gathering information and meet again for lunch the first week of October.

September 25, 2018 – Conversation with Live Oak Bank

Sam encouraged me to get a better understanding of the SBA 7A loan program and referred me to Randall Behrens at Live Oak Bank. Ultimately, Coin Toss’ situation wasn’t a fit for this program, but speaking with Randall introduced new ideas into my strategy and offered yet another piece of new information I didn’t know to ask for. Thanks to this CAS member, I had another piece of data to make a better decision.

September 26, 2018 – Conversation with CAS Member, Steve Waters (CPA, CEO)

Steve and I met for beers to discuss my overall situation and just to bounce ideas off each other, one brewery entrepreneur to another. I didn’t realize Steve had been Sam’s student a decade ago and only came into the beer industry when his family founded a small brewpub in his hometown. Steve was a CPA and seasoned auditor and operator, just not in the beer industry. Steve discussed how he used CAS to get up to speed and how he is now a very willing mentor to people like me who make great beer and need occasional help with the numbers. Steve is actually what Sam calls a “Member Expert” within the CAS community. A member expert is someone with a high level of expertise in one area who makes herself/himself available to other members. As a CPA, Steve’s expertise is accounting and finance. He’s also a super normal dude who has slowly, methodically, and profitably grown his brewery with CAS’ help.

September 26, 2018 – Conversation with Irvine & Company CPAs

Karly Tell and her colleague, Jason Nishikawa telephoned me to learn more about my situation. They have deep knowledge of the craft beer industry and quickly helped me articulate my challenges to determine if they were a fit or if they could recommend someone better. Within just a few minutes, they set up an in person meeting and connected me with a trusted bookkeeper in my hometown, Oregon City.

 

In just 14 days, I was able to tap into the real power of CAS. I can’t believe it took me this long, but I don’t want you to make the same mistake. This is the best $99 you can spend as a brewing entrepreneur. Join now!! Don’t wait!! I’m ready to be your colleague, your confidant, and share a few beers while we grow and learn together.

Don't Get Stuck in the Middle: European Ownership, Flagship Strategies, & Craft Beer Market Growth

By Mark R. Meckler, Ph.D. and Sam Holloway, Ph.D., October 16, 2018

We’ve been scratching our heads at the growth strategies of some of the USA’s iconic (formerly) craft breweries. While the vast majority of regional craft breweries are experiencing flat to negative growth, a small handful of corporate owned/invested craft breweries are expanding. At first glance, it seems like these growing regionals may be doing something ill advised and perhaps going about growth the wrong way. As we pondered this phenomenon, we understood that this corporate craft strategy was neither unwise nor folly, and that it is a warning shot to all craft breweries. Below we explain what we think is going on, and offer some strategic advice for craft breweries going forward. 

Note: We have not spoken to anyone in the companies mentioned below. Our review of publicly available data, plus some thinking about how industry growth occurs outside of beer and which parts of a generic industry growth strategy fit and do not fit the current US craft beer industry. Also, we include formerly “craft” breweries like Founders and Lagunitas in our analysis, actually they are the heart of our argument. Our definition of “craft” includes all former craft breweries that are now corporate owned – because small craft breweries compete with them head to head, everyday.

Read all the way to the bottom if you want to know one way that the craft beer market share could grow significantly beyond the BA’s 2014 prediction of 20% of total US beer market. Read all the way to the bottom if you believe premiumization and taproom/at brewery sales are the only good strategy for every craft brewery – we believe you would be wrong. Don’t blindly trust the consumers/sales data immediately in front of you, take 5 minutes and keep reading to understand how different customer groups respond to different marketing tactics. Don’t blindly trust the BA reports that don’t include former craft breweries like Founders and Lagunitas; to the majority of beer drinkers (the early and late majority customer segments) they do count as craft. Read below how this works and then decide where you fit.

Is there still a place for a “flagship” driven beer business strategy?

It seems that breweries like Founders and Lagunitas are “buying market share” or at least they are focused much more on volume growth than most small craft breweries that are (wisely) focused on dollar growth. How does this make sense? We believe it is because (the deep pockets of) a few large European Brewers are relying on a flagship model for success. Didn’t the flagship model go out of fashion with craft beer enthusiasts? Yes. Aren’t companies like Craft Brew Alliance struggling with their former flagship strategies like Widmer Hefeweizen? Yes. Why would a European Brewery still use this strategy in the USA? It is because they are competing for different customers. We believe two EU Breweries in particular, Heineken (Lagunitas) and Mahou San Miguel (Founders) are strategically positioning themselves to win the early and late majority segments of the overall US beer industry. 

This matters because adoption by early and late majority consumers will (theoretically at least) skyrocket craft beer’s influence “across the chasm” (Moore, 1991) and could grow overall craft market share from the current range of 10%-17% toward as much as 70% of the American beer market. These European companies know how to win a market share game, and they aren’t using “crafty” beers like Blue Moon or ShockTop to do it. Further, they aren’t buying up multiple craft brands in a variety of regions like AB InBev has done. They have a “one-brand-one-flagship” model, and they are laser focused on getting beer drinkers like my dad and my uncle to pick Lagunitas IPA or Solid Gold Lager instead of picking from a great local nano- or microbrewery.  When early and late majority consumers (like our dads and uncles) contemplate rotating tap handles at brewpubs and bars, or packed shelves at grocery and convenience stores, they make their choices differently from earlier adopters and craft beer enthusiasts. These European brewers with years of acquired marketing wisdom know this about the early and late majority, and they know how to exploit the difference. 

Founders and Lagunitas are playing the same game with different strategies

As detailed on Brewbound in late 2017, Founders has seen enormous growth at a time when most regional craft breweries are flat or down. According to Forbes,much of this growth can be attributed to aggressive (or downright low) pricing across their portfolio of off-premise 15 packs. For example, as stated in the Forbes article, Founders recommends Solid Gold Lager be priced at $1.17 for 12-ounces versus the craft national average (According to IRI) of $1.56 per 12-ounces. This means Solid Gold six packs are more in line with Budweiser 6-pack prices than most craft brands. In some ways, Founders appears to be buying market share, trading volume growth for dollar growth. This goes opposite to the premiumization trendand price increase occurring in most taprooms and among the USA’s smallest 6,500 breweries. What could be driving this strategy? Hold that thought for a minute…

At the same time that Founders is seemingly buying market share, Lagunitas is growing while charging a super-premium. Lagunitas CEO Maria Stipp told Brewboundthat mid-2018 sales were up 4% in dollar growth and 5% volume growth. However, unlike Founders’ low cost strategies, Heineken owned Lagunitas has among the higher priced offerings: at an off-premise case price of $38.37, they are the seventh highest price among nationally available craft portfolios. Lagunitas remains highly focused on their flagship IPA, which ranks #1 in the IPA category in the USA. We note that Heineken recently went through a big layoff of sales people at Lagunitas, but their strategy remains a one-flagship-premium price winner. What does this all mean?

We think that the European ownership of these national craft brands tells an interesting story. Back in 2014, we predicted that Heineken would have an aggressive craft beer acquisition strategy that matched its flagship model of promoting their signature Heineken Pilsner. Unfortunately for them, the Heineken as “aspirational” brand tactic no longer works as well in the context of the super-premium craft beer movement. Since 2014, we have seen Heineken buy up Lagunitas Brewing and similarly position it as a flagship model, infusing the company with money and growing Lagunitas’ sales globally. Similarly, Founder’s Brewing is partially owned (30%) by Spanish brewer Mahou San Miguel. At the time of the minority investment, Founders Brewing’s blog offered the following glimpse at a global flagship strategy for Founders: “Mahou will help us grow to be an internationally recognized brand. They’re looking at this investment as a long-term partnership, and they’re excited to help grow Founders throughout their extensive global distribution footprint.”

To summarize, these European owned and European influenced American craft breweries are using a flagship model that has fallen increasingly out of favor among most small American craft breweries. Further, while AB InBev appears to be competing with the small US craft brewers in a fight for enthusiasts and early adopters (only 15% of beer drinkers), Heineken and Mahou San Miguel are fighting for the other 85% of American beer drinkers with a flagship craft strategy – and it is working. Keep reading for a quick lesson on the laws of innovation diffusion and industry growth.

Flagships are dead! Long Live the Flagships!

We believe the increasing reliance upon a flagship model is highly correlated with an increase in foreign ownership of these companies. Further, we think these foreign owners aren’t as tied to being “craft” or to being “American craft” and we think this is smart for attracting the early and late majority of beer drinkers.These foreign owners are chasing volume and sales markets (dominated by the classic American premiums, like Budweiser, Bud Light, Miller Lite, Coors, and Corona Extra drinkers). However, instead of building “crafty” “or craft-ish” brands like Blue Moon or Shock Top, these European owners are taking aim at the early majority with some of our best legacy craft breweries and nationally recognized craft brands.

Our argument rests on two well-documented industry strategy frameworks: the industry lifecycle and innovation diffusion (Rogers 1976; Rogers 1983), plus an understanding of a particular component within those frameworks that is called “the chasm” (Geoffrey Moore, 1991).

Let’s start by making a general assumption: all growth industries need adoption by the early majority market. The only time this is not true is if the industry has no desire or drive to grow beyond at most 20% of the potential market for its goods or services. This is the core strategy of Founders and Lagunitas – let all of us small craft breweries continue to fight over the 15-20% of “true craft drinkers” while they gobble up market share and push into the early majority. Figure 1 (below) depicts a generic innovation diffusion scenario.

Figure offers a graph of the generic innovation diffusion situation (Rogers 1976; Rogers 1983) 

The first two groups to adopt a new offering are the innovators and early adopters. As the growth stage hits, two very different groups must get involved for mass market development, the early and the late majority. However, the transition from initial growth to mass market adoption often does not occur. There is a “chasm” that often does not get crossed. There are many reasons that make it difficult to “cross the chasm.” The foremost reason is the vast difference between the needs/desires of the majority versus the innovators and early adopter types. Industries get stuck because they have become accustomed and bound to serving the innovators and early adopters that loyally helped carry the industry through the embryonic and early growth stages of its development. 

Sound familiar? It should, because loyal, enthusiastic and knowledgeable craft beer drinkers by far dominate the market segment that currently purchases craft beer. Craft breweries have become experts at pleasing this group, and have developed a joint loyalty. This is not a bad thing, it just leads them to having less focus on the majority of beer drinkers than would be ideal.

 

According to Geoffry Moore (1991), innovators are “enthusiasts,” they like to be first and they are willing to put up with inconsistencies and to tinker with early versions of a technology, a product or a service. Early adopters are “visionaries” who explore the new innovation and envision modifications that could bring the innovation into the main stream. They like special treatment and will put up with trial and error. Both innovators and early adopters like to experiment and are ok when quality is not always there, and ok with purchasing a brand or style they are unfamiliar with. But these folks only account for 6-16 percent of the market. These are the “true craft” drinkers most of us are competing for.

Lagunitas and Founders are playing a different game – they want to own the early majority.

The early majority and the late majority are very different from early adopters and innovators (see Figure 2 below). An industry that does not understand the differences enough to also appeal to the idiosyncrasies of the early majority has greatly reduced chances of crossing the chasm to mass adoption.

  • The Early Majority does not like trial and error
  • The Early Majority are pragmatists
  • The Early Majority knows what they want and need
  • The Early Majority does not want to make extra effort to find it or acquire it.
  • The Early Majority won’t try something unless someone else has tried it first.
  • The Early Majority wants it to be available and convenient
  • The Early Majority is willing to pay fairly for if it gets what it wants and needs
  • The Late Majority is conservative
  • The Late Majority accepts a new way only when the old way is no longer viable
  • The Late Majority expects low prices and high customization (that it don’t like to pay for)
  • The Late Majority expects the most convenient acquisition possible

Figure 2 highlights the "chasm" that must be crossed to reach the early and late majorities (Moore, 1991)

 

All of this together means that If craft breweries want to cross the chasm and gain adoption by the early majority, (which accounts for about 24% of market share) and then the late majority, (which accounts for 45% more of the market), then craft breweries will have to provide broadly available, consistent quality, broadly distributed, branded beers. In a word: Flagships.  

Brands like Founders and Lagunitas are the poster children for craft to cross the chasm. My father (a typical early majority member) orders All Day IPA when he goes out. My uncle orders Lagunitas IPA. Those are “their” beers now, and for them, this is completely craft beer.  These brands are what the early majority are ordering. Because they taste good? Yes. But just as importantly, because it can become a “my beer,” because consumers can get it everywhere, at least in their super-region. 

This is where Founders and Lagunitas are focused… and if they win to some extent we all win as the overall market share of craft can achieve more than 50%. After all a rising tide floats all boats, right? At the same time, this feels like a somewhat unsatisfying result. Why should non corporate sponsored craft breweries leave this giant slice of market share to the foreign owned behemoths?

So what should a craft brewery do? Don’t get stuck in the middle

Most craft breweries need to do nothing. Small local sales strategies will not need to change all that much. Many microbreweries can survive on innovators and early adopters. However, most important for the craft beer group is that a strong handful of regional breweries emerge and also pursue the flagship model on a regional or even national level. The challenge is that a lot of large regional producers are “stuck in the middle”.  Sam Adams, Sierra Nevada, New Belgium, Bell’s, and breweries like these are in a tough spot. They are trying to appeal to enthusiasts and the early majority – and they don’t have as deep of pockets as Heineken does. Yeungling is much closer to a flagship model and less stuck in the middle among the largest US craft breweries. 

If you are a brewpub, nanobrewery, or microbrewery selling most of your beer direct to consumers – keep doing that! Craft brewers under 40,000 barrels annual production should definitely continue to provide variety, one-offs and other experimental brews in their local markets in their tasting rooms and brewpubs. However, if you want to grow and get big, we believe you need to choose a flagship, but don’t make it yourself. We foresee a lot of flagship beers being brewed by friends in the sharing economy. 

Flagship Strategies for Small Craft Breweries: Using the Sharing Economy

While we do see the necessity of the flagship model to get craft across the chasm, we do not recommend spending money on huge new tanks (until it is absolutely necessary) in order to make this scaling up possible. Instead we encourage brewers to contract brew with reliable high quality brewers, creating a well-dispersed production and distribution network that can cover a region while utilizing existing excess capacity. Crafting a Strategy members are already doing this between the USA and Europe.The key is getting just one flagship beer consistently brewed, packed and delivered in all cities all over your region. With one beer, like Occidental Kölsch, Melvin Killer Bees Blonde, or Backwoods Copperline Amber, who knows what could happen with passion, hard work, a shared economy production network and the vision that so that these beers could be ordered pretty much everywhere.

REFERENCES

Moore, G. A. 1991. Crossing the chasm: Marketing and selling high-tech products to mainstream customers (Collins business essentials). HarperBusiness, New York

Rogers, E. M. 1976. New product adoption and diffusionJournal of consumer Research, 2(4): 290-301

Rogers, E. M. 1983. Diffusion of innovations. The Free Press

12 NW Whiskeys Reviewed

By Lenny Gotter, CAS Member Expert, Spirits Guru and more

Note: Neither Lenny nor CAS receive financial compensation or other benefits from the selected companies. Analysis and results are from whiskey enthusiasts and made out of love and delight…

Photo by Polara Studio: PolaraStudio.com

Most consumers have performed some blind taste test in one form or another. In talking to friends and family many reference wine tasting as their first experience tasting something they know nothing about and then trying to determine flavors, aromas, and quality. Participating in many wine tastings myself, I remember looking around and observing others with the very same question on their minds “Do I like this?” Pretty tough question when you don’t know the ingredients, manufacturing process, cost, and how the packaging looks. Researchers typically use blind taste testing to compare one brand to others. Here in Portland, Oregon State University has a Sensory and Consumer Group in which I have volunteered a few times to blind taste test foods, the last being frozen Ahi Tuna. The Sensory Group has strict guidelines including no one is allowed to wear fragrances on the day of testing.

This year was my first year as a spirits judge.  Previously, I had been on the production side of the industry as the founder of Eastside Distilling.  There I had created flavor profiles for more than 20 products, many that ended up winning awards and several that are now multimillion dollar brands. I have done hundreds of experiments on flavor. Back then, before becoming a judge, I thought I had an educated and diverse palette. Wow did I have a lot to learn! When your first task as a judge is to rate 21 corn vodkas, all made from the same bulk neutral grain spirit, your taste buds and your brain go to a whole new level.  When all those glasses of clear alcohol stare at you blankly with no input as to cost, and packaging and marketing, you have to dig in and really evaluate based on smell and flavor. I know that sounds obvious, but trust me, organize a blind test with your friends.  Pool together ten bottles of very similar products, say 4 year Bourbons, have your spouse pour the samples in another room and start tasting them one at a time (you will need lots of glasses).  What you think is your favorite Bourbon may not be your favorite Bourbon!

American malt whiskey is not a defined category in spirits, yet… so a blind tasting is even more challenging.  What is American Malt Whiskey? Well here is the standard from the American Malt Whiskey Commission: Made from 100% malted barley and distilled in entirely one distillery. Mashed distilled and matured in the United States of America. Matured in Oak casks not exceeding 700 L. Distilled to no more than 160 proof or 80% alcohol by volume. Bottled at 80 proof, 40% alcohol or more by volume. This is pretty loose for a whiskey definition and leaves plenty of room for variation and innovation.

The products we tried here did not all fit into this guideline as some were made with less than 100% barley, but they are all similar enough in production to warrant a taste test. Everything we tasted was in the range of flavor from an Irish whiskey to Scotch whiskey to something totally different.  I decided to do my tasting at Polaris Studio here in Portland because they have been working with me for many years in taking product shots for not only my products but also other companies I work forI had originally thought of bringing in whiskey professionals, but I decided that instead of professionals I would get enthusiasts.  I was not disappointed with the results.  Out of the 12 samples, three rose above the rest, and the top two spots were very… very close.  All of the products were very good and there were no bad whiskeys in the lot.  In general, the products that did not score in our top were simply younger and a bit less structured.

All of these whiskeys are from Oregon & Washington where some of the best barley in the world grows:

#1
Westland Single Malt Whiskey

aromas of blackcurrant tangerine and walnuts
flavors of mossy bog, tar, waffle cone, and campfire smoke
a long pleasant lasting earthy hint of peat finish
Westland Distillery - WestlandDistillery.com

#2
Bull Run Oregon Single Malt Whiskey aged four years 89.08 proof

the nose is moderate with aromas of malt, toffee, light peat smoke and a touch of cardamom and tobacco leaf
the taste is cocoa powder, waffle cone, white pepper and raisin
an oily lasting finish of coffee, caramel, and a touch of mushroom funk on the end
Bull Run Distillery - BullRunDistillery.com


#3
Clear Creek Distilling’s McCarthy’s Single Malt Whiskey

nose is peaty smoke with a hint of cinnamon
flavors of smoke, peat, and honey
earthy campfire smooth finish
Clear Creek Distillery - ClearCreekDistillery.com

The rest in alphabetical order:


13 Corners American Malt Whiskey 80 proof
nose is very light aromas of alcohol fuel oil and whole wheat bread
flavors of soggy toast clove and milk chocolate
finish complemented by a lasting light malty and almond flavor and a bit medicinal
Wishkah River Distillery – WishkaRiver.com

Copperworks Distilling American Single Malt Whiskey 106 proof
the nose is very light of smoky cocoa beans a touch of cinnamon
the taste is lots of caramel and graham cracker with black pepper
finish is dry and malty with a burnt sugar sweetness
we found it to be a bit hot at 106 proof, but a few drops of water opened it up nicely
Copperworks Distilling – CopperworksDistilling.com

Four Spirits Single Malt Whiskey 80 proof
This was the wildcard of the bunch. Aromas of banana popsicle and chai tea
flavors very sugary reminiscent of custard and bananas foster
a short fruity, grassy finish
4 Spirits Distillery – 4SpiritsDistillery.com

Idle Hour Malt Whiskey 88 proof
aromas of peach pie, caramel, and grain
flavors a little bit hot reminiscent of lightly burnt wheat toast
sea salt air finish that ends a bit medicinal
Seattle Distilling Company – SeattleDistilling.com

Madam Damnable Washington Single Malt Whiskey 88 proof
nose is rising rye bread with white pepper and hazelnut
Flavors of rye toast moss and black cardamom with a spicy rye finish that burned a little bit.  Few drops of water took off the excess spicy bite
finish of modest peat smoke and caramel
Sounds Spirits – DrinkSoundSpirits.com

Ransom Spirits The Emerald 1865
noses pleasant and balanced shortcake allspice and brown sugar
full-bodied and rich flavors of butterscotch pancakes almond and a dusting of clove
finishes smooth and malty
Ransom Spirits – RansomSpirits.com

Rogue Spirits Oregon Single Malt Whiskey 80 proof
the nose is very light gunpowder phenolic with aromas of orange piecrust demerara sugar and hazelnut
flavors of buckwheat pancake peaty smoke hazelnut and nutmeg with a waxy texture
the finish is lasting malty mushroom and smoke
Rogue Spirits – Rogue.com

Tualatin Valley distilling Oregon single malt 92 proof
almost no nose cinnamon cookie with clove moderate alcohol presence and a slight medicinal quality
flavors very light of barley biscuit pecan a touch of caramel with a white pepper burn
a lingering finish of pepper spiciness
Tualatin Valley Distilling – Tvdistilling.com

Westward American single malt whiskey 92 proof
aroma doughy cinnamon roll prune and a light iodine aroma
the flavors are ready yeast general and malt
finish of burnt caramel, with a bit of mushroom funk
House Spirits – HouseSpirits.com

In closing I would like to add that this was an exceptionally enjoyable tasting and I’m very excited about all of these products what the future holds for American malt whiskey.  It is my firm belief that American Malt Whiskey will become the next big category in the American spirits so you heard it here first.  I’m very excited to have so many excellent products from so many local distilleries.

Lenny Gotter
Spirits Guru/Brand/Marketing/Sales Consultant/CAS Member Expert
LennyGotter.com

In a Year That Soured, Here Were Some Winning Strategies

By Sam Holloway, President Crafting A Strategy

This blog features a few of our member success stories from 2017. I’ve organized these stories using the Boston Consulting Group’s decision-making framework: The Strategy Palette. This should help you decide how your brewery should think and act in 2018 if you survived the craft beer pinch of 2017.

The last five days have renewed my confidence in strategic thinking and how our approach at Crafting A Strategy works. This may seem odd since the last five days have been dominated with bad news, brewery closings, layoffs, and a general malaise resulting from 2017. Still, at the risk of shameless self-promotion, I think it is worth noting that during the toughest year in beer since the mid 1990s none of our member breweries closed. How did they survive? Why did their strategies work? How do our members work together? It’s because we think and act differently, not building strategies typically taught in a traditional MBA. It's no longer sufficient to have one strategy. Success in 2017 and beyond requires breweries to operate in multiple business models, each with their own strategy, goals, and mindset.

We hope these brave entrepreneurs will inspire. We also hope that more committed entrepreneurs will join Crafting A Strategy and help us sustain the global craft beer renaissance. This blog is longer than I would normally like, but it could help save your business by teaching you how to think. Here’s one of our members describing how his thinking has changed:

Ben Parsons, Co-Founder, Baerlic Brewing (Portland, OR): “In terms of the brewing industry, I tend to exist in the gray area between the brewers and the owners. More often than not, the owner is not the brewer. They are vastly different skill sets and require vastly different mind frames. This is where I really get the most out of the CAS community. It’s more a brewery entrepreneur community and that's really where my time gets more bang for its buck in terms of making better beer. If I run a better business now then I am afforded the opportunities to make better beer in the future.”

The BCG Strategy Palette: The Inspiration For Crafting A Strategy’s Strategic Mindset

Developed by Martin Reeves and his colleagues at the Boston Consulting Group, we believe this lens allows us to explain why our members succeed when others fail.

Source: BCG Henderson Institute: https://www.bcg.com/publications/collections/your-strategy-needs-strategy/intro.aspx

Quadrant 1: Classical

I’m already big, and won’t need to change

Unfortunately, this quadrant is where a classically trained MBA lives. The best way to win here is to be big. If you are big, you get all the scale advantages and bargaining power. Getting big was a great strategy if your brewery was founded before about 2003. This is the quadrant of a blind commitment to volume growth. This is the quadrant of deep pockets. If you aren’t already big, don’t think this way. If you are already big, congratulations and be prepared to adjust your strategy. If you are big and you don't adjust, prepare for a blood bath, a red ocean, and to merge and acquire each other.

Quadrant 2: Adaptive

It’s harder to predict, but I can and will change

This is where most of our production brewery members live. They trade profit maximization and volume growth for growth in happiness, sustainability, employee morale and reasonable profitability.

Steve Waters, CEO Backwoods Brewing (Carson, WA): “2017 was the first year we acted differently. For the first time, we didn’t bank on explosive growth. We readjusted our goals to include profitability and moderate growth. Everyone saw the slowdown coming; we just decided to respond to it where previously we ignored it. You see, my parents put their life savings into this brewery and then gave it to my brothers and I to run. That’s a lot of responsibility. We joined Crafting A Strategy because we wanted to think and act differently. We wanted to be profitable. I’m happy to report, with Sam’s guidance and support from our CAS peers, 2017 was our first positive EBITDA year ever and we grew volume on top of it!”

McKean Banzer-Lausberg, Co-Owner Migration Brewing (Portland, OR): “The entire Migration management team receives the (CAS) weekly emails and very often have strategic discussions about relevant topics brought up in the emails. We have also referenced a wide variety of white papers to help drive decision making. Migration's primary goal for 2017 was to secure a production facility location and financing for a major expansion. Secondary was to bolster our growing team with talented, thoughtful people that compliment our company's culture. We worked with Noah Brockman at the SBDC, Josh Bean of Ethos Commercial Advisors, Columbia Distribution, and Pacific Continental Bank in order to achieve these goals.”

Quadrant 3: Shaping

I can’t predict it, but I can control it

This is where most of our brewpub members and self-distributor members operate. Sure, some also have wholesale agreements that place them in the adaptive quadrant for that part of their business, but their forward looking and strategic choices lie in shaping a future where they can win. Often, this starts with looking in the mirror and asking themselves if they can commit to thinking and acting differently.

Ben Parsons, Co-Founder of Baerlic Brewing (Portland, OR): “For me, 2017 was a year of trying to get into stride. Since Baerlic opened in 2014, it has been a near endless amount of work in mostly the putting out fires category and I have worked really hard to try and move away from that mentality…The biggest of which was removing myself from the day to day operations of physically brewing beer. Which was hard, because I absolutely love brewing beer. It's why I wanted to open a brewery in the first place. But, as much as it pained me, I quickly recognized that decision as one of the best business decisions I have ever made. It has allowed me the proper amount of time and energy to build the business side of Baerlic.”

Steve Waters, CEO Backwoods Brewing (Carson, WA): “The weekly updates from Sam and Joe have helped shape our mindset. We realized a reckoning was coming and our market was getting tougher by the day. We had to treat Backwoods first like a business and second like an art – not the other way around. Looking ahead to 2018, there is so much knowledge within Crafting A Strategy – other breweries, distributors, professors, lawyers – we are leveraging this knowledge to improve our operations. We’re even taking a few field trips to other member breweries to steal some of their secrets. Everyone here shares knowledge. Everyone here wins together.”

Tom Schmidlin, Founder and Head Brewer Postdoc Brewing (Redmond, WA): “We are not doing much differently than other successful breweries, but I think there is some separation between the successful and not successful breweries. New beer releases always give a brief uptick in sales, whether it is a new product, a new package, or a new distribution channel. Even with the recent closures I believe there are more breweries in Washington than ever and consumers are looking for what is new. We will continue to create new products and packaging to keep people interested in our brand. At the same time, we are committed to our core brands and continue to grow those, opening new channels for selling those beers.”

Quadrant 4: Visionary

I can predict it and I can change it

We teach our members to fail cheap and fail fast. The strategic way to try new things is to do them in a way that won’t wreck the business. These strategic moves are business model moves based on your vision of your best future. They are hypotheses, both of business model and markets, and they influence and shape each other over time (Holloway and Sebastiao, 2010).

Ryan Flynn, North American Sales Director for Oproer Brewing (Utrecht Netherlands): “We believe that it is nonsense to waste the environment with the transport (of Dutch-made beer) to the USA. So, we reached out to Sam Holloway and asked if any CAS members had excess capacity and a desire to make our beer closer to where it was going to be consumed. Sam recommended CAS Member Coin Toss Brewing and CAS Member LGM Distributing to make and sell the beer for us in Portland. Since then, we have expanded our vision to include brewing American craft beer in Utrecht for sale in The Netherlands and beyond. We articulated our vision in this blog, and now we have a growing and different business model of fresher beer at a much lower cost to the breweries and to the environment.”

Ben Parsons, Co-Founder Baerlic Brewing (Portland, OR): “As Baerlic is a pretty direct expression of who I am, it has been hard at times to really dig into what makes Baerlic “Baerlic” without going down that rabbit hole of self-exploration that might have some scary implications, ha! But, in a pretty concerted effort to discover what truly defines us, I realized that our biggest differentiator in the market is our agility. This is where our ninja like agility has evolved from. We are a very small brewery making and selling just over 1100 BBLs in 2017 and we have learned to use our size to our advantage. We can turn on a dime, when a larger brewery cannot. We can change our entire sales strategy, when a larger brewery cannot. We brew many many different styles well and can push new products to market at lightning speed when larger breweries simply cannot. Every time we try and act like a large production brewery, we fall flat. This has been a crucial realization for us over the last several years and I attribute our year over year growth in terms of brand equity AND actual sales to this mantra. We are not a hoppy beer brewery. We are not a German or Belgian beer brewery. We are not a lager brewery. We're not a sour brewery. We are all of these things and that is what really defines Baerlic. And we will continue this scrappy mindset as long as it works.”

Renewal: The Penalty Box

BCG Director, Martin Reeves calls strategic renewal “The Penalty Box.” In this mindset, the most strategic thing you can do is survive. Our members faced tough times in 2017 and found ways survive and advance toward a profitable 2018 and beyond.

Tom Schmidlin, Founder and Head Brewer Postdoc Brewing (Redmond, WA): “In this market, success sometimes means outlasting the competition. We grew in 2017, although not as much as we had hoped. Our Seattle sales rep left us for personal reasons, and we have been unable to find a suitable replacement. This definitely put a dent in our sales. But when we look around our area, there have been several brewery closures while we are still growing. Just in Redmond we had one surprise closing and another coming up in a month, so there will only be three breweries left.”

To Summarize: Your Strategy Needs A Strategy

Winning in 2018 and beyond means that your brewery can’t survive with only one strategy. It all starts with your business models. Each channel you sell beer through (or plan to) needs its own business model and its own strategy. These business models should complement and reinforce each other as much as possible, but don’t try to jam a single business model into every channel. Also, don’t rely upon a volume growth strategy as your primary strategy (unless you are already large or have unusually deep pockets). Finally, you don’t have to do this alone. The breweries at CAS work together and continuously share ideas, successes, and failures. Plus, other members including lawyers, CPAs, bankers, consultants, and several professors surround them.

Please review our membership and testimonials from beer entrepreneurs like you. Our community gets stronger with more breweries. For less than the price of one nice dinner with your management team, you can give them a year of training, networking, and learning on our all digital and on demand platform.

Sources and Additional Resources

If you’ve made it this far through the blog and still want more…

Watch BCG’s 3-minute video on The Strategy Palette, "Your Strategy Needs Strategy".

If you want a 10-minute video on why The Strategy Palette helps companies in tough times, watch this Ted Talk from lead author, Martin Reeves. I use Reeve’s Ted Talk to start all of my Executive MBA workshops – both in the USA and abroad.

How to Make Investors Understand You

It's about being clear, not convincing.

Several of our Crafting A Strategy (CAS) members are reaching a critical milestone in their growth – the need to ask for other people’s money (again). While the financial pro formas, your two years’ worth of taxes, profitability (if you are profitable), business plan, and business model will garner lots of attention; today I want to write about what may ultimately seal the deal – your investor presentation.

As President of CAS, as a brewery shareholder, as an outside director, as a professor, as a beer industry researcher, I make presentations for a living. Whether I am asking for money, asking for time, asking for students’ attention, I am always asking for something. I change my presentations all the time, but there are some key take-aways from my best presentations. For this blog I will deconstruct what, according to several audience members and advisors, was my best presentation to date. The 2016 Craft Beer Finance and Investment Conference in San Diego, CA. This was a presentation where everyone in the room knew more than I did about finance and investments. I was the outsider, asked to speak to a strong network of industry insiders, financial professionals, and people I look up to. Some of them were CAS members and some were key CAS partners – I was a little terrified.

I think many CAS members feel this same way when asking financial professionals to invest in their breweries. By retracing my steps in San Diego, I think I can help you do your best at raising money.

1. You Have About 30 Seconds to Inspire or Scare Them (You choose)

I was the last speaker in San Diego, usually a dreaded spot in the lineup because people are packing up their tradeshow booths, checking flights, and (especially at a good conference like this one) intellectually drained and tired. In my audience were people from Goldman Sachs, Private Equity, Bankers, Equipment Leasers, M&A Advisors, and a host of other people who could run circles around me when it comes to finance and investment. I knew I had to be memorable or lose half the audience in the first minute. Buoyed by experience and a little worried by what I was going to say next, I pushed forward: “Why would a crowd of finance and investment experts want to listen to a strategy guy? I think it’s because you are all lying to yourselves.”

Analogous opening lines in your investor presentation:

How many of you have an investment in your portfolios that you truly love?

At a dinner party with your closest friends, how many of you break out pictures of your stock portfolio and pass them around? Asking your friends to hold them up to the light, smell them, and talk about how being near your portfolio makes them feel?

2. Ask For Help, Be Vulnerable

Now that I had the attention of all these smart people, I had to keep them interested. I had to deliver. I find the best way to do this is to ask for help. In San Diego that morning, I began by being vulnerable. I admitted that I went home early from the conference gathering at Karl Strauss Brewery. I couldn’t figure out what I was going to say. I sat through every presentation the day before learning about the wins and losses for investors having the courage to enter the craft beer space. I then went to dinner with these professionals. After a few rounds, the narrative began to change. I learned the future wasn’t as clear as they made it seem publicly just a few hours before. I felt the pain and confusion in their voices; I knew my original talk would perpetuate more sameness. I knew my standard stump speech wouldn’t be memorable.

I reminded all of these finance professionals that I sat through every single presentation, that they painted a clear picture of the future, and set measurable and achievable financial metrics to achieve those goals. Then, over beers I learned the future was more uncertain than they let on. There was a lot of confusion, missed targets, and fear that the future won’t look anything like what their models predicted. That’s when I knew I had them. I study decision making under extreme uncertainty. Financial projections are based on certainty. My research studies actions managers can take when there is no good data to rely upon. Their everyday lives rely upon data from the past – data that represents an alternative reality to what they were experiencing in August 2016.

I told them the next 20 minutes would be completely foreign to what they may have expected. But, if they trusted me, they would have a new way to make decisions on Monday when their old decision models no longer applied. After being vulnerable, I offered a path forward.

Asking for help at a brewery investment presentation:

Running my craft brewery, everyday I open up my portfolio for the world to love, to hate, to criticize, and to talk about. And I don’t know how to measure that kind of value on a spreadsheet but maybe one of you does? Could you help me quantify the joy and happiness my business creates daily and where that fits in your portfolio?

If you want a soulless exponentially increasing ROI that returns value to investors first and to employees, the community, and the environment a distant second, then you are at the wrong presentation. But I need help, my top line is good but I am about to bite off another big piece. I know I can do better on expenses, but do any of you know how hard it is to make beer consistently and at scale? I need balance, experience, and your trust. I need patient money, not just your money.

3. Focus on Being Clear, Not on Being Right

Making good presentations is about communicating your expertise as simply and clearly as possible. The simplest way to communicate your expertise is to talk in your own language and not the audience’s. Scientists often do this, they use jargon and acronyms because it is how they speak with each other, but they leave the audience confused. A confused audience doesn't receive a clear message, thus the presentation isn't as effective.

No message will be effective unless it is clear. Clear messages give the audience a choice to opt in or opt out. Clear messages equal understanding. That is the goal for you as a presenter. Be convincing with your passion, be clear by using words that the audience understands, and give them the choice to ask for another meeting or simply thank you and move on. I really like the formula presented by Melissa Marshall in her Ted.com talk: Talk Nerdy To Me.

I finished my speech in San Diego by talking about decision making under uncertainty. This, finally, was something I did know more about than my audience because I had been studying it for a decade. I didn’t try to compete head to head with finance and investment professionals on topics they were better at. I didn’t try to convince them that I was smarter or that I had a better way of thinking. However, I did say that the science I study is just as rigorous as their decision models. I removed jargon and used pictures and quotes instead of bullet points (admittedly, I still had a few bullet points). I then asked them if I could show them my science. To conclude, I made my science relevant to their new reality. I didn’t try to convince them to change; I only wanted to understand that there are other ways to make hard choices.

Being clear at a brewery investment presentation:

Let me tell you about how my business improves the lives of my employees, my neighbors in the community, and how we bring happiness and joy to all that enter our tasting room. If that isn’t part of your ROI calculation, then this may not be the ideal investment for you.

Making an investment into my brewery will likely not yield the same financial ROI you are used to in your other investments. It may be higher, but it can likely be lower. However, I imagine your investment in our brewery may be the only investment you talk about at your dinner parties. It may be the only investment where your money stays locally here in the community where you live. If that doesn’t sound great to you, no problem... Enjoy the beers we provided and thanks for your time.

The Case for International Contract Brewing

For the past several months, I have been engaging CAS members on the topic of contract brewing. There is a growing movement within our membership that believes in a simple principle: Beer should be made as close as possible to where it will be consumed. Several members have come out more strongly, saying “it is morally wrong to ship beer across oceans.”

What principles does shipping beer overseas compromise?

  • Environmental principle: Shipping water over water is wasteful.
  • Freshness principle: If beer needs to be consumed within six months, why let it spend a month on a boat before it enters a distant market?
  • Cold chain principle: Many foreign countries simply don’t have a cold infrastructure set up for beer
  • Brand and community principle: Suppliers that simply say goodbye to their beer when it leaves their dock have less control over how and where their beer is marketed and lack a direct connection to their new, local market. And, they don’t make good partners to their distributors
  • Financial principle: Shipping beer internationally is expensive. Because it can be impossible to retrieve brewery owned kegs internationally, new costs and environmental impacts of one-way kegs are introduced

How could a new business model based on international contract brewing remove these obstacles? What are the benefits?

  • Environmental benefits: carbon footprint is reduced
  • Freshness Benefits: Beer can be packaged and delivered to retail bars or grocery stores within days (not months)
  • Cold chain benefits: There are certain distributors in Europe/Asia that have cold storage, although many bars store beer in the basement (not terrible, but usually 16 degrees Celsius instead of the preferred 5 degrees Celsius). Finding the right distributor with enough cold storage is essential
  • Brand and community benefits: Local knowledge, local networks, and an understanding of local labor laws and wages/benefits packages to attract the best talent. Also an understanding of how to remove employees, which is nearly impossible in some countries.
  • Financial benefits: It costs between 5,000 Euros (East coast of USA) and 9,000 Euros (West coast) to ship a refrigerated 40 foot container of beer to Europe. Brewing locally, this cost goes away, but pricing stays basically the same. Cooperating partners can use this value to ensure QC/QA, to procure the right ingredients, and also ensure each entity’s margin targets are met.

Fundamentally, a new business model based on international contract brewing creates business advantages. Here are some examples:

  • Access new markets and grow your business without capital investments.
  • Reciprocity: Contract brew beer for your foreign partner at home, grow new and diverse revenue channels
  • Fractional in-market sales reps: Imagine offering your European wholesale partner on the ground support personnel in Europe, but sharing this cost with other CAS member breweries? Each Brewery pays a percentage, the distributor picks up a percentage and you now have a knowledgeable person talking about your beers to new consumers.
  • Have fun! Imagine a business trip to Europe or Asia to promote your beer. When was the last time you took a vacation, anyways???
  • Be local. We all know that being local and small is a great competitive advantage. Why not partner with a local brewery to brew your beer on their system? You are automatically local, new and innovative.
  • Develop your people. Have you ever had a sales person or other employee approach you saying they needed a change? What if you could rotate people through your European operations and create a win-win professional development and personal development scenario?
  • Be environmentally friendly.
  • Increase the variety of beers you can brew in new markets by eliminating the freshness challenge.

Of course there are risks as well, and we’ve got an entire forum thread on concerns about ingredient quality, equipment, beer quality, storage, and more. Click here for the forum thread: Contract Brewing - Key Contract Provisions.

Next Steps:

CAS member breweries should consider this new business model. Brewers in Europe have a long history of contract brewing. And distribution is not subject to traditional franchise laws like you may see in your state. With no shipping, there is money in the system to make sure everyone gets a fair price. CAS members are already engaged in facilitating contract brewing here in The Netherlands.  And, I just toured a brand new, cold warehouse in Breda, Netherlands (images below) and spoke with the owners of USA Beer. They see a bright future in partnering with us. Who’s in?

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