category-iconOpenings / Closings

Learning From Openings & Closings

March 20, 2017

By Andrew Keatts, March 20, 2017

Twisted Manzanita was huge in South Korea, and that might have been part of the problem.

“We were a pretty big deal there,” said John Olsen, vice president of business development for the eastern San Diego County brewery, which shut down last year after six years in business.  “Our distribution partner told us our pale ale there was their second most popular beer, and the brewery itself was voted the fifth best in the country.”

Beyond the hard fought win for the Seoul beer market, Twisted Manzanita had also made its way into 11 countries and 10 states. That expansion may have been its undoing.

“Looking back on it, I would have recommended we focus on our market, and grow smartly from there instead of pushing it,” Olsen said. “The idea was to try to be the first into these local markets that were growing their craft beer cultures, get there first and establish a brand in those areas as the craft movement started moving across the country.”

The company started modestly in Santee, 30 minutes east of downtown San Diego, in 2010. It expanded into a bigger brewing facility, opened tasting rooms in higher traffic neighborhoods Pacific Beach and North Park, took on a distilling operation, expanded its distribution internationally, and eventually couldn’t make it all work.

Maybe we’re seeing craft beer functioning as a typical industry, where a natural churn of openings and closings indicates nothing beyond the reality that some businesses fail.”

In the end, Olsen – now a real estate agent – said the closure didn’t teach him as much about how the beer industry is changing as it did about breweries being subject to the same fundamentals as any other small business.

“Cash flow is king,” he said. “Don’t try to grow too fast. Start as your neighborhood brewery and grow from there. Once you start buying too much equipment and generating more space to fulfill the larger production that you need to stabilize your business, that’s when things get wiggly because you have to make beer to hit a number, instead of maintaining quality.”

For years, craft beer skeptics have called for some sort of correction in the industry. The relentless pace of new brewery openings has made for easy calls that it can’t continue. And every spate of new closings – or layoffs from high-profile breweries like Stone and Green Flash – brings a fresh call that it’s the end of irrational exuberance in beer.

Those conversations got kick started this week with news of a few more brewery closings. Valiant Brewing Company in Orange County announced it was shutting its doors, and late Friday San Francisco-based Speakeasy Ales & Lagers said it was shuttering operations indefinitely after growing financially insolvent.

Maybe we’re there now – or maybe we’re seeing craft beer functioning as a typical industry, where a natural churn of openings and closings indicates nothing beyond the reality that some businesses fail.

That, at least, is the contention of Bart Watson, chief economist at the craft brewing industry group the Brewers Association.

He anticipates releasing the final numbers for openings and closings in 2016 by the end of March. Those numbers, he expects, would say that the rate of brewery closings is right where it’s been in recent years. The volume of closings will increase for the simple fact that the number of breweries has been steadily increasing for years.

“There’s more competition now, so growth trajectories aren’t the same,” he said. “Most of the challenges craft breweries face are just the challenges of running a small business: they’re undercapitalized, they have bad business management – for brewpubs it often boils down to service quality. The challenges are mostly how hard it is to run a small business, let alone a brewery.”

Matthew Rogers / Good Beer HuntingTwisted Manzanita flew too close to the sun and expanded too quickly, maybe.

That’s consistent with Jim Crute’s experience.

Crute is the owner and brewer of Lightning Brewery, a lager-focused operation just north of San Diego that predated the mega-rush of new breweries in the county (there are now over 130). When he opened in 2006, there were just 12 breweries in the city.

Now, Crute is trying to sell the business. If he can’t he’ll close his doors. The time has come, he said.

Crute’s biggest problem, he said, was baked into his business plan from the day he opened. He built a business that intended to sell 80% of its beer wholesale, and 20% through retail. That was the business that made sense back then, but if he launched now he’d flip the whole thing: he’d try to sell 80% of his beer out of his own tasting room, and just 20% through distribution.

“I should have figured that our four years ago,” he said. “I focused on wholesale. That was a mistake. I thought it would be more stable, but focusing on retail is much better.”

The benefits are simple. Now, breweries can open small – real small. Then they can use the capital savings from not opening a massive facility to crank out a large volume of beer, and instead open multiple tasting rooms. There, they cut out distributors and make significant profit on every pint.

“You have to get to a point where you’re making money, and then you have the money you need to grow,” he said. “It doesn’t matter how much you’re doing, because once you’re making money you can make the next move.”

Crute had other similar problems tied into the same issue. Lightning was situated in an industrial park that looks a lot like the others many San Diego breweries call home, but his wasn’t surrounded by anywhere near as many workers. Where other breweries would fill up with nearby 9-to-5ers for Happy Hour, his didn’t.

Things finally went bad for Lightning when his distributor dropped them in early 2015. Lightning had been underperforming, which he said he later learned was because other breweries were offering salespeople commissions for selling their beer – something he had never known was an option. Then they got a new distributor that said they’d turn things around, but things actually got worse.

Crute started burning through cash reserves, and this summer a distributor sent a payment a few weeks late. He couldn’t pay his vendors, and didn’t want to go to investors to have them cover the payments until the check came in. His business manager eventually laid out that if things are so shaky that one late check sends the business into turmoil, maybe it’s best to shut down.

“Rely on your own salespeople and do your own distribution,” Crute says to new breweries. “Don’t rely on a distributor to take care of your own neighborhood.”

Lightning hasn’t closed its doors yet, with Crute still looking for a buyer. Carlsbad’s On-the-Tracks brewery has already become the first to shut down in 2017.

Here’s the problem with a tasting room: you’re maxed out by your location.”

Four breweries in the area shut down in 2016 – Twisted Manzanita, Pacific Brewing Company, URBN, and Valley Center Brewing. But one of those business owners, Andrew Heino of Pacific Brewing Company, wasn’t deterred. He’s getting ready to open a new brewery in the same space as Align Brewing Company.

Heino said the old business was actually doing okay when it closed its doors. It had grown 15% in each of its two years in business, but it was selling all of its beer out of the tasting room and couldn’t make good on the business plan to distribute throughout the county.

“It was a weird problem to have, but it wasn’t enough,” he said. “We were growing, and growth shows success in my opinion. But it wasn’t growing at the pace we needed to grow to be competitive. It was a dead-end business model.”

Eventually, he and his partner came to irreconcilable differences over the best way forward, and they decided to go separate ways and close the business.

Now, with Align, Heino still wants to eventually become a distribution focused business. Eventually he’d like to have two tasting rooms, while distributing throughout the county and gradually building from there.

“Here’s the problem with a tasting room: you’re maxed out by your location,” he said. “My location can only fit so many people. If I can only fit 50 people in there, you have to look at distribution to add revenue. So that’s always the goal, but you need capital.”

If weaker players aren’t going out of business, that would be a cause of concern.”

Countywide in San Diego, closures last year were still swamped by new openings, with 21 new breweries opening their doors last year. That’s all consistent with national trends, too, where openings continue to outpace closures and there’s no evidence yet of an increase in the closure rate.

“We’ve grown exponentially, which has been great, but now we’re a mature industry,” said Jill Davidson, president of the San Diego Brewers Guild and western regional sales manager for Pizza Port. “Running a small business is challenging, and no industry is exempt from that. Look at restaurants. There will be closures, and also new breweries entering the market. So there’s competition, which just means you have to minimize your room for error and be more strategic to be successful.”

Not everyone is having a hard time making a go of it right now.

Modern Times Brewing, for instance, is continuing is still growing at a blistering pace. It’s opening a new tasting room in northern San Diego County, a massive new brewery-garden-pool-restaurant compound in Anaheim and a new restaurant and brewery in Los Angeles. After producing 3,700 barrels in its first 12 months of operation, just about four years ago, it anticipates brewing over 50,000 barrels this year, and is now distributed throughout California, Arizona, Oregon, Washington and parts of Nevada and Hawaii.

Owner Jacob McKean said none of the closures he’s seen have been a surprise, and he sees them as a sign the industry is functioning normally.

“If weaker players aren’t going out of business, that would be a cause of concern,” he said. “The difference between breweries that fail and breweries that keep chugging along is often just a matter of luck and timing. Ultimately, the best thing any brewery can do to protect themselves is to make incontestably world class beer. When that is no longer sufficient to survive, then I will start to worry.”

AB InBev is an investor in October through its venture capital arm, ZX Ventures
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