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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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Finding a Space

Note from CAS President, Sam Holloway: At CRAFTINGASTRATEGY.COM, we are committed to bringing our members the most relevant, up to date business wisdom. Over the past year, we have realized that our members are great resources of wisdom, and through our guest expert blogs, we can give them a voice. Tom Schmidlin was an incredibly skilled and well-known home brewer in Seattle, Washington. He decided to “Go Pro” almost exactly one year ago. We’ve asked Tom to reflect on his journey and to offer wisdom to our members with breweries in planning. Tom will author four pieces this year, beginning with the current piece: How To Find The Right Space For Your Brewery. This initial blog is publicly available, future blogs will be for CAS members only.

Tom Schmidlin - Member Expert, Brewer and Proprietor, Postdoc Brewing

There is a lot that goes into finding the perfect space for your brewery; it is a process that can take months to years.  The first and most important thing to keep in mind is there is no such thing as perfect, each space will have its pros and cons.  You may find an awesome space for what you want to do, but with a landlord who wants you to agree to move out with three months’ notice (this actually happened to me).

When you start looking for a space, it is helpful to have a vision for your business.  Are you looking to build a production brewery, with any retail sales being incidental?  Or do you want to build a brew-pub, where almost everything is retail?  Or is it something in between?

In the beginning, I was willing to have my vision fit the space available.  Because I was open to a wide variety of business models, I looked at spaces that would make great brewpubs, would be perfect for a mostly production facility, or would combine production with a large tasting room.  Since I lacked a partner for the food and thought it would be too much to manage on my own, I soon decided that a brewpub was not for me which helped narrow the search.

Beyond the physical aspects of the space itself, it is critical that you understand the community where you plan to locate your facility.  Think about who travels through the area and why they are there.  What kind of jobs do they typically have, how much money do they have to spend, and what kind of beer do they like to drink? Consider who your competitors are, and why they are successful or not.  Why will people come to your place instead: convenience, better beer, better atmosphere?  Will they get to you on foot, bikes, buses, or cars?

The more I looked, my mind coming back to this one area in Redmond that I drove past twice daily on my commute.  As it was, there was no place for me to stop for a beer on my way home without going out of my way and fighting traffic one way or the other.  It is a relatively small area with high car and bicycle traffic, next to a 640 acre multi-use park, in an area with a lot of high wage earners.  With all of that going for it, I decided to focus the search in this area.

Narrowing it down to that vicinity, I felt that a brewery and tasting room would be the best option.  Our taproom is essentially a bar serving only our beer, which may not be legal in every state but is common in Washington.  This helped further define the requirements.  Tasting room means car traffic, so you need to make sure there is adequate parking.  Redmond’s building code dictates the number of parking stalls required, so it was easy to figure out if a given space meets that criterion.  But we also had to expect truck traffic for deliveries, so the parking lot needs to handle that as well.  Obviously there are a lot of things to take into consideration.

Getting a commercial real estate agent was a tremendous help for us.  It was in his best interest to help us find the right spot, since he only gets paid if we are able to pay our rent.  He was also a great source of knowledge about reasonable lease rates and terms in our area, and knew about spaces coming open before they were actually on the market.  He even went so far as to set up meetings with officials he knew in local governments as we tried to decide in which city to locate the brewery.  In a competitive real estate environment, having this kind of assistance will help you find a great place for your new brewery.

In my experience, it will be very helpful for you to talk early and often about your plans with the local government.  Other than a brief conversation very early on, I did not keep in touch with them or keep them in the loop about what we were trying to do.  I knew the area was properly zoned and we should have few hold ups, but I didn’t realize how helpful they could be in the whole process.  They were very happy to work with us to make sure that we could do things within budget but also meeting the code.  In matters of the building code, it is definitely not a situation where I would ask forgiveness rather than permission.

Hopefully, your relationship with the government is not an adversarial one, and that is from the federal level on down to your local inspectors.  They simply have too much power to delay you or shut you down to try to go head to head with them.  In some cases they pointed out common mistakes before we made them, which saved us time and money.  In other cases we were able to change which section of the code applied to us.  In yet other cases they agreed that the code made no sense, however their job is to enforce the code and it is a rare inspector who will take the risk of approving something substandard.  I have yet to meet one.

Alcohol businesses are under increased scrutiny compared to your average business.  My experience with the city government so far is that if they get the sense that you are trying to do the right thing then they are will do whatever they are allowed to help you be successful.  They want our business in town, because it means jobs for the residents, increased traffic to other businesses, and a growing reputation for breweries that will help attract other businesses.  All of that translates into increased revenue for the city.  Hopefully you can find a welcoming place for your venture.

Where Will The Next Great Brewery Come From?

By Sam Holloway, Ph.D. and Mark Meckler, Ph.D. - Crafting A Strategy

One of our goals to better serve our members at CAS has been to “go vertical” and understand everything about the craft beer industry. By deeply understanding this important and complex industry, we can help ensure the survival and healthy growth of the craft beer industry.  Sometimes, by looking in other places and at other industries, we see a gap in our own understanding.  A recent trip to a local home brewing supply store spawned just such a discovery and made us aware that we can do more to help support the next generation of great breweries.

Who Are The People And Organizations That Seed The Craft Beer Industry?

In Portland, Oregon if we like fixing and building things ourselves at home, we go to a local hardware store for the supplies we need. The good ones have experts that know where everything is, and can tell us what we need and even give excellent advice on how to get things done. The hardware store employees are a wealth of knowledge for the home repair enthusiast. This is similar to the role and relationship between the home brewer and the local home brewing supply store. The home brewing/distilling/fermenting supply retailers typically do a fantastic job of teaching, coaching, selling, motivating and creating community for the home/private craft-brewing enthusiast. While we were at Bader Beer and Wine Supply in Vancouver, WA, (a fantastic place) we realized: these are the people and the organizations that seed the entire industry.

A Knowledge And Support Gap In The Craft Beer Supply Chain

We believe the mentoring relationship between home brewers/fermenters/distillers and the homebrew supply shops and owners needs to be reflected in the craft beer industry supply chain. Where are these shops, guides and relationships for fledgling craft breweries and the brave former home brewers that have decided to “go pro”? We can follow our local hardware store example in the construction industry to look for a blueprint for success.

Like the craft beer industry, the construction industry is a highly fragmented industry populated by a few global firms, a few large national firms, a handful of regional firms and mostly thousands of small local firms that specialize in the various trades and crafts. The large construction companies buy supplies differently than small and emerging companies. Large construction companies know what they need, rely less on mentoring, and focus on price, volume, inventory management, and market forces to dictate how and when to make purchasing decisions.   Large construction companies do not shop at Ace hardware anymore.  And what about the small independent contractors that dominate the industry? They also do not shop at an Ace hardware anymore, but the construction industry has a mature supply chain, that adequately fills in the knowledge gap…

Because construction is a mature industry, the supply chain has figured out how to deal with fragmentation and what is needed for each type of business. Once a contractor decides to “Go Pro,” they have a slightly different, more professional hardware store to fill their needs – more volume and lower prices than a typical neighborhood store, but still small enough to provide personal service, mentoring, and relationship building. The craft brewing industry should learn from construction – we should also offer entrepreneurs transitioning from hobbyist to professional a one-stop shop for supplies and advice. In Portland, Oregon a typical, small contractor shops at specialty retailers like Parr Lumber. They can have a credit account, and they typically get a “contractor” discount so that they pay closer to wholesale than a homeowner would pay as a walk in.  A place like Parr lumber is in between a small, neighborhood hardware store and a big box retailer like Home Depot. The primary difference is the knowledge and mentoring that Parr lumber provides above and beyond what a big box retailer can save on pricing. Businesses like Parr Lumber bridge the gap between DIY enthusiasts and the large professional contractor who orders directly from lumberyards, steel manufacturers, roofing suppliers, concrete manufacturers and so forth.  This is where small businesses may source almost all of supplies they need, all under one roof, and gain valuable advice from experts. Often, the relationships grow so strong that when a contractor grows large, they still buy from Parr Lumber even if it costs them a bit more.

The Business Opportunity

Since home brew supply shops play such a crucial mentoring role in getting breweries started, perhaps our industry needs other suppliers to continue this mentoring role after a brewery launches. The Brewer’s Association does a good job on the fermentation science side of things, but business wisdom is lacking.  We started CRAFTINGASTRATEGY.COM to fill this gap and serve this need. But we can’t do it alone; so we are always looking for industry partners that understand the knowledge gaps that exist and want to help. We believe we have found another one in the GrainCorp family of companies. It is clear to us that they really want to help the industry, from bottom to top. One of the GrainCorp companies, BrewcraftUSA approached us with a simple but powerful proposal: “How can we, as a company, better serve the craft brewing industry? What can we do together with CRAFTINGASTRATEGY.COM?”  

Much like that home brew supply shop owner that coaches, motivates, and creates community at a local level; mentoring and sharing knowledge needs to occur at the industry level. The bad news is that there is no “Parr Lumber” equivalent in the craft brewing/fermenting/distilling industry. Once you go pro, you leave the comfortable home brew supply shop and move to separate bulk suppliers, and typically less nurturing relationships. The good news is that by putting knowledge and mentoring ahead of sales – doing what is good for the industry first –companies like BrewcraftUSA are making a concerted effort to fill the existing knowledge and mentoring gap in our industry supply chain. We all know there is more that can be done. That is why we’ve partnered with BrewcraftUSA for the 2015 National Homebrewer’s Conference (NHC).  Come by their booth, the CAS team will be there

We would both like to listen to your ideas about the kind of support you need, and we would both like to help you learn how to run a successful beer business.

AB/In-Bev's Apparent Strategy

Sometimes it’s good to get out of Beervana. Portland, Oregon is a wonderful city and it has been my home for the past sixteen or so years. I still remember my first visit, when I was interviewing for my job at the University of Portland. My potential new colleagues took me to the old Bridgeport Brewing on NW 14th, and we had fantastic pizza and the most delicious ale this kid from New York had ever tried. I had been all over the world, cooking food and running food & beverage departments in some of the world’s most beautiful places. Yet almost immediately, Portland stood out as special. Peaceful and progressive; old growth with new green; healthy and alive. It was like begin dropped into Tolkien’s “The Shire.” And the beer was fantastic, nearly magical. The flower-blossom aroma and high spirits of that IPA we shared made me feel like we were drinking the sap of a living beer plant; it was like tasting truly fresh food for the first time. Sixteen years later, I remain comfortable in Portland. It is my "happy place."  And it’s also a good thing that I get out of town now and then.

Today I am in Florida for a business meeting.  When I put on my strategist’s hat, a warning light started blinking in my brain. I think by living in Portland, Beervana, I am being lulled into thinking that the craft movement is unstoppable, and that small independent breweries will most certainly win the day.  The data reported by the Brewer’s Association confirms my confidence, my comfort -- and thus the big problem. Warning light! Cognitive bias alert! I had to get out of Portland and see if this comfortable state-of-the-industry well being is really happening elsewhere.

Many months ago, in our CAS Forum, I warned a seasoned production manager that you couldn’t blindly trust data to inform your strategy – you had to get out of your cubicle, turn off the computer, and manually check your operations.  In that forum thread, we were focused on production planning, so we spoke of the difference between virtual and actual inventory. I suggested how “look and see” verification to see how far you actual inventories varied from the data being reported on the computer screen was essential to his success. The same issues apply to broader business analysis and strategy. You have to get out of your comfort zone; you have to take a critical look at whether your data are deceiving you. Sometimes you have to go outside and sit on the deck, and look at things from a different perspective to save your company, or your industry.

I decided to see if AB/In-Bev’s strategy, as viewed in the comfort of Portland, surrounded by independent craft breweries and culture, was the same if I analyzed it in Florida.  So here I am, in a fancy-ish bar (Deck 84) in Delray Beach, Florida. Lots of beautiful people here sitting on the deck, sipping drinks and watching the Atlantic Blvd Bridge over the Intracoastal Waterway rise for the passing yachts. Aside from the view, Deck 84 is a typical South Florida watering hole. They have standard bar menu food. They have a decent beer menu, mostly bottled, with a few tap handles. They have what seems to most a nice selection of craft beer. I just finished my meeting with a partner of a well-known Angel investing group to discuss mergers, acquisitions and other geeky business stuff. He had a Blue Moon (MillerCoors) served with an orange on the rim of the glass (“brilliant marketing ploy,” he says). I got a Full Sail Cascade IPA. The bottle that came says: “Employee Owned.”  This is where I started to get scared…

Of the dozen or so craft beers on the menu, more than half are owned by AB/In-Bev. Then there is Bud Light, Budweiser and that whole assortment. Sitting here, far from Beervana, The AB/In-Bev strategy seemed simple and clear. Own the beer menu. Leverage bargaining power up and down the supply chain. Defend your territory and develop consistent sales routines that make it easy for Deck 84’s beverage manager to make money. AB/In-Bev’s strategy in Florida is to minimize menu (shelf) space for MillerCoors and Heineken brands. When their sales guy comes in, he has an entire portfolio of easy sales: The old standard American lagers, standard nice imported lagers (Stella Artois, Becks), excellent imported ales (Leffe) and a nice handful of fully (Shock Top, Elysian) or partially AB/In-Bev owned American craft beers (Craft Brew Alliance stuff: Widmer, Kona, Omission, etc.). One stop shopping for the beverage manager of Deck 84... Nobody, and I mean nobody, over here in Florida (other than craft brewery owners) knows that Blue Point, Elysian, or Kona are AB/In-Bev investments. And that is just how they want to keep it.

What A Difference A Door Makes

Ben Engler - Member Expert, Brewer and Proprietor, Occidental Brewing Co.

When operating a new brewery, one likely employs used or re-purposed or undersized equipment. As the brewery matures and sales grow, steps must be taken to increase production and maintain efficiency. Obvious solutions like adding cellar capacity and labor are easy to understand, but these are only a couple of options among the myriad of choices you will face. Your goals may include brewing more beer, earning greater profits, or (one of my goals this year) spending less time at the brewery. Regardless, it is imperative to evaluate the entire business and the system of operations and internal linkages when deciding how to spend money and which opportunities to pursue.

Our first major expansion at Occidental included adding new and larger fermenters, an additional brite tank, a bigger glycol chiller, a real hot liquor tank (HLT) and a new beer cooler. Clearly, the additional tank space would facilitate brewing more beer, every growing brewery’s goal. It has turned out, though, that one of the most important components to this expansion was an unlikely one, the door to our new cooler. It reminded me of the CAS white paper, What Is Warehousing. In that paper, ‘space’ is touted as a critical resource within any brewery or brewpub. The size of our old cooler’s door simply didn’t have enough space.

Confronting Unforeseen Bottlenecks

Our first, very economically priced (old and cheap) cooler came only with a wide “man door,” through which a pallet would not fit. This meant all beer went in by hand truck and out by hand truck. We understood this would be an issue when we purchased the setup, but did not realize the impact it would eventually have. When you are brewing 20 bbls a month, such inefficiency is less obvious and easier to manage then when monthly production has increased to 200-plus bbls. The man door proved a painful bottleneck. If we were racking beer and there was not a distributor pickup that day, it all went into the cooler, one keg or several cases at a time. Then, when a truck was scheduled, all beer was removed, slowly, and restaged for delivery. There comes a point when even a team of Oompa Loompas would say this is too much. We learned our lesson and made sure the new cold box had a door fit for a real brewery.

The new cooler is only about 600 square feet larger than the original, but the key difference is the 8 ft. sliding door. Pallets are obviously superior to hand trucks for moving beer. Perhaps this is why I get so much pleasure watching my new 64 sq ft door open and close – it is oddly satisfying. Beyond making everyone’s lives easier, this door improved the brewery efficiency a measurable amount. The time we save in a given year because we are not stacking and unstacking kegs and cases currently stands at 300 hours of labor. Instead of taking 1 to 2 hours to stage small orders, it now takes minutes to stage even large quantities for multiple distributors. If you want to make the day of your finance department/person, illustrate to them how a non revenue generating piece of equipment can have an ROI of 3 years!

This type of operational efficiency is based upon the resources your beer business has (or needs to acquire). Resource efficiencies, even such low-hanging fruit as the size of a door, are everywhere in a small brewery. The hot liquor tank (HLT) we installed as part of this expansion is another simple example. Previously our HLT was a weakly insulated vessel with no method of heating. It required filling immediately prior to mash in, since it could not keep the water at temperature over long periods of time. It was also undersized and we were failing to capture as much water from the heat exchanger as we could. As sales grew, double brew days became the norm and we could clearly benefit from a larger tank that was better insulated and had a heating element.

Our new hot liquor tank, just like the cooler, has similarly proved extremely valuable. Reducing the water waste is nice, but the biggest benefit is the time savings. It used to require about an hour to fill the old HLT enough to mash in. I used to have to get to the brewery an hour earlier to heat up the water… Now, the brewday could begin immediately upon arrival, which saved us time. If we brew 160 days a year, that is 4 weeks of labor saved. Realizing these efficiencies is how we can continue to grow without adding a bunch of employees (cost, overhead, liability).

Look Ahead and Do Not Ignore Any Process

It is easy to watch demand outpace supply and begin calculating how many tanks must be purchased to fill all orders. Focusing on the fun stuff, without looking at all the linkages within your production system will bring headaches down the road. My hope is that my series of CAS papers will help other breweries see around corners and learn from our growing pains. Growth must be planned carefully and involves much more than a bigger cellar. Bottlenecks can occur throughout the entire brewing process. If beer is made faster than kegs can be cleaned, or there are not enough hoses to complete multiple tasks simultaneously, or in our case, your door is too small, all the tanks a building can hold won’t lead to more beer. Consider how you interact with all of the equipment throughout your entire process. What is keeping you at the brewery an extra hour each day or making you wake up an hour early? What slows you down? What delays the next task? You can’t buy more hours in a day, but with the right equipment and planning, you won’t need to.

Note from CAS: This public blog is the first installment of a series by Member Expert, Ben Engler. The remaining parts are for members-only. To join our learning community, sign up here.

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!

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