Craft Beer CEO Keeps Clear Head On Sales

PORTLAND, Ore. (TheStreet) -- Craft beer is growing, shelf space is shrinking and showdowns with local governments have brewers battling just to get their bottles to drinkers. How does a craft brewer survive?

If you're the Craft Brewers Alliance ( HOOK), you pick up new brands, update your legacy and bargain with the big boys to secure your business future.
The Redhook brand of beer celebrates its 30th birthday this year, and the craft beer segment is stronger than ever.

It's been three years since Seattle's Redhook Ale Brewery and Portland, Ore.-based Widmer Brothers Brewing merged into the Craft Brewers Alliance, and the company's identity continues to ferment. Though its Redhook brand celebrates its 30th birthday this year with bulbous new bottles, and Widmer founders Kurt and Rob Widmer are still in the fold and creating beers, Anheuser-Busch InBev ( BUD) still owns a 32.2% stake in the company, handles its distribution and continues to make fanboys question the alliance's "craft" credibility.

Even the alliance's lineup has been in flux. Craft Brewers brought Hawaii-based Kona into the fold in October, but sold its 38% stake in Chicago-based Fulton Street Brewery and its Goose Island brand to Anheuser-Busch InBev in May.

The latter had an immediate impact on the Craft Brewers Alliance's bottom line last quarter. The company announced earnings earlier this week, noting that the $16.3 million Fulton Street sale in May increased net earnings from $1.7 million during the same period in 2010 to $8.2 million this year. The alliance's sales also increased from $37.2 million from April through June of 2010 to $41.5 million last quarter.

The Craft Brewers Alliance's tweaks and adaptations helped create a brew and business that has grown from 571,000 barrels worth of production in 2008 to 590,000 barrels last year, according to Beer Marketer's' Insights. That's nearly 260,000 more than Magic Hat and Pyramid producer North American Brewing but, despite Anheuser-Busch distribution, is less than the 786,000 barrels produced by Sierra Nevada and far shy of the nearly 2.3 million barrels rolled out by Samuel Adams producer Boston Beer ( SAM).

So can a brewer get its distribution from a big brewer such as Anheuser-Busch and still be considered "craft?" Can distribution agreements with big brewers help craft brewers avoid distribution dustups like the one taking place in Wisconsin? Craft Brewers Alliance Chief Executive Terry Michaelson thinks so and said why, when it comes to craft beer, the consumer's taste trumps the critics' tirades:

How has the Craft Brewers Alliance fared without Goose Island?

Michaelson: We feel really good about our progress and positive about our strategy. Our relationship with Goose Island really was a very positive relationship, but it was primarily an investment in that they sold their own brand and we sold our own.

There were select markets where we helped each other out a little bit, but it really wasn't the centerpiece of our business. It really was more of a financial partnership, so it hasn't had a major impact from that standpoint. What we have been doing in the time since the Goose Island discussions in the spring is had the opportunity to roll out our portfolio strategy and new initiatives.

In that time, our business has been going forward in a very positive way and has been getting a very positive reception from consumers, wholesalers and retailers and, most importantly, our top line is heading in the right direction.

How have your Redhook, Widmer Brothers and Kona brands been performing?

Michaelson: Kona continues to be a very strong brand. It's a brand that people can really have fun with and be excited about, and that connection to paradise in Hawaii is something people can relate to. Kona's been growing around 30%, which is spectacular and presents a lot of opportunity.

Redhook actually had a very positive quarter. We're seeing positive growth in Redhook, which is something we haven't seen in a number of years. It's actually been down in the last few years, but it's now turning the corner and we're getting a good response to the new bottle and packaging. I think some people are discovering it for the first time and some people are rediscovering it.

With Widmer, we're having a lot of fun with beers that reflect Kurt and Rob's roots, which is creating unique interpretations of styles. With the Rotator IPA, we're introducing a new IPA on a rotating basis to explore that category. The 924 Series with some of our high-end beers like Pitch Black IPA and our Nelson Imperial IPA have been doing really well. In fact, our morning conference call indicated that those are 10% of our portfolio sales at this point, so it's kind of a fun, new and hopefully significant business addition.

Redhook puts your company in a rare position among craft brewers by giving it a 30-year-old brand to maintain. How do you bring new energy and drinkers back to that brand?

Michaelson: The interesting thing for us at this point is that beer consumers and craft beer consumers in particular expect variety and diversity in their beer offerings. Although it's a challenge to figure out how to communicate how each brand is unique, that's also the thing that makes it exciting for us.

For Redhook, it's about connecting that unique personality and that quirkiness that's been a part of it. What we're finding is that it's about getting the beer in the right places and communicating it the right way. The challenge is just getting people to experience that because, once they do, we're having a positive experience.

For us it is somewhat unique to have a brand like Redhook that's been around for 30 years, but it's helped in this industry in that we have Kona, which people are discovering and haven't had the chance to experience, and Redhook, which is one of the older brands in the industry where a lot of people are rediscovering, so that helps us deliver that diversity.

One of the places where your company is most able to make up ground on competitors is through distribution, and the partnership with Anheuser-Busch InBev has a lot to do with it. How does that partnership continue to benefit the Craft Brewers Alliance and its brands?

Michaelson: The A-B relationship is about the distribution connection. For them, it was about making sure they had what they considered high-quality craft beers available to their distribution network early on when the segment was just expanding.

Having an integrated distribution system where we're able to get to market directly, where there's consistency in the systems and how they interface and where we can trust the quality, how they care for our beers and how they go to market -- we see that as a definitive advantage we have. We're the only craft brewer that has that aligned, integrated distribution network, which we think makes a big difference in the way retailers get the beer, the way we get to market and the freshness and quality of it.

Anheuser-Busch reduced the CBA's nearly $6 million distribution fee 30% a year ago and a lot of that savings went toward brand promotion. How has that worked out for the alliance?

Michaelson: It's worked out very well, and I think that's reflected in our performance at the top line in the first half of the year, specifically in the second quarter. Shipments of our core brands were up 10%, and I think that's an indication that we've been able to spend the money to help people find and experience our beer.

For the customer, it's about drinking occasions. The customer's looking to have a beer after they've mowed the lawn, at a white-tablecloth restaurant, at a barbecue -- all of those. Our portfolio delivers the styles and the brands that fit those, so having more money allows us more distribution, allows us to do unique sponsorships and events and will allow the consumer to interface. The end result is moving the top line, and that's good financially, but it indicates that the customer is appreciating it.

Your company is one of the few that stakes itself to the craft brewing industry right in its name. At a time when craft brewers are producing not only hundreds of thousands, but millions of barrels a year, what does the term "craft brewing" mean to your company in the greater context?

Michaelson: There are lots of different definitions out there for craft, but for us it really has to do with how the customer experiences the beer and brand.

The customer is becoming more demanding, and we think it has to do with how they perceive the quality, variety and authenticity of the whole brand experience and how they relate to it. They want all of that, and it really has more to do with that relationship than it does to the size of brewer. From the consumer standpoint, they're calling nanobreweries and gypsy breweries craft ... for a lot of consumers, MolsonCoors ( TAP) witbier Blue Moon and Anheuser-Busch InBev witbier Shock Top are craft. It's only people in the industry who start applying ownership tags and volume tags which, to the consumer at this point, really aren't meaningful.

What is it about the craft industry's growth that has made the Alliance's business decisions necessary, especially decisions to adapt its brands for survival?

Michaelson: There's a fundamental change in the beer category as there have been in categories like coffee, where the consumer is looking for a new kind of experience than they have in the past. Brands are still important, but they're looking for quality, looking for variety and looking to be kind of surprised both by the beer and the brand experience, so it becomes paramount to provide that to the consumer if you're going to be successful.

The second thing on the beer side is that there's a lot of consolidation at retail, especially on the off-premise side, with major chains consolidating, so it's important that brewers are delivering to the consumer, but that they're doing it with people who have enough gross margin, who bring enough business support, who are able to support them with both distribution and analysis and discussions of how to build that business together.

What makes us unique is that we have these unique beers and brands and that craft brewing richness of history in terms of creating new and great beers. But on the business side we have more resources and an organization that can deliver to the retail channels what they're looking for.

-- Written by Jason Notte in Boston.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post,, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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