May 2, 2018

Boulder County breweries grapple with industry slowdown

Strolling through Oskar Blues' Longmont headquarters and brewery — a bustling maze of eclectically decorated office space, cavernous storage warehouses, brewing facilities where employees zip around on bicycles, assembly lines packed with a seemingly endless parade of cans and a taproom where staff and the public cheerfully mingle while sipping ales made a few yards away — one could be forgiven for assuming the craft beer industry is cruising along full speed ahead.

But the industry, of which Oskar Blues is an undisputed leader with production facilities in three states and distribution in all 50, is showing signs of a prolonged slowdown.

Following years of explosive growth, both nationally and in Boulder County, the United States craft beer industry has seen that growth rate decline every year since 2014, when annual production volume growth peaked at 18 percent. Last year, that growth rate was only 5 percent, according to data from the Boulder-based Brewers Association.

"Oskar Blues' business — for the first time ever — was less than flat on a national level last year,"brewery marketing director Chad Melis said. "This was the first time in our history that our business was down."

That drop-off is less a function of some deep flaw in the company's strategy and more a function of the changing landscape of the craft beer world, he said.

"Obviously, the industry has matured and there are a ton of breweries and options," Melis said. Oskar Blues is certainly not shouldering the burden of this apparent industry maturation cycle alone. In Boulder, Avery Brewing Co. saw slower sales growth last year.

"We are definitely feeling the same challenges as a lot of people in the industry," Avery's marketing manager, Joe Osborne, said. "We had an awesome boom for a long time, but this a maturing industry and all of us need to batten down the hatches."

A crowded marketplace

The recent dip in growth has coincided with an uptick in competition, compounding the challenges faced by some brewers.

That competition is particularly fierce in Boulder County, historically a hotbed of brewing activity.

With about 50 breweries, the county "has one of the densest concentrations of breweries in the country," Brewers Association Chief Economist Bart Watson said.

The local love of craft beer creates both opportunities and challenges for brewers trying to break into the market or established operations trying to hold onto their piece of the pie.

"Colorado is unique in the sense that craft brewing is a legacy here. This is one the true pioneering hotspots," said Jason Ingram, national sales director for Longmont-based Left Hand Brewing. "The level and quality of beer here is naturally going to be some of the strongest in the country."

Brewers around the country are starting to experience the kind of competitive pressure that Boulder County operations have dealt with for years, he said.

Osborne added: "You want to first own your backyard, but the challenge comes when your backyard is populated by so many people doing a lot of the same things you're doing."

While growth has decelerated over the past four years, by no means has the industry screeched to a halt. Last year, craft operations brewed roughly 25.4 million barrels with a retail value of an estimated $26 billion, Brewers Association data shows.

But because of increased competition, revenue from those barrels is spread thinner and thinner. While craft beer production was up 5 percent in 2017, the total number of small and independent craft brewers — nearly 6,300 nationwide — was up roughly 16 percent, according statistics from the Brewers Association.

The association defines craft brewers as independently owned companies with production of fewer than 6 million barrels of traditional beer styles per year.

"The pie (of craft beer consumers) is definitely expanding, but the industry is expanding faster than the amount of new drinkers we are pulling in," Ingram said.

Standing out in the crowd

Speaking on the vast number of breweries, association economist Watson said, "In a more competitive market, you really have to find ways to differentiate yourself."

Some brewers, such as Longmont's Wibby Brewing, are attempting to spur growth by reaching for a different slice of the overall beer industry pie than their competitors.

Wibby's slice is lager, which forms the basis for all of the brewery's offerings.

"We saw an opportunity with a niche that was being totally underserved or even ignored," brewery cofounder and vice president of sales Ted Risk said. "Having a product lineup that is completely differentiated allows us to stand out."

The 2.5-year-old brewery recently expanded its distribution network out of Boulder County and into Denver.

Avoiding stagnation and dreaming up innovative ideas are critical to the craft industry's long-term success, cofounder Ryan Wibby said.

"People think everything has been done before — take music, for example," he said. "People wonder how anyone could come up with a new melody. But people always come up with new songs and new music nobody has ever heard before."

Just brewing a great beer won't cut it

Because competition has become so fierce, simply brewing fantastic beer is no guarantee of success, experts say.

"You can't just have great beer because there's so much great beer out there," Wibby said. "You've got to be exceptional in every facet of the business. You've got to have great branding, great customer service, a great brewery experience."

Building taprooms on-site at breweries is a way companies seek to showcase their products and connect with the communities where they operate. These taprooms often host live music and events.

"In Longmont and Boulder County, there are new taprooms popping up all the time," Left Hand's Ingram said.

At first glace, this may appear to bode well for the industry. But Ingram warned that breweries should take care not to grow their taprooms at the expense of sales at bars and restaurants.

"You're asking (bars and restaurants) to support you by selling your beer, but you're also in direct competition with them," he said. At Left Hand's taproom, "We don't maintain super late hours and it's not cheaper to drink in our tasting room because we don't want to undercut our partners."

During the recent growth slowdown, breweries are tweaking production logistics and sales strategies to maintain an edge.

"We have made a ton of production process changes to get more efficient," Avery's Osborne said.

He added that in addition to overhauling the company's branding and product lineup, "We're putting more sales focus into the Front Range and Colorado with a focus on going deeper rather than broader."

"We've always tried to be as nimble and agile as possible," Osborne said.

At Oskar Blues, Melis said they have tried to improve "innovation on the canning and packaging side of things."

"That's going to have to continue at a higher level," he said. "This all goes back to getting better — innovation doesn't have a finish line."

Ingram added: "You need to be making great, quality beer, but also need to be maintaining financial discipline, watching your margins and resisting the urge to expand too quickly."

He pointed to the San Diego-based Green Flash Brewing Co., which was recently sold at a foreclosure auction to a private equity firm, as a company that grew too quickly and without enough attention paid to running the business responsibly.

While many in the industry are looking for ways to ignite the pace of growth and expand into bigger markets, some are taking a different approach.

Chris Marchio, whose resume includes a stint as head brewer at Denver's Fiction Beer Co., said, "I believe that this grow, grow, grow model is on the outs."

Instead, he said local brewers can find success by offering one-of-a-kind artisan brews in off-the-beaten-path locations.

Marchio is in the process of launching Knotted Root Brewing Co. in Nederland.

"We are trying to create more of a destination brewery," he said. "Being able to offer a different drinking experience is what we are counting on."

Watson said "experiential brewing" may be a segment primed for faster growth than the overall craft industry.

Closing time

While last year saw the opening of nearly 1,000 new breweries nationwide, 165 existing breweries closed, according to Brewers Association data. That closing rate is up about 40 percent over 2016.

Boulder County establishments were not immune from the market forces that shuttered breweries around the country.

Niwot's Powder Keg Brewing Co. had its final last call in March.

The brewery's owners posted on Facebook last month that the establishment was done in by "long battles with rent costs that outpaced sales growth, on-premise sales that declined with increased market saturation and regrettably low foot traffic."

The most recent local brewery to close up shop was Gunbarrel's Vindication Brewing, which was expected to serve its final beer Saturday.

Vindication cofounder Eric Huber declined to comment on the closing, but the brewery made a Facebook post last week that read, "Though we're heartbroken about closing, we're insanely grateful we have these last few days with all you incredible beer-drinking enthusiasts."

Watson said he expects more closures to come.

"I think the closing rate here might tick up," he said. "It's very rare to have an industry where every business succeeds."

Still a place for newcomers?

While the craft beer industry is crowded and competition is increasingly stiff, there is little doubt there will continue to be innovative and successful brews flowing in Boulder County.

"There is still room for a new brewery to start and to grow into a great regional brewery, but it's tough," Ingram said. "But just because it's tough doesn't mean there aren't great brewers out there who will give it a shot."

Risk agreed.

"I'm sure you'll continue to see some closings," he said. "But if a new place opens up and puts out a quality product — especially if it is a different product — there's probably a place for it."

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