BY: Noah Davis, Business Insider
On a recent Monday morning, the stretch of Route 100 that runs through sleepy Waterbury, Vt., was bumper-to-bumper. The line of Camrys, Sierras, and Outbacks, some from as far away as Illinois, inched forward in the crisp air, their drivers united in a singular goal.
In the immortal words of Homer Simpson: Mmm, b-e-e-e-r.
Jen Kimmich sighed at the chaos. She knew what they’d come for. They’d been arriving every Monday for the past two-and-a-half years, more every week, to the point where they now crowded the parking lots of the nearby Phinne nail salon and the Merchants Bank, both on the wrong side of Rt. 100, forcing their owners to dash across the state highway to reach their journey’s end, a cramped retail shop in a modest beige building that housed the Alchemist brewery.
The Alchemist, which evolved from a brewpub Kimmich started with her husband, John, a decade ago, has brewed a variety of beers, but the one that drew the faithful — 90% from out of state, Kimmich estimated — was the one in the silver-and-black 16-ounce cans, Heady Topper, the double IPA that rules of Beer Advocate’s Top 250 beers list.
The beer had sparked a frenzy.
The Alchemist cannery in Waterbury, Vt.
“We thought people would come to town, go to the pub, and buy a four-pack,” she tells Business Insider. “What we didn’t anticipate were the droves of people coming to buy as many cases as they could.” Just when they thought the mania had peaked, the Chicago Tribune or the Atlantic would do a story, and it would start all over again.
In December, undercover investigators from the Vermont Department of Liquor Control arrested Stephanie Hoffman, a 28-year-old who was trying to sell five cases on Craigslist. Her price? $825 for 120 cans, a roughly 100% premium.
Heady Topper is a fine brew, perfectly bitter with an 8% ABV and a smooth, fruity finish. A bargain at just $3 a can, or $72 per case. People who came to the brewery were only allowed to buy one per visit. Kimmich attempted to manage the chaos while John, whose unkempt dirty blond hair matches his wife’s, brewed in the back. And brewed. And brewed.
They tripled production last January, to 36,000 cans a week, but crowds kept coming, and soon there wasn’t enough left for the stores and brew pubs around the northern parts of the state. Outlets in south Vermont complained that they couldn’t get it at all.
For the Kimmichs, it was getting to be too much. Too many cars, too many people, too much attention. Even the owners couldn’t find parking at their brewery. They made a decision: they would close the retail shop, take a time out and look for a larger space. “It was a mess,” Kimmich says. “There were near accidents on Rt. 100. Our neighbors were unhappy. The town was concerned.” The decision was big news in the brewing world and beyond; even the AP covered the story. Fans can still find the cans in shops around the area, but the crush at Alchemist has abated for now.
An Intoxicating Success
Heady Topper was not an instant hit. In fact, it wasn’t even one of the five staple beers the Kimmichs made available when they opened the Alchemist Brewpub in 2003. They didn’t think a big, boozy double IPA would sell well enough to have it on tap all the time. Instead, they focused on more traditional styles like pale ales and pilsners, only brewing Heady occasionally. Sales were okay, but it was too strange, too different, and too fresh for most peoples’ palates.
The brewpub, meanwhile, was turning into a successful small, local business. On busy nights, people would wait up to two hours for a table, eager to eat some cheap, hearty food and knock back a couple pints in the friendly environment the Kimmichs created. Some of the wealthier Waterbury residents prevailed upon the owners to raise prices, but they refused. They wanted to keep the joint affordable.
“We would always have college students come down from Burlington, and they wouldn’t mind waiting,” Jen says. “They knew we were a place where they could take the $20 in their pocket and get a plate of red beans and rice, have two beers, and have enough for a tip. That was important for us.”
In 2011 the Kimmichs made the decision to open a small production brewery. The plan was to supplement the brew pub with a line of canned beer. They would start with one style and eventually expand to a second. After some discussion, they chose Heady Topper as the first offering because they felt a fresh, hoppy double IPA was missing from the market and the high alcohol content would allow them to sell the beer for more of a premium.
But in August, just a day before the first cans were scheduled to roll off the line, Tropical Storm Irene dumped
John Kimmich, the mastermind behind Alchemist’s legendary Heady Topper.
15 inches of rain on northern Vermont. The Winooski River overflowed its banks. Water rushed through downtown as Waterbury’s residents fled to higher ground. More than 200 homes were severely damaged or destroyed. The brew pub was hit hard, its interior a mess of mud and ruined equipment.
As they picked through the wreckage, the Kimmichs realized they had one option: double down on the production brewery and Heady Topper. They received a $100,000 loan from the Vermont Economic Development Authority, and used the money to add tanks, increasing production by 100%. It was a decision borne out of necessity — the Kimmichs were desperate to keep their staff employed.
Heady did a modest business at first, but momentum built quickly, and soon customers were lining up. Initially, it seemed like Heady benefited from being the new kid on the block. “I remember other brewery owners saying, ‘Enjoy the wave while it’s here,'” Kimmich says. “They thought it would drop off after that initial rush. But here we are two-and-a-half years later and it keeps getting more popular. It’s taken a life of its own.”
She realizes they could make more money if they raised the price, but she and her husband refuse to do so. It’s the same reason they kept prices down at the brewpub all those years ago, even as local businessmen left in a huff because they refused to wait in line for two hours.
“Having money shouldn’t give you the ability to enjoy beer more than anyone else,” Kimmich declares. “We make a good amount of money on it, but we’re not price-gouging. If it got to the point where we were selling it for $8 a can, all of our great fans at Phish shows or up at UVM wouldn’t be drinking it the way that they are. To charge $9 or $10 for something that is made and put out in three weeks isn’t right. It really takes advantage of the customer. We don’t think that it should be a privilege to drink beer. No matter what the demand is, we’ll keep it at $3.”
Craft Beer’s Big Moment
On one hand, the story of Heady is simply the tale of a remarkable brew that found a passionate audience. But it’s also emblematic of a larger trend, the explosion of the craft-beer category, which has led to a veritable tsunami of small-batch beers created by eager new players like the Kimmichs.
Every year now, craft beer chips away at the market share of the macro-brewers — Big Suds? — as consumers turn away from the Budweisers and Coors Lights of the world in search of more full-flavored beer. In 2012, 13 million barrels of craft beer were produced, up more than 71% from 2006.
In dollar terms, craft beer now represents 10.2% of the domestic beer market, and a report from IBIS World predicts spending on craft brews will grow to $3.9 billion this year.
The trend is accelerating. According to Bart Watson, the staff economist of the Brewers Association, volume was up 13% during the first half of 2013, and that will likely increase in the second half of the year, which traditionally shows stronger sales as consumers turn to fall and winter beers. “It wouldn’t surprise me to see craft at 15 percent of the market by volume in the near future,” notes Harry Schuhmacher, editor and publisher of Beer Business Daily, citing industries like wine, spirits, and candy, where the premium space is responsible for between 15 and 30% of sales. In the brew mecca of Oregon, craft beer accounts for 47% of beer consumed. While no one expects the rest of the country to match this figure, it’s held up as an example of how successful craft beer can become.
But even such a healthy rise in consumer demand won’t be enough to sustain the many new breweries jumping into the marketplace. For every Alchemist, there are numerous small breweries turning out solid product that will never see a profit. In 2012, more than 400 were launched, for a total of more than 2,400 nationwide. Meanwhile, another 1,500 were in the planning stages — an amount equal to all the new independent breweries that came online between 1996 and 2012.
Just how those new breweries will survive, given the challenges of distribution and limitations of shelf-space and taps, is an open question, especially when even the craft beer market is dominated by a few big players, like Boston Beer Company, Sierra Nevada, and New Belgium. (Boston Beer, which makes Sam Adams, is now so large that the Brewers Association keeps changing the definition of craft beer to keep it in the fold.) Meanwhile, Big Suds has responded with its own versions of craft-like brews such as Blue Moon and Shock Top, made by MillerCoors and Anheuser-Busch InBev respectively, which have quickly come to dominate the market for specialty beers.
For now, the buzz is positive, but beneath the surface, there are signs of trouble. Breweries are undercapitalized and the old guard well remembers a brutal stretch between 1996 and 2000 when 300 breweries closed as the market cratered due to a flood of inferior product and fickle consumer tastes.
Besides, as any college freshman knows, even the best keg party is often followed by a brutal hangover.
Tapping a Market
Rep. William Steiger got the craft beer movement started with H.R. 1337.
The modern craft beer industry has its roots in a little-known bill introduced by Wisconsin Representative William A. Steiger. The businessman-turned-politician, who helped establish environmental protection for the Great Lakes and hired future vice president Dick Cheney as a Congressional intern, sponsored H.R. 1337. Alan Cranston, a senator from California, added an amendment that legalized home brewing on a national level. President Jimmy Carter signed the law on October 14, 1978, and in the early 1980s, a number of states began legalizing brewpubs. The number of breweries, which by 1978 had fallen to an all-time, post-Prohibition low of 89, began to climb.
The recent jump in craft brewing began to the mid-to-late aughts and has recently picked up steam. “Part of it was the cost of capital,” says Jason Childs, a professor who teaches The Economics of Beer at the University of Regina. With loans and investors easy to come by, the barriers to entry fell.
Meanwhile, tastes have changed. After decades spent guzzling bland industrial mega-brews, beer drinkers have made the same evolutionary leap as wine- and coffee-drinkers before them, waking up to the pleasures of subtle, carefully crafted flavors. Appalachian State University now offers a degree in Fermentation Sciences, which provides instruction in entrepreneurship and business management in addition to brewing skills. The University of California-Davis and Oregon State University also have programs. The Homebrewing Association claims more than 37,000 members, a jump of 400 percent since 2005.
Katherine Kyle, general manager at The Blind Tiger, one of the first craft beer bars in New York City, remembers when customers would insist there was a misspelling on the chalkboard outside the bar. “I think you mean ‘draft’ not ‘craft,'” they would inform her. She hasn’t had that conversation in years.
Even as the craft segment has exploded, overall beer sales are falling, dropping by 0.9% in 2012. Big Suds has responded by creating their own niche brands aimed at securing their dominance. Blue Moon and Shock Top are marketed as as full-flavored, “artfully crafted,” Belgian-inspired brews. Not only are the names of their corporate
Tenth and Blake
Some craft brewers view MillerCoors’ Tenth and Blake division as an attempt to obscure Blue Moon’s corporate ownership.
parents conspicuously absent from their packaging, the companies have created new divisions — MillerCoors’ Tenth & Blake Beer Company and ABI’s Green Valley Brewery — that further blur the associations. The tactics have been controversial, so much so that MillerCoors CEO Tom Long recently felt the need to defend his brand. “We should be proud to make beers that grow and are popular — that’s the American way,” he told Bloomberg. “Being small and unpopular, what’s the utility in that?”
Not that the sniping makes a difference. Both faux-craft brands are massive. Blue Moon’s two million barrels would represent around 15% of the craft market by volume. Shock Top, meanwhile, grew 100% between 2010 and 2011 and continues to gain ground.
There are some in the craft community who argue the presence of these beers is a good thing, as they have increased the penetration of the craft market. “If you asked the world, ‘Who has had a Blue Moon?’ almost everyone would raise their hand,” says Michael Kiser, of the Good Beer Hunting blog. “That fundamentally changes the consumer. That is now a person who is interested in flavor, who is interested in process, in the word Belgian. Craft breweries are building on a wave that was created by these things.”
That said, they are also in danger of being inundated by it. A number of successful craft breweries — including Terrapin, Redhook Ale Brewery, Wiemer Brothers Brewing, Kona Brewing Co., and Leinenkugel — have been acquired by or taken on major investments from ABI or MillerCoors.
Goose Island was purchased by Anheuser-Busch InBev.
But Goose Island benefited from efficiencies of scale, as well as a powerful distribution network. “We make a better beer than ever,” founder and former CEO John Hall tells Business Insider. The popular Bourbon County Brand Coffee Stout continues to hold the No. 4 spot on Beer Advocate’s Top 250 beers.
Even so, such consolidation will likely remain the exception. The bigger battle on the horizon is not between marco and craft but a throwdown among craft brewers themselves.
The Small Business of Small Beer
In 2012, former Goose Island “innovation brewer” John Laffler founded Chicago’s Off Color Brewing along with Dave Bleitner, focusing on unusual beers with names like Prairie Prairie Dog Attack, Cat-Sip Hibiscus Gose, and Screw You Jeremy Danner.
The Off Color founders have modest ambitions. “Dave’s married, and his wife makes more money than he does,” Laffler says. “I’m not married, so I need to find a wife who makes more money than I do.” Would-be craft brewers with visions of Clydesdales dancing in their heads are advised to take note. While the craft industry as a whole will grow, the window in which a lucky, talented newcomer might manage to create a national brand — or even make a halfway decent living — is closing fast. All together, the 400-plus craft breweries started in 2012 produced around 100,000 barrels, which is less than Anheuser-Busch InBev produces in a single day and about 4% of Sam Adams’ annual output.
New arrivals will find themselves splitting a smaller pot. “I see the industry becoming more local, more regional, more city-specific,” Laffler says. “At that point, you’re locked in making $35,000 a year and hopefully your business can last 10 years.”
Rich Buceta, a former advertising executive with close-cropped salt-and-pepper hair, founded Singlecut Beersmiths in Astoria, Queens, the first to open in the borough since the 1950s. Buceta expected 50 to 100 people at the opening; 1,200 showed up.
“We’re a real, bona fide local brewery,” he points out. “Without naming names, some breweries have names that are nothing more than a marketing ploy. You can argue it’s craft beer versus crafty beer, something that’s really not what it purports to be …” (The reference is likely to the highly successful Brooklyn Brewery, which has produced most of its beer upstate since outgrowing its Williamsburg location.)
Underlying such squabbling is a growing sense that a shakeout is on the horizon. “There’s still the ethos that we all get along and that we all help each other out,” Laffler says, “but our competition isn’t Anheuser-Busch. It’s not Coors. It’s Bell’s. It’s New Belgium. It’s Deschutes. It’s these regional breweries that are having less growth in their home markets so they have to expand to foreign territory.”
For example, Lagunitas, which produces nearly 500,000 barrels a year in its Petaluma, Calif., brewery, is opening a new facility in Chicago, which will have the capacity to produce 1.7 million. That could dramatically alter the beer market in the Windy City. The size of the company allows it to make beer faster and cheaper than the competition.
“At some point, are people going to want to pay $12 per six-pack when they can pay $7 and get a high-quality six-pack from a bigger brewery?” wonders Oregon State University economics professor Patrick Emerson, who runs the Beeronomics blog. In Oregon, he adds, “We’re starting to see some closings. As a cold-hearted economist, that’s a good thing — it increases the pressure to be exceptional.”
Good for consumers, perhaps, but challenging for craft brewers. When Buceta launched Singlecut last year, there were no other craft breweries in Queens. Now there are at least five. Nearly every week, people get in touch asking for his advice about starting a brewery. He rarely responds. Much as he’d like to, it wouldn’t be good business to lend a hand to someone who could potentially steal his market share.
“Brewers are going to start having sharper elbows, and you’re starting to see cracks in the theory that a rising ship raises all tides in the craft beer world,” Schuhmacher says.
The trend is of growing concern to insiders. “We don’t really have the emotional tools for dealing with battling the guy down the street rather than Anheuser-Busch,” Good Beer Hunting’s Kiser acknowledges.
“It Will Turn, But You Don’t Know When”
Forty-three breweries closed their doors in 2012, including six during a rough two-week span in February. That was up from 37 the previous year, and included Nevada’s much-loved Buckbean. Owner Doug Booth, who brewed “Roller Bock” for the Nevada National Guard after they flew the company’s flag during a mission in Afghanistan, blamed high costs and the tough economy. “The prices of the ingredients increased, and we really had not planned for that,” he told the Reno Gazette-Journal at the time. “We were looking to increase our revenues, but unfortunately, we were too understaffed to manage it properly.”
Greg Koch, who founded San Diego’s Stone Brewing Company in 1996, thinks plenty more closings are on the horizon: “We are giving the consumer a dizzying array of choices, which range from super-high quality to rather mediocre stuff,” he points out. “You can expect that consumer fatigue will show up again, just like it did in 1996. It’s like a school of fish. It will turn, but you don’t know when.”
Off Color’s Laffler shares Koch’s concerns. “I’m really worried that a lot people are going to get into trouble in the next couple of years,” he says. “They are risking a lot of money, whether it’s their own or other peoples’. These are peoples’ jobs. It’s not a hobby. This is a profession.
Courtesy The Blind Tiger
The Blind Tiger in New York.
“Everybody’s undercapitalized,” Laffler adds. “F**k, I’m undercapitalized. I think there are a lot of rosy-colored glasses out there. A lot of people look at craft beer as a way to make money or be successful. Everyone has been growing at 10, 20, 100, 200 percent a year. Some new brewery founders think that they are going to do that, too. The world of beer was much different two or three years ago.”
Koch calls it “an age of irrational exuberance.”
The Stone founder, always quick with a metaphor, compares the craft industry to a young San Diego tree, one that came of age during one of those rare years when the usually fierce Santa Ana winds fail to materialize. “There’s no headwind at all,” he says. “In order for a tree to grow strong, there has to be wind. Otherwise, when we have a season of severe Santa Anas, there will be toppled trees all over the place. A lot of small brewers right now are growing up with no headwind. Chain stores are asking them before they open if they can get in line to buy some of their beer. This is an unusual thing that they think is normal. This won’t continue.”
Stone, it must be said, is one of the few beer-making outfits that has successfully made the transition from local to national. Seventeen years after it was founded, it’s now the 10th-largest craft brewery in the country. But even Koch is feeling the squeeze from all the new, local breweries popping up across the country.
“I just got back from a short trip to Minnesota,” he recalls. “A couple of the beer bars that have our beer on tap pretty regularly, just happened to not have our beer on tap. Why? Because their taps were filled with the new guys. It’s not that they don’t like Stone. It’s not that they aren’t going to be putting Stone back on tap. But when you have just so many physical tap handles — and now you have this rush of new stuff and everybody is in a shiny-new-object mode — it creates competition. You can’t sell beer if it’s not available.”
The flooded market has bred a generation of beer fans with no allegiance to a particular brand but an unquenchable thirst for the latest and greatest. As a result, many beer bars regularly rotate kegs, meaning that breweries need to constantly innovate to maintain sales. “We usually won’t keep the same beer around for a long time,” says Joey Pepper, the lead bartender at Brooklyn’s Torst. “We’ll do one initial purchase of it and then maybe come back to it later.”
Loyalty to a favorite producer is a thing of the past. For The Blind Tiger’s Katherine Kyle, the goal is to build a good slate of options, period. “I try to order the beer that’s going to move, but at the same time, I’m also curating that list,” she says. “I have some parts that I want to be accessible and some parts that I want to be more esoteric.”
Kyle views the beer explosion she and her bar helped create with some wariness. Plenty of neophyte brewers, she says, just don’t cut it. “Sometimes a young brewery isn’t ready,” she says. “We’ll take it because they really want to be in the bar, but if they don’t have the kinks out, the crowd here will pick up on it.”
Back in Vermont
Jen Kimmich is on the hunt for a new space. She and John had their eye on one spot but they had to bail after a traffic study indicated that they would need to pay to widen the road. Now, they are trying to decide whether to open a new, larger retail shop or buy a space where they can build a second brewery.
Cans of Heady Topper fresh off the production line.
“There’s an idea that we are against any growth,” Kimmich says a bit defensively. “That’s not true.”
Meanwhile, the Alchemist crew continues to brew beer, and not only the world famous double IPA. Another favorite is Petite Mutant, an American wild ale made with 1,500 pounds of local Montmorency cherries and several quarts of concentrated Montmorency juice from Wisconsin. “We’ll never even break even on it,” Kimmich says. “It’s like the $10,000 batch of beer. We’ll keg some up for local accounts and probably sell some single cans of it. And we’ll drink a lot of it.”