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Monday, March 28, 2016

The Dangers of Expansion

Just a quick follow-up to that Deschutes post. As so often happens, it precipitated a nice discussion on Facebook--which no blog readers would have seen. In the post, I alluded briefly to "tough sledding" for Deschutes as they move forward. I didn't unpack that at all, and I think there's some benefit in doing so.

No one outside the Pacific NW has any idea what this
is or how it relates to Deschutes Beer.


Every brewery faces business challenges. If you're a brewpub, you must get people in the door. If you're a small production brewery, you have to compete in the craft market with very efficient large breweries even while making comparatively more expensive beer. If you're a mid-sized regional, you have to develop a mass market approach, but you don't have the might to defend against better-funded national brands. Of course, each of these has certain advantages, too. They're all local, and have a home-court advantage on sales. Brewpubs appeal not just through their beer, but the ambiance and food at the pub. Regional breweries are more responsive to local trends.

Every time a brewery expands, though, it takes on a new level of risk. Most outright brewery failures happen during expansion. You predict where the market will be and how you'll fit into it, take on a bunch of debt, and then hope you weren't wrong. Nowhere is the risk greater than when a brewery wants to go national. The barriers, costs, and complexity are immense:
  • You have to establish relationships with distributors in every market;
  • You have to understand the vagaries of each market with respect to retail access (some states only sell beer in liquor stores; others have restricted hours, etc, etc) and build a national sales force;
  • Laws governing beer sales differ in every state;
  • You have to create national brands that will sell in places as diverse as NYC, Houston, San Francisco, and Des Moines;
  • You take on a ton of debt and can't afford to suffer through too many years of underperforming sales;
  • You're competing against breweries backed by multinational corporations with almost unlimited resources to secure distribution, advertise, play hardball at the retail level, run promotions, and staff giant sales forces;
  • You have to maintain your identity as a local brewery that's from a place while at the same time create a bridge to people with no natural affinity or interest in that place. Deschutes is a case in point: people in distant states don't even know how to pronounce the brewery's name, much less have any idea what Mirror Pond or Black Butte are;
  • You have to predict where the market will be nationally in five, ten, and twenty years and make sure your brand can continue to compete with national brands that might seem more current or sexy.
There's nothing to say that Deschutes can't pull this off. If you think of the 4,000 breweries in the US, there are only about twenty that have any kind of shot at this, and Deschutes is definitely one of them. They have one of the strongest and most diverse line-ups in beer, a great brand, and they've been incredibly astute about anticipating trends (think of the timely releases of Chainbreaker White IPA, Red Chair, and Fresh-Squeezed). But they will also be competing against companies that could afford to drop hundreds of millions of dollars just to acquire a brand--never mind the millions they're prepared to spend establishing them. So it is a pretty ballsy move and carries with it huge risk. If the bet fails, the brewery may end up a slowly-receding brand in the AB InBev portfolio in twenty years--the fate of so many other brands over the past century.

11 comments:

Bryan said...

Can we consider the timeline in which they hope to make this happen as a pivotal part? They don't even want to break ground for another three years, which means they have plenty of time to prepare, let alone continue their slow rollout along the East Coast, whatever that may be.

Alternatively, a lot can happen in three years that could shape a business in all sorts of ways while Deschutes waits to simply *start* building.

If construction isn't until some undisclosed time in 2019, and we would assume it would take a couple years, perhaps, to get it up and running, there's a lot that can go right or wrong in between. But at least there's lots of time to prepare.

Andrew Michuda said...

I live in South Florida and hold Deschuttes in high regard. Of course, I'm an anomaly, being an obsessed homebrewer fond of Black Butte. But I agree that 90% (maybe 99%) of the Florida market has no idea what Deschuttes is. I see various brands that get deals with Total Wine pop up on the shelf down here. Unless I've heard of them from a reputable source, I'm too risk averse to shell out $11 on a six pack. There's far to much mediocre to bad beer out there nowadays. I'd much rather buy a local beer canned a week ago than an unknown IPA from 2K miles away, without a packaged on date.

Dann Cutter said...

Who's to say they aren't sold by then?!

With companies throwing around $Billions, Deschutes could be an attractive acquisition.

Bill Scott said...

In the past year, the bottle shop I manage has gone from 3 facings, selling about 2 cases/month of Deschutes to 8-10 facings selling 3-4 cases per week (during the slow season).
Fresh Squeezed has certainly led consumers to take notice of Deschutes once again.

Daniel Warner said...

Andrew, I've only had a few pour-worthy bottles, but I have been noticing a lot of aggressively mediocre beers popping up.

Both of the "everything is generic two row and chico" and "enjoy this lavender-cucumber blossom-hibiscusj-rose petal gose aged on peanut butter extract" varieties.

I really wonder how all these brands are going to compete on store shelves. Most bottle stores I see around here prioritize whatever their distributor is prioritizing, then local. Everything else falls off.

Jeff Alworth said...

Bryan, yes. In Gary Fish I trust. I know of no more deliberative, intentional breweries than Deschutes, and this timeline seems exactly predictable. To use Rumsfeld's old (and pretty useful) frame of known unknowns and unknown unknowns, Deschutes will almost certainly eliminate all the former, leaving only the latter to deal with.

Jeff Alworth said...

Dann, you're right--and anyone who bets on a brewery being the kind that "would never sell" is a naif. Nevertheless, this move makes it seem less likely that they will sell, since in proceeding with this expansion they limit their buyer's choices.

Jeff Alworth said...

Bill, fascinating. You're in Ohio? Do you have any sense what customers think of the brewery/beer? Is it all Fresh Squeezed, or was that just an entry way?

Jeff Alworth said...

Daniel, I assume you don't get Deschutes there? (Deschutes has an interesting portfolio, built largely on sessionable English-descended ales rather than very modern exotica.)

In Oregon the way we've sort of handled this is through 22s. You go to the store and there are sixers, which occupy probably 30 linear feet in an average store, and shelves of 22s, which occupy maybe ten. And there are as many breweries in the latter (mostly small ones) as the former.

Daniel Warner said...

Pretty sure no, Jeff. I had it when I lived in Austin. It occupies a spot filled by breweries in our regional Portland, Asheville, notably Highland and Green Man.

Both of those both get distribution down here, as well as included in "local" beer selections. A hard sell.

Why Virginia is an easy answer: They are lobbying hard to compete with North Carolina's exploding industry. They want national brands. Richmond paid a steep price for Stone.

I'm not sure these national brands will truly bolster the industry or swallow the local places. Oskar Blues, New Belgium and Sierra nevada moved just outside of Asheville, and Asheville's had a unique reputation as a brewpub mecca for a long time now. It weathered it fine. The same is not true of Richmond or Roanoke.

Reinkster said...

Can't wait to try some of this Desk-hoots beer!!! ;)

~Adam

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