How Tapping the Jewish Beer Market Begat a Plan

An earlier version of this story specified incorrectly that Shmaltz Brewing was certified kosher by The Union of Orthodox Jewish Congregations of America, known as Orthodox Union.

SAN FRANCISCO ( MainStreet) -- The craft beer industry can refer to itself as a community all it likes, but it took the help of a much older, tighter community to help Shmaltz Brewing founder Jeremy Cowan get his business flowing.

Back in 1996, Jeremy Cowan thought he would get some laughs by making the country's only Jewish celebration beer. He brewed 100 cases of Genesis Ale and delivered it around Northern California just in time for Hannukah.
Brewer Jeremy Cowan describes in Craft Beer Bar Mitzvah how he turned Shmaltz Brewing from a lark into serious lager.

Fifteen years later, his Shmaltz Brewing and its Saratoga, N.Y.-brewed He'Brew and Coney Island Craft Lagers have outposts in New York, San Francisco, Atlanta and Chicago, a 10-person staff and $2 million in annual business. Instead of following the traditional craft beer marketing formula of growing a regional business around a brewery location, Cowan contracted out his brewing and took it to a few dozen communities across the country with strong, sizable Jewish populations. Cowan even had all of Shmaltz's ingredients and materials, brewing process and brewery conditions certified kosher.

As Cowan notes in his book Craft Beer Bar Mitzvah: How It Took 13 Years, Extreme Jewish Brewing and Circus Sideshow Freaks to Make Shmaltz Brewing Company an International Success, released last year, that nothing came easy for the first decade. At various points, Cowan was tens of thousands of dollars in debt, paying distributors roughly 80% of the company's take and still figuring out partnerships with retailers such as Whole Foods ( WFM).

In recent years, however, Cowan has turned potent brews such as the 15-malt, 15-hop, 15% alcohol-by-volume Jewbelation 15 into profit. His business model has become a template for other niche brewers. His beers, meanwhile, have become industry favorites.

He'Brew's Jewbelation 14, Vertical Jewbelation, Bittersweet Lenny's R.I.P.A. (named in tribute to comedian Lenny Bruce) and Rejweventaor 2010 Year of the Grape all took home gold medals at the 2011 World Beer Championships. Its Coney Island, Albino Python, Sword Swallower and barrel-aged Human Blockhead lagers from its Coney Island line also came away with gold.

We spoke with Cowan about his early days as a struggling brewer, how he finally broke even and how the burgeoning Jewish beer market eventually brought him success:

According to the book, Shmaltz Brewing had a really tough time of it for many years before finding even moderate success. How did you make it from more than $50,000 in credit card debt and peeking at other brewers' plans to gold medals at the World Beer Championships?

Cowan: I didn't make it for years. It wasn't until Year 8 that I broke even for one year and, cumulatively, we're still working on breaking even in 15 years.

We're profitable each year now since 2004, but for years and years it was a challenge to sell enough beer to cover the cost of running the business even without owning a brewery. Craft beer has changed so much so quickly in the last few years to where you can start charging better margins and people are willing to pay more for better products.

You can carve out more and more niches in the industry that just didn't exist five, 10 or 15 years ago. It's been a bizarre combination of a lot of luck, great timing and a lot of work to survive the lean times and get to the point where we can grow.

We're still a small company. We're a boutique beer company even after 15 years. We brewed 9,000 barrels this year. Sierra Nevada does that every day.

Shmaltz has made Kosher certification a key element of its business. Why was Kosher certification important when brewing's core ingredients and processes usually fall under Kosher guidelines?

Cowan: Kosher certification is an interesting area. There hasn't been a huge demand for it in the beer market, but I thought it would be important to get all of our beers Kosher certified so the community would be conscious of the fact that they could bring the beers to celebrations, give the beers as gifts and enjoy the beers in their homes or at restaurants that they want to patronize.

Kosher certification is three elements: the ingredients in the beer, the brewing process and the conditions of the brewery. For us, it's pretty straightforward since we're for the most part using grain, hops, yeast and water. Some beers that use ingredients like the sacred fruits can get a bit more complicated, but we just wanted to make sure that everyone was confident that the products could go anywhere the Jewish community wanted to bring them.

What kind of response has the beer received within the Jewish community?

Cowan: It's been amazing. From the beginning, I got tons of support -- and it's nice to be the only fish in a very small pond sometimes. That's exactly what I've done with the He'Brew brand. I've carved out a pretty good niche in the craft brewing community.

In the Jewish community, if you look at the national Jewish brands that have survived the last few years, it's just the big ones like Kedem and Maneschewitz. Those are big companies with a huge array of products, but the younger, more contemporary brands like J-Dubs -- a Jewish music label -- and Heeb magazine have been fortunate to survive a very difficult business model because so many people in the community have been so supportive.

Has the book tour turned on people who weren't familiar with your beer to the product?

Cowan: People will say to me sometimes, "Oh, He'Brew, I see your stuff everywhere now." It's very gratifying and completely unrealistic. We still have a giant portion of the Jewish community, even Jewish beer drinkers, who have never heard of us because we don't advertise or have a big marketing machine. We do hand-to-hand word of mouth and very organic marketing.

Maybe one day we'll have the ability to place ads, but for the moment it's word of mouth and endless in-person events for myself and my staff. My staff in Chicago, Atlanta, San Francisco and New York has expanded what I could have done literally tenfold now that there are 10 of us.

Speaking of those cities, your nonregional, far-flung business plan is fairly unorthodox for the craft beer industry. How difficult has it been to grow using this model and how hard was it to build the network?

Cowan: Originally, I knew that I would never sell enough beer in one area to run the business, and that's exactly what happened. It wasn't until I expanded to about 20 markets around the country where there was a Jewish community to try to reach those folks that I started breaking even.

What really happened is that my strange little business model of selling a little bit of beer in a lot of places ended up being the perfect business model as craft beer exploded over the last five years. Instead of searching for a preponderance of beer drinkers in any given market the way that Sierra Nevada or Redhook ( HOOK) or Boston Beer Co. ( SAM) started, my model actually works for a boutique brand so that I could just find that portion of cult following everywhere in the country -- whether it was in Raleigh, N.C., Cleveland or California.

That model ended up working for people like founder Patrick Rue at The Bruery in Orange County, Calif. or brewmaster Ron Jeffries at Jolly Pumpkin Brewery in Dexter, Mich.. It continues to work for certain products where you're not really be able to make enough beer to service the whole country or you're making special beer that costs a lot and takes a lot of time to make.

When you look at some of the brewers who you were both up against and brewing with in the very beginning, a bunch are no longer brewing today. When a craft brewer cites Pete Slosberg and now defunct Pete's Wicked Ale as a contemporary, it's a good sign they've been around a while.

Cowan: Pete actually lives right down the street from me in San Francisco. It's also interesting that people have taken very different paths on purpose.

I was conscious of keeping small and making decisions that basically guaranteed that I could keep control of the company and grow more slowly. You have to have the money to buy ingredients to keep reselling the beer and I was coming at this with a very limited budget and shoestringing it every step of the way.

Growth for growth's sake is not particularly a great strategy in craft beer. Growth for margin, profitability and sustainability is, to me, a better plan.

A lot of your initial margins seemed to go toward paying to get your beer out there. At one point in the book, you mention that four out of every five dollars Shmaltz brought in during its early days went toward putting it on trucks.

Cowan: That's something the average consumer hasn't been educated about, and it's a real problem for the industry.

When you buy a craft beer from either Sierra Nevada or Shmaltz Brewing, you're literally only paying for the ingredients, labor and overhead to make that beer, with a very minor profit margin built in. You are not buying the kind of margin for bigger beer companies that allows them to become monopolies by marketing so heavily to everybody.

We're competing in an industry where the rules are completely upside-down for what we're trying to accomplish. I complain about this all the time. Small beer companies should have charged $20 a six-pack 20 years ago. If they had come out of the gates at that time and set the price point where boutique wineries did, it would be a very different beer market.

I don't know if the volume would have been where it is, but we definitely would have had health insurance a long time ago and a little bit of money for sales and marketing. But craft breweries were started by guys who were a lot more passionate about the production side than they were about sales and marketing, so they didn't build in that giant cushion the beer world demands to get the word out.

That's a huge differentiation for me as a contract brewer to say that we have multiple yeasts, alternative brewing processes and outrageous extreme beers.

When prices increase on your more premium beers, does the playing field change a bit? Are your closest competitors necessarily beers?

Cowan: I think it is funny that now that some of those 22-ounce beers and 750-mililiter beers are sitting on the shelf, you look at it and say "My God, that Allagash is $16.99" or "That Bruery is $22." If you're lucky enough to get something from Lost Abbey or Russian River and go over to the wine section, you see that a bottle of mass-produced cabernet from a giant international wine producer is $25. It's a great time to tell that story over and over, especially at restaurants where there are hundreds of wines on the lists, but now they have to add great craft beers. Especially in places like New York, San Francisco and Chicago.

Those premium beers played a big role in making Shmaltz profitable. When did the company end up turning the tide?

Cowan: For our 10th Anniversary in 2006, I put out two extreme beers called Monumental Jewbelation and Genesis 10:10, a 10% pomegranate ale, and a rye I.P.A. called Bittersweet Lenny's R.I.P.A. Those were three big, bold beers in 22-ouncers that were a couple bucks more for each beer.

At the time I didn't have the chutzpah to charge as much as Dogfish Head Brewing or Stone Brewery was for their limited anniversary beers, but I certainly charged more than I did for our regular beers. All of a sudden, our little distribution network around the country that I'd been working with for several years was able to take a half-pallet or pallet of these special beers, get shelf space and get a great margin for the distributor and retailer. That confluence of distribution and creativity is what turned Shmaltz into a manageable business model.

You're brewed at Old Saratoga Brewing, which is owned by Medocino Brewing. How much of the brewing input comes from you and how much comes from your brewer?

Cowan: That's another very unusual aspect of our business plan, the contract brewer. Having some of the pretty exotic beer recipes we have is basically unheard of in contract brewing.

Contract brewers want to make seven- to 14-day beers and they want to crank them out and put them in huge production runs. I never could have done what I've done with beers like Jewbelation and with the barrel-aging program we have at those facilities.

-- Written by Jason Notte in Boston.

>To contact the writer of this article, click here: Jason Notte.

>To follow the writer on Twitter, go to http://twitter.com/notteham.

>To submit a news tip, send an email to: tips@thestreet.com.

RELATED STORIES:



Follow TheStreet.com on Twitter and become a fan on Facebook.

Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, 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.

More from Investing

The Stakes Are High for FAANG Stocks This Time Around

The Stakes Are High for FAANG Stocks This Time Around

This Market is Comparable to Getting Into a 'Fist Fight'

This Market is Comparable to Getting Into a 'Fist Fight'

Profit From the Good Side of Bad Selloffs: An Illustration

Profit From the Good Side of Bad Selloffs: An Illustration

Data Regulation on FAANG's Could Just Be Underway: Cramer's Investing Teach-in

Data Regulation on FAANG's Could Just Be Underway: Cramer's Investing Teach-in

3 Things Investors Can Do to Stay Strategic When the Market's Volatile

3 Things Investors Can Do to Stay Strategic When the Market's Volatile