Increased competition from other alc bev types with broader flavor selections and lower prices, plus coming of age of less loyal younger drinkers, has folks in wine world wondering what to do about it.  “I think that first bottle of wine is being impacted” by craft beer, one anonymous wine exec told UC Davis Grad School of Mgmt researchers during survey of 26 senior execs shared at annual Wine Industry Financial Symposium this week.  That’s as cocktails could be “taking a little bit of the wine-by-the-glass business away,” another said for survey, according to a Sonoma Press Democrat report.  It pegs growth of Calif wine at +7% during first half of 2014 as total wine industry is up about 1.5%, “fairly anemic,” wine and grape broker John Ciatti told the paper.  He’s looking at cider too, points out “it is a little scary when you think about cider actually growing more than the entire US wine market.”  Certain segments of wine industry posting healthier gains, like direct-to-consumer shipping, as we noted last issue, as well as off-premise sales, +6% in July.  So some wine folks still pretty positive, even as some of major cos looking at “lightly carbonated” offerings or diversifying (mostly into spirits) to boost biz.  

But some other movement in wine biz running parallel to beer.  That is, consolidation.  Private equity offices currently bidding on Treasury Wine Estates, owner of Beringer Vineyards and others.  Interestingly, whereas private equity doing more deals in craft beer, strategic buyers, mid-to-large wineries, “tend to be the ones closing the deals,” the paper wrote.  As in beer, buyers already in biz “are willing to pay higher prices,” and it’s “a seller’s market.”  All pretty familiar.  What’s different, then?  Why haven’t strategic buyers in beer had as easy a time as those in wine biz?  “Craft,” or a desire to hold onto being perceived as such, seems at least part of answer.

Tho bigger operations like Brew Hub and Two Roads dominate headlines, small contract-brewing service provider in Baltimore is rapidly ramping up its own capacity, seeking go-to status among burgeoning ranks of Mid-Atlantic craft brewers.  That operation is Peabody Heights Brewing, located at historic site – to baseball lovers if not beer lovers – in heart of Baltimore, just blocks east of Johns Hopkins Univ.  More on baseball connection in a moment.

Brewery was founded by trio of entrepreneurs: Stephen Demzcuk, owner of RavenBeer and its popular Raven Special Lager; local businessman and former energy-biz exec Hollis Albert III, and former Xerox exec and sheep farmer from France named Patrick Beille, who’s brewing his own craft brand Public Works Ale there too.  They recruited as head brewer Ernie Igot, who spent coupla decades at Philippines’ San Miguel brewery, where at one point he oversaw operations of 11 breweries and 2 brewpubs in Philippines, China, Indonesia and Vietnam before immigrating to US and embarking on 12-year run at Heavy Seas in Baltimore.

Peabody Hts opened 2 years ago, and already has produced 27 different styles for array of regional brewers that also includes likes of Fin City and West Va’s Mountain State, 6 all told currently.  On day CBN contributing editor visited, it was brewing very first batch for local newcomer Monument City for appreciative co-founder, Matt Praay, who said Igot had been invaluable in helping him refine 6-7 initial recipes, including first brew, 51%-rye IPA.  (It was turning out to be long day as they figured out how to prevent rye-rich mash from sticking to vessel.)  Peabody Hts’ range of services extends from recipe development to invoicing and attaining TTB label compliance.  Co aims to maintain stable of 5-10 clients, not 30, co-founder Albert asserted.  Tho brewery is happy to work with startups, it does require commitment to brew there once a month, in 1,000-case minimum defined by its 90-hl vat size.

Contract biz emphatically is “not a stepping stone” to developing co’s own brand, Albert insists, tho he allows that co has “kicked around” idea and has recipe in hand.  Some members of team, like Igot, argue successful own brand would boost economics of enterprise, but that’s not key part of biz plan.  Co did 6,600 bbls in contract biz in first year and is on track to hit full capacity of 10K bbls this year, with ambitions to double that next year as 2 more brite tanks and 8 fermenters start to arrive in coming months.  It hopes to buttress 12-oz bottling line with canning line this spring and, a bit further down road, 22-oz bomber capability.  Peabody Hts can ride current facility to considerably larger scale, accommodating as many as 40 tanks.  Self-financed by founders, co moved into black on operating basis by 4th qtr of first year, Albert maintains.

Brewery is sited at 50K-sq-ft former RC bottling plant last occupied by Beverage Capital distributor that’s been outfitted with 30 hl brewhouse and 90- and 120-hl fermenters procured from defunct Surgenor Brewing in British Columbia.  Site was intentionally located in “typical old Baltimore” nabe to contrast with established brewers like Flying Dog and Heavy Seas out in industrial parks, said Hollis, who frequented rowhouses across street with his dad back when he was a kid.

Playing Its Baseball Card    As with Two Roads, which is located in old machine tool factory and is avidly playing up industrial heritage of Stratford, Conn, area, Peabody Heights Brewing aims to elevate its visibility by tapping into local history.  In this case, it’s location on site of fifth Baltimore Orioles ballfield, which opened as Terrapin Park and segued to Oriole Park once team moved there, but burned down in 1944.  Former left field and right field walls are within footprint of plant, so co has commissioned surveyors to identify precisely where home plate and bases were located, so they can be inset into plant floor next to standee of batter for those touring thru.  Albert expects to establish mini-museum of Orioles history around new 20-tap taphead in tasting area, featuring photos of Babe Ruth and Negro League stars playing on site.

3 Reasons to Leave Your Prospective Client   Albert’s rules of engagement?  Since close collaboration is aim, “I’ve got to like you,” said Hollis.  Second rule: “You’ve got to love craft beer and know your S#!+.”  Come in with specific vision for brand because “we’re not here to develop your craft brand and flavor profile.”  Third: “You have to have a marketing plan” – say, if you insist on playing in saturated IPA segment, offer a twist, as Monument City is doing with its rye offering.  Ranks of those already turned down included a nice-enough founder who proved to have obnoxious partner and an established contract-brew purveyor who failed to realize that the beer samples she’d brought with her were skunked, Albert said.

Dogfish Head announced it will fill out the rest of Indiana, starting mid Oct, with AB network – Zink Distributing in Indy, Mid America Beverage in Kokomo, Best Beers in Bloomington, and North Vernon Beverage in North Vernon.  Recall, Dogfish re-entered state late last December with MC distrib, Indiana Beverage.  Co originally planned to fill out rest of state early 2014, but “it takes time to find the right partners,” sez Dogfish founder Sam Calagione.   

Highest trending top craft cos are many of the same regionally-focused heavy hitters we’ve been hearing about for some time, takin’ a look at top cos $$ sales in IRI multi-outlet + convenience data thru Sep 7.  With exception of Lagunitas, up near 70% YTD, and (more recently) Founders, +80%, both distributed well beyond home regions, many of fastest-growing top 50 cos in scans very regionally focused.  In Calif, Firestone Walker (+63%) and Ballast Point (+140%) each gained between 0.2-0.3 share of craft $$ YTD.  Near mirror images for #41 and 42 players on opposite coasts: 10-Barrel up 125% in PacNW and Devils Backbone +131% in Mid-Atlantic.  Few other East Coast cos still making a splash: Cigar City (+115%) and Foothills (+112%).  Scanning down a bit further, 5 more cos in top-60 growing faster than +50%: Four Peaks (+62%), Shorts (+67%), Revolution (+207%), Karbach (+129%), and New Holland (+54%).  Of these 5, New Holland has largest distribution area, as the other 4 sell in pretty tight geographies.  Also gotta note, this yr Ballast Point, 10 Barrel, Devils Backbone, Cigar City, Foothills, Revolution and Karbach more than doubling sales in scans for 2d yr in a row (see Apr 15 issue). 

What’s more, many of these cos gettin’ over half of their growth from just one blazin’ brand, typically an IPA.  Seems to be the model for fast regional growth in chains these days.  Three of ’em tripling or close: Firestone 805 Blonde up 205% and now 35% of Firestone’s biz in scans; Founders All Day IPA, +209%, now over a third of Founders’ biz; Ballast Sculpin IPA +193% and near half of Ballast’s biz.  For 10 Barrel, Apocalypse IPA +129% and Devils Backbone’s Vienna Lager +146%.  Another IPA, Foothills Hoppyum is more than quadrupling and is almost all of Foothills growth and about two-thirds of its biz in IRI.  Four Peaks Kilt Lifter (+37.5%) not growin’ as quickly, but also a top-100 scan brand that makes up exactly half of co growth.  Rest of cos listed above also have big leads brands – perhaps just as important to total growth, like Cigar City’s Jai Alai IPA, Revolution Anti-Hero IPA and others – that don’t quite rank on top 100 brand list.  Other fast growin’ regional cos getting over half of their growth from just one brand: Bell’s with Two Hearted Ale, Ninkasi with Total Domination IPA, Oskar Blues with Dale’s Pale Ale, Flying Dog with Raging Bitch, Southern Tier’s Seasonals and Victory’s Golden Monkey.  SweetWater 420 just under half of total co growth.

Natl accounts are #1 growth driver for Sierra Nevada in 2014, Nick Lundquist told distribs last week, especially the top 20 chains.  Those 20 chains are 38% of total Sierra biz, but got 2/3 of its growth so far this yr.  Safeway and Kroger are its top 2 customers and both are up double digits.  In all, chains are 60% of Sierra’s total biz, 80% of Sierra’s total growth.   Sierra founder Ken Grossman has poured $10 mil into syndicated data, training and additional staff for natl accounts.   But in reviewing  “areas to improve” for Sierra from Tamarron survey of distribs, Joe Whitney noted that #1 area for improvement remains “national account effectiveness.”  So expect further development from Sierra along these lines. 

Sierra Nevada Up 80% Last 4 Yrs in NC   Sierra Nevada already has reaped some rewards locally from having a big new brewery in North Carolina and can expect more.   It’s up 80% in North Carolina since Sierra announced new brewery, said eastern sales director Tommy Gannon.  Up 155% in Asheville in 4 yrs, 90% in Charlotte.  The brewery “can have a really big effect,” added Tommy.  But title of his talk was “How Far  Do the Ripples Travel?”  Remains to be seen.

A fascinating glimpse into some craft-centric millenials’ consumption patterns courtesy of mktg and sales director Joe Whitney at last week’s Sierra Nevada’s natl sales conference.  Sierra spoke to around 400 consumers, and Joe found striking pattern repeated with many young millennials.  Again and again, these young beer drinkers told him that 60-80% of their total beer consumption, not just craft but all the beer they drink, is in form of IPA.  It’s “always something about the flavor.”  While many didn’t like it at first, it becomes a “badge of honor.  ‘I can drink IPA and like it.’”

Recall, Joe believes IPAs “can be half” of a much bigger craft segment, as “big as craft is today.”  What does that imply?  If IPAs are presently a little over 20% of craft, then craft brewers will sell over 4 mil bbls of IPAs in 2014.   Or about 2% of the total beer biz.  But if IPAs can become as big as craft is today implies that IPAs could be 20 mil bbls or about 10% of industry consumption in 5-10 yrs.  That’s 5x larger than they are today.  Impossible?  That’s probably what they said about light beers once upon a time too.  

TSG Consumer Partners, which is part of new deal to buy Pabst, acquired a stake in a craft brewing company, said to be SweetWater, according to several sources.  TSG makes many investments and has confidentiality agreements with some of cos it has invested in.  So unsurprisingly, it has not commented on this.  TSG previously invested in such bev cos as Vitaminwater and Muscle Milk, and also invested in Yard House chain.  While not acknowledging publicly, privately TSG has told folks that it has craft investment too.  SweetWater didn’t comment either.

SweetWater is one of hottest craft brewers in 2014, likely to grow 35-40%, more than 50,000 bbls, and approach 200,000 bbls.  A TSG Consumer Partners stake in Sweetwater would be clearest evidence yet that private equity is making inroads investing in craft, after a couple of years of fairly intensive shopping.  Recall, last week family office Ulysses Group invested in Southern Tier and earlier this summer Riverside Group bought stake in Uinta.  Will private equity ownership of stakes in craft brewers change consumer perceptions of craft brewers as anti-corporate rebels, small local and independent companies fighting against the man?  Especially since many PE funds have literally billions under mgt.  Or will the consumer not know or not care?   Is this yet another emerging definitional battleground, or no issue at all?  Stay tuned. 

The 21st Annual Beer Insights Seminar at the Waldorf=Astoria in NYC on Nov 9-10 has a stellar lineup, including top craft pioneers Deschutes ceo Gary Fish and Brooklyn co-founder Steve Hindy.  We’ll also bring you a provocative panel to explore one of the industry’s hottest topics: franchise law carve-outs for small brewers and other 3-tier issues.  Veteran industry attys Marc Sorini and Mike Madigan will be joined by Manhattan Beer’s chief operating officer Bill Bessette.  Execs from each of the top 4 US beer suppliers will present topical talks.  We’ll provide extensive q&a opportunities and plenty of networking time.  Sign up today to take advantage of special early bird registration (available only thru end of Sep).  Click here for more info.  Click here to register.  

Plans for coming Lord Hobo Brewing Co include producing 10K bbls of mostly IPA in year one, according to illuminating piece from Boston Globe late last week.  Lord Hobo is already name of Cambridge, Mass bar operated by Daniel Lanigan, who co-owns coupla other beer-centric bars in NYC and Baltimore.  But it’ll also become moniker of Boston area production facility Daniel’s building in 46K sq-ft space originally slated as contract operation before decision to focus on in-house brands.  Leading the pack: Boom Sauce IPA, one of handful of IPAs Daniel hopes will be widely-distributed counterpart to well-known but hard-to-find New England IPAs from locally-focused brewers like the Alchemist, Hill Farmstead and Lawson’s Finest Liquids.  First batches should hit early next year.

Shmaltz Brewing expects about $4 mil in revs this yr, after moving operations to upstate NY, founder Jeremy Cowan told Albany Business Review.  It’s adding tanks to boost capacity into 35-40K bbl range, from 20-25K bbls currently, as it continues to refocus efforts on its new community after early years as niche brand with wide distribution.  Recall, Cowan sold Coney Island brand to Boston Beer’s Alchemy & Science operation last yr.

Elsewhere in upstate NY, one Syracuse-area family is looking towards vertically integrating almost entire beer making and selling process.  The Menikheim family is a couple years into developing a hop and barley farm, close to opening a brewpub and prepping recently-purchased space for conversion into a larger production facility.  Under new NY Farm Brewery license, they’re looking to grow and process hops and set up a micro-malting operation under Oran Station Brewing Supplies moniker.  Seneca Street Brewpub could be open by Christmas.  Down the line, they’ll open up Limestone Creek Brewing.  Ambitious, and now possible.

US microbreweries (<15K bbls annually) and brewpubs could serve upwards of 1.65 mil bbls straight out of their facilities in 2014, based on a “back of the envelope” estimate from Bart Watson, Brewers Assn chief economist, in recent post.  He bases the estimate on the assumptions that production at brewpubs will tick up about 5% to around 1 mil bbls and hot-hot micros will boost production around 25% to about 3 mil bbls.  So Bart’s expecting about 600K bbls of craft growth just from players producing less than 15K bbls this yr, which could be conservative.  The pace of openings hasn’t slowed (and may still be accelerating) and overall craft seems to be moving even faster than last yr, when micros posted about 25% growth according to BA stats.  Another conservative estimate: taproom sales account for about 25% of microbrewery production, per Bart.  If that’s true tho, microbrewery taprooms would serve about 750K bbls this yr, in addition to another 900K bbls or so from brewpubs selling 90% of production on-site.  At about 1.65 mil bbls, that’s almost 5% of total on-premise sales, Bart notes, assuming fairly stagnant on-premise volumes.  That volume inches up quickly with less conservative estimates of how much micros are selling in their taprooms.

A handful of small brewers applied some other numbers to the growing taproom trend for the cover story of the BA’s current New Brewer magazine.  Taproom sales accounted for a wide range of production: from 11-14% for one 7000-bbl brewery to 100% of a small operation working on a 1-bbl system.  As both Bart and mag note, changes to state law allowing these on-premise sales have been a big driver.  Such a change in Texas shifted Jester King’s sales from entirely distributed to 70% of its approximate 1000 bbls sold on site, according to the article, estimating it’ll even back out to closer to 50/50.  On-site sales a financial boon too, earning one brewery 3-4X the money made by sending the beer out for distribution, one micro owner told mag.  The piece briefly mentions potential resistance from nearby on-premise accounts that in some states pay much higher licensing fees.  It also notes that taprooms don’t have to be such a “small” brewery phenomenon: Sierra Nevada runs 3 separate spaces in Calif, with another expected soon in NC.  Even contract outfit BrewHub pours partner brewery brands in its Fla taproom.

Speaking of Fla, monthly taproom sales there have doubled since early 2013, based on stats Bart shared in same post.  In May and June of this yr, all Fla manufacturing breweries sold over 2500 bbls directly to consumers each month, about 4X the volume all state brewpubs sold during the same period, which has been pretty stable since at least mid-2010.  Brewery sales to consumers grew about 60% from last June to this June, these stats seem to indicate, and approached 14K bbls for the first 6 months of 2014.  All of this suggests that “the on-premise environment isn’t as bad as the numbers suggest it is, rather it is simply changing,” to Bart, as he’s said at our conferences and elsewhere.  But don’t go assuming micros are simply shifting sales to their taprooms barrel for barrel, we’d caution, as drinking straight from the source is part of taprooms’ appeal.