Thirst for craft beer drives expansion at Sonoma County breweries (w/video)

This is a story of how dramatic change comes to a business - specifically America’s $100 billion beer industry.

The words used to describe it vary: revolution, explosion, or massive. But there is no doubting the tremendous growth in the craft beer industry - which boosted production 18 percent during the first six months of 2014, compared to the previous year - is disruptive and has executives at large domestic brands such as Miller, Budweiser and Coors concerned, even though craft beer is only around 10 percent of the overall beer market.

The change can be seen nationally from the hops farmer in Yakima, Wash., who is planting more specialty crops to keep up with the popularity of hoppy beers, to the metal fabricator in Beaverton, Ore., which has orders for new tanks, to the South Carolina lawyer who hopes to lure well-known craft brewers to his state where some supermarkets still do not sell beer on Sunday.

And it can be especially seen along California’s North Coast, a major epicenter of the nation’s craft brewing industry with eight of the 50 largest, from San Jose to Eureka. Some are seeing annual growth rates from 30 percent to as much as 50 percent, and are making plans. Big plans.

Tony Magee, founder and owner of Lagunitas Brewing Co. in Petaluma, intends to play a leading role. Lagunitas, the nation’s fifth-largest craft brewer, this summer opened up its second production facility in a shuttered steel mill on Chicago’s southwest side, complete with a taproom that is generating tremendous buzz.

The new facility will produce about 120,000 barrels this year out of a total 600,000 for the company, equal to about 18.6 million gallons, said Ron Linenbusch, company spokesman. At capacity, the Chicago plant next summer will be able to do 1.2 million barrels, while the plant in Petaluma will max out between 700,000 and 750,000 - not bad for a company that started out on borrowed money in 1993 in Marin County and survived a marijuana bust back in its early days.

During an interview this summer, Magee glanced at his smartphone and read news that Anheuser-Busch Cos. - the “King of Beers” now owned by a Belgian and Brazilian multinational - had opened a new high-end U.S. business unit. His eyes perked up when he read that Anheuser-Busch CEO Luiz Fernando Edmond believes his company has “tremendous opportunity to grow in this segment.”

“You can call this capitulation,” said Magee, known for his rambling Twitter feed and iconoclastic nature. “Now they are playing on our turf.”

While some may dismiss Magee’s bravado, many people in the industry don’t think he is that far off the mark. It’s not a matter of if craft brewers will take a major chunk of the U.S. beer market, but when, and by how much, and who will survive in an industry that had 2,822 domestic breweries in 2013.

It is realistic to expect craft beer will eventually take as much of 40 percent of domestic market, according to beer executives and analysts. Magee said he could see 50 percent within 10 years.

“There is no question the craft beer category has exploded and that momentum is really carrying it all the way through 2015,” said Ross Colbert, global strategist for beverages at Rabobank International, which does business with large international brewers.

Besides Lagunitas, activity has especially stepped up this year driven by a finicky millennial market that craves interesting tastes and experiences, and older drinkers, who thanks to their neighborhood brewpub, are exposed to top craft brewers through specialty offerings, word of mouth, and Internet forums such as BeerAdvocate and RateBeer.

Sierra Nevada Brewing Co. in Chico, the nation’s No. 2 craft brewer, this summer opened its new brewery near Asheville, N.C., an area that has attracted No. 3 craft brewer New Belgium Brewing Co., of Fort Collins, Colo., and Oskar Blues Brewery of Longmont, Colo. Some of the growth was in part because of a specialized brewing program offered through the local community college.

States vie for business

The activity was further highlighted when Stone Brewing Co. of Escondido, the nation’s 10th largest craft brewer, announced earlier this month that it would build a new plant in Richmond, Va., in one of the city’s historic neighborhoods.

Stone received 250 solicited responses and another 300 unsolicited for the new brewery, said Chief Operating Officer Pat Tiernan, in a process that featured grassroots campaigns on Facebook and state economic officials meeting with company executives to offer financial inducements. Virginia Gov. Terry McAuliffe reportedly had a kegerator installed in the governor’s mansion to serve Stone beer.

“We were surprised by the number of responses we got,” Tiernan said. “We didn’t expect that level of enthusiasm.”

Stone isn’t just looking domestically, it’s also planning a brewery in Berlin.

The change is noticeable in South Carolina, which didn’t open its first brewery until 1994, said Brook Bristow, general counsel for the South Carolina Brewers Association. It now has 20 craft brewers and 13 brewpubs and the drive to lure Stone was so fervent that the conservative state Legislature passed a bill - dubbed the “Stone Bill” - that lifted many restrictions on breweries.

“Things are starting to evolve at a pretty good pace here,” said Bristow, who added state economic officials are now prepared for the next expansion by any craft brewer after losing Stone to Virginia. “Beer drinkers are so much more educated than previous generations. It is definitely growing fast.”

The change also can be seen in the hops fields of the Pacific Northwest. For example, the 11 hops growers that represent Yakima Chief-Hopunion LLC are finding that they are now having to plant more aromatic Simcoe hops, a popular variety used by Lagunitas in its beers such as Hop Stoopid Ale. The company produces about 3 million pounds of Simcoe annually, and plans an additional 1 million pounds next year, said Steve Carpenter, president and chief operating officer.

“It’s definitely created some challenges for us, that’s for sure,” Carpenter said. “They are definitely taxing our resources.”

But concern has mounted whether the growth can continue, given the demand for resources used to make beer: water, malted grain, hops and yeast. California brewers, aware of the drought conditions in the Golden State, have noted the availability of water in their expansion plans, as well as cost savings in distribution with a refrigerated product. (Lagunitas had been spending $150,000 a month in freight costs prior to the Chicago plant opening.)

Richard G. Norgrove, brewmaster and chief operating officer for Bear Republic Brewing Co. in Healdsburg, noted that it appears the malt barley crop this year will be very uneven, likely driving the price up in an increasingly competitive marketplace. “Word is starting to get out about this,” Norgrove said.

Bear Republic has already taken steps in sustainability at its new plant in Cloverdale that is expected to come online early next year, striking a deal with the city to bring more wells into production by prepaying for their use. “It gets down to the ability for people to manage their resources,” Norgrove said. The brewery is the 36th largest U.S. craft brewer.

Unlike Lagunitas, Bear Republic is looking at more limited growth in its business plan with a regional focus on the California market, a likely future plant in the San Diego area and launching a whiskey line. It has downsized from being sold in 35 states four years ago to 22 states in order to maintain quality. Norgrove’s motto is: “Let’s be stronger in our backyard.”

Russian River holds tight

Others are taking a wait-and-see approach. Russian River Brewing Co. in Santa Rosa has consistently said its has no plans to expand after owners Natalie and Vinnie Cilurzo bought out their other investors, despite a fervent fan base that lines up for hours on end when it offers up its triple India Pale Ale “Pliny the Younger” each February.

Colbert of Rabobank said he sees an eventual stratification of the industry where the top 25 craft brewers will “have a bright future” and rest of the top 60 will have to make a decision on how ambitious they want to be.

“The mid-tier, 30 to 60, those guys in some cases are not quite bankable,” he said. “Yes, a bank will lend, but it will lend in assets. .?.?. The smaller you are, the harder it becomes.”

At Lagunitas, the future appears bright as Magee has had talks with people from GE Capital about financing the company’s growth.

“Despite all the troubles in the world and all the economic issues, we can probably finance what we want to finance,” Magee said.

Private equity is interested, though some scoff at the quick returns demanded by Wall Street that clash against the artisan appeal of an industry started mostly by home brewers. Boston Beer Co., the nation’s largest craft brewer, is publicly traded on the New York Stock Exchange, but it is a unique example. Given its size, many question if it should still be considered part of the industry.

There are exceptions. Uinta Brewing Co. in Salt Lake City recently accepted an investment from the Riverside Co. “Riverside brings some much needed business acumen and financial support to the table for Uinta; sure I’ve been at it for 21 years, but at heart, I’m just a brewer,” Uinta founder and CEO Will Hamill wrote in a blog post on Aug. 29.

Magee is hinting at a third location, and conceptually could see Lagunitas operating a total of five U.S. breweries if trends continue - still a big if.

“This will take some time to get it right and we are in good shape to do so since we are carrying adequate capacity headroom now,” Magee said in email Friday.

That’s also in addition to an international plant, most likely in the United Kingdom, he said.

“There is a generational thing happening. There are a lot of young people coming into the world now, and they never plan to drink Budweiser. It’s something they haven’t given much thought to,” Magee said.

Magee said he realizes there will be a resetting and the growth will eventually level off, given the demand for natural resources, available retail shelf space and changing customer preference.

“Sooner or later the tide will go out,” he said. “My hope is that we will put ourselves in a good spot.”

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.