Chairman Rich.

Rich Doyle president and founder of the Mass. Bay Brewing Co. of Boston assumes chairmanship of the Brewers' Association of America

Rich Doyle has been a high-profile member of the East Coast craft brewing industry for over a decade, as his Mass. Bay Brewing Company has weathered the vicissitudes of small-scale brewing in a tough market. This year, F.X. Matt II passed the chairmanship of the Brewers' Association of America to Rich. In the interview that follows, we talk about the issues that face small brewers in the United States, and we include a sidebar on the fortunes of Rich's Boston-based Mass. Bay Brewing Co. (sometimes better known as the Harpoon Brewery). Our interview follows.

Modern Brewery Age: What decided you to become an industry activist, and join the Brewers' Association of America?

RICH DOYLE: Initially I was looking for some industry camraderie, for lack of a better term. Because there wasn't any industry camraderie here on the East Coast ten years ago. There were just a handful of small brewers on the East Coast at the time, and we were all working really hard and struggling. We had an odd dynamic in Boston, with a large shadow cast by a big competitor. But I saw that it wasn't that way in other parts of the country. I thought it would be interesting to talk to other people doing the same kind of thing that we were. We were four or five years in the business, and we had very little contact with other brewers. So the BAA gave me an outlet for talking to other people with similar professional concerns.

I joined the BAA in 1991, and have been a director since 1995. I found that it was very rewarding that I could reach out for that camraderie, and it was there. I found other people who were very happy to talk to me about their businesses, and what they had gone through. It was personally and professionally rewarding. It was great to have colleagues, finally.

Were you among the first wave of craft brewers to join Brewers' Association?

Yes and no. Many of the Western brewers were already there. Fritz Maytag, Ken Grossman and Michael Laybourne were there. Fred Bowman from Portland was a member.

In those days there were also a larger number of old-line regional members[ldots]

Well, there were more regional breweries back then. Companies like Pittsburgh Brewing Co. and Hudepohl-Schoenling were very active, as well as companies like Stevens Point and Genesee. Those companies are still around, kind of. But in terms of active members, now it's just Matt and Lion, they are just about the only independent older regionals out there.

So the torch has been passed to a new generation of craft brewers[ldots]

I guess. But now you have a guy like Ken Grossman, doing about 400,000 barrels. He's a craft brewer, but that's pretty big. You hit 100,000-200,000 barrels, you're a regional brewer. So we now have some new regional brewers. Then there are some companies in the middle that have never joined, like Yuengling, or Redhook. They both say they are going to join, but haven't yet.

Do you try to recruit these guys?

We try to recruit everybody. There is literally no one in the industry that isn't contacted by us. We contact the big three brewers, the Beer Institute, the NBWA, Gambrinus, Heineken, you name it.

I see it as a set of steps. There are some issues that we all agree on, and there are some we don't. We start out together, and then lose some people all the way up the chain. But I think it is valuable for these companies to be part of this kind of trade organization. We have so many members, and our members are small businesspeople that are frequently in contact with members of Congress, and state legislators.

We are like the canaries in the coal mine. Any of these regulations that are going to whack these larger companies are going to put us out of business. The OSHA ergonomics regulations, which NBWA says will increase the cost per case by 30 cents, would hit us first, and harder. That's why it's important for wholesaler groups and importers to be members of the BAA. There may be one issue that really bothers them. We're not in the same segment, but we are all in the same industry. We have allied memberships for suppliers and associate memberships for anybody else that doesn't meet the criteria for membership. There are a few restrictions in our by-laws that restrict certain companies from being voting members. You can't be foreign-owned to vote, and you can't produce more than two million barrels. The idea is to coalesce our voting membership around common issues.

One of the things I've learned is that you don't have to agree on everything to have successful relationships. Anybody who is married realizes that you don't have to agree on everything all the time [laughs]. Relationships across tiers can lead to intra-industry changes that will be beneficial to everybody.

One example of an intra-industry issue is franchise laws. A supplier might say "Franchise laws are idiotic, let's just rid of all of them." And a wholesaler might say, "The franchise laws are great the way they are, we don't want to change any of them," And that's why neither party can talk about the issue. I don't think that's particularly wise on either part.

In my experience, the first people to complain about existing rules are people that haven't been very successful or haven't done a very good job of setting up their business relationships.

That said, I think that there is room for changes in franchise laws in many states. But it's not a matter of throwing the franchise laws out, or just accepting that the system is great as it is. In many states the laws can benefit from some changes.

Are franchise laws the primary divide for wholesalers and small brewers[ldots]

Yes, that is the primary one. A second example is access to market. Our membership, made up of small brewers, is hard-pressed to oppose any kind of distribution alternative. Whether it's direct shipping by a brewer in a state, or even out-of-state direct shipping. It's hard for us to rule that kind of thing out entirely, when there is such consolidation of wholesalers. Now we also have things like 100% share-of-mind and these supplier contracts. Various big suppliers are trying various things. Some of them will stick, and some of them won't. Miller, for example, seems to be changing their contract approach.

In this climate many small brewers have been thrown out of many distribution houses. Many of the small guys, sub-5000 barrel members, are suddenly finding they can't even get distribution in their own state. When those direct shipping issues come up, they say "We can't lobby against that, we're going out of business!"

We understand that the three-tier system is necessary for the wholesalers to be in business, and we know we need to have a great wholesaler network to be in business. My brewery could self-distribute our own beer in Boston, as we once did. But we couldn't self-distribute in Hartford, Connecticut. To have any kind of reach in the market, a brewer needs wholesalers.

I think wholesalers also need us, and they have to realize that access to distribution is a sensitive topic to us, just like the three-tier system is a sensitive topic to them. It's essential to their livelihood. Some of our members are not realistic about where their beer has a possibility to succeed. But there are plenty of examples where a brewer's beer was selling well, and they were thrown out of a house anyway, with nowhere else to go. I can speak from personal experience on that. We had several markets where we were doing well by any measure, and nonetheless we were terminated.

During the 100% share-of-mind push?

During the last couple of years. There were two markets where that happened. It's very standard in wholesaler-supplier contracts to have a just cause provision. You think "Hey if someone is going to terminate me, it would be nice to tell me what I did wrong." From our perspective, it would be nice to have just-cause provisions for wholesalers terminating suppliers. Was our beer not selling? Was it not fresh?

I wonder if wholesalers have thought about that. But to small brewers that's a basic fairness issue.

Certainly wholesalers operate from a position of strength, relative to small brewers. But of course those laws were designed to protect them from larger suppliers.

Yes, but I think the franchise laws were also written to insulate wholesalers from having to sign agreements with large suppliers that are deleterious to their interests. Well, in my opinion, if they signed all these contracts that came down the line, the laws didn't protect them very well. Not many of those guys liked those agreements. If the laws don't protect them from that kind of thing, why do they need franchise laws to protect them from us?

I think some wholesaler advocates believe that if you remove some of the legal structure, it's like an animal losing its exoskeleton, and the tier wouldn't he able to stand on its own.

Not as far as we're concerned. You see, that's why we're such a great ally. We need them, we really, really need them. I hope they know that.

Besides that, all brewers need them for draft. No major brewer can do draft beer distribution. Even Anheuser, which now basically owns a lot of its big wholesalers. How much Anheuser-Busch beer is distributed though brewery or relative-owned distributorships? That becomes an interesting question.

Anyway, these big brewers could direct ship to Wal-mart and 7-11, and cut out the wholesaler. But they can't do that with their draft beer.

What percentage of craft beer is draft? A lot. Usually 30-50% of a small brewer's business. In states like North Carolina, which is such a strong chain state, if they allowed cross-docking, sending a truck to the chain, you could cut out the wholesaler.

I suppose if there were no laws, and the big guys shipped direct, then it would devolve into a Home-D system, like in New York City, where a guy with a warehouse handles a town, and buys in from everybody, and delivers it in vans to the mom and pop stores.

But that wouldn't be as practical for us small guys. For the wholesalers, I think it's much better from an economic, operational standpoint to have smaller suppliers that really need them. Rather than the big guys, who, when you look at the economics, it is kind of a legal reason that keeps them in the system. Except for draft beer, of course.

I'm not one of those who believes that beer wholesaling is just a protected industry. If you believe it is, then it's something like the goat cheese industry in France. How long can something like that hold up? You want to protect the farmers, and the rural lifestyle and all that. But where is the constituency for that kind of protected industry?

If you look at beer wholesaling, both the supplier and retail tiers are made up of richer, bigger, more powerful entities. If Wal-Mart or A-B wants to direct ship, it's going to be hard to fight them. These companies are huge and powerful, and they don't need wholesalers as much. But we do. So having laws to protect wholesalers from small brewers is ironic, because we are the ones that really couldn't do without them.

For small brewers, there are operational and economic reasons for the existence of beer wholesalers. It's not just some protected industry to us.

How will the BAA work to bridge the perception gap between small brewers and beer wholesalers?

I think we need to work on the issues that we have common goals on. That's why we attend the NBWA\Brewers Legislative Conference in Washington, D.C. I want to work hard and get our members to be helpful on issues that we share. Number two, we have to make sure our membership and our board has clear positions on issues that we want to work with NBWA on. That has been difficult for our association in the past, because we haven't always spoken with one voice. Perhaps they didn't know our point-of-view because we hadn't stated it.

We want to have a good faith attitude about dealing with wholesalers and the NBWA. I have always believed that the NBWA has dealt in good faith. It is incumbent on us to listen to them, and I hope they will listen to us. We want to forge a climate of reasonableness at the national level.

Many wholesaler-brewer issues are not national issues, but state issues. So much of the relationship is based on state laws. We agree by and large on the federal stuff, but we get bogged down at the state level.

On a state by state basis, the small brewers are so few that they haven't had much of a voice[ldots]

That's where we come in. If you look at the power relationship, you would say "Hey, why would wholesalers want to change this law, what's in it for them?" Well, it comes down to a climate of reasonableness. It creates a business climate that is reasonable. That can start at the national level, and filter down. I think we have to recognize that we need each other more than ever. I've said that we need them. But they also need us. I think wholesalers are stronger if they have multiple brands. They are not just taking orders from one big supplier. It's also a diversification play. Who really knows what consumers will want in three or four years? If you look at some of the presentations that Bob Weinberg puts on for the BAA meetings--about how much consumption has shifted from full-calorie to light brands, and the rise of new brands. Things change. If you are a wholesaler, you are a distribution conduit. Small brewers are good, because we bring interest and quality to an industry that can get commodified too easi ly.

Nationally, the specialty/import segment is 20% of the margin pool. That's a great segment to be in. It's not only more revenue per case, but it is made up of smaller suppliers that need wholesalers more than the big guys. Not just because it is the law. We can provide wholesalers with a greater sense of independence. We are partners, and we are not dictating a damn thing to them.

It would he interesting to examine if wholesalers in strong craft/specialty markets had a higher degree of operational independence. You could look at Northern and Southern markets, and I bet you'd see different types of relationships between wholesalers and suppliers. It would be hard to quantify, but interesting.

In any case, our priority is to build a strong working relationship with the wholesale tier. Relationships break down when people state angry opinions as opposed to well thought out ones.

Wholesaler associations were once hostile to brewpubs but eventually they were fitted into the legal structure through compromise.

Brewpubs are interesting topic for wholesale breweries as well. If they are not selling any beer but their own, from a wholesale brewery perspective, they are just taking up real estate.

If a bar is just selling Bud, or just selling its own beer, it's kind of the same thing. At industry events, you want to ask brewpub people: Are you a retailer, or are you a fellow brewer? That's something that most brewpub people don't realize. I had a call from a trade publication, because a local brewpub was taking out its brewery equipment. The slant of the story was that the craft beer business was eroding. I told them that was one way to look at it. The other perspective is that people are looking for branded product. Once there is enough wholesale brewery beer available in a given market, there is less need for a brewpub, because consumers can get a variety of branded products that are made in breweries that can arguably do a better job of it.

It doesn't cost a restaurant owner any more to buy beer from us than it does to make it themselves. If you start dividing 1000-2000 barrels worth of production into depreciation, two brewers, a lab, etc. People say "we do it for $3.50 a barrel variable costs." Yeah, but what are the fixed costs? $60 a barrel. And you have 1500 square feet of brewery space where you could fit ten tables on a Saturday night.

My view on that brewpub selling its brewery equipment was "This is great for craft beer, because I can sell to that place now." That was real-estate that was closed us and to other small brewers. Will there be less craft beer sold in that place now? No it will be different craft beer. It will be Harpoon and Sam Adams and Otter Creek.

I suppose you could argue it's evolution. The brewpub model is the most old-fashioned of breweries.

Yeah, circa 1500s, brewed on premise.

And you're the big fish in their pond.

Yeah, I guess. But we are such different businesses. It's hard to compare them.

One thing that Dan Bradford brings to us is that it is important to reach out to a broader base of brewers, including brewpubs. That's always been an issue internally for us. It's not always been clear that we can offer services that appeal equally to wholesale breweries and brewpubs.

Things like Bob Weinberg's presentation at our convention have a lot of meaning for us, but may not to a brewpub operator. You could do a presentation on what changing FDA mandates on dish-washing, and our members would tune out. Wholesaler relations are not a big issue for brewpubs, and that's one of our main committees. Access to market is one of our top four issues, and I suppose if a brewpub decides it wants to self-distribute it's an issue. A lot of our members have taprooms or separate pubs. For our members, however, the big brewery is the dominant part of the business. You have to have enough common issues to coalesce around, and of course there are many national issues that affect all of us.

You mentioned four top issues for the BAA[ldots]

One of the major issues at the recent legislative conference was rolling back the excise tax from $18 a barrel to $9 a barrel. All the other taxes from that tax increase of 1991 have been repealed, except for this beer tax. The luxury tax on yachts was repealed, but the excise tax was doubled. It seems pretty regressive to me. So we're trying to roll that back, and the BAA is interested in preserving our tax differential. Bight now it is at $11 a barrel, and if that roll-back occurs, we would want to make some adjustments. That excise tax issue, and the preservation of the differential is a key one for us.

Second, we want to disseminate positive messages about the industry. I think that because of the poor stock price performance of the public breweries, there is a perception the craft beer business isn't doing very well. We're selling more craft beer now than we were when everyone was writing about us and loving us. So are we doing better or worse? The growth rate is less, but the amount of beer being consumed is more. The thing that no one tends to write about is that the price points are a lot higher. That's certainly true for the markets that Mass. Bay is in. All the leading brewers have raised prices in the past year, but it's an untold story as the '96-'97 beer market was flying we were seeing a lot of $4.99 six-packs of craft beer. Not anymore. Pricing is very different today. So we're looking at better prices and higher volume, with a real uptick in volume in the last 6-9 months. So I want to see public perception catch up. I suppose if we're selling more beer at higher prices, maybe there is no proble m with public perception. Maybe the only problem is with some parts of the business press. But whatever it is, it's bad for us if people have a misconception that things aren't going well. So we want to set the record straight.

Third, we have access to market issues. We have a consolidating wholesaler environment. That means we have fewer opportunities for our members to get product to market. We want to pursue avenues to increase our choices, opportunities and our sales. We want to make sure that these opportunities don't decrease.

Fourth, we want to play an active role on issues that involve responsible drinking. Whether that is attempts to roll the blood alcohol content level back, to .10. to .08, or to nothing. It's issues of alcohol education, it's issues regarding health benefits of moderate consumption. Those are all issues that we take positions on, and in some cases public positions.

I think the BAA can play an important role in this area. I think the public and the press sometimes take a jaundiced view of big companies. Although on this score, I'm not skeptical about what the big companies have done. The large brewers of our industry have been very good on this score. They have been very responsible, and they have spent a lot of money spreading the word about responsible consumption.

There are other industries that get a lot of flack. The gun industry, and the tobacco industry. I don't even like mentioning them in the same sentence as the beer business. Having a beer or having a gun. Having a beer or smoking three packs a day. They are very different.

I think our industry has been very up front about alcohol education, and the leaders of the industry has done a good job. But small brewers can play a role too. There are a lot of us, with a lot of voices. Those people who are skeptical about the motives of big companies, might not be so skeptical about us.

Legislators, for example.

Sure. I think we can work hand-in-hand. There is nobody that doesn't take this responsibility seriously. We're all aware of our responsibility as corporate citizens. I think it's beneficial to have a public policy dialogue about these issues. We should engage more people in things like alcohol education. One of my favorite things is to look at areas where it might be handled better. Let's look at underage drinking. If that's a problem in the United States, let's look at places that have similar economic, cultural and climactic conditions.

Like Europe?

Yes, let's take Europe. You've got your British soccer fans, but overall the Europeans may have some better attitudes about drinking. They are much more stringent about their blood alcohol level, but they also have a much different drinking age. That mix of introducing people to alcohol at a younger age, while holding people more responsible for the level of alcohol in their blood seems to work well. I'm not advocating this from the standpoint of the BAA, but I think it is worth looking at. I was talking to some Congressional staffers at the conference, and they were pointing out that we have drinking age laws that are broken by such a large proportion of people that the citizenry isn't taking this law seriously in the United States. This is not an issue on the agenda of the BAA, and it is not an issue for our company. I'm speaking philosophically. It's strange to have a law that is broken so routinely. It could become like the 55 MPH speed limit.

I think we should have more parental involvement in alcohol education. Should you have your first beer at age 19 or 20 with your frat buddies? In secret? You should have your first beer with your mom and dad. I did. My children will. At my children's private school, they have outlawed alcohol on campus. So even at receptions for parents they can't serve alcohol. I think common sense can get lost. One group says "We've got the 21-year-old drinking age, and that's the way it will stay." And another group says "We're staying with .10, not .08, screw you. Maybe an 18-year-old drinking age with .05 BAC would be better public policy. Again, I am speaking philosophically, and this does not represent any BAA policy agenda.

The good thing that is happening is that alcohol related driving fatalities are down, as are the other measures of alcohol abuse. So things are working.

You wonder if that is due to the laws[ldots]

Or changing demographics. It's like the declining crime statistics. That's because there were fewer 21-year-olds out there for awhile, and we had a lot more people in prison.

Yeah, do the math.

Right, do the math. We will have an upsurge in the young population in the coming tow years. Unfortunately, I would expect that alcohol-related fatalities might rise, given the larger number of younger people. It's really tough to heat numbers like that.

Anyway, those are the four things that we will be working on. We will also be trying to expand our membership. We want to represent a broader swath of the industry, and be more effective at doing so. That means we will take positions and our membership will espouse those positions to their elected officials. That is the best way to effect change. Take clear positions, and go out and fight for them.

You have some very solid growing companies as members now.

Absolutely. We represent a substantial part of the craft beer in the industry. We have the Boston Beer Company as members, which pushes us up there in volume terms. Yuengling, Redhook and Pete's are the only absentees. Pete's used to be a member, but now they are owned by Gambrinus.

There are a few 20,000-barrel brewers that aren't members. In the Midwest we're in pretty good shape, and in the West we have everybody but Redhook. But there are many in the 5,000-20,000 barrel range we don't have. We will be going after them, but people have to see the importance of joining.

The "local" aspect of the small brewery movement may hinder that bigger perspective.

We do have a lot of 'rugged individualists" in this business. They are in their own narrow market, focused on their own business. Some people don't write checks for stuff that doesn't keep the lights on. Some people don't have the resources, and a few are cash-flow negative. But I suppose there is also some thought that, "The guys at the BAA are smart guys and they're doing a good job, what do they need me for? I'm busy. And incidentally, I don't have to write a check." I suppose there is some of that.

For me, joining the BAA was the result of a search for collegial relationships. For others it might be a wholesaler issue they need help with. Membership is not cheap, and each company will have to decide whether membership makes sense for them. But the issues we are tackling are important, so in my opinion people should join and get into the conversation. I don't see any other group effectively staking out these issues. There is no one else doing it, even ineffectively. If any of the issues we have been discussing are important to a small brewer, they should come on board, and join the Brewers' Association of America. We need their voice, and we need their opinion.

Rich Doyle on the Harpoon Brewery and the state of the craft brewing market in New England

What is the status of this slow-motion "shakeout" that we hear about?

Well, if you look at a three or four year time horizon, it has been pretty steady. It's not a six-month event, but it's steady. You have a company like Catamount shut down, with the creditors locking out the employees. They are done. You look at Pilgrim here in Massachusetts, and Ipswich looking to reinvent themselves. Independence in Philly going out of business. And the Frederick bubble burst. It remains to be seen what Mr. Snyder will do with that. That was a kind of controlled implosion, that could create a black hole. They have good little brands, but show me the history of successful management of declining brands. Talk to Bob Weinberg about that. How many times can you bring back a brand? Corona is one example, but very rare. In the craft segment, these are from very small bases. How do you take these small brands and make them successful? Maybe one of them. But you can't revive a bunch of them.

You might lose the authenticity. You don't have the story of a hunch of young guys starting a brewery.

You are better off starting from scratch. After a while, no one who understands how it worked the first time is around anymore. Companies like that need marketing, not sales. An ounce of marketing is worth a pound of sales. You need brand focus and brand concept. You've got to plant it in people's heads.

The segment hasn't really expended to much of its resources on marketing[ldots]

Well, which part of the segment? Jim Koch has certainly done some marketing.

But I think more crafters are like Sierra Nevada, that doesn't spend anything on marketing.

True, but Sierra Nevada has a very well-branded product. You can brand yourself without spending a lot of resources on marketing. On the flip side, you can spend a lot of resources, and it won't necessarily work. I've seen a recent marketing effort by a craft company that is staggering. I wonder if the cost per barrel is not the highest amount ever in the history of the beer industry, in terms of dollars per barrel sold. We spend a fair amount of money in this market, and this company spends four times as much as we do, and sells almost nothing. You can spend a lot of money, and it won't always work.

A growing number of craft brewers have well-established brands[ldots]

Yes, there are a lot of success stories. Summit, Boulevard, Goose Island, Deschutes, New Belgium and Abita. All BAA members, and all very successful in their home markets.

But there are some companies hurting, especially on the East Coast. The East Coast is a tough market.

You guys certainly had your struggles.

In this market, we're high-profile in some ways, but nationally we're not very big. There are companies that are out in the middle-of-nowhere, U.S.A. that are much bigger than us. We're in this great market, so why is it different? Maybe they are great brewers, and I know they are. But also this is a different market. Imports and Sam Adams are bigger players here than in those markets. The roots of those strong brands are just much deeper here. That's why I think it has been difficult on the East Coast. We have been fighting a stronger headwind right along. The market has developed, but our penetration level is less as a group. If you throw Sam Adams in, they have such a strong share, that's a lot of volume. Out West, in markets that haven't been as receptive to imports and Sam Adams, five or six guys might split that same volume up.

Will this market will continue to develop?

Sure. I'm optimistic. As we improve our products and our brewery and our sales force and our marketing, we will continue to grow. I don't think some light switch will be thrown and the East Coast becomes the Pacific Northwest or the Bay Area. But if you like that market, go build a brewery out there. It be slower here, but things are going well.

Scale is an interesting thing. We can do it better and cheaper now than we did it before. Adam Smith was right. We have two full-time lab people now, while we used to have two full-time brewers. It's nice to be able to afford the people and equipment to do things really well, and to do it in a less painful way. Our product is better than ever, and our work environment is better too.

We have plenty of capacity in bottling and packaging, but this is the fifth year for our brewhouse. It's small, and it's fine for us now, but we may need to bump up capacity. We would love to add a new bank of fermenters and we may put in a new brewhouse, to add about 50% capacity. There's an uptick in the market, and we could put the brewhouse where our taproom is. Capacity comes first. We can relocate the taproom elsewhere.

The United States is the best place in the world to be a beer drinker in the year 2000. Not only because of what our industry has done, but because we have great choices. In other parts of the world, they have great tradition, but not the diversity of styles. In each region, there are specialties. Here in the U.S. we have it all.

Article Details

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Publication:	Modern Brewery Age
Article Type:	Interview
Geographic Code:	1USA
Date:	May 8, 2000
Words:	5594
Previous Article:	Craft brewers bounce back.
Next Article:	Switching to Imports.
Topics:	Breweries Management Brewing industry Management Malt beverages

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