It was late Friday afternoon in Sonoma, California, and the pitcher of strong ale was half consumed. Brewmaster Thoren Barrelson and Brewery owner Frank Shepherd were philosophizing over their work. They had just poured themselves a second pint of their carefully crafted chocolate stout. The aromas of ripe barley, soft hops and chocolate malt melded to form a perfectly balanced stout, soft on the palate, not to heavy or bitter or sweet.
Barrelson closed his eyes, as was his habit when sipping this concoction and continued: "In the end Frank, this is turning out to be far more about me than we ever expected. And I love being out in front, talking to customers and fans talking about the magic behind our beers and about the quality of our brewing team. We’ve done a great job balancing our growth and with staying true to our core mission always brew the highest quality craft beer in the world. Never compromise on craftsmanship. It has been an exciting rise for Magic Barrel, and for me, how can we ensure we stay authentic to our core brand community while also growing to serve new markets?”
Shepherd replied to his friend and Brewmaster: "You know I agree, and I'm ok with it -- with you in the limelight. Your role, partly real, partly imagined by our followers, this strong connection between us, the brand and our community and consumers may be the base of our whole business. And I don't mean just you and me, this brewery my father and I started, our employees, our distributors, our customers... The idea of Magic Barrel, the idea of what we do, has gone beyond what we actually do. The Magic Barrel Way is far more than the process of making beer it is core to how we communicate with others and it is core to how I hope to run this business. We've been swept up in the movement, in some kind social or cultural wave of need. I am proud of this, you know I am, and you know I am honored to serve. But does this very boon at the same time limits what we can be, limit our ability to grow?”
"What do you mean?" said Brewmaster Barrelson. “You are concerned, worried about something?"
"I was only thinking that as long as we understand the true sources of value we provide, who we are, what we do, the Magic Barrel Way. play our roles as holders of the secret potion, and authentically embrace the craft and what we provide, this can't go wrong. I was celebrating in my musings, not trying to concern you.”
Shepherd sat quietly for a minute. They had no problem sipping the beer in silence. Local is special, he thought. The local craft brewery or brew pub has become a sacred gathering place where beer is the sacrament. The locals, when they cross threshold and enter our Public House, they are seeking congregation and celebration.
"It is almost like we provide something missing in their lives," he said quietly, almost to himself. "Like we are serving them something magic and they are uplifted; elevated when they drink our beer."
So yes, in some ways we are to them like the high priests that administer the hopeful potion. But I just have a hard time embracing it. Don’t we just provide good beer? Good carefully handcrafted beer yes, but isn’t it just beer?
Barrelson swallowed and responded. "Well Frank, I do feel the role of the magic maestro, I feel like I am growing into it. Or, maybe it is growing into me, no Thoren er what I want to happen. And today, now, I feel it, truly I do."
Frank Shepherd’s business-owner perspective kicked in. "If the Magic Barrel Way is more than about making great beer, how can we ensure that we support it? How can we ensure our distributors and retail partners embrace our core values? How big can we make this movement before we lose grasp and threaten our authenticity? How many barrels can we produce and still remain in such inspired and elevated esteem? What do we truly offer of so much value? Tell me, can we truly grow this little brewery enough to earn more than a pittance for our families, and be relegated to barely making payroll? To do so we have to be more than local, we would need to be a regional brewery – but still stay small in the eyes of our core followers. If what you say is true, our local evangelists must always to be first served. It is they who hold us up, they who present us as magical wizards, as enchanters and they who demand we embrace the role."
"But we have to make money," Shepherd thought to himself. How can we grow so that we can serve more people and become financially secure, and at the same time keep this magical and honorable stature of local artisans?
Growth is something Magic Barrel Beer had not found difficult so far. Their bottled ales had continued to penetrate the market. Twenty-two oz bottle sales continued to grow. With the help of good distributors and good branding, their beverage line had been picked up by the large retailers – Safeway, Rite Aid, Albertson’s, Trader Joe’s, Fred Meyer / Kroger, etc. But getting shelf space was really hard and competitive. If sales didn’t grow distributors would not push and retailers would stop giving Magic Barrel valuable visible shelving.
Magic Barrel also continued to penetrate the draft beer market, especially in Central West and North West California, including the lucrative San Francisco area market. They were on the edge of making the decision to diversify their product mix by providing a lighter, more compact and more durable packaging option. Following a few other innovative craft breweries they were considering putting craft beer in cans. Shepherd felt they had the opportunity to become the northwest leader in this higher margin category. They were already leveraging their existing distribution network to gain placements.
More worries wrinkled his brow. Was it too soon to bet on cans? Was this the right way to move forward? Was this the right way to gain margins, or should they just find ways to economize the existing business model? If it went badly, could the business even survive?
Growth sure was not easy. It was expensive and risky. Banks had been reluctant to help with financing, so Frank had decided to find other sources of financing. They bootstrapped, they got micro-investments from their loyal customers. They made due with borrowing less, and increasing margins by controlling more of the value chain. By being innovative with their business model and focusing on cash generating decisions instead of barrel-age growth–they had built up enough cash and credit to self-finance a growth move so that they could increase capacity by up to 5x within their existing building.
Frank again asked his key question: "if it all went wrong, could we absorb the loss or would it kill us? Is the risk really worth the potential increases in revenue, margins and market reach?"
And the risks were very real.
Shepherd looked Barrelson in the eyes. "Thoren, if we keep growing, how long will it be before we are removed from the hearts of our loyal followers, and labeled corporate bureaucrats rather than magical artisans and protectors of local communities? There are ten hopeful craft brewers just waiting to take our place. I am worried about losing the role of magic. We are already opening a Public House and are entering new markets in Oregon, Washington, even Alaska. Who knows what the reaction will be?"
"And," he continued, "what happens if drought leads to another fire in Yakima or the San Wakquine Valley and hops and barley prices shoot up again, and we've promised standard pricing up and down the west coast to all these big time distributors? What if our distributors fall in love with some other brewery, and we become old news? What if the locals drop us? We're dead meat!"
Then, tongue loosened by the fine craft brew, one of his true and deepest worries about the brewery came out.
He lowered his voice. "What if some new place makes you an offer so good that you leave?”
Barrelson had been listening, but only kind of. Shepherd was a worrier, a dear hard working guide and worrier. This was the kind of difficult conversation Frank and his Board of Directors liked to have. Barrelson usually just nodded his head and tuned out all this noise. He simplified the situation in his mind: "People like beer, we make beer, our beer is very good, why worry?”
The Magic Barrel Public House would be fine, he thought to himself. It would sell even more beer and would grow their legend. But the idea of becoming bigger, going national or international was a double-edged sword. Was there a way they could stay the same company with the same loyalties and culture? He knew they absolutely had to move up to the next level. Barrelson took great pride in professional development, always reminding Shepherd that it is people who make the beer great, and we need to cultivate their futures – professionally and individually. The assistant brewers from Humboldt, Portland and San Diego that he had trained, working for almost nothing, would be launching their own exciting new recipes, building their personal brands, and developing under his watch.
"Ok Frank, I see your point. You are wondering: how can we move up to be a larger production brewery with a much broader regional, maybe even national or international distribution? We may need to yield some local market share and power to the next wave of microbreweries, but we definitely need to remain locally connected. I get it. I do. But you know me; I think that we shouldn't plan too far ahead. Don't worry too much. Keep making good beer. As each season comes around, we see what we've got, see what's out there, then decide what to do with it. I don’t know if that is a strategy, but its been working for us Frank. I don't know the answer to your big question, but I am ready to be the ‘Face of the Franchise’ if you need me. You and the Board decide what you want to do, I’ll work hard, build a great team and continue to provide the magic.”
Shepherd had the following options in his mind for growing the business and was trying to balance it all in his head, the risks, the rewards, the economic realities, and the human sensitivities: Product line expansion: craft beer in cans. Cans fit better on shelves and cans increase shelf life, but will consumers embrace this new package and do we know how to implement this technology efficiently?
New product development: produce a beer for the emerging market of non-beer drinkers who are curious about craft beer. Something like a Radler, a sweet bock, or a non-alcoholic soft drink like Malta Amstel or Vita Malt. Expand barrel-aged beers and the successful Dark Magic series, and ramp up the single-batch program to keep the brewing team happy by letting their creativity thrive under Barrelson’s careful watch.
Market penetration - geographic expansion: build more capacity of the existing product line and expand distribution to the whole western USA.
Forward vertical integration: Get into the distribution business and distribute our own beer. Gain the margins appropriated by the distributors.
Market line concentration: Stick to what we do best and defend it. Find the beer that is most popular and consistent and ramp up production of that single product and sell it nationally. Add retail revenue streams:by opening craft quality brew pubs, keeping the extra margins through direct sales to end customers,avoiding the distributors as much as possible.
Backward vertical integration: buy into hops and barley farms.
Unbeknownst to Mr. Barrelson and Mr. Shepherd, across town at Russian River Brewing Company and at Lagunitas Brewing Company, up in Cloverdale at Ruth McGowan's Brew Pub and in Portland, Oregon at Occidental Brewing, Bridgeport and Backwoods similar Friday afternoon musings were brewing. Strangely, mysteriously, magically really these odd philosophical conversations were occurring -- as if by chance. And yet, they were all were eerily the same.
"Another pint, Frank?" asked Barrelson.
"Yes, thanks Buddy" Shepherd responded to with a worried smile.
Note: Magic Barrel Brewery is a fictitious representation of the many breweries we have studied all across the globe. Magic Barrel was written expressly for educational purposes to enlighten CAS members to the strategic problems faced by all sorts of breweries from startups to established regional craft breweries. All brewery and individual names are fictitious and not intended to represent any actual brewery or any actual business issues.