The State of Beer

After surviving a few false starts, Michigan’s microbreweries are enjoying an explosion of popularity and success. But can the good times last amid evolving regulatory standards, calls for more government oversight, and global competition?
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Scattered throughout smaller Michigan cities and metropolitan areas, and frequently taking up residence in once-abandoned urban buildings, microbreweries and craft brewers have taken a sizeable chunk of the shelf space Michigan retailers reserve for beer — not to mention they’ve made a major push into out-of-state markets.

In a “state of the industry” study by San Francisco-based Demeter Group, Michigan’s craft beer industry grew 20 percent in 2012. In addition, the state now ranks fifth in the nation in its number of breweries, according to Drink Michigan, a group that promotes state-made wine, beer, and spirits. The Demeter statistics include the recent opening of 17 breweries — with establishments in Grand Rapids, Big Rapids, Lake Leelanau, and Marquette — as well as to an existing variety of long-established breweries that are thriving across metro Detroit.

All told, Michigan now has more than 100 craft breweries, and its trade industry group — the Michigan Brewers Guild in Lansing— claims its members deliver a $113 million economic impact for the state. Overall, the global beer industry accounted for more than $2 billion in economic activity in the state last year, according to the Beer Institute Economic Contribution Study.

Scott Graham, executive director of the Michigan Brewers Guild, believes the industry still has a great deal of growth potential. “If you ask around, there are a lot of people (who are) unaware of the fact that there are local breweries in Michigan, let alone more than 100,” Graham says. “The analogy I make is that the snowball is starting to get bigger. Every time it rolls over, it’s kind of in an exponential fashion.”

Microbreweries were a phenomenon in California long before they caught on in Michigan. One of the first to believe microbreweries would be successful in Michigan was Larry Bell, who started Bell’s Brewery in 1983 as a home-based business operating out of Kalamazoo. “California tends to do things before we do them,” Bell says.

Indeed, several leaders of the Michigan craft beer industry say they studied the initial emergence of brewing in California. It dates back to the mid-1960s when a brewer named Fritz Maytag took over a struggling San Francisco brew operation and transformed it, producing what was widely regarded as a quality craft beer. From there, Maytag developed a series of products that became popular in the Bay Area.

In the mid-1970s, what proved to be one of the most successful California craft beers arrived in the form of Anchor Liberty Ale, which pioneered a technique called “dry hopping” that delivers both a sharp taste and a vibrant aroma. In the years that followed, now-legendary California microbreweries like New Albion Brewery and Sierra Nevada Brewing Co. emerged, proving the viability of the concept and stirring the imagination of Michiganders who spent time in the Golden State.

Mark Rieth, principal and CEO of Detroit-based Atwater Brewery, says he became intrigued by the concept after a stint in California during the 1980s. His goal was to see if he could make it work in his own backyard. “I was kind of indoctrinated into the microbrewery scene, the brewpub scene,” he says of his German-style beer.

Michigan took a major step toward its future in the craft brewing industry in 1992, when state lawmakers allowed breweries to sell beer by the glass. Prior to that, the only way microbreweries could earn revenue was through distribution, making it difficult to get a brewing operation off the ground.

 

At the same time, the Legislature reduced taxes on small brewers. The notion of a microbrewery operation began to gain traction in Michigan in the mid-1990s. Brewers like Atwater and Bell, as well as Big Buck and Cain’s, jumped into a growing torrent of business. By the late 1990s, Michigan was seemingly awash in craft brewers and the industry appeared to be on its way to sustained prosperity. But the next step wasn’t that simple.

“You had a lot of people in the mid- to late ’90s getting into the industry who were unprepared for the beer industry and craft beer,” says Ron Jeffries, founder of Dexter-based Northern United Brewing Co. Many of those new players folded almost as quickly as they emerged, and Michigan’s craft brewing industry took a hit in terms of numerical growth, credibility, and consumer interest.

Poor quality doomed many of the early brewers, leaving the survivors to deal with the consumer backlash. “Businesses were trying to put a product in a bottle that was too far away (from its destination), that wasn’t pasteurized, that didn’t have date codes,” Rieth recalls. “If you have a bad product, a customer tastes that product and now they have a bad impression of craft beer.”

The industry also suffered in the late ’90s from a series of distributor mergers, which left a large group of brewers competing for a shrinking offering of avenues to market. Those who survived put a strong focus on expanding their distribution reach and, in around 2008, the Michigan market — partly due to emerging “buy local” sentiments among consumers — began to embrace craft brewers in a bigger way than they had even a decade earlier.

While the Michigan beer industry has seen its strongest growth in the past five years, some of the best-known Michigan brewers were already far ahead of the curve, due to the fact that they were in the business before there even was a curve.

What is a Microbrewery? / click here

Bell’s Brewery is Michigan’s oldest craft brewer, and founder Bell says he started it because he was out of options. “My choice was that I was going to go to jail for the things I was doing at home, so I had to get a license,” he says. He decided to open a home brew store on Burdick Street, near Kalamazoo’s venerable Sarkozy Bakery, before moving to the current Bell’s location on Kalamazoo Avenue. In 1983, the notion that a home brewer could succeed as a viable business earned Bell the nickname Lunatic Larry. “Many home breweries had much more sophisticated equipment than I started with,” Bell says. “I didn’t have any money. I washed bottles by hand and filled them by hand. It was a tough go of it.”

John Linardos, founder of Detroit-based Motor City Brewing Works Inc., says he started his operation in 1995 with inspiration from “booze and stupidity,” after spending time learning the trade and the nature of what he calls the micro-movement. He believed then that the industry would grow. “Who knew it would take 15 years?” he says. “Those years were pretty rough, especially for those who didn’t have taprooms and relied solely on distribution.”

Motor City Brewing Works opened a taproom in 2001. While it helped the operation for a period of time, Linardos returned to distribution to better appeal to specific markets. One of its brands, Ghettoblaster, is aimed at the creative community, while its Motown Lager and other brews are being sold at New York’s Lunt-Fontanne Theatre, which is the home of the new Broadway show “Motown: The Musical.”

“Where we want to be is based on what we’re working on,” says Linardos, who is setting up a new packaging operation across Canfield Street from the brewery. “If it’s Ghettoblaster, we want to be where there is a strong cultural, creative arts community. We’re pretty unique in our different products. The Ghettoblaster brand is its own animal.”

 

Northern United also has a variety of products that require different approaches. One of its signature brands, Jolly Pumpkin, is produced through a time-consuming and sophisticated process that requires the brewery to sell it in substantial volumes in order to make money. “When we started in 2004, it was clear that the market in Michigan was not going to support the volume we needed to stay in business,” Jeffries says. “We realized we wouldn’t be able to maintain our business only in Michigan, and we quickly made some friends and allies in the industry and leapfrogged into markets that were more mature.”

Another Northern United brand, North Peak, has been able to be profitable through a more traditional craft distribution approach that focuses on Michigan and Ohio. Atwater also has expanded nationally, part of a trend that sees craft beer representing 10 percent of the overall beer market — and it’s shooting for 20 percent within the next decade.

Atwater’s current distribution success is a far cry from its early days, trying to persuade local grocers to give its product a small patch of shelf space. “We were the first craft beer in Kroger,” Rieth says. “They didn’t understand us, and they didn’t understand that segment. I remember that in a handful of Kroger stores we had (some) six-pack segments, and they would be on the bottom shelf in the corner, but we would be proud of that. You have to gain acceptance from the consumer, and … it was there for them.”

Rieth says Atwater started marketing to smaller, independent retailers, but eventually was able to gain success in larger establishments. Meijer, he says, was one of the first to bite — with the idea of encouraging its customers to drink local.

Jeffries acknowledges that the current growth in the industry means new players are once again coming in, but he doesn’t believe the result will be a repeat of what happened in the late ’90s. “The difference is back then you had a lot of people getting into the industry that were new to the consumer market,” Jeffries says. “Now you’re seeing fast growth of existing breweries that have been in Michigan and have been distributing for a while. You do see a lot of new entries into the market, with new breweries starting up, but the huge growth is coming from established breweries.”

Even so, Jeffries believes that as the industry grows, so do the problems. “The challenge will be in equipment and raw material needs,” he says. “As we have this explosive growth, it’s a constant new task. How do you handle your raw materials flow by doubling the amount of malt you needed last year, for example? You might need a bigger cooler, so that’s going to be a challenge.”

Some brewers have pulled in the reins, only to come roaring back. “When the economy went down (in 2008), banks were not lending money,” Rieth says. “We went through three years of significant growth, and raising capital was an issue. Do you build it and hope it comes? Do you put in that million-and-a-half dollars’ worth of new equipment? We were filling 50 percent of our purchase orders a little over a year before we did our expansion, and we had to pull out of five states because we couldn’t supply enough product. We decided to focus on supporting local and making sure we didn’t have any out-of-stock beer with our retailers here.”

 

Another unappreciated run-up and expansion of the craft beer business is profits. “Retail has so much square footage devoted to mass market beer that can be converted to craft,” Jeffries says. “The (stores) are making more money on every six-pack of craft beer they sell than mass-market beer, and they’re starting to realize that.”

Sandi Cotter, a member of the law firm Dykema Gossett in Lansing, has closely followed Michigan liquor laws for a number of years and believes the current legislative and regulatory environment is much more friendly to craft brewers than it has been in the past. And she sees the potential for other factors that could fuel the industry’s growth for years to come.

“It seems that the (Michigan Liquor Control) commissioners who have been appointed by this governor (Rick Snyder) are much more open to doing business, to serving the customer — which is theregulated community,” Cotter says. “I think people see opportunities now where they might not have a few years ago, so you grab onto opportunities where they arise and try to take advantage of that to improve your business.”

As an example, Cotter says previous commissioners would sometimes go beyond statutory requirements for granting a sales permit, launching investigations of applicants when the only thing the statute required was that the applicant file a form and pay a fee. At the same time, initiatives by the Snyder administration to slash regulations have the potential to benefit the beer industry, although many of them are tied up in an “omnibus” bill that might never make it to a vote.

Graham, of the Michigan Brewers Guild, says many brewers want to have multiple outlets but are hamstrung by a legislative definition of a microbrewer that limits production to 30,000 barrels of beer per year. Any brewer who goes over 30,000 barrels is limited to only one sales outlet — which was not a major problem when the industry was in its infancy, but has more of a detrimental effect today, given the rapid growth. “It’s cash flow for a growing small business,” Graham says. “There’s all this growth in the industry, but most of it is in microbreweries.” 

(Microbreweries are limited to producing 30,000 barrels annually, but are not limited to the number of locations they may operate.) 

 

Graham also hopes to see the Legislature change franchise laws that may affect the contractual relationships between brewers and their distributors. Currently, any brewer who comprises more than 4 percent of a distributor’s business is subject to state franchise laws, which overrides any contract signed between the two parties. The law was passed to prevent gigantic franchise operations from having too much power in their relationship with small distributors.

But Graham and others in the industry argue that craft brewers can hardly be portrayed as having the economic power of, say, an Anheuser Busch or a Miller, and in most cases it is actually the distributor who represents the larger and more powerful party in the relationship.

“If you look back in history, as brewers consolidated and got larger and larger, they were able to exert kind of an onerous and overbearing influence on the distribution business,” Graham says. “They were able to take the brand away, and a distributor who had built a business would have nothing. But if I’m really a tiny part of that distributor’s business, I should be able to have a contract that is enforceable and not trumped by Michigan franchise law, and it would help the small brewer to be able to make that change.”

Attorney Cotter believes an easing of regulations, especially concerning brewers’ ability to serve and sell beer by the glass, opens the industry to tourism. “We had it with the wineries a while ago and it proved to be a good tourism draw for the state,” she says. “Now I think craft brewing is one (industry) where you can see that kind of growth, because it’s something that appeals to people — a product that’s made in Michigan, and you can come and see how it’s made and do the tasting at the breweries. It’s something that draws people from different areas of the state.”

As regulations are loosened and the market embraces craft beer, Rieth, who plans to open a 7,000-square-foot microbrewery and distillery in Grosse Pointe Park called Atwater in the Park by summer’s end, offers a bit of advice for new players in the market. “It’s all about entrepreneurship, passion, believing in your own product, and being fully capitalized,” he says. “It’s also about being realistic and having a long-term approach, not just trying to jump and say, ‘The craft beer industry is hot and we’ve got to get into it.’ ”

Jeffries agrees, saying that anyone who gets into the market ultimately has to understand that it all comes down to quality — which is much more work to achieve than a lot of people realize. “Brewing beer is a challenge every day,” he says. “It’s an agricultural product, just like wine. I don’t know if a lot of people realize that. It’s also a live product. You’re dealing with fermentation, so you’re dealing with microorganisms that have a mind of their own.” db

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