Wednesday, October 19, 2011

On Brewpubs and Economies of Scale

Here is a nice Washington Post article about Brewpubs outgrowing their breweries:  

You can brew only so much beer in a restaurant, and you can shoehorn only so many fermentation vessels among the tables and chairs and deep-fryers.

With thirst outpacing output, several regional brew pubs have been building, buying or renting off-site breweries to keep their own taps flowing and to supply an off-premises market of grocery stores, liquor marts, bars and restaurants.
I have always thought that there are two models for aspiring professional brewers that want to start their own company: packaging brewery or brewpub.  The problem (or curse) of the first is that economies of scale demand growth.  Unless you can sustain an incredibly loyal following that will pay a premium for your beer, you have to grow to keep prices competitive and survive.  I don't think that in the modern era of craft beer you can ever count on loyalty - there is just too much good and new beer out there to grab attention.  There is nothing wrong with a packaging brewery per-se, just that your business model must plan for growth (see, e.g., Ninkasi).

The brewpub model is the escape, if you will, from the tyranny of economies of scale.  From what I can glean, most brewpubs do about 75% of their business in food, can keep beer prices reasonable by cutting out the packaging, distributing, retailing and associated costs and margins.  The brewpub is the model of choice, in my view, for the homebrewer-going-pro in that it allows for lots of flexibility and creativity.  The problem with this business model is that you are in the business of a restaurant first, and the restaurant business is incredibly hard and tiring and easy to muck up.  Smart owners (see, e.g., Block 15) get experienced restaurant managers to handle the food side and concentrate only on beer. 

So this trend of brewpubs getting stars in their eyes is troubling to me.  I think the temptations are great, but the business of packaging breweries is hard.  It is easy to think of selling in volume as the path to riches and success, but the craft beer world is getting ever more competitive and to leverage a successful brew pub to start a packaging brewery is fraught with danger.  As I understand, here in Portland, Laurelwood's great scheme to open an off-site production brewery and expand the brew pub empire is on indefinite hold.

The WaPo article addressed the complications with moving into off-premises sales: 
Off-premises is “a different market, no doubt,” says Bowers of Brewer’s Alley. You need to persuade a distributor to carry your beers, then entrust them to retailers who might plop them among dozens (perhaps hundreds) of rival brands. Bowers was cautious: Before sinking thousands into a production brewery, he was able to gauge demand by contract-brewing the six-pack version of several of his brands at the Flying Dog Brewery across town. He found a ready market, selling 4,000 to 5,000 cases per year.

The enticements outweigh the risks. For the first half of 2011, craft beer volume grew by 14 percent nationwide, and sales soared 15 percent higher than in 2010.

There are singular successes, such as Oskar Blues in Lyons, Colo. Nine years ago, it was an average-size brew pub in this Rocky Mountain gateway town of 1,600. Then owner Dale Katechis began canning his Dale’s Pale Ale with a manually operated canner capable of filling two cans at a time. Other U.S. craft breweries had contract-brewed canned beers (mostly amber lagers and golden ales) at bigger breweries, but Oskar Blues was the first to operate its own canner and the first to can an aggressively hopped pale ale.

Today, Oskar Blues operates an off-site plant in nearby Longmont, Colo., which is on pace this year to turn out 58,000 barrels’ worth for shipping to 26 states. In December, the company will take possession of a new canning line able to fill 300 cylinders a minute. That machinery will enable Oskar Blues to begin filling 16-ounce cans with a new brand called Deviant Dale’s IPA, an 8 percent alcohol powerhouse seasoned with pungent Columbus hops.

“It’s been a wild ride,” says Chad Melis, marketing director for Oskar Blues.

And it probably has a lot of pub brewers stroking their chins and going, “Hmmm.”
Enticements indeed.  All I can say is brewer beware.  Whatever you do, shield the core brewpub business from the packaging brewery in case it all goes wrong.