Don't Beat 'Em, Join 'Em: Why Brewing Together Works Better in the Craft Beer Industry Craft brewers' cooperative thinking fosters a spirit of collaboration and creates a powerful bloc that shows steady growth.

Old Foghorn is a killer name for a stout from the coast of Northern California, thought Lenny Mendonca, who made the beer part of his lineup when he opened Half Moon Bay Brewing Co. in 2000. In short order, a letter arrived informing the fledgling brewer that Fritz Maytag's Anchor Brewing Co. already owned the evocative name. A senior partner at management consulting firm McKinsey & Company, Mendonca knew the drill—the legal chain of events that occurs when one infringes on a competitor's trademark. He received a letter. But it was not what he expected.

"It was a personal letter from Fritz—not a letter from his lawyers—suggesting we find another name and wishing us luck," says Mendonca, who came to understand that Maytag's collegial, low-key style was the rule among the craft-beer brethren.

"I will return a call from anyone in the craft-beer industry who wants to talk," he says. "Fritz and the other early craft brewers set that tone."

Fifty years after Maytag bought Anchor Brewing and introduced craft beer to America, the sector's esprit de corps extends well beyond friendly chats. Craft brewers open their doors to others. They share equipment and help train one another's staffs. Trade secrets? Craft brewers take pride in having none.

When Adam Avery of Avery Brewing Co. in Boulder, Colo., and Vinnie Cilurzo, owner of Russian River Brewing Co. in Santa Rosa, Calif., discovered they both produced a beer called Salvation, they joined forces to create one they called Collaboration Not Litigation Ale. Such joint craft beers are common.

"It is a very unusual culture, and it shouldn't be," says Mendonca, now a director emeritus at McKinsey. "Not being an asshole is good for business."

Indeed. Craft beer is in its sixth year of dramatic, sustained double-digit growth, with no sign of a slowdown. While overall beer sales in America have been flat, retail sales of craft beer grew 22 percent in 2014, taking a big chunk out of the market share of Budweiser and the other giant brands.

Craft beer accounted for 11 percent of beer sales by volume. But in terms of dollars, craft beer represented 19.4 percent of the beer market. At the start of 2015, there were 3,400 craft breweries, with an estimated 10 more opening every week. The failure rate for new breweries? Near zero. (See sidebar, page 46.)

The explosive growth certainly makes it easier to cooperate, says Mendonca. But cooperation fuels the growth, he says, not the other way around. Brewers have created a virtuous cycle that other industries ought to copy.

Lessons to share

Any business sector that can be described as "craft," "artisan" or "local" can benefit from collaboration among competitors, according to Stanford University management science and engineering professor Bob Sutton and Hayagreeva "Huggy" Rao, Atholl McBean professor of organizational behavior at Stanford's Graduate School of Business, authors of the 2014 book Scaling Up Excellence: Getting to More Without Settling for Less.

Scale, discounts and uniformity are the hallmarks of successful big brands. Craft companies, in contrast, are known for differentiation and limited production. Consumers describe craft products as "authentic" and "high quality," says Sutton. They are willing to pay more for craft and to sample among craft offerings in a category. The craft category comes first; the individual brand is a secondary consideration.

Craft products often emerge as the result of a sudden regulatory or technological change that allows new entrepreneurial players into a business sector dominated by large corporations or previously prohibited to everyone—today, think marijuana and artisan distilleries.

The insurgent entrepreneurs won't bond together into a cooperative community, however, unless they need each other to survive. A shared threat to the group's survival, often an incumbent corporate segment leader, appears to be essential.

Cooperation makes sense when "a segment needs to share knowledge to legitimize itself and increase sales in a battle against a common enemy," says Sutton, citing the open-source software developers who created their collaborative culture to battle Microsoft's dominance of the industry. "With a named enemy, an industry segment becomes a social movement."

Rao calls these "hot causes with cool solutions." The battle for survival creates its own energy, a force that propels the collective self-interest ahead of the individual self-interest. He notes that low-power radio stations competing with large national radio chains had to band together to survive; the same is true of early automobile hobbyists, who joined forces as the American Automobile Association, sharing ideas and building consumer awareness and demand for this new form of transportation long before Ford built the Model T.

Today, Rao says, key emerging cooperative sectors include organic foods and "natural" products. Similarly, gourmet food trucks, a relatively recent innovation in food service, rely on one another to survive a harsh regulatory environment in which brick-and-mortar restaurants have fought to limit where and how the trucks operate.

Scott Sonenshein, a professor at Rice University's Jesse H. Jones Graduate School of Business, has been studying a group of 50 food trucks for several years. "These are deeply personal businesses," he says. "The chefs all know each other. They need each other. Trucks share staff, know-how, even food."

A tight band of food trucks will support one another on social media; through Twitter, the community can magnify its collective voice and multiply the members' shared following, Sonenshein explains. "They feel more confident and successful as part of this brotherhood and, as a result, they become more successful."

When a truck tries to benefit from the group without contributing to its welfare, it can be "cut from the herd," Sonenshein says. This can be as simple as being ostracized on social media, or there may be a more aggressive effort to exclude the offender from operating near the group.

In the past five years, gourmet food trucks have become a fixture in cities across America and are now an established food-service entry point for chefs eager to build a following.

The rise of craft beer

In the early days of the craft-beer revolution, everyone felt alone, says Charlie Papazian, an early organizer of craft brewers and now president of trade group the Brewers Association. It was only by coming together and talking with brewers who were succeeding that others "gained faith." The brewers who thought craft beer was a cutthroat business? They got smart or failed, Papazian says. "Alone we were vulnerable. Together we had a voice."

"Beer was a losing proposition," says Dan Carey, brewmaster at New Glarus Brewing Co. in New Glarus, Wis. "There was no market, no money—just rebellious artists who imagined something different."

When President Jimmy Carter repealed the Prohibition-era law against home brewing in 1978, artisan brewers emerged from their basements and started selling their beers. In 1984, there were 18 craft breweries (defined today as less than 25 percent owned or controlled by an alcoholic beverage industry member not themselves a craft brewer and producing no more than 6 million barrels of beer per year). A decade later, America had more than 500 craft breweries.

"We all made the pilgrimage to San Francisco to have a sit-down with Fritz Maytag, who was always cordial and kind," says Carey of the craft-beer pioneer who purchased Anchor Brewing in 1965. Ken Grossman, founder of Sierra Nevada Brewing Co., made helping new brewers an imperative in his company. So did Carey.

Grossman personified the home-brewer-turned-pro: He scavenged junkyards for old dairy equipment to jury-rig a brewery in a small warehouse near Chico, Calif, struggling to make enough beer to afford more equipment to make more beer to pay for another small expansion. Grossman sold his beer by word-of-mouth, with friends telling friends about each new brew.

At the other end of the spectrum was Jim Koch, founder of Boston Beer Co. With a Harvard MBA and a willingness to contract out production to midsize regional breweries, Koch invested his time and money in marketing. He slapped a "Best Beer in America" label on his Sam Adams bottles after winning a few competitions, infuriating other craft brewers. He was, and still is, one of the only craft brewers to use national TV to sell his beer. Koch took delight in directly challenging higher-priced imported beers and competing with the big brewers—in particular, Anheuser-Busch.

By the mid-1990s, Koch's aggressive style had Anheuser-Busch's full attention. The industry giant launched a national campaign slamming Boston Beer and Koch, personally. Other craft brewers took a step back from Koch, believing it was his fight. An emboldened Anheuser-Busch took on the whole craft-beer sector, using its powerful distribution system to dramatically limit the sales of craft beer. It was ugly. A lot of craft brewers went out of business.

The war cooled, but craft-beer sales stagnated for a decade. During those years, the brewers regrouped into the cohesive force they are today. Making great beer became a mission, says the Brewers Association's Papazian. "Unless everyone is making a quality product, the sector risks a consumer perception that craft beer is inconsistent. Hit-or-miss quality hurts the whole microbrew market." The brewers adopted their current "rising tide lifts all boats" mantra.

Carey says craft brewers never lost their core values: "This is a passionate group of counter-culture revolutionaries running businesses less to get rich and more to satisfy their creativity. We collaborate to move forward to make a better and better glass of beer."

Collaboration set the stage for the current craft-beer boom. "The craft category would not be what it is today if craft brewers hadn't collaborated," says Mike Kallenberger, a former Miller Brewing executive who now consults with craft brewers. "This category grew almost entirely by word-of-mouth, with virtually no advertising at all. The more they helped each other, the more people drank craft beer."

A millennial moment

But the current surge in demand—the explosive growth—started in 2004, about the time a critical mass of the Millennial generation became drinking-age adults. "Local, craft, cooperation, individuality—these are Millennial values," Kallenberger says. "They see their personal values reflected in craft beer and every other small-scale artisan product on the market. It's not so much anti-corporate as a search for authentic products that speak to them. Knowing who made what they eat and drink—that's craft.

"Education and income separate this generation into different segments," he adds, "but craft beer is a unifying product drunk up and down the income and education scales."

"Local" was always part of the craft-beer story, Papazian says. "But now, with this new generation, "local' is a separate cultural phenomenon."

At some point, Sutton and Rao claim, craft beer may even eclipse Big Beer. In the constant dance between scale/efficiency and individuality, craft will scale up and become the dominant player. The radicals will become the establishment.

"It's Saul Alinsky's Rules for Radicals," Sutton says. "When revolutionaries win, they become the enemy of the next group to rise up. Obama was a radical before he became The Man. Apple is The Man. Microsoft isn't a good enemy now that the new CEO talks about the importance of open-source software."

A shared enemy

The stage for the next chapter in the craft-beer story is being set by Anheuser-Busch, now a division of Belgium-based AB-InBev, the largest beer company in the world. And if Sutton and Rao are correct, Anheuser-Busch may again be showing itself to be the common foe that will galvanize craft-beer companies into sticking together and remaining competitive.

With Budweiser sales falling year after year and now trailing craft beer, ABI has been gearing up to recapture market share by buying regional craft breweries, including Bend, Ore.'s Ten Barrel Brewing Co. and Chicago's Goose Island Beer Co., and launching new flavors of legacy brands, such as Budweiser Light Lime—to expand its footprint in the market. (Anheuser-Busch declined to comment for this story.)

"It is a war for shelf space," Carey says. "Craft beer is now under a larger and more personal direct assault from Big Beer than ever. We have a much bigger piece of the pie. Their sales are dropping, and ours are growing. The shooting and stabbing is increasing. We are stronger. They are more vicious."

A snarky, anti-craft Budweiser ad campaign that launched during the Super Bowl caught everyone's attention. But the ground war is being fought in grocery-store aisles. "I'm talking about access to markets," Carey says. Anheuser-Busch is spending more on advertising, adding more brands and working to dominate store shelves. As happened in the 1990s, the beer giant is trying to use its distribution muscle to limit craft beer sales. "It's like playing musical chairs with a 300-pound football player."

If the increasingly fat and happy craft-beer sector needed a reminder of the importance of collaboration, they have it now.