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Big breweries are facing big challenges

The craft-brewing industry has slowly but definitively shifted in favor of smaller, hyper-local operations for whom success does not equate to taking over the world or the beer aisle

Craft beer’s rise over the past three decades has largely been signaled by its increased presence at grocery, big-box and liquor stores. Nowadays, it is commonplace for craft ales and lagers to take up half the beer aisle, while overflowing into endcaps and floor displays. Products hail largely from large and midsize producers, including local operations such as Stone Brewing, Ballast Point Brewing and Karl Strauss Brewing. Those companies played key roles in kicking off San Diego’s craft-beer boom.

But times, trends and beer drinkers have changed. So, too, have craft-beer entrepreneurs who now face a consolidating yet still crowded marketplace. Rather than attempt to claw their way to the top, today’s brewery founders are setting up small base camps servicing their immediate geographic areas in a manageable, less complicated manner with lower stakes and far less risk.

As the market rises to meet those more minute newcomers, larger, longer-established brewing companies find themselves navigating an industry that has changed dramatically because of shifting consumer preferences, a pandemic, scarcity of goods and inflation.

New breweries: Now vs. then

The Brewers Association, an American brewing-industry trade organization, defines a small brewery as a company producing less than 15,000 barrels of beer per year.

Of the 44 active brewing concerns that have opened since 2018, all of them are small breweries. The largest of them is Scripps Ranch-based Harland Brewing, which is projected to produce 13,500 barrels in 2022. Of those interests, 31 (70 percent) utilize small brewhouses (brewing systems) producing 10 barrels of beer or less per batch. More than a third of those businesses are “nanobreweries,” meaning they brew beer in batches of three barrels or less and produce less than 1,000 barrels of beer annually.

To put this in perspective, in 1996, before the term “craft beer” even existed and without an established customer base to sell to, Escondido’s Stone Brewing launched with a 30-barrel brewhouse, while Ballast Point Brewing opened with a 15-barrel system in Linda Vista. Back then, the ability to scale one’s operation was essential to success. Only brewpubs (restaurants producing beer on site) were able to sell beer directly to customers, leaving grocery stores, restaurants and bars — all of which were dominated by macrobreweries such as Anheuser-Busch, Miller and Coors — as the only path for craft breweries to reach consumers.

Along with local contemporaries like Karl Strauss and Green Flash Brewing, Stone and Ballast Point overcame numerous challenges to gain a foothold in the marketplace and grow. Today, Stone operates a 120-barrel brewhouse in Escondido and a 250-barrel system at its East Coast facility in Richmond, Va., while Ballast Point’s Miramar headquarters boasts the county’s two largest brewhouses at 300 and 150 barrels, respectively.

As recently as a decade ago, craft-beer entrepreneurs were following these early blueprints, opening breweries with 15- to 30-barrel brewhouses and business plans that outlined widespread distribution in multiple states as well as eventual upgrades to higher-volume production equipment to satisfy increased demand. Being able to shift into overdrive and becoming a large, well-known regional force was the definition of success in the craft-beer industry.

Fast-forward to the present day, and of the 44 local beer interests to debut in the past five years, only two (less than 5 percent) distribute their beers outside of California, with many limiting product distribution to Southern California, San Diego County or their own taprooms. The latter provides the best profit margins while allowing companies to fully communicate their identities to customers, increasing the likelihood of establishing long-term patronage. But there’s more to it than that. Consumers have been progressively shifting their allegiance from longtime front-runners to upstarts and underdogs for some time.

Smaller means flexibility

Over the past decade and a half, craft-beer drinkers’ support of small and local businesses has greatly increased. This has been accelerated over the past three years as consumers have rallied to save neighborhood businesses from going under during the pandemic.

“The shift to hyper-local has been going on since we opened as San Diego’s first post-Prohibition brewery in 1989,” says Chris Cramer, Karl Strauss’ co-founder and CEO. “Back then, ‘local’ meant our beers were made here in the city of San Diego. Over time, as 150 breweries opened, the definition of ‘local’ morphed to mean a brewery that’s located in a consumer’s immediate neighborhood, and we helped drive that trend by opening multiple locations in San Diego County.”

Community pride aside, craft-beer enthusiasts have exhibited an ever-increasing thirst for new products over the past decade, too. Many of the county’s — and the country’s — most popular breweries feature ever-changing tap lists or introduce one or several new beers on a weekly or biweekly basis. This keeps consumers engaged and their interests piqued on a consistent basis, but that type of rapid-fire variety is extremely difficult to match for larger breweries. Those operations traditionally focus their energies on producing and widely distributing a finite selection of year-round beers augmented by quarterly seasonal offerings and the like.

“In recent years, we’ve seen a rise in people wanting to try new beers versus committing to their one favorite. This is often easier to satisfy at neighborhood breweries where they are working on smaller brewing systems and can be nimble. Many large breweries don’t have that flexibility,” says Erin Smith, Stone’s vice president of marketing. “We have had to get creative to meet fans where they’re at. We started our One Batch Dispatch program as a way for our brewers to really flex their creativity in styles that are often too challenging to create on our big system. We package those beers in four-packs and sell them out of our tap rooms and direct-to-consumer online.”

Smith and Cramer said while they cannot commit to the release frequency of some smaller breweries, both of their organizations utilize pilot and R&D breweries to keep small-batch and limited-edition offerings flowing.

Not too big to fail

Though consumer interest in smaller, local competitors has impacted Stone’s bottom line, Smith says that, even in the current market, more sizable companies maintain a host of advantages. She cites economies of scale allowing larger breweries to purchase goods at more economical rates than small operations, as well as robust infrastructures, greater manufacturing capabilities, and skilled workforces.

Even so, consumers’ shift to what’s small, hyper-local and new, coupled with the emergence of alternative alcoholic beverages (hard seltzers, kombucha, teas, etc.), plus rising costs of goods, services, utilities, labor and more, have made business challenging — and in some cases impossible — for the county’s large and midsize breweries.

In December 2019, frustrated at failed attempts to find success with the company it acquired for $1 billion four years prior, multinational conglomerate Constellation Brands sold Ballast Point (which had been the eleventh largest US craft brewery when it was acquired) to its current owners, then Chicago-based Kings & Convicts Brewing (which has since fully relocated to Miramar) for a slim fraction of what it paid.

This January, following years of declining sales, WCIPA LLC, the investment firm that purchased Green Flash from its

founders in 2018, sold the brand (along with sub-brand Alpine Beer Co.) to Canadian cannabis corporation Tilray. It has since moved production of Green Flash and Alpine beers to Colorado. Meanwhile, the 44,000-square-foot brewery that housed Green Flash remains vacant with no prospective buyers.

This summer, unable to pay back hundreds of millions of dollars in debt, Stone (currently the ninth-largest craft brewery in the country) was acquired by Sapporo USA and will soon produce the Japan-based corporation’s beers stateside while keeping Stone’s brand and portfolio, facilities, restaurants and taprooms intact.

Then there’s the case of Point Loma-based Modern Times Beer, which found itself terribly overextended, flush with public venues but unable to operate them due to pandemic closures followed by decreased on-premise patronage. Even after shuttering all but one of its five locations outside of San Diego County this February, the company still failed. A court-ordered receivership auction followed, leading to the company being purchased by Maui Brewing, which will now be able to produce its beers on the mainland while keeping the Modern Times brand and its trio of local tasting rooms alive.

Growing down

The struggles of some of the industry’s most sizable and established players have inspired owners of large and midsize breweries to take a hard look at their businesses and make tough decisions. Such was the case for Tomme Arthur, managing partner of The Lost Abbey.

Opened in 2006, the San Marcos manufacturer of Belgian-inspired, West Coast-style and barrel-aged beers made a big name for itself behind high ratings and prestigious awards. As was the standard back then, the company took every opportunity to grow, expanding its facility and distribution area, while increasing its cellar capacity and packaging capabilities.

The Lost Abbey’s current setup can produce up to 25,000 barrels of beer annually. However, the company is on pace to produce just 8,000 barrels this year and recently moved production of its bestselling product, Mongo Double IPA, to sister-company Pizza Port Brewing’s production facility in Carlsbad’s Bressi Ranch development. Arthur and his partners have put their brewhouse and fermentation tanks on the market, and when their lease comes up for renewal next year, the company will only renew half of its 40,000 square feet.

Our 30-barrel brewhouse and fermentation cellar were designed to maximize output. However, if we brew to a larger scale, we have high finished-goods costs. Larger tanks mean more glycol and that requires more energy, and those are ridiculously expensive. Imagine that the family car is currently a Suburban and we really only need a two-door Honda.”

Tomme Arthur, Managing Partner, The Lost Abbey

The Lost Abbey’s ownership team is open to offering its current brewery in its existing space as a turnkey operation. Were that to happen, The Lost Abbey would purchase a smaller brewhouse and cellar setup based on current production figures. Alternatively, the brewery and cellar equipment could be sold on its own. All of these scenarios will accomplish The Lost Abbey’s goal of getting leaner to remain viable while continuing to produce quality beer.

“When we opened, we wanted to make world-class beers and be recognized for the landmark beers and flavors coming out of our brewery,” says Arthur, who refers to his team’s preservation-geared strategy as “growing down”. “That vision is still very much in our DNA. If anything, we are staying very true to the seeds we planted.”

Looking to the future

Arthur contends that some small breweries may find a pathway to high year-over-year compounding growth, but he says it’s not for the masses and double-digit industry growth simply isn’t there anymore.

When asked if he believes there will be a time when a significant percentage of new brewery owners open companies built for substantial growth as they did in the 1990s and early-2000s, Cramer, San Diego’s longest-tenured brewery owner with 33 years under his belt, is optimistic.

“There will always be opportunities for people to scale a new business if the product is right and it meets the identified needs of the market,” says Cramer. “I am sure we will see this happen again.”

A shortened version of this article originally appeared in the Business section of the Tuesday, December 27, 2022 edition of The San Diego Union-Tribune

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