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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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Compensation Strategy

Andy Sherwood, MBA - Guest Expert, HR & Benefits

Note from President, Sam Holloway: Andy Sherwood, MBA is our latest addition to our pool of Guest Experts at CAS. Andy has a long history as a home brewer, plus extensive knowledge in finance, operations, and as benefits administrator and benefits auditor in large and small organizations. Andy’s MBA focused on the beer industry, where he conducted interviews of brewery owners across the country, producing an MBA thesis centered on benefits policy standards for craft breweries. We are very fortunate to have Andy and his ideas as part of a four part, member’s only blog series on “HR & Benefits Strategies for Craft Breweries” in 2015. ~Sam Holloway

Compensation Strategy: The Puzzle of Direct and Indirect Benefits

Many challenges await a growing brewery. Chief among these initial challenges is developing a strategy surrounding the compensation of employees. It is important to identify the elements that go into compensating an employee before developing a strategy. Planning effectively is hard, and there are many components of crafting a compensation strategy to consider. This blog entry will cover three important topics when developing a compensation strategy. First, we will review the difference between exempt (salaried) and non-exempt (hourly) workers. Second, we will take a look at how much to pay employees based on market ranges, and finally we will delve into utilizing total rewards packages to attract and retain the best people in the industry.

Exempt vs. Non-Exempt Employees

When working capital is scarce and cash flow is unpredictable, there is a natural tendency to do everything in one’s power to create an exact and predictable payroll budget. Many entrepreneurs accomplish this by putting everyone, from the part-time bookkeeper to the master brewer, on salary. While this makes it easy plan for payroll, it is ill advised. In particular, a blanket policy to salary employees could violate the Fair Labor Standard Act (FLSA). This federal statue, brought about by the Roosevelt administration as part of the New Deal in 1938, implemented many reforms including establishing a federal minimum wage and the forty hour work week.

The FLSA also defines who can be considered a salaried employee and establishes minimum weekly dollar amounts for salaried employees. The minimum amount a salaried employee can make is $455 per week or $23,660. If this annual salary seems to reside on the low end of the spectrum, then keep reading! A quick Google search will reveal that the Obama administration is hinting at an executive order that will bring substantial changes to this $455 a week minimum. Guidelines have been established by the Department of Labor to help employers determine which employees may be salaried and which employees must be paid on an hourly basis.

For instance, your brewmaster would most likely be a salaried employee under the DOL guidelines. Brewmasters’ work is creative in nature and requires advanced knowledge in a field of science; these characteristics suggest a salaried or exempt employee status. A shift brewer, depending on their duties, could qualify as either an exempt or non-exempt employee. Outside sales people are also considered exempt if they are regularly in the field making sales or obtaining orders. Your part-time bookkeeper is most likely a non-exempt employee unless their primary duty includes “the exercise of discretion and independent judgment with respect to matters of significance” (in the words of the DOL). That clause is one of the keys to determining the status of an administrative employee.

Finding the Range

Through my conversations with brewers and brewery HR professionals, I’ve seen variations on three different types of compensation philosophies:

  • This is how much we have: This is pretty self-explanatory, a budget-based approach and one that I am sure most breweries are familiar with. Essentially a budget is drawn up for a position based on available resources.
  • The wild west: Often times, retaining and attracting talent in craft brewing means “one upping” the competition in terms of salary, bonus structure, and benefits. This approach usually starts by asking the target how much they are currently making and then offering a substantial increase to motivate her/him to jump ship.
  • Data-based: As the industry matures, larger breweries are beginning to take an analytical, data-based approach to compensation. This is done by compiling salary survey data from peers within the industry and matching positions based upon duties. Additional considerations include compensation adjustments for knowledge, skills, and abilities - as compared to some industry standard. Salary surveys are compiled and published by multiple sources within the industry, including the Brewer’s Association.

Total Compensation

An entire blog post (or two or three posts) could be and probably will be devoted to the topic of indirect compensation for brewery employees. In fact, Sam Holloway has asked me to spend 2015 helping your learning community understand this complex and important decision. I am happy to do so!! For now, here is a quick summary. First, adding medical benefits and a 401k retirement plan is something that all brewers should begin thinking about the moment that they begin to add full-time staff members. Otherwise, you will undoubtedly find the perfect fit for your organization, and she won’t leave her current job because of insurance and retirement benefits concerns. For quick reference on how to get started in these areas, I recommend the following free sources:

By far, the most important and most difficult piece of crafting a compensation strategy involves these creative and indirect compensation vehicles. As you’ve read elsewhere within the CAS learning community, not everyone in your company is motivated by simple “carrots and sticks”, not everyone responds well to traditional bonuses, commissions, or monetary rewards. In fact, focusing too much on these can kill your company culture, and result in Harry Levinson’s “ Great Jackass Fallacy” overtaking your business. Keep your eyes out for my next blog, where I will write about how to balance direct and indirect compensation, to create a place where employees feel safe, inspired, and are ready to go out and help your community, one great craft beer at a time.

Truth Telling in the Workplace

Mark Meckler, Ph.D. - Crafting A Strategy

Human beings have a long history of only telling truths and partial truths that are convenient or self-serving. In the Declaration of Independence, Thomas Jefferson declared: “All men are created equal”. Did he truthfully mean all men, or just all white men? If he were being completely truthful in 1776, wouldn’t he have said something like “All men are created equal (except black men, Native Americans, women, and most other people different than me)”? Slavery, native’s rights, and women’s rights were difficult discussions back then – and civil rights, gender equity, and many other discussions remain difficult today. So why it is so hard to be truthful? And why is it a problem?

One of the most difficult things to do at work (or almost anywhere for that matter) is telling the truth. It seems so simple. Don’t we tell the truth almost all the time? No, we don’t. Here I make a short case to the members of our learning community --­ to those who want to become better leaders, to those who want to make better decisions, and to instill better cultures in their craft businesses: Learn to tell the truth! I have an ironic saying that I’ve been living by for a number of years at my University and that I preach to my graduate leadership students: If you start telling the truth at your job, after a while, you will start to get away with it. Here are three simple CRAFTINGASTRATEGY.COM rules for a good leader and an impactful decision maker:

Rule #1: Don’t “b.s.” or lie to yourself

Rule #2: Strive to absolutely minimize how much you b.s. or lie to others

Rule #3: Be authentic

These rules are difficult to follow, especially at first. There are strong cultural norms and personal habits fighting against them. Not lying to yourself or to others means not subordinating honesty or truthfulness to any of your other “more important” values. Make honesty and truthfulness more important than almost anything else; more important than money, power, being right, being liked, pride, status and so forth. Authenticity means not picking and choosing or admitting only things that are politically correct, and hiding things that are not (at least not within your team and your organization). Lying and inauthenticity gets us frustratingly nowhere because the organizational solutions and processes that get built are then likewise inaccurate and incomplete. Habitual, even occasional lying results in organizational routines and solutions that are not in synch with the truth, and therefore do not work well.

In the craft brewing business, this lesson is incredibly important. The craft beer industry was built on honesty and the battle cry of “authenticity.” Honest ingredients, more flavor, doing things the right way, high standards, being different because of our values and always acting in accordance with our values; all of these core beliefs have united small and independent breweries in the pursuit of happiness and civic health. Why then, would a new entrant into craft beer slam the very products they create? Something is out of synch.

It is widely known that Elysian co-founder; Dick Cantwell opposed the sale to AB/In-Bev. As reported in the Chicago Tribune, Cantwell was furious when, during the Super Bowl, his new bosses aired a commercial slamming pumpkin peach ale, despite Elysian brewing Gourdgia on my Mind only a few months prior. Do you think AB/In-Bev was completely truthful with Cantwell and his cofounders at the time of the purchase? Or, were they telling only some truths, the admirable ones, about improving distribution, and growing Elysian into a national brand, and how they, personally love craft beer and believe in the movement? Were there lies (holding back other known truths) about the real level of support and belief in the company for craft beer? This is what needs to be discovered. Perhaps the new craft division or department, and their negotiating team is just a small outlier in this giant company that truly does have different beliefs and values than the rest of AB/In-Bev, values and hopes that honestly are in line with Elysian's. Perhaps they did disclose this to Elysian's board, and perhaps they told the board it would be a battle to sway to rest of the corporate giant to their way of thinking, but that they believe it can and will be done. Perhaps. Perhaps not.

There is an old saying, I think it is originally Korean and it translates something like this: "there is what you say is true, then there is what is really true. And then, there is what is really really true."

Truthfulness as Your Culture’s Key Coordinating Mechanism

 

“Coordinating mechanism” is a fancy terminology for any means that we use to coordinate parts and pieces of our business. Culture is one of the primary coordinating mechanisms in any firm and the CAS members reading this blog can read how this works in our white paper: Using Culture as a Coordinating Mechanism .

For Crating A Strategy members, click here to read the full white paper about truth telling at the heart of any strong culture.

The King of Business Models

Sam Holloway, Ph.D. - Crafting A Strategy

A Shift In Strategy for AB/In-Bev

This morning, we were all surprised to hear that Anheuser Busch bought Seattle’s Elysian Brewing. That makes two iconic, awesome craft breweries in the Pacific NW that have been acquired in the last few months. While I will let others debate the soul of craft beer and consumer reaction, I want to talk to you about the winds of strategic change. Specifically, I want to celebrate the brewpub/tasting room business model that is disrupting the 3-tiered system.

We’ve discussed this in our podcast on Blue Ocean Strategy. The brewpub business model is a ‘strategic weapon’ that helped craft beer pioneers like Kurt and Rob Widmer level the playing field and get into business. Now, with the rapid acquisitions of iconic Elysian Brewing and 10-Barrel Brewing, we see the incumbent firms acknowledging this business model is the future.

Often, large publicly traded firms ignore disruptive innovations, usually because they are under extreme pressure to perform well in the short term to keep investors happy. We’ve written about this practice of ‘ Chasing Profitability To Your Death’, borrowing ideas from Harvard Professor Clay Christensen and his research. What I find extremely interesting about AB/In-Bev is they are different than companies like Bethlehem Steel, Woolworth’s, and other historic incumbent firms. AB/In-Bev is being proactive, shifting from a Defender strategy to more of a Prospector strategy (Miles and Snow, 1978).

CRAFTINGASTRATEGY.COM members can read about the change from Defender to Prospector and also listen to Dr. Mark Meckler’s short video on firm strategies for adaptation by clicking on our white paper: Competitive Advantage Through Consistent Routines. All the great firms adapt to the new reality, and in this paper we discuss how Widmer adapted from a Defender strategy (where they protected and promoted their awesome Hefeweizen by making investments in equipment and distribution to scale this style and take it national) and later adjusted to consumer preferences for variety by introducing their “Rotator IPA series”. Is AB/In-Bev following their lead and shifting gears toward understanding variety and quality – it appears so.

What does this new reality look like? Defenders prosper by investing in technologies and assets linked with economies of scale. Defenders produce one great product in large volume, and organize their entire business to protect and promote their flagship beer. Heineken is currently organized this way, which we discuss here. When a defender changes strategy, and looks to adapt to changing consumer preferences, they become Prospectors (Miles and Snow, 1978). Changing to a Prospector strategy requires a shift in entrepreneurial thinking.

Prospectors solve problems differently than Defenders. Prospectors explore for new opportunities and new markets, and aim to develop new technologies and products that fit emerging customer preferences. Most prospectors start small and develop these new products internally. However, a well capitalized incumbent firm like Anheuser Busch may actually find it ‘cheaper’ to acquire small innovative firms than to develop new products themselves. The recent string of acquisitions by AB/In-Bev certainly fits a shift to a Prospector strategy.

If I am right, then this is only the beginning of the acquisition spree. Prospectors are aggressive, smart, and timely and they value risk taking much more than Defenders. Let’s keep our eyes on AB/In-Bev, but right now they appear to be following Miles and Snow’s (1978) strategic playbook page by page.

Be Very Afraid of Downward Pricing Pressure

Sam Holloway, Ph.D. - Crafting A Strategy

The craft beer industry is currently enjoying a great ride, with a new brewery opening nearly every day in America. As I have traveled the world, meeting brewers and talking with them, consumer preferences are changing everywhere and the demand for quality is growing. All of us craft brewers, no matter our size or production capacity are enjoying a growth market where consumers seem to be willing to pay almost anything for a six-pac of hand crafted, delicious beer. We are all doing great, all for one and one for all against the clear beers, right?

THEN I SAW THIS AT THE GROCERY STORE, TODAY:

One month ago, before AB/In-Bev acquired Bend, Oregon’s 10-Barrel Brewing, the price of a six pac of their fantastic beer was closer to $7, $8 or $9. Even the large craft breweries are adding capacity, which will ultimately drive down prices. Is your brewery ready for downward price pressure? I didn’t think so…

What are you doing at your brewery to prepare for lower prices? It is easy to ignore strategy when folks don’t blink at paying $5-$6 per pint at your tasting room. It is easy to think you don’t need to work on the business side of brewing when margins are high and your brand community members pack your tasting room because they want to feel connected to something local, something pure. Let me let you in on a little secret – YOU SHOULD BE TERRIFIED OF THAT PRICE FOR A SIX PAC OF CRAFT BEER.

CAS Members, check out our active Forum Topic: Downward Pricing Pressure. Our Guest Expert, Professor of Marketing and ex-AB employee Dr. Peter Whalen has chimed in with “Don’t Panic!”

To the Public, we built CRAFTINGASTRATEGY.COM to help your business survive the tough times and to help ensure this industry is going to be here for a long time. Our member’s only forum currently has the following active topics (these are just a few):

  • Downward Pricing Pressure
  • Production Planning Strategies and Managing Inventory
  • Self-Distribution Across State Lines
  • The Risk vs. Reward of Guest Tap Placements
  • How to Ship Beer Overseas

Our member’s enjoy over ten hours of instruction videos and narrated PowerPoints on business model innovation, leadership, pricing, negotiating with distributors, innovating new products, and controlling costs up and down the supply chain. Every week, we add in two more content pieces based upon what our member’s need and what they ask for. We’ve got an amazing group of business professionals who are learning how to be nimble, passionate businessmen and women. They are working together, bouncing ideas of each other and off our panel of experts. A true community of wise business owners is growing – they just happen to all make craft beer.

What are you doing to prepare your business model for downward price pressure? Until today, you probably didn’t have to do anything but ride the wave of increasing prices and popularity. If you want to survive prices like the ones now being offered by AB/In-Bev for an extremely high quality beer like 10-Barrel’s, you better wake up.

Get started now by visiting our podcast page. The podcasts are free; we want you to run your business with confidence. Listen to them, and then consider the benefits of membership.

Great Leaders Empower Others

Mark Meckler Ph.D. - Crafting A Strategy

Top Down, Bottom Up, & Middle Out Leadership

Let’s get the message clear from the start. Everyone in your company needs to know how to lead. Everyone in your company needs to know how to follow. Everyone in your company needs training to learn how to lead, follow and to think strategically. It is what all the great companies do: They empower leaders, followers, and thinkers at every level of the organization.

The goal of great managers is to know when to lead, when to follow, and to model a consistent commitment to employee training, culture, and the employees’ strategic thinking. Managers accomplish this by:

  • Letting go of any illusions of machine-like control. A business is not a machine so don’t treat it like one.
  • Getting as many people as you can throughout the operation educated and trained to think about business.
  • Encouraging and preparing everyone to lead when necessary, and everyone to follow when necessary.

Ken Kesey, the famous Oregonian, author, leader and founder of the Merry Pranksters, had a wonderful saying: “Feed the hungry bee.” What does this mean for managers and owners working hard to build and run a business? It means finding a way to accommodate and support anyone in your company that has the desire to get better. It means managers must work hard for everyone and anyone in their organization who has the motivation to help and to do more. Because if you feed the hungry bee, you get more honey.

A manager who is not a good leader may be selfish and self-serving; only accommodating and supporting her own goals and personal agendas. Many managers do this with some positive results, but the selfish manager’s won’t have hungry bees, they will have bored drones. Selfish managers will not get anywhere near the full potential of the team’s output of honey. A manager who is a good leader will do three other things every time:

  1. Explain the goals. The company goals. How the division’s goals fit into the company’s goals. How they differ somewhat from the company’s goals. Convey why the company and the division have these goals. Communicate which goals are being met and which are not. Great managers also make it personal, and never forget that if an employee’s personal goals are being met, their professional goals will flourish. They do this by sharing their own personal & professional goals with potential followers, and describe how they fit with the broader goals, and how they may differ. The good leader is also a “real person”: with goals and desires, emotions and conflicts just like everyone else. This is level 2, leading with the head.
  2. Describe how these goals fit together and are driven by deeply held values and strong feelings. God managers emphasize their own personal values and the company’s values, beliefs and expectations. They will inspire feelings and emotions in those who hear them. By doing so, a number of those people identify and freely choose to put their energy and motivation toward those very same goals. This way, many of your hungry bees want to work on just the very things you would have hoped. Instead of simply forcing them to work on what you have hoped to force. This is level 3, leading with the heart.
  3. Offer meaningful rewards that can be expected if project performance goals are achieved, and model the kind of behavior that will most likely lead to project success. A good leader knows that if the rewards and punishments don’t really matter, it’s kind of a joke and it doesn’t work. This is level 1, leading with the hands.

Good Management Is Like A Rose Bush

Every time we listen to our employees we must also hear them. When we hear an employee’s personal goals, values, expectations and hopes, we become less like a machine and more like a rose bush. You have to feed the soil and then let things grow, never really knowing where the next flower bud will emerge. We must also prune branches when they have finished blooming so that resources may flow to other parts of the plant that are ready to produce.

Because of this organic growth path, leaders and strategic thinkers are needed all over a company, in every division, department and function. Leaders and thinkers are needed for projects, initiatives and improvements to emerge, to grow, and to flower. Strategic business thinking must reside all over your business. Train your employees, and then make an ongoing commitment to spend time at work talking business. Get their brains as cleverly thinking about the business as they are about designing a bottle label, or brewing up some fine sour beer.

I have emphasized elsewhere how important it is to allow others to take the lead sometimes. The manager who tries to lead in everything is bound to fail. Leading all the time is simply too difficult and too exhausting. Leading a great company takes a team effort. Sometimes you lead and sometimes you follow. In fact, leading only at the right times is strategically critical to success. Anyone who is a fan of cycling understands this concept. The fastest rider and best sprinter do not the lead peloton until the right moment. They don’t even lead within their own team; they follow behind conserving energy for much of the time! Strategic leadership requires allowing others to lead when the time is right, and following properly during those times.

Share The Responsibility To Lead

The manager that takes everything on him or her self is being foolish in two different ways. First, they are wearing themselves out so that over the long run, they are too mentally and physically exhausted to do great work. Second, they are training others in the organization not to lead, and sending an implicit message that the firm does not believe they can lead. Not a wise course. Bad strategy.

Give your employees the resources and training that they need to succeed. Give them opportunities to develop and lead new initiatives and projects. As the owner or upper level manager, many times you need to follow. Support employees and coach them, subjugate yourself to a smaller and role on the team. Show everyone on the team that even the owner is willing to be a follower in order to help a budding project flower. And when projects flower, the hungry bees deliver the honey.

Community Entrepreneurship - New Ways of Thinking Are Needed

Sam Holloway, Ph.D. - Crafting A Strategy

I just returned from a great evening in San Jose, CA. Along with VP of Marketing & Operations, Joe Belcher, I flew down for a meeting of the newly formed Downtown Craft Beer Alliance (@SJ_CraftBeer). CAS member, Camino Brewing, formed this alliance as they attempt to change the mindset for economic development in downtown San Jose.

Downtown San Jose has a checkered past and has mostly been ignored by small businesses. The three newest craft breweries are all located south of downtown and away from the hotels and convention center. Camino Brewing aims to change this, and formed the Downtown Craft Beer Alliance to raise awareness of how collaboration instead of competition can allow for transformational good in San Jose.

I will be honest; my presentation about community entrepreneurship was uncomfortable to some audience members. Using words like collaboration, positive sum strategy, and civic wealth felt a little out of place in Silicon Valley. Silicon Valley has tremendous wealth, but this wealth usually resides in a very small segment of the population. It is also this segment that largely ignores the downtown area. Camino Brewing sees how cities like San Diego, CA and Portland, OR have used craft breweries to transform neighborhoods, and they see the same opportunities for San Jose. Yet, as we spoke to our audience about the benefits to entrepreneurs and to society from these special types of small businesses, there was a definite split among the crowd. Many of the audience members were inspired by this kind of strategic thinking. They see the craft beer industry as a way to keep money and jobs local, and give the part of society ignored by Silicon Valley and Venture Capitalists a chance. These folks are very open to collaboration, to sharing recipes and even sharing market share with other small craft breweries.

Some in the audience just didn’t buy it. They were stuck in the world of zero sum strategy, where one firm’s gain means another firm’s loss. And it makes perfect sense. The stereotypical “Silicon Valley Tech Startup” is built upon secrecy, intellectual property, and a goal to scale wealth in only a few people – the initial investors and inventers. Craft breweries scale value in other ways, and the value to society scales at least as fast as the wealth scales to the craft brewing entrepreneur. This is a different way of thinking, but it is a path forward for Downtown San Jose.

It is this type of community entrepreneurship that forms the basis for the craft beer movement. Consumers want to buy local, they like knowing the name of the brewmaster, and they like buying fresh products grown by their peers. They would much rather make themselves feel great and patronize a local small business than to buy a cheaper product that makes someone they will never meet more wealthy. Consumers get it, craft brewers get it, and many investors and Silicon Valley billionaires do not. That is the mindset we need to change in order to change San Jose.

Here is a challenge to ask your neighborhood millionaire or billionaire in Silicon Valley: “Do you have any investments you love?” My bet is they really like the financial return of some investments, but they do not have a strong emotional connection to many investments in their portfolio. They are doing the right things to cash in personally, and they don’t necessarily trust local government or traditional non-profits to fix society. They may love their town, but they aren’t investing in its future. Breweries bring this all together. Breweries are engines of economic and civic good. It works in communities all over the world. Maybe San Jose can be next.

Lastly, I want to give a shout out to our members from Camino Brewing, Allen and Nathan who put the event together. They joined our membership this summer and since then have not only been crafting THEIR OWN strategy, but have raised capital and formed the Downtown Craft Beer Alliance. We can’t wait for what comes next from Camino Brewing!

My Journey to Understand Craft Distilleries

Sam Holloway, Ph.D. - Crafting A Strategy

In January of 2014, I was asked to go to San Francisco and give a talk about the beer industry to University of Portland Alumni. We had a great venue at the law offices of Nixon Peabody, and a great host in UP Alum Greg Schopf. My University had figured out that if they serve beer and have a professor come talk about beer, a good crowd usually showed up. Plus, it happened to be the same night as the men’s basketball game against our rivals from Spokane, Gonzaga University. It was a great night, we had about 50 guests, talked a little beer business strategy, and the Pilots upset Gonzaga for a crucial home victory.

I’ll never forget that night because it was the first night a craft distillery approached me and asked if CRAFTINGASTRATEGY.COM applied to craft distilleries, too. A super nice guy from St. George Spirits (famous for Hangar One Vodka) approached me after my talk and invited me to come across the Bay to Alameda and take a tour. While I wasn’t able to take him up on his generous offer, it did start me on a path of discovery. I am still learning about distilleries, but I am continuing to think craft distilleries and craft breweries are quite similar when it comes to strategy.

My first validation that craft distillers could benefit from the same strategic thinking as craft brewers came when I met a spirits expert during a trip to Europe in June 2014. My family visited longtime friends, Victor and Jenny ten Wolde and their three lovely daughters. Victor is a commercial & marketing professional who has worked in the spirits industry for 15 years. He has had the honor to work on brands like Ketel One vodka, Johnnie Walker, Remy Martin, Campari, and the Diageo Classic Malt whisky portfolio (portfolio includes Lagavulin, Talisker and Oban among others), both in global business development and local marketing roles. The companies he has worked for range from relatively small family owned distilleries to globally operating industry leaders. Victor’s expertise includes strategy (portfolio, brand, pricing and distribution), financial analysis and plan execution.

Victor and I sat in his living room, drinking beers during an amazing World Cup Game where Holland scored five goals in a match against defending champion, Spain. Victor and his neighbors were screaming the whole night, in disbelief and joy at their national team. We didn’t know just how special of a tournament Holland would have, but we did get a chance to talk about the business of craft alcohol manufacturers. Victor, to his credit, was a bit skeptical at first. Like me, he didn’t want to give any advice unless he was sure he was right. As we talked, perhaps by about the third goal of the match by Holland, we realized many of these craft entrepreneurs share the same qualities. You can hear Victor and I recount this realization in a podcast by clicking here. Mind you, we waited a few weeks to record this, so we could sober up and so Victor could immerse himself in the CRAFTINGASTRATEGY.COM learning community. After his review of the website, Victor called me and was energized to help. We came up with the podcast idea because I wanted our member’s to hear the passion in Victor’s voice, and also the quiet confidence with which he gives advice about branding, strategy, sales and distribution. It confirmed my hunch that craft distilleries can benefit from our strategic wisdom.

Inspired by my conversations with Victor, I approached another contact in the craft distillery game, Lenny Gotter of Eastside Distilling in Portland, Oregon. I knew of Lenny from two sources, as a consumer of his great products like Below Deck Rum and Burnside Bourbon, and also from an international rum expert and friend of Lenny’s, Roger Patteson. Roger also happens to be the lucky guy who married my sister-in-law, Erica. Small world, indeed!!

 

I sat down with Lenny last week and discussed his successes and big plans for growth. We met in his new facility; a huge 41,000 square foot building that is going to completely change the game on distillery row in SE Portland, Oregon.

 

Credit: Portland Business Journal

With Lenny’s passion and expertise, I see a bright future for Eastside Distilling, his employees, and all of us who love his products. When I showed Lenny the CRAFTINGASTRATEGY.COM website, his eyes lit up. He said his growing distillery needed a common curriculum for professional development. I told Lenny how our current members were using the website, the podcasts, and the core curriculum to give employees the business sense and wisdom that Lenny has spent years learning on his own. I am proud to welcome Lenny and his employees to the CAS learning community. I am proud to welcome my new brother-in-law and rum expert, Roger Patteson into the CAS community. Their joining is another strong indication that craft breweries and distilleries may have even more in common.

As I continue to explore for links between the two business models, it is great to have distillery owners and experts in our learning community, sharing their challenges and wisdom with each other and with our craft brewery owners. We’ve got some great momentum, and our global community is making a difference in neighborhoods all over the world, one craft beer business, and (now) one craft distillery business at a time.

Community-Based Entrepreneurship: A Paradigm Shift

Sam Holloway, Ph.D. - Crafting A Strategy

Several years ago, Helder Sebastiao and I wrote a paper about a paradigm shift in entrepreneurial thinking. Business models were replacing technologies as the primary source of value creation. Entrepreneurship was becoming less about algorithms and software and more about individual people, their hopes and their dreams. Entrepreneurs were beginning to make business model choices based upon their own values, beliefs and skills. Entrepreneurs were letting their personal values and personal goals influence the business model, instead of simply making the business model fit into what they thought could make them the most money.

We didn’t get everything right, but a lot of other scholars started thinking about business models at about the same time. There was a paradigm shift in how to create value, enabled by the Internet and IT infrastructures that could connect previously unconnected parties. In my own world of the craft beer industry, the brewpub business model disrupted an entire industry, allowing brewing entrepreneurs to become their own distributor and retailer, and keep more of the profits for themselves. By thinking strategically about how to organize a beer company differently, and changing the laws within their state, craft brewing entrepreneurs disrupted the three-tiered system and generated incredible wealth for them and for society. Imagine a world without Hefeweizen from the Widmer Bros. Imagine a world without IPA, certainly society has benefitted from this disruptive business model. What about traditional investors? Do they benefit from craft beer businesses the same way they do from a technology startup?

Keep Portland Weird

 

A couple of days ago I spoke with a colleague who advises new companies and consults on merger and acquisition (M&A) activity. He made a statement that got me thinking. He said he was considering getting out of the M&A game because there was no deal flow in a city like Portland. I remarked that in my world of craft brewing, most of the businesses were lifestyle businesses and the founders were genuinely happy to stay small and make a living – but many of these same entrepreneurs were uninterested in making a killing. They had neither the goals nor the business skills to turn their small craft brewery into an investable business. As my colleague sat back in his chair, we mused of a new paradigm in entrepreneurship: the non-scalable business model.

Portland, Oregon has historically been labeled a city that lacks a critical mass of scalable ideas. Businesses that start here seem to leave when the opportunity to scale requires access to traditional forms of venture funding. For example, Jive Software left Portland for Silicon Valley, suggesting that executive talent is lacking within this city. Many groups in the software industry are trying to change this, including the Software Association of Oregon and their Portland 100 initiative. Why are we so obsessed with one kind of business model – technology/software companies – and one type of investment capital, private equity?

Private investors seemed to shrug their shoulders at Portland, dismissing it as a small-time city that will never be a hotbed for traditional and scalable businesses. This was always seen as a weakness in Portland. But I think it might be Portland’s core strength. Portland is weird; entrepreneurship here is different. Why isn’t this celebrated more?

 

A New Paradigm is Making Investors Confused and Uncomfortable

Why are craft breweries making the large breweries and traditional investors so uncomfortable? We’ve recently heard from the MolsonCoors CEO that craft breweries are ‘massively overvalued’. We have responded to this by suggesting the business models and operating margins between Molson and a typical craft brewer are so different, it doesn’t make sense to compare them. So then, why are we still doing it?

Most craft breweries aren’t good targets for professional investors – at least not in the beginning. Professional investors ignore these non-scalable businesses because they do not provide a clear path to wealth generation. However, a traditional investor only really cares about financial wealth and he makes investments into businesses that can scale and produce financial returns. What about societal wealth? What about civic wealth? What if we redefine entrepreneurship to be about communities; where the societal benefit scales and the individual financial gain is more modest? My friend and colleague, Mike Russo writes about this phenomenon in his book, Companies on a Mission. But Mike writes mostly about individual companies, not an entire industry of mission-driven, non-scalable companies.

Collectively, Portland’s 50+ breweries and other industry stakeholders contribute billions of dollars to Portland’s economy. These companies provide jobs, pay taxes, and give neighborhoods a hugely valuable asset – a place to celebrate and congregate. Neighborhood breweries may be the new cathedrals of consumption, and they can charge high prices for a great product. Consumers don’t seem to mind paying over $5 for a beer, because the values represented by these local, hard working entrepreneurs align with their own personal values. We even have non-profit breweries in Portland, trying to capitalize on the values-based utility that breweries provide society. Keep Portland Weird – Your Damn Right We Should!

Paradigm Shift in Entrepreneurship

 

Business schools are teaching entrepreneurship differently. Business plan competitions are being replaced by business model competitions. Business plans are no longer the starting point for entrepreneurs, but rather reserved for a later time in the venture’s development (after the business model and market opportunity are better understood). Steve Blank’s Lean LaunchPad approach, which focuses on business models and eschews business plans, is sweeping the nation and changing how people think. The times they are a changin’ – and professional investors are left with nowhere to put their money. Maybe this is OK. Debt financing and banks may be the investment vehicle for communities like Portland. Craft brewery businesses can use debt instruments until their business model and the market provide enough evidence suggesting that scale is possible. Widmer Bros. Brewing grew this way, and eventually went public in a more traditional, scalable fashion once the market validated their business model. More recently, Ninkasi Brewing Company of Eugene, Oregon, perhaps the fastest growing craft brewery in American history, has ignored M&A and private equity in favor of debt . They recently invested over $20 million in themselves, using banks just like any other small business. Ninkasi is certainly scalable, they are enjoying a fast rise as America’s IPA, but they are still doing things differently. Keep it weird, Craft Beer!

I love the craft beer community and the businesses within it. These entrepreneurs aren’t weird, they just have different values. Community, society, and personal well-being trump profitability, scale, and traditional investment logic... Sounds pretty good to me.

Congratulations Postdoc Brewing

Sam Holloway, Ph.D. - Crafting A Strategy

One of the most rewarding things I get to do is tour a brewing facility of a Crafting A Strategy member. First, these members often become friends and walking with them through the ups and downs of planning a brewery, forming their entity, finding the money, and keeping one’s sanity (most of the time) is an extremely emotional, frustrating and rewarding journey. I was fortunate enough to get a tour of CAS member and longtime friend, Tom Schmidlin’s new facilty a couple of weeks ago. Postdoc Brewing has taken a major step forward and I was inspired by the humble pride Tom exhibited as he showed us around.

It also means there is more work to do! While Tom is focused on permits, construction, logo, brand design, fund raising, keg acquisition, and all the many other things that go into opening a brewery, by visiting Tom and taking him out to lunch, I am reminded of the intense pressure and responsibility that brewery owners assume to make their dreams come true. As Tom and I sat over lunch, our co-founder and VP of Marketing and Operations, Joe Belcher joined us along with our newest team member, Caleb Hilger. Caleb is interning with us as he pursues a degree in Entrepreneurship and Innovation Management from the University of Portland. Caleb is also a home brewer, so he definitely fits the mold of CAS and its customers.

As we talked with Tom, something became very clear to Joe, Caleb, and me. We need to have more conversations like this with our members in their place of business. These meetings are certainly about celebrating our members’ accomplishments, but they give us a chance to offer direct advice to a member and provide this advice in real-time. Inspired by this meeting with Tom, I would like to announce a weekly newsletter and podcast that will be coming to our members shortly. Additionally, we will be visiting three West Coast (USA) cities this fall to meet with CAS members and their craft beer friends to answer questions and give advice on a myriad of topics. Stay tuned! We want to capture these conversations and share them with others, so that anyone opening a brewery or restaurant can share in the excitement, frustration, sorrow and joy that come with starting up a brewery or restaurant. The emotion that comes from face to face interactions is important to share, as important as the wisdom we provide. Direct conversations are also a way for Joe, Mark, Caleb and me to find out new content that the website should feature, and that is important as the rules change from state to state and year to year.


I can’t wait to see this space populated with shiny new fermenters!

Future home of Post Doc’s Tasting Room

Below is an example of the value of face time with our members, pulled from our conversation with Tom:

Tom has a great location near Microsoft’s campus in Redmond, Washington that is also across the street from a large Whole Foods store. I asked Tom if he had thought about packaging his beer and sending cans or bottles over to Whole Foods. He said the thought had crossed his mind, but he had a lot of other things to accomplish first. We laughed, offered cheers, and clinked glasses. But I continued, talking about an innovative program Whole Foods developed to support local entrepreneurs like Tom: the Local Forager Program. Every Whole Foods store has the authority to stock about 8% of their items from local suppliers, even if that supplier cannot make enough product to supply another store. If sales go well, Whole Foods will offer that entrepreneur a microloan to allow them to scale production and serve multiple stores. It is a wonderful program that I only just heard about when Whole Foods’ CEO, Walter Robb III visited my classroom to speak to University of Portland Students last spring. Mr. Robb brought with him the local forager for the Pacific NW, Denise Breyley. Denise spoke so passionately about her personal commitment to help entrepreneurs whose values and beliefs align with hers and with Whole Foods’, that I wanted to share this program with Tom and with the craft beer world. Thanks to Denise and to Whole Foods for putting local first!!

Thanks, Tom for bringing Joe, Caleb, and I into your new brewery location. Thanks for inspiring us by following your dreams. I cannot wait to celebrate your opening and drink Postdoc Brewing’s beers in your tasting room and at your first Whole Foods tasting. Cheers!

Are Craft Breweries Overpriced?

Mark Meckler, Ph.D. - Crafting A Strategy

It's a Matter of Perspectives

The CEO of Molson Coors Brewing Company (TAP) recently commented that North American craft breweries are way overpriced [1]. What did he mean by that? For his perspective, click the link and read the article. For my perspective, read below and I will explain the rest of the story.

First, some props to Molson Coors. This is a great company – Molson’s brands are legendary in Eastern Canada and Northeastern United States. Many New York and New Englanders (like me) grew up with Molson Golden as our aspirational beer, not Heineken. Coors held status as well. It was hard to get. I remember stories from my older friends as they drove many miles to get their hands on this great beer from the Rocky Mountains and brought it back from trips across the country. Molson Coors is a company with a great history that knows what it is doing. So when the CEO speaks, it is certainly not out of ignorance.

Large breweries have a financial model that has developed over the years. In general, they expect much higher operating margins and they design beers and supply chains to help them achieve this. According to Yahoo! Finance, Molson Coors’ operating margin was 12.33% last year and AB/In-Bev’s was a whopping 32.2%. As a comparison, the average operating margin for small, independent craft breweries was 2% in 2013 [2]. Large, clear beer breweries achieve these margins through economies of scale – a term that suggests the more of a particular product you make, the lower the cost per unit gets. They achieve these economies through bulk purchasing, automated processes, large continuous batch production, heat pasteurization, and years of learning to perfect their processes and eliminate waste. At the same time they have large advertising and promotion budgets that help them keep prices up. They are very profitable operations. They are able to keep costs down and prices up.

Wall Street (the stock market) has come to expect these margins from these kinds of companies. If a large brewery – Molson Coors for example, were to report in a quarterly statement that margins were 10%, the share price would drop like a rock, and the major shareholders (mutual fund managers, investment banks, retirement funds) would scream for the CEO and the rest of the top management team to get things back on track immediately. These top managers are under constant, tremendous pressure to keep margins up and keep sales volumes up.

The vast majority of Craft breweries do not have the cost advantages that come with economies of scale or from using ingredients designed to control costs and increase shelf life. Craft breweries require high quality ingredients that enhance flavor, character and spirits; which mean the critical inputs are expensive. Furthermore, the fermentation processes change significantly with the style of beer being produced. A small batch of triple dry hopped IPA, hand bottled and labeled, and delivered in a Sprinter van does not meet the operating margin criteria for Molson Coors. This helps explain why craft breweries are able to keep the prices up, but they cannot keep the costs down like the large, clear beer firms.

Value is defined differently for Small, Independent Craft Breweries – So it should be measured differently, too

Everybody seems to know these critical differences between craft beers and the large, industrial beers produced by Molson Coors and others. However, no one seems to talk about how these fundamentally different products and very different business models affect company values. This leads to statements from the Molson Coors CEO that craft companies are overvalued --- compared to the clear beer business model, he’s right. Craft breweries cannot come close to the operating margins of Molson Coors, and until they do, their value should be measured on different metrics than those that Wall Street uses to value Molson Coors. Let’s look at one of the largest, most successful craft breweries as a comparison.

Craft Brew Alliance (BREW), a partnership of five different craft breweries had operating margins of 3.43% in 2013. Industry financial analysts trashed the low margins and they especially “blamed” Widmer Brewing, the most “craft beer style” brand in the CBA portfolio. They pointed out that Widmer’s beer had the lowest margins in the portfolio. So, the best microbrew of the bunch, with the most flavor and character has the lowest margins. Why, because the ingredients and the process are more expensive. It’s basic math, really. The Widmers are not complaining, nor are their customers. But because BREW is publicly traded, their numbers are trashed compared to Molson Coors despite the fact they have a fundamentally different product that is much more expensive to make and has a much shorter shelf life, which increases distribution costs.

How Does All Of This Explain Molson Coors CEO’s Comments?

If we assume Craft Brew Alliance is among the most efficient and large craft breweries in the world, then they ought to be able to achieve some economies of scale. If we take a smaller craft brewery, like Green Flash, Ninkasi, or even your favorite local brewery, why would Swinburn say they are overvalued? To a beer conglomerate CEO like Peter Swinburn, purchasing a brewery with only 3.43% margins (or less) and only a small local market is not a viable purchase unless: (a) it was compensated by huge added value of other assets of the brewery (like the brand, or some secret recipe) and (b) it was very cheap to buy. An attractive price is something low enough to justify owning a business that only achieved 3.43% operating margins with best hopes of bringing it up to 10%. That is why almost all craft breweries, even the successful ones, look overpriced to the big firms. No matter what, the purchase of a typical to good craft brewery by an established clear beer corporation would bring those average operating margins down. With Wall Street expectations putting constant pressure on CEOs like Swinburn, his comment that craft is overvalued can be expected. However, this type of thinking can be dangerous, even to the large, clear beer corporations…

Dr. Sam Holloway wrote a very intelligent blog about the large beverage distributors “fleeing up-market” giving away the lower margin accounts. The large established industry players almost always eschew less profitable, small market segments, leaving them like scraps for others to run. As Dr. Holloway pointed out, staying out of small and less profitable vertical markets is completely logical --- and at the same time sometimes leads to the demise of large incumbent firms. This is just what happened in the U.S steel industry when they ignored the mini-mills. Clayton Christensen [3] called this a disruptive innovation when a new business model of a small market segment catches on, and grows up to steal away the customers of the big established firms.

To those in the craft beer industry, 3.43% operating margins look pretty darn good. It’s a living, a darn good living. Especially when distribution costs are local and low, and advertising is by brand community and word of mouth. That keeps the net profit margins pretty reasonable. In some markets, despite the low operating margins of individual craft brewing firms, the overall market share is actually larger than for clear beers!!! [4] Little by little, operating margins are growing, which suggests that craft beer business are learning, gaining efficiencies, and may someday improve operating margins. However, for a craft brewery to approach the operating margins of AB/In-Bev, we don’t think this is reasonable in the near future. What is more likely is that the craft beer industry will reflect the wine industry. Perhaps someday in the distant future, specialty craft beer will account for 70% of the market and bulk clear beer only 30% of the market. Margins will grow as the breweries learn and grow, and those higher volumes will certainly make up for lower margins. That’s how the wine industry looks today[5] …That doesn’t look so bad to us…

 

[1] Rupp, Lindsey. 2014. Molson CEO Says Craft-Beer Firms ‘Massively Overvalued’. Bloomberg News. http://www.bloomberg.com/news/2014-06-26/molson-ceo-says-craft-beer-companies-are-massively-overvalued-.html . Accessed on June 27, 2014.

[2] Risk Management Association (RMA) e-Statement Studies . Breweries 2013-2014. Breweries with revenue annual between $500,000 and $2,000,000.

[3] Christensen CM, Rosenbloom RS (1995). Explaining the Attacker's Advantage: Technological Paradigms, Organizational Dynamics, and the Value Network. Research Policy Vol. 24 (2):233-257.

[4] http://www.beervanabuzz.com/2014/04/craft-surges-ahead-of-big-beer-market.html

[5] Kim, W. C., Mauborgne, R., Hunter, J., Marks, B., & Mortensen, W. (2009). Crafting winning strategies in a mature market: the US wine industry in 2001.Harvard Business Review, (July 1).

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