Brewers Association of America convention, panel discussion, Nov 11th, 1997.

The question before the panel of industry players: "Can the Small and Microbrewer Survive?"

What follows is a transcript of a panel discussion organized for the Brewers Association of America Annual Convention, held at the Copley Plaza, Boston, MA, November 9-11, 1997.

PETER REID (Moderator): We're gathered to answer the question "Can the small and micro brewer survive?" Our panel got together beforehand to discuss the topic, and I think Jim Koch might have had the best visceral response to the question. Jim?

JIM KOCH: I guess I said "ask a stupid question, get a stupid answer." Of course they can survive. They're not going to have a lot of money for expansion and growth, but for many it's a labor of love. Most aren't even big enough to be here [At the BAA meeting] by and large, but they're going to survive and they should survive. They are part of what makes what we're doing special.

KIM JORDAN: I think there is a place for microbreweries as smaller, local-focused producers that will allow consumers to get a variety of choices in the marketplace. Are they going to be national players? Probably not, because of the capital issue.

GARY MATTHEWS: It strikes me that you have a classic low barrier-to-entry business: it's easy to get into, and some people get into it for emotional reasons. But it strikes me that that's not the crux of the issue. A lot depends on how many small brewers there are, and how concentrated they are in a local area.

REID: So if brewery density is low, and a brewery keeps their market local, they have a better chance of making it?

MATTHEWS: I think so. I was talking with Rich Doyle of Harpoon earlier, and I was impressed with how much strength Mass. Bay Brewing Company has developed in its local market. It depends on how much territory a brewer wants to cover, but it strikes me that it's very possible to make some money in a local area.

KOCH: I think that Gary's point is right. Although I would suggest that Harpoon is a big player in Boston. They've been around for a long time, and they have good leadership. The real issue is the other 24 small breweries in the Boston area, and how do any of them get any critical mass to compete with Harpoon.

What's happening in the segment now is a lot of retrenchment, by people who expanded optimistically, and are now pulling back into their core areas of strength, typically geographical. These companies are dropping salesmen in remote markets and pulling back into core areas. To Gary's point, there are low barriers to entry, but interestingly, there are very large barriers to exit - fixed capital. It's tough to kill a brewery or a brand. The shakeout doesn't happen until someone comes in and looks at your brewery and says "It weighs about 1800 lbs., and stainless steel is going for 40 cents a pound, so I'll give you $600 for it" Until breweries are getting cut up for scrap, shakeout isn't here.

REID: I wasn't going to bring up that word "shakeout" but are we going to see one?

KOCH: My sense is that there is some retrenchment You'll see some consolidation - one brewery doing two or three brands. But actual shakeout, when brands go off the shelf, and breweries stop producing, and the vessels get sold for dairy tanks, not yet. When that happens, it's a shakeout.

REID: Are the big brewers going to eat the small brewers lunch? Are they trying?

DAVID HEIDRICH: It's no revelation that they want share in the specialty market The deeper question: Are the actions of Anheuser-Busch responsible for the numbers that everybody is reporting in the last 12 months? In my market, I would say they are. Others have other opinions. I know that in the Midwest, and we're right across the bridge from Cincinnati, the failure to see significant growth by almost all specialty beer brands there is being impacted by big brewer efforts.

KOCH: David was both diplomatic and eloquent, and I don't pretend to be either one...so I'll pass on that one.

KIM JORDAN: I think the actions of Anheuser-Busch are of significant concern. But I don't think we should lose sight of the fact that our own efforts, or lack thereof, at things like quality, are more significant. It is a natural tendency to focus on things outside yourself, and identify those as barriers. While there may be some truth to that in this case, every one of us who puts beer out in the marketplace of questionable quality, threatens all of us. And I think that has more significance for us than what Anheuser-Busch does.

DAVID HEIDRICH: Kim makes a good point. When a consumer gets poor quality beer, they don't always write off that brand, but the category as a whole. I don't think they do it consciously, but they will run back to the safe haven - often a brand that looks special, with the Michelob label on it, or the Guinness name on it. Quality problems have not killed the category, but it has given people an opportunity to expand their horizons to other high price brands. And I think that has helped the imports expand off our growth - due to poor drinking experiences by consumers, and sometimes consumer confusion.

Jerome Chicvara [Full Sail Brewing Co., Hood River, OR] was telling me about seeing a woman standing in front of a cold box looking for Full Sail Brown Ale. There were so damn many brands out there, she couldn't find the facing, so she gave up. She went to what I'll call "the default brand" a well-known international product. It's not what she warned, but the number of micros made it too hard for her to shop. The combination of bad experiences and confusing marketing have taken away consumers that we may have generated and fueled these other categories.

REID: Let's address the quality issue first. Is there any way that small brewers can guarantee quality to the consumer? Give them a standard to measure by?

KOCH: No, but we can get them part of the way there. My feeling has been that at least half the quality problems we have are in the form of stale beer. Consumers have no way of knowing if the beer is fresh or not, unless there is some user-friendly coding on it. We've been doing this for ten years now, and it's been a huge battle in this industry to get any kind of consensus. It took years to get the Institute of Brewing Studies to even endorse some kind of freshness dating. Because you can lose money on it - it costs money to do it Freshness is an ingredient just like hops and malt You have to budget for it.

REID: Other members of the panel, do you feel that date stamping is a way to help guarantee quality?

KIM JORDAN: Certainly, but I think equally important it creates a place for you to have definitive discussions with your distributors about whether they are performing or they are not. If a bottle is not marked with anything that shows how old it is, how will your distributors know they are inside or outside the bounds of performance?

I also think it's a good concept for the consumer. Beer is not like wine, and it doesn't improve with age. When we put a date on a bottle we are reinforcing a concept that I think is to our benefit. As Jim said, if you're serious about quality, you have to budget for it. I think that's really true. In your budget, there has to be a line-item for buying back beer that's old or bad. Do we let our reputation go into the toilet because consumers drank beer that wasn't up to our standards? You've got to be congruent in your talk and your walk.

GARY MATTHEWS: I would endorse what Kim said. I think that's exactly right. At the end of the day, we are selling brands. We're in the business long-term, and it's all about having great physical quality, as well as great imagery and packaging, and all the other things that go to building a great brand. If you spend all this money on advertising and point-of-sale and packaging, and you have a lousy product, you're never going to get any place long term. So whatever you spend on quality, it's a fraction of what you spend on marketing. They have to go hand-in-glove. We spend an enormous amount on quality. Our stuff is pasteurized, so we get a little more shelf life out of it, although we chose not to make our dates consumer legible. One of the things we do in our regular order of business is pull product off the shelf. We audit distributor warehouses, and spend one percent of sales on quality measures.

REID: You've also got your draught specialist teams...

MATTHEWS: Yes. We have a lot of people in the field working draught Guinness. They are in all the bars, looking at the gas pressure, the cleanliness of the lines, educating the bartenders about clean glassware and in our case, the two-pan Guinness pour. They cheek the dates on kegs on very call. They are in the accounts, literally, every two weeks to work on quality.

HEIDRICH: If I could figure out bow to get $115 for a 13-gallon keg I'd do the same thing [general laughter].

MATTHEWS: One hundred and fifteen dollars? It must be discounted in your market [more laughter].

DANIEL BRADFORD, Publisher, All About Beer magazine: On the quality question, on a given supermarket shelf, what percentage of the beer has freshness problems, and what percentage is badly made?

KIM JORDAN: "Badly made" is a really subjective judgement, and that's one of the reasons we'll ever be able to create a quality stamp for specialty beer, because it's so broad that it would be meaningless.

JIM KOCH: In terms of freshness problems, I'll give you a guess and say 20%. If you go into a store in a major metropolitan area today, probably one out of five facings. It might have gone down a little lately because of the retrenchment, because retailers are cutting stock.

RANDY SPRECHER, Sprecher Brewing Co.: Gay, you mention that your people are in an account every two weeks. We go into on-premise accounts and try to do the same kind of thing, but we go back a month later, and they still aren't cleaning glasses properly, they still aren't attending to the draught lines. Do you have to do this kind of education forever.

GARY MATTHEWS: That's a great question. We track each call, because our people fill out a report after the visit. We monitor what was done, and how the account is keeping up with it. After the first couple of calls, accounts usually make great progress. And then things sometimes decline, because staff turnover is so great that our people have to reeducate all over again. It's still necessary because quality is so important, and you need great attention to detail. But when I joined Guinness two years ago, we didn't do any of this, and we left it to the distributor. But I'd say quality is too important to leave to the distributor. The program that we've initiated has made a huge impact for brand Guinness.

REID: Earlier we talked a little about the consumer confusion in front of the cold box. Some people have talked about the possibility of varietal merchandising, selling by style to help lessen that confusion. Can someone on the panel speak to that?

HEIDRICH: I would be attracted to stylistic merchandising, particularly outside my home market. Jim has a great billboard of facings, and he carries that nationwide. In Cincinnati, I can get four or five facings, all our products. But if I went 300 miles away, where Oldenberg is not known, I get one facing amongst all of the other guys who have five and six.

If you compare wine merchandising, all the chardonnays will be together. You go to any wine store, and you find that Kendall-Jackson Chardonnay is outselling the fourth or fifth highest chardonnay in that store by ten to one. How many more facings does K-J have than the fifth selling chardonnay? K-J may have two bottles side by side, and the fifth selling guy has one. And the 150th selling chardonnay has one facing too.

For some reason in the beer business, we allocate space in grocery stores based on total volume. If a wine store allocated their shelf space the way a grocery store allocated their shelf space, we'd have 18-ft sections of Kendall-Jackson, and a little corner with everybody else. What good does that do the consumer? No good. Point being, I'm not sure why Bud gets 44 feet, just because they have 44%.

KOCH: You have to set the shelf the way consumers want to shop. I'm going to guess that more consumers shop looking for a brand than a style. Even if they are looking for a style, they look for a specific brand that makes that style. If you try to break up all the brands, and set it by style, I think you would create more dissonance and confusion for the consumer. We've tried both. But we've found too much retailer resistance to setting by style.

AUDIENCE QUESTION: This is a question for Jim. When you go out into the trade, and you go to the cooler, and you see the eight facings for Sam Adams, and others have four or five. Is this something that we can sustain? It seems like the bloom is off the rose with seasonals, and the whole industry is retrenching as we well know. Do you see breweries paring away their brands? Is this one way that we'll solve the confusion at the retail level?

KOCH: I think it's going to happen. I don't think breweries will do it, I think that retailers will do it for us. They will tell us which SKUs aren't moving. Our philosophy, at Boston Beer, is that we tell our salespeople to "lead with lager." We always want the Samuel Adams Boston Lager to be our leading brand in all our displays. Just within our product mix, lager is growing and the others are slipping. And I think that's the wave of the future. I believe that we are moving from a time when the growth of the category drove the brands. That happened all through the '90s, and we all did very well. And we were all full of the hubris of success, feeling that we were doing so well by virtue of our own personal wisdom and our great beer, and all the other arrogance that I and the rest of us were guilty of. We're moving from a time when the category was driving the brands up to a time when brands are going to have to drive the category. And that's happening with imports now. It's not like the import growth in the early '80s when the category grew; now imports are doing well, and it's strong brands that are making that happen and pulling the category up. In order for brands to be strong, they have to have flagships. A name has to mean a product. If you go to a bar, and you ask for Sam Adams, you have to know what you're going to get. And it can't be the Scotch Ale, it's got to be the Sam Adams Lager. That is our focus going forward.

GARY MATTHEWS: In the off. premise, the retailers are starting to pare back this category, and they are looking a lot at velocity per SKU, and turns per item. Many of you have at least one item, a fundamental product, and the turns on that product are terrific, and quality I would bet is terrific. But if you add products, to try to get that billboard space like Sam Adams, the price you pay is the last few SKUs have slower turn. Retailers are figuring that out.

KIM JORDAN: I find myself wondering what all these liquor stores are going to do with all that cold box space. How many facings of Fat Tire can you have in a cold box? But I think it is going that way, and it makes me sad. And I agree that it is brands that will be driving the category.

There will be fewer players in the category. A few strong national players, and then some of the regional players. And the whichever local brewers can get facings. In my market, that's conceivable, because it is independent. But when it comes to chain-driven markets, I'm not sure how the smaller brewery Will get distribution.

REID: Does anyone have any comment on how the chains are driving this trend?

JIM KOCH: We've seen that in California, about six or eight months ago, when one of the larger chains did a reset and gave more shelf space to the higher velocity brands. The total shelf space didn't change, tan instead of one facing of Sierra Nevada Pale Ale, now they have three. And other people were cut down to one facing, or dropped.

REID: Another issue, certainly, is distribution. Is the distribution system adequate in terms of capacity, and in terms of quality?

KIM JORDAN: I can't really speak to this, because I tend more towards wine and spirits houses than beer houses. I worry that there is a perception that I'm not supportive of beer wholesalers, but I've found that it works better for us. I think the quality of the salespeople is a little higher with wine houses. I think the execution on-premise, line cleaning and that sort of thing may not be as good with wine houses. But wine houses are a viable option for our segment. Especially since the big three want their people to focus on their own brands. Where else are we going to go? The new boutique distributors, where they exist, will have to be retrenching as we are. That's an intense business, and it will he hard for them to survive, without the cold box clout of the bigger houses. And that leaves only one other option - wine and spirits houses.

And in terms of structure, I can have one wine and spirits wholesaler to cover the whole state of Colorado. I only have to get to know one management team, one sales team, and really develop a tight relationship with them. If I was using beer wholesalers, I would need to deal with seven. How can you build a serious relationship with seven different management entities? For me, our choice was not a lack of enthusiasm for beer wholesalers, but more a pragmatic choice.

Incidentally, it's amazing when you focus on drivers of trucks how responsive they are. Because people don't focus on drivers of trucks. And they are the daily manifestation of who you are out in the marketplace.

JIM KOCH: In Colorado, Kim, you probably have a lot of leverage with your wine and spirits wholesaler. You are putting two or three million dollars into his pocket. And that's great in that situation. But I will just speak to our experience with wine and beer houses. We were in a lot of wine and spirits wholesalers when we were starting out, because the beer guys wouldn't take us. But over time we've had to extricate ourselves from those situations. There are still some good ones, but by and large they do have at least three major problems. One, they can't do draught They don't have a draught department, they don't do service, they don't clean lines, it's not their world. Two, they want to ignore freshness problems. A wine and spirits wholesaler has two or three thousand items to sell he doesn't have time to check codes and rotate product. Three, in most marie they don't give you full coverage of the entire account base.

In Chicago, we just moved from a wine and spirits wholesaler to a Miller house. The wine wholesaler was very committed to our brand and got it up to a very high level, but they just couldn't seem to go any fun. And went into the Miller network, and matched up the wine house account list to the Miller call list, we found out that the wine and spirits guys weren't calling on 34% of the accounts. They didn't know they even existed. They had never done any business with them, as far as they were concerned they did not exist. We have almost 50% more accounts called on by the beer wholesaler. So if we hadn't gone with the beer wholesaler in that circumstance, we would never have accessed a third of the market. It's not like we couldn't get a distributor, but the distributor we could get shut us out of a third of the market.

GARY MATTHEWS: I think it goes back to developing a partnership with the wholesaler in general, whether in training, and merchandising, or whatever. We've been working with our wholesalers for years on draught freshness and draught quality, it pays off.

KIM JORDAN: Also, you absolutely have to be a player for someone to do the things you want them to do. You can't be barely profitable and expect them to put tons of effort into your brand. That may be one reason that some of us are not going as far and as fast as we'd like.

DAVID HEIDRICH: We sell 80% of our product within 60 miles, but farther away we've gone with a wine guy that wanted to do it. They tell us they're going to make an investment in a cold box, they don't even call it a walk-in. They have a refrigerator in the lunch room, and that's all they know about refrigeration. And I'm about the heaviest thing that their delivery guy has to pick up. And he's not happy about it. A keg of beer weighs a lot more than a case of Maker's Mark.

Editor's Note: The remaining text of the pond discussion at the Brewers Association of America convention will be included in our next edition.