Beverage Industry Lays Out the Welcome Mat for Craft Beer Brewers

Entrepreneurship is thriving in the craft beer segment, where start-ups are joining established stars in tapping into a thirsty and growing audience.

By Kevin T. Higgins, Managing Editor

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Lagunitas Brewing Chicago

The Bavarian flag hangs next to the Stars and Bars at Lagunitas Brewing’s new Chicago brewery. In the background are the first of 120 fermentation tanks that will be installed.

Capital costs, regulatory requirements and existing supply-chain relationships create formidable barriers to entry in many segments of food and beverage processing. A notable exception is craft brewing.

While overall U.S. beer consumption is flat to declining, craft breweries continue to enjoy double-digit annual growth and now account for 8 percent of the market. Brew pubs and micro-breweries are opening at a rate of more than one a day, and more established Western craft brewers are scouting locations to open new breweries east of the Mississippi River.

In mid-sized and smaller cities across the nation, used dairy tanks and other equipment are being repurposed by start-up operators with little or no experience. A case in point is NoDa Brewing in Charlotte, N.C., a city that has gone from zero to six craft breweries in the last five years. When the brewery opened in Charlotte’s North Davidson Street arts district in 2011, head brewer Chad Henderson surrendered his amateur status as a home brewer. A minor in chemistry helped him produce 1,650 barrels (bbl) in the company’s first year.

That level of production wouldn’t fill two of the 120 fermentation tanks that eventually will be in place at the new Lagunitas Brewing Co. plant in Chicago. Occupying a former steel plant in the city’s Douglas Park neighborhood, the brewery is expected to top out at 1.6 million bbl a year capacity. Production and packaging equipment currently fills half of the 300,000 sq. ft. building.

With the exception of Boston Beer Co., maker of Samuel Adams, the craft beer segment is dominated by California and Colorado brewers with histories tracing to the 1990s. Lagunitas is the third to expand eastward in the past 18 months, with two more (New Belgium Brewing and Stone Brewing) eyeing 2015 start-ups.

Logistics are driving construction: Lagunitas founder Tony Magee calculates the freight savings from serving markets east of Denver from a Chicago location will pay for the second brewery (a $20 million credit facility from GE Capital is financing the expansion until those fuel savings accrue). “We just traded transit costs for an asset,” summarizes Karen Hamilton, Magee’s sister and a member of the firm’s marketing team.

Founded in Magee’s Lagunitas, Calif., kitchen 21 years ago, the Petaluma-based beer maker seems to have staked out the stoner hophead demographic, arguably the fastest growing U.S. audience. Hoppiness characterizes most of the craft brews, but few can match Lagunitas’s liberal use of the bitter-tasting flower.

Advanced hopping systems from German equipment supplier Rolec GmbH have helped make the Munich-based firm the brewhouse supplier of choice for North American crafts. Rolec currently has six brewhouse projects under construction in North America, not including a second brewhouse slated for delivery to Chicago in November. Company technicians are permanently assigned to the Windy City to help operate and maintain Lagunitas’ system (the flag of Bavaria hangs in the brewery in acknowledgement of their presence).

Most of the North American Rolec brewhouses are in the 30-100 bbl range. Lagunitas’ kettle holds 270 bbl, identical to the batch size of a brewhouse installed in Petaluma last year. The five-vessel Chicago brewhouse includes an energy-recovery system, CIP system and wort cooling and aeration tanks. Owner’s manuals for much of the plant’s equipment surely are available in German: a Krones bottling line fills 450-500 bottles per minute, and a Shenk plate & frame filter does a final cleanup on 3 barrels of beer per minute prior to filling.

North Carolina has lured two Colorado (Oskar Blues and New Belgium) and one California (Sierra Nevada) craft brewers with generous economic development subsidies and, in the case of Sierra Nevada, a fast-track legislative change to allow on-premise beer sales for breweries producing more than 25,000 bbl a year.

Lagunitas’ choice of Chicago was partly sentimental — Magee was born on the city’s north side — but also an acknowledgement of its status as a transportation hub. “At one time, the city made it difficult for craft brewers to start up here,” says Hamilton. But changing social mores and job creation have helped put “a very positive spin on alcohol.” Even the brewer’s flirtative association with marijuana wasn’t enough to harsh the new brewery buzz. (One beer in the lineup is labeled “Censored,” with the word covering up its original name, “Chronic,” slang for cannabis).

Edginess is a virtue in this segment, which eschews the heavy media spending that characterizes mainstream beer makers (Boston Beer excepted again). When it comes to marketing, “it’s really word of mouth,” confesses Hamilton, with a dollop of grass roots promotion. The 5,000-sq.-ft. Chicago tap room is closed to the public Mondays and Tuesdays, when the space and open taps are turned over to community nonprofits for fundraisers. One group raised more than $33,000 at its event. “We always make great friends that way,” says Hamilton.

Few if any craft brewers can match the sales growth and financial success of Lagunitas. After one decade of operation, production had grown to 27,000 bbl; eight years later, it topped 244,000 bbl, and added capacity in Petaluma and new production in Chicago ensure that growth curve can be sustained. Combined capacity will be second only to Boston Beer among craft brewers.

Wild growth on a smaller scale is not uncommon. Back in Charlotte, Olde Mecklenburg Brewery, the granddaddy of the crafts with a tradition tracing back to 2009, is in the midst of a $6 million project that will move it into a renovated 25,000-sq.-ft. warehouse and a newly constructed brew pub. It will leave behind rented production space and a tap room with all the warmth and style of a basement rec room. Helping in the transition are numerous zoning law changes enacted by the city to encourage craft brewing start-ups.

That’s the kind of welcome mat any food company can appreciate and envy.

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