The formation of Craft Brewers Alliance this summer from the merger of Widmer Brothers Brewing Co., Portland, Ore., and Redhook Ale Brewery, Woodinville, Wash., created a portfolio of non-competing craft beers that only could be possible with the creativity of craft brewers. CBA’s story begins with the inception of the two breweries more than 20 years ago, but its purpose continues to evolve with the growing challenges of competing in the beer segment.

 

“One of the things that we started to realize is that the more united we were in terms of the way we were able to go to market, the way that we were able to brew, all of those things helped us meet consumers’ needs and our retailer and wholesaler needs as well,” says Terry Michaelson, CBA’s co-chief executive officer. “As we looked at this, what we knew is that the market is looking for a wide variety of brands that they really like. That’s really what the craft industry is about: quality beer and variety.”

 

The company’s brands now include Widmer’s top-selling Hefeweizen, Drop Top Amber Ale and Broken Halo IPA, and Redhook’s ESB, Long Hammer IPA and Blackhook Porter. The portfolio also features Hawaiian Kona Brewing Co.’s beers such as Longboard Island Lager through a licensing agreement. CBA also owns 20 percent of Kona Brewing and 40 percent of Goose Island Beer Co. in Chicago.

 

In addition to pleasing consumers with variety, the merger offers retailers some peace of mind with their changing marketplace.

 

“For the retailers, with all the consolidation with the wholesalers, they were looking for people that could ensure them great distribution, which we had, but could also call on the retailers and help them figure out how to build their business,” Michaelson says. “As we looked at that, we really felt that joining together would give us the most flexibility in terms of being able to fulfill those needs in the market.”

 

Helping to make its distribution demands easier, CBA holds a distribution agreement with Anheuser-Busch Cos., St. Louis, and A-B owns 36 percent of CBA.

 

The companies’ combined brands account for around 650,000 barrels, and CBA ranks as the third-largest craft brewer after Boston Beer Co. and Sierra Nevada.

 

 

Founded in 1981, Redhook was the brainchild of Paul Shipman, current CBA chairman emeritus, and Starbucks co-founder Gordon Bowker, who came up with the name Redhook. The idea behind the brewery was to target the rising popularity of the import segment, says David Mickelson, CBA’s co-chief executive officer. Mickelson joined Redhook in 1987, and served as Redhook’s president and chief operating officer prior to the merger.

 

Redhook went through rapid expansion on the West Coast in the mid ‘80s. By 1994, Redhook had built its brewery in Woodinville. Also that year, Redhook signed a distribution agreement with A-B, and the following year the company went public, which provided the brewer with equity and capital to build another brewery.

 

The company decided it wanted to be a national brewery and built a facility in Portsmouth, N.H. For many years, the brewer tried to maintain 30 to 40 percent growth rates annually by building capacity ahead of need. Within a few months of opening the Portsmouth brewery in the summer of 1996, the industry started to fall flat. Redhook survived the late ‘90s and early 2000s with a lot of excess capacity, Mickelson says.

 

Being a publicly traded company proved to be beneficial to the small company.

 

“We never had a large debt for anything we had to do, which was extremely beneficial because of the tough years that followed,” he says. “It would have been really challenging to survive, frankly, if we had to borrow that money to build that facility.”

 

In 2004, Redhook and Widmer’s first formal partnership formed, with Redhook signing a licensing agreement to produce, market and sell Widmer Hefeweizen in the eastern half of the country. This set the groundwork for the companies to enter into a selling and marketing partnership called Craft Brands Alliance.

 

“It was created to sell and market both companies’ products in the western half of the United States,” Mickelson says.

 

CBA’s other half, Widmer Brothers Brewing Co., began in 1984 with the ingenuity of Kurt and Rob Widmer. Shortly after the brothers started shipping beer in 1985, they developed Widmer Hefeweizen, an American version of the German hefeweizen, which has become the brothers’ top-selling beer ever since.

 

“That really drove the growth of the brewery,” says Michaelson, who joined the company in 1994, and before the merger acted as president of Craft Brands Alliance. “People were fascinated by the quality product with a kind of unique color and served with a lemon.”

 

Widmer also was unique as a brewer because for the first 10 years in business, the company only sold kegs for on-premise accounts. “A lot of that had to do with Kurt and Rob’s perfectionism,” Michaelson explains. “They really didn’t want to put it into the bottle until they were absolutely certain that the quality would be there.”

 

In 1996, Widmer opened up a new brewery in Portland and started bottling. Shortly after that, it was Widmer’s turn to enter into a distribution agreement with A-B, so that the brewer could gain national distribution while continuing to expand on the West Coast.

 

By the early 2000s, both Redhook and Widmer had started to look at how competitive the high-end segment was becoming, Michaelson says. “We really started talking about ‘Is there a way to work together where we can get the unique aspects of the brands?’”

 

The brewers wanted to keep the heritage of the companies, but in the marketplace be better suited to compete against imports and other craft brewers, he says.

 

The first alliance really wasn’t an original idea for the companies. The Widmer brothers visited Redhook’s operation when they were looking at building their brewery. Widmer also watched Redhook form a distribution relationship with A-B and then formed its own.

 

“There has always been a mutual respect and sort of a give and take,” Michaelson says. “By the time we got to 2004, there had been a long history and trust level built up where we believed that working together in the market that we’d be stronger than just individually.”

 

Craft Brands Alliance provided a learning experience for the two companies. “We discovered that working together really did make us stronger and help in the marketplace,” Mickelson says.

 

The merger of the two companies was the next step, he adds. Whether it was about access to the companies’ brewing facilities for all the brands or how the brewers’ marketing and selling relationship was growing, the merger was about “where we could go together was greater than where we could go independently,” Mickelson says.

 

From a retailer’s perspective, the merger created a more seamless sales operation. “From a national customer standpoint, we had multiple people calling on them to cover separate geographies, but we were able to combine that and make it a little bit more efficient,” says Marty Wall, vice president of sales. “We’ll be able to touch more customers because of that also.”

 

 

Definite efficiencies are gained by owning three breweries with varying capacities. The Woodinville and Portsmouth breweries both have smaller production capacities than Portland, so some ability exists to produce beers closer to the markets in which they will be sold.

 

“One of the advantages we have in having breweries on both coasts, which is really unique for a craft brewer, is that our beer can be fresher when it gets to market,” Michaelson says. “With craft beer, the fresher, the better; it is a full-flavored product.”

 

At the same time, CBA plans to keep the breweries branded.

 

“They’ve grown up that way in the communities, and the local communities have close ties with that,” Mickelson says. “We want to make sure we feature that individual side of each company.”

 

Blending the brands has never crossed the co-chief executive officers’ minds. “They are both unique beers and unique brands to start with and the customer has come to know them and care about these brands because of that,” Michaelson says. “… If you go back to variety, and that being what’s driving a lot of the decisions in the marketplace at this point, variety and quality is what we continue to go back to.”

 

“Why melt them together and dilute the personalities they both have?” Mickelson asks. “We didn’t want to do that. We want to maintain those personalities and take pride in them, and the customer wants to know that too.”

 

 

Driving consolidation in the beer market as a whole are rising commodity costs and a slowing U.S. economy. In regard to increasing commodity costs, barley has risen around 100 percent during the past year due to poor weather conditions and farmers using the land to grow corn rather than barley, reports London-based Business Monitor International. Hops faired even worse, with the cost of some of the most popular varieties increasing by 600 percent. Like many beverage companies trying to offset expenses, CBA posted sales increases for its brands.

 

“There is no question that it impacts the small brewer as much as it does, if not more than it does, the larger brewer,” Mickelson says. “We have the ability to be able to contract some futures and do a few things to try and normalize things over time. We can’t absorb it all, but we’re in a pretty solid position to be able to make it work despite those price increases.”

 

The company certainly didn’t expect the expense structure to change as much as it did when it was looking at the merger, but the combination has benefited the company.

 

“I know we’re not going to change the way we craft our beer, and I know that most craft brewers are going to brew at the same degree, at the same quality, so you’ve got to find other places where you can leverage and save some money,” Michaelson says.

 

In addition to the challenges of increasing commodity costs, the current economy that is leaving consumers with less disposable income is also having an impact on the craft beer segment. While the Brewers Association reported craft beer dollar sales during the first half of 2008 increased 11 percent and beer volume grew by 6.5 percent, compared to the same period in 2007, this marks a slowdown in craft beer sales and volume. In 2007, craft beer volume increased 12 percent and dollar sales increased 16 percent.

 

With the diversity of the craft beer segment, however, the co-chief executive officers find it difficult to lump together the total category’s performance.

 

“I think you have to consider that statistics are difficult to get your hands around because the definition of the craft brewer by the Brewers Association excludes us,” Michaelson says. “The definition doesn’t include the national domestic brewers participating for the first time more successfully in the craft space. Whether it’s Blue Moon or A-B and some of their specialty products, I think if you add those products, which are really in the craft space, the industry continues to grow.”

 

Like other craft brewers in the industry, CBA has seen slowing growth. For the second quarter of 2008, the company generated total net sales of $10.7 million, representing a decline of 9.5 percent on shipments of 76,200 barrels. This marked a 20.5 percent volume reduction.

 

“I think all of the beer business and all of the craft brewers are struggling a little bit on-premise because restaurants and bar business is just down in general,” Michaelson says. “I think that’s the most difficult end of the business. But I think also because of the popularity of the brands on-premise there are lots of opportunities … They are very open to doing business when you have the right kinds of beers for them.”

 

While the grocery channel is posting positive results for the company, overall on-premise is proving to be difficult. CBA’s bottle vs. draft sales vary greatly by market and by brand, but the company’s largest brand, Widmer Hefeweizen, posts 60 percent of its business on draft, says Tim McFall, vice president of marketing.

 

“It seems like the more we push the bottle business, the better our draft business gets,” he says. “We’re always on the Widmer brand trying to accelerate growth of the bottles and we’re having success with that.”

 

With increased interest and competition in wheat beers, Widmer Hefeweizen continues to be a priority brand for CBA going forward. For the Redhook brands, with Redhook ESB’s sales maturing, the company has begun to put a lot of emphasis on Redhook Longhammer IPA.

 

“Longhammer IPA is the No. 1 IPA in the country, and our challenge with that brand is to grow in each market,” McFall says. “Nationally, we’re the leader, but in each individual market we’re not. So our challenge there is to expose Longhammer to more customers.”

 

Giving a boost to the entire Redhook line, this summer, the brand received a graphic update that aimed to tie the beers together on the shelf and improve shelf impact, McFall says. Redhook generates about 70 percent of its sales in bottles.

 

Another area of growth for the company is its licensed Kona Longboard Island Lager, which received national distribution after the merger. Most of the brand’s gains are from existing markets, but Kona Longboard’s distribution is moving to the East Coast market. “It’s a great brand,” McFall says. “It’s a great tasting beer. People are just now discovering it.”

 

In addition, CBA’s investment in Goose Island offers both brewers new opportunities. “Right now, they still sell and market their beers in the Midwest, which is kind of their footprint,” Michaelson says. “There certainly is the potential that we may be able to help them sell the beers outside their Midwest footprint. I think they are excited about the opportunity and we are as well.”

 

CBA also plans to be quick to market with new products, beginning with a limited-release program of specialty beers. This fall, the company re-introduced from Redhook’s archives Redhook Double Black Stout, an imperial stout brewed with coffee. The beer is available on draft in select markets and in bottles nationwide. Positioned at a higher price point, Double Black Stout is intended to generate new distribution at a higher margin.

 

“If you look at what’s happening, even at retail, it’s really in those high-end unique niches,” Michaelson says. “We really see that in the consumer base, the opportunity is really very fertile. What we’re confident on is that people are going to continue to buy our kinds of beer. Now it’s up to us to make something that’s better, more interesting, more unique than imports, major brewers and other craft brewers. I think this is a segment that will continue to do well in a difficult economy.”

 

 

Now that CBA has a portfolio of craft brands to sell, the company is excited to move into new markets and take advantage of the merger to manage its brands through its wholesale network and to its key retail customers.

 

“We’ve accomplished a lot in the last six to eight months as far as just getting multiple organizations together into one, and it took a lot of work from key players in both Widmer’s and Redhook’s organization to get us to this place,” Wall says.

 

“As far as the opportunities go, now that we have our team together, this group as a whole has high expectations for what will happen in 2009. We’ve identified some opportunities in the marketplace where we can invest. We will be able to grow quite substantially, so we’re pretty excited to move beyond the integration process into a more unified group, which is a huge step for us because it took awhile to make that happen.”

 

In 2009, CBA plans to take advantage of the opportunities it sees in the national retail channel, particularly in the eastern United States. “We plan to invest more heavily in the grocery channel, which will allow us to generate more distribution opportunities and provide a more unified look for both our wholesale and our retail customers,” Wall says.

 

The company also doesn’t have any immediate plans for any more mergers or acquisitions. “Our feeling is that we’ve got a great portfolio of brands now and we’re really focused on them,” Michaelson says. “We’ve learned in this industry to never say never, but our focus is on the brands we have now. We think there is still tons of opportunity. There are lots of places where the brands we have now are not in distribution at all. In the markets where we do have distribution, there is still a lot of growth potential. So for now, we’re focused on taking this wonderful portfolio of brands and growing them.”

 

“It’s not all about getting bigger,” Mickelson adds. “It is getting better at what we do every day, and we hope that translates to the consumer.”