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09.2006

Massachusetts Beverage Business

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Article By: Andy Crouch

In the first part of this interview, I sat down with Sam Calagione, president of the Dogfish Head Craft Brewery, and Tomme Arthur, head brewer for the Port Brewing Company, to discuss the business of beer and what it takes to be the face of their brands. In this second edition, these two personalities address Anheuser-Busch's renewed interest in the craft beer category, the tough fight ahead for small brewers and small distributors, and why most beer priced over ten dollars isn't worth your money.

At the recent Craft Brewers Conference in Seattle, Calagione gave a rousing keynote address to the gathered attendees. Featuring more than 18OO craft brewers from around the world, the event also played host to the 2OO6 World Beer Cup and its awards. To the friendly audience, Calagione delivered a speech filled with obscure literary and musical references, and an ode to his friend Tomme Arthur, that built to a single, unmistakable crescendo: Craft brewers should be proud of their successes, celebrate them, but be prepared to defend the ground they worked so hard to claim.

In one particularly interesting passage. Calagione reported: "Americans will always vehemently protect their right to create an alternative - not just an alternative to giant breweries, which is what we represent, but to the increasing homogeonization of American culture. It's not outlandish to recognize our boil kettles as modern day melting pots - the sources of beers as diverse and colorful as the people who buy them. Made by people as diverse and colorful as the people who buy them."


ANDY CROUCH How important is it for a brewery to have a face or a specific person identified with it?

SAM CALAGIONE Whether what people identify with is a person or a name, it all boils down to what makes your company distinct. It can be a person, Fat Tire beer, Arrogant Bastard, but whatever it is, the most important thing is that in this very crowded market place, that you brand stands out as being unique. Sometimes that is a combination of a personal element and a brand that has a unique identity. It's probably not as easy as it was five or six years ago to do that because there are so many breweries doing such interesting things.

There's a lot of different models for that. There's not just one route to success for building a brand, but many different ones. What's important is that you prioritize building a brand that is unique compared to the others out there.

TOMME ARTHUR I think what's been a bigger challenge for a lot of us is the Johnny-come-latelys, the me-too's. We've been doing things a little bit differently for a long time. I refer to them as flavor driven beers, as process driven beers, they are just beers that we want to make. We don't make them that way because we think it is a marketing tool, it's because we believe in the process and in getting the results. But right now, it's chic, it's in. It's to the point where everybody is doing it and there's a lot of people who aren't doing it well. People are doing it because they see there are ten-dollar bottles of beer. It's weird because there are going to be a lot of ten dollar bottles of beer out there, but guess what. That devalues and demystifies some of the things we are doing because someone may not get to our beer. Where we may have been the one or two ten-dollar bottles of beer in a spot, and the first two they try may suck and they may not be willing to go back to the other ones. That's a challenge and a shakeout. Everyone sees that there is a lot of press to be had and a lot of love in this extreme beer movement. I don't really call it an extreme beer movement for what we're doing. It's just the beers we want to make in the ways we want to make them and that's the story we're telling.

Everything we're going to do at the new brewery is about this story that we tell. We're not going to look at every beer and say, "could we use chrysanthemum flowers because it's going to give us a better story?" No, it's "is that the flavor we're looking for." There are plenty of brewers that are looking at Sam's beers thinking, "Man, that guy's telling a lot of stories with these things, I'm going to go out and do that and hope that I can get press or ten-dollars a bottle and not be worried about it. That's scary.

SC I agree with you Tomme, but to an extent what you're saying [is] it's sort of an extreme beer shakeout that mirrors the craft beer shakeout we had back in 1995 and 1996. Where maybe it wasn't a ten-dollar, cork-finished beer but it was a seven-dollar six-pack that made the suits on Wall Street say, "Oh, I'm going to open a brewery." We lived through that and I feel the customer lived through that with us. I feel like they are the ones who are ready to call 'bullshit' on the people that bring pseudo, derivative stuff to the market in 2OO6. They are way better prepared to call 'bullshit' on that stuff than they were in 1995 when guys were coming out with bad product.

TA It's good that there is at least a database or an opportunity for research to be had with these beer websites that people can go look at. But there is still this sense that people are going to get burned and that's going to hurt and take its toll. We're not getting into cork-finished bottles because we think it's an opportunity for us. We know that's where our beers need to be. Somewhere down the line, your beers will survive the shakeout because they have pedigree, they've been made that way, and the story, the personality, and they've been made this way for a reason. I think the more barrelage that goes on, the more of these things that come out, we're going to see a lot of beers that aren't worth peoples' time. We don't want to be the next big thing, we're not interested in being the next flavor of the month. It's hard because when you release a new brand from a new brewery and people get all excited about it, you are the flavor of the month. You then have to find a way to grow above that.

SC I'm sure there is some of that reactionary brewing going on for some of the bigger extreme beers, but I'm excited to see your beers come out here and get on the shelf next to ours. I'm excited to see [Russian River's] beers come out and [Avery Brewing's] beers. There's definitely a karmic element to what we're doing where we're trying to help the breweries we believe in get a presence in every market. One bottle of Pangaea on the 75O-millilter shelf next to a bunch of imports and Belgians says something. Twelve bottles of great American, unique, exotic beers says something altogether different. It legitimizes the category and helps us break down that pricing ceiling that beer suffers from compared to wine. I'm really excited to see the brands that are stepping up and trying to get a national profile for their more exotic beers.

AC Recently, we've heard a lot about some larger American brewers either taking a renewed interest in brewing or distributing more flavorful products or in craft brewers themselves. What are your thoughts on what this means for craft brewers?

TA Anheuser-Busch is capable of making any beer they choose to make. They have more money than God. I think their biggest problem is distribution; they have it, but that their distributors don't know how to brand or deal with those beers. So even if they were to come out with the beers on a Budweiser, corporate level, then they'd still have to send them through their A-B houses and the A-B house would have to figure out how to deal with them. On some level, it's just great to see that they are trying because it portends that we have great things ahead of us. They look at our segment as being very healthy. They are not going to accept that our numbers are going up seven-percent in terms of growth every year.

AC What about the possibility of further acquisitions or takeovers of craft brewers by larger breweries?

TA At the end of the day, the craft beer consumer is a lot better educated now and I think they really appreciate the independence of the breweries they support. I'm kind of betting my life, my home, everything that I'm mortgaging against this brewery expansion. I'm betting that whether Anheuser-Busch owns one-percent of your company, that it'll be viewed as being a little bit pregnant. I think it'd be very difficult for a brewery to sell some equity share and not have it be perceived as a scarlet letter on their chest as they try to sell their own beer through A-B's distribution network.

AC Do you think it's likely that A-B will seek equity shares in more breweries than it already has?

SC I'll play devil's advocate here and play a worst-case scenario forward. Let's say they line up a network of eight breweries nationally that they are going to welcome into their distribution network. Let's say they buy 25-percent of those breweries to begin with and those breweries realize what an amazing network Anheuser-Busch has built. Now these eight breweries go out and invest fifteen-million dollars a piece in bringing their breweries to the next level because they can't fill the pipeline that is now so huge. Now they're sitting on fifteen-million of debt. What happens if Anheuser-Busch says, "You know what? I don't really like this and I'm going to kick you out of my distribution network unless you allow us to buy 51-percent of your company." Now you've got all of these small companies on the line. I just see it as a very slippery slope and its not one I'm interested in. I don't know how you do it and not need their distribution. I don't know how you take their distribution and not become addicted to it.

The smaller distributors are targets in the same way smaller breweries are as well. If they basically in a panic say, "Well, if I don't sell out now to the big guys, my brands are going to ditch me for Anheuser-Busch and then I've got no equity in the company I built." There are distributors our size who mortgaged their lives to start their companies who are in a very similar position and I'm hoping they hold their ground. I'm not against Anheuser-Busch. I'm against totalitarianism. It's getting to the point it's a monopoly. I'm betting every cent towards not letting their be a monopoly.

TA There's always going to be someone who sells out though.

SC Yes.

TA You say eight, but if they only get four then it's still a pretty good success rate. It's interesting because [Anheuser-Busch] has three breweries on what I would call the West Coast: Widmer, Redhook and Kona. So I don't really see them looking to the West Coast.

AC Many craft breweries are now to the point where their capacity is quite substantial. Are craft brewers going to hit a point, a glass ceiling, above which they cannot go without some help with distribution?

TA The biggest thing that is yet to be determined is whether or not exporting becomes viable. I don't think there is a lot of people who have focused on the potential for growth in exporting. As American craft brewing maintains its viability, I think exporting is going to become more a part of it. The Brewers Association is certainly looking at that as a real positive.

I think that most of the breweries still have options available to them. There are not, to my knowledge, very many breweries who presently distribute in all fifty states. So growth is possible on distribution levels, but then it becomes access to the market. Access to the market is going to be tough.

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