Craft brewers: developing the right infrastructure to grow
With the craft beer industry continuing to grow, key players in the $23.5-billion market are constantly looking for ways to scale their businesses and meet increasing consumer demands. With 222 craft breweries throughout the state, Michigan ranks sixth in the nation, with an estimated state economic impact of $1.85 billion in 2014. Western Michigan is a robust player in this growing industry with two of its largest breweries, Bell’s in Kalamazoo and Founder’s in Grand Rapids, ranking seventh and 26th, respectively, in the nation according to 2015 statistics. In Holland, the exciting news is that New Holland Brewery recently signed a contract with Pabst for national distribution of its products.
With craft beer becoming available in more places — from food trucks to fine dining restaurants — brewers will want to invest in the infrastructure to deliver their products to retailers and consumers in an efficient manner. The following are the best practices on expanding your craft beer distribution network.
Local, regional and national brewers
Craft beer companies typically fit into three categories based on size: the small local brewpub, the regional brewer and the national production brewery. Each has unique needs when it comes to production and distribution.
The local brewpub typically sells most of its beer on premise or at the brewer’s restaurant. This reduces the need for distribution and allows the brewpub to recognize profits quickly. A regional brewer, on the other hand, typically requires more equipment, such as tanks, as well as a larger amount of real estate to produce and store inventory. The regional brewer might be selling out of a tasting room, with revenue and growth coming through selling their brand into other accounts. Between 2012 and 2016, the number of regional craft breweries nearly doubled (47.8 percent). At a much larger scale, a national production brewery may have several operations and requires a more sophisticated and robust distribution system.
To grow or not to grow
In today’s market, expansion is a matter of choice rather than survival. Each category of brewery has its advantages and drawbacks and each has the ability to deliver a good profit. It’s important for investors and owners of breweries to align on objectives when it comes to growth targets and appetite for expansion. Once brewers and investors agree on business objectives, they can set priorities for investment and determine the amount of capital they’ll need to build their infrastructure. If a brewer aims to slowly expand a brewpub, for example, he may not need to purchase a new warehouse to store beer right away; instead, he can gradually scale up distribution. As part of this evaluation process, brewers also will need to consider operational needs to maintain equipment, including maintenance and upgrades.
Assessing where (and how) to expand
Brewers also need to evaluate where to expand. Craft-centric regions, including San Diego, Colorado and the Pacific Northwest as well as the newer craft hubs of Atlanta; Chicago; Austin, Texas; and Asheville, North Carolina, have turned into destinations for craft beer tourism. This means that there’s a large market in these locations for craft beer, though there is also a lot of competition. Other areas of opportunity include traditional grocers and convenience stores. For instance, Whole Foods now carries a selection of craft beers. In fact, craft beers have become so popular at Whole Foods that the grocer has created its own brewing company that offers select craft beers and produces about 400-500 barrels annually.
A key partnership for craft brewers are beer wholesalers, who support, sell and distribute their product. As the craft beer industry has continued to grow over the last decade, wholesalers have adjusted their business models from supporting a few key suppliers (such as Anheuser-Busch or MillerCoors) to now having more than 30 breweries to support, sell and distribute. Wholesalers have also increased the training and size of staff, often deploying craft-only sales teams. Today, brewers have the opportunity to work with large distributors as well as craft-only distributors. Craft beer’s continued growth will be in part due to the commitment and support of these innovative beer wholesalers.
What works best for your craft beer?
Ultimately, the value for a particular brewer is case dependent. Key factors to consider include quantitative elements (growth rate and profitability), intangible factors (brand awareness), competition (assessing if similar products are in the market) and succession planning based on the end goal (for example, an IPO).
Brewers need to assess if the distribution strategies implemented would support their growth and closely align their financial strategies with their long-term goals.
There are benefits for the craft brewery industry in working closely with a larger financial institution. The global perspective and footprint enables it to provide broader growth strategies as well as capital needs, whether those needs are to support a small local brewery or to aid with national distribution as the brewery grows. Larger institutions also have the resources to help with business transitions, whether that is to a family member, private equity or IPO.
Craft beers are expected to climb to nearly one-quarter of the U.S. beer market by 2022; the industry is certainly becoming much more competitive for the next generation of entrepreneurial brewers. At the same time, their ability to secure capital and know they have options in the future has never been better.
Brian Mulvaney is senior vice president, global commercial banking, and Scott DeMeester is senior vice president, market manager West and Central Michigan, commercial banking, for Bank of America Merrill Lynch.