So You Want to Start a Craft Brewery
In Start Your Own Microbrewery, Distillery, or Cidery, the staff of Entrepreneur Media Inc. and writer Corie Brown with Zester Daily Contributors explain how you can get started in the craft alcoholic beverage industry, whether you want to start your own microbrewery, distillery or cidery. In this edited excerpt, the authors offer a closer look at the craft brewing industry so you can see if you're a good fit.
In the past few years, craft brewing has come out of the basement and into the limelight to give traditional beer companies a run for their money. As defined by their trade organization, the Brewers Association, craft breweries are independently owned (less than 25 percent of craft breweries are owned or controlled by an alcoholic beverage industry member that is not itself a craft brewer), producing no more than 6 million barrels of beer a year. Embracing European traditions, craft brewers use malted grains and fresh hops to revive old styles as well as to invent new ones.
In 1976, Congress approved a $2-per-barrel reduction in the $9-per-barrel federal excise tax on beer, specifically for small breweries, in an attempt to help save the few remaining regional breweries. This tax differential for small breweries took on greater meaning in 1991 when the federal excise tax on beer was doubled on beer to $18 per barrel but the lower $7-per-barrel tax was left in place for the first 60,000 barrels brewed by small brewers. The tax break is not only a tax incentive to start a small business, it's a critical federal support that helped establish the craft industry.
Craft brewers have been united in their faith that the craft beer market will grow faster with more successful craft breweries. That attitude engenders a cooperative spirit among craft brewers that buoys the sector. Brewers consciously reach out to help their competitors make better beer, believing that across-the-board quality is vital to the success of the sector. Even with the blizzard of new brands coming to market, craft brewers maintain their one-for-all-and-all-for-one attitude.
“We’re a new kind of capitalism with a different perspective on the end game,” says Charlie Papazian, president of the Brewers Association. “We've found a way to be in business and enjoy it. A lot of people are flabbergasted by the camaraderie, the sharing among competitors. We're open to doing things in a positive light. More passionate than opportunistic.” Craft brewing rewards vision and unique approaches, Papazian adds. “It doesn’t reward followers, people who need a model," he says. "Consumers know who the owners are because they're leaders, front and center.”
The approach fuels growth. The 18 breweries in operation in 1984 grew to 540 breweries by 1995. Brewpubs were the hot idea that gave rise to then Colorado Governor John Hickenlooper’s Wynkoop chain of brewpubs and Gordon Biersch Brewing Company owned by Dan Gordon and Dean Biersch. Breweries experimented with styles, opening the way for New Belgium Brewing Company, launched in Fort Collins, Colorado, in 1991, specializing in Belgian-style beers. Sam Calagione launched Dogfish Head Craft Brewery in Rehoboth Beach, Delaware, with beers flavored with fruits, coffee, and a long list of even more exotic ingredients.
It was a frenzied time that suited manic personalities, such as Tony Magee, founder of Lagunitas, who financed an initial miniscule brewery with money from friends and family, relying on sales and bank loans to pay for the cost of near-constant incremental expansions. The struggle was to build enough brewery capacity to serve growing demand but not expand so fast that supply outstripped demand with capital costs becoming a lethal financial burden. Many first-time entrepreneurs fell off this tightrope.
The most successful craft breweries are now national brands. Boston Beer (Sam Adams), Sierra Nevada Brewing Company, New Belgium Brewing Company (Fat Tire), Lagunitas Brewing Company, Stone Brewing Company, and Green Flash Brewing Company have opened or are planning to open second breweries as distant satellites of their original locations to facilitate national distribution.
“Craft beer has won the hearts and minds of consumers,” says Benj Steinman, editor of Beer Marketer’s Insights. And larger companies aren't staying on the sidelines. In 2014, Anheuser-Busch bought 10 Barrel Brewing Company, a 45,000-barrel-a-year, Bend, Oregon, craft brewery for a reported $50 million and a month later snapped up Elysian Brewing Company, a 50,000-barrel Seattle brewery. These were Anheuser-Busch’s third and fourth craft purchases following Goose Island Beer Company in Chicago and Blue Point Brewing Company on Long Island. And while these particular purchases “sent a shudder” through the tight-knit craft beer world, Steinman says, craft brewers should get used to seeing their comrades cash out as Anheuser-Busch and others buy “craft cred.” The big beer companies don’t have much choice: Americans are buying less beer overall, with total sales volume dropping 1.3 percent in 2013, and sales remained flat in 2014. In 2014, for the first time, craft beer sales by volume eclipsed U.S. sales for Budweiser.
"It's clear that craft is going to play a significant role in the market,” says David Walker, co-founder of Firestone Walker Brewing Company in Paso Robles, California. “Big Beer tried and failed to make it difficult for us to survive. So they only have two choices: Invent their own craft beers or buy craft breweries. They're going to fight for market share.”
Craft beer marketing will change quickly in a more competitive market. New craft brewers need to be big enough to finance the marketing, distribution, and sales efforts that will be increasingly critical to survival.
Craft brewers should be careful what they wish for if they want Big Beer to fade away, says Andy Thomas, CEO of Craft Brew Alliance, a consortium of craft beer brands—Widmer Brothers, Kona Brewing, Redhook, and Omission—in which Anheuser-Busch holds a one-third interest. Large beer companies spend an estimated $1 billion a year on mass-market, sports-oriented pro-beer messaging. Craft brands spend almost nothing on mass media. “Craft can’t be cool if beer is irrelevant,” Thomas told 200 craft brewers attending Brewbound in San Diego in December 2014. Big Beer supports the whole beer category with their mass marketing.
That kind of thinking runs counter to craft beer traditionalists. In the past, new craft producers who launched with a splash before establishing a local following for their beers often failed. “Smaller startups are in it for the right reasons,” says Papazian. “The larger startups, given that their investment relies on other people’s money, need quick returns.” They won’t find them in craft beer. “No one gets rich quickly or easily in craft beer,” Papazian adds.
But they also don’t fail. While the growth rate may slow, sales are predicted to continue to climb. According to industry analysts at IBISWorld, craft beer revenue growth will slow from the 11 percent average annual growth rate of 2008–2013 and grow an average of 5.5 percent a year between 2015 and 2020. Increasing market acceptance and low barriers to entry make this industry attractive for new businesses, the analysts say. Minimal equipment is required to brew craft beer, and it can be bought ready to use. A culture that emphasizes locally brewed craft beers has also encouraged entrants into the industry. As a result of high demand justifying price increases, the industry is becoming more profitable. Craft brewery profits averaged 9.1 percent of revenues in 2014.