The View from Alaska.
Geoffrey Larson is president and co-founder of one of America's northernmost brewing outposts, the Alaskan Brewing Co. of Juneau.Recently we interviewed Geoffrey Larson, president and co-founder of the Alaskan Brewing Co., one of the fastest growing small breweries in the United States.
Modern Brewery Age: What's going on at the brewery these days?
Geoffrey Larson: We are in the midst of summer as far a production. We're putting in some new equipment, adding some noise-abatement walls, training some new hires. But mainly we're into the routine of summer.
You're cranking up production levels?
Quite a bit. The period from December through February we save for a lot of routine maintenance issues. We also did a lot of our market surveys, and our annual business reviews with wholesalers. We tried to tie up the loose ends from 1999, and get ready to rock in the year 2000.
How are you projecting 2000 for craft beer?
I'm pretty bullish. The marketplace is trending strongly. Some major consolidations have taken place in the trade, and so the I'm optimistic. We're trending up 18% in first quarter, which pretty much matches what we did last year, we were up 18% year-end for 1999.
When you speak of consolidation, do mean on the brewery side with some of that shakeout stuff we've seen.
Well, yes, but I think the word "shakeout" is inappropriate. When I look back on the performance of the imports over the last 15 years, there was a five year period from 1989 and 1993 where they saw decreases and flattened sales. Our "shakeout" was just a zero growth year, and we've just picked up right afterwards.
In terms of consolidation, there has also been substantial consolidation in the wholesaler network, and that's very significant for the small brewer. There is a change in the way that small brewers have access to wholesalers. The major brewers have done a fairly good job of commanding 100% of the wholesaler's attention. Fortunately, I think that is starting to relax a but, due to the wholesaler's need for a broader book to be sold to the retailer. Consumers are demanding a broader selection of product.
Miller has seemed to back off a bit, but there are some important market access issues at stake[ldots]
No question. Our market is fairly well-defined, we're in Northern California, Oregon, Washington, Idaho and Montana, and obviously Alaska. We started our business in 1986, and from '86 to '96, we would always call and interview every wholesaler in every new county or new market. Up until '96-'97 we could generally get interviews with all of them, and we would choose the best match in terms of chemistry and potential performance. But in '96, '97, and '98, we suddenly found that wholesalers wouldn't even return our calls. This happened especially as we were opening markets in California. In certain counties, there wasn't any interest in even meeting with us.
Do you think it was due to exclusivity or market saturation?
Definitely exclusivity. There certainly was a proliferation of brands, and that was confusing for consumers, and difficult for retailers and wholesalers to sift through the wheat and chaff. The reason I think it was due to the exclusivity desires of the majors, is because we have a remarkable track record. Our sales were trending 40% a year in every market. The wholesale market is fairly open, and wholesalers talk to each other. I think it was common knowledge how well we were doing in all of our markets. That leads me to believe that it was due to the need for wholesalers to maintain relationships with their largest suppliers.
You said you see it opening up a bit more now?
Well, certain consolidations have occurred. The increases in sales for our category and the imports have made wholesalers aware that we fill an important niche. I'm not sure that we're seeing open-armed acceptance yet this year. But there is a climate change happening.
If the big guys said they could supply wholesalers with their own specialty brands and imports, that hasn't happened.
I think the majors tried to do that, and I think that was an effort on their part to fulfill the needs of the wholesaler. But the efforts they made just ran counter to the way they do business. It's a very different category. They do a phenomenal job at what they do. They are the consummate competitors out there, and I have a whole lot of respect for them. But at our end we deal with such small percentages, and I'm just not sure it's worth their effort and time.
But craft beers provide a nice chunk of the margin pool[ldots]
Yes, we do, although depending on each individual craft brewer, there is a difference in the impact. One thing we've tried to do at Alaskan is focus our energies on a small marketplace. We want to maximize our impact in as small an area as possible. We gain strength in a relationship when we sit down in business review with a wholesaler and you account for a significant part of his dollar volume. That provides a very good synergism between the brewer and wholesaler. The consumer gains from that strategy; because you get increased turns in the market, and product freshness is supported with higher turns.
The chain support is also important. They need to appeal to their consumers. They are willing to take some risks as far as getting new and different products on the shelf. They want to supply products that consumers want.
Trying to focus our efforts on as small a region as possible is a synergistic building for our brand family and for relationship building with wholesaler, retailer and consumer.
What was your first move out of Alaska?
You have to keep in mind that Alaska is a market of 500,000 people. Geographically it's huge, but it's a pretty small population. This made it necessary for us to go further afield earlier on than others. I remember hearing a speaker at the Craft Conference in the late 1980s, saying that you should focus all your efforts in a hundred-mile radius of the brewery. I was thinking, for us, that's ice, snow; mountains, water and whales. I can't do that. My next biggest market is 900 miles away, and that is Anchorage. For me to go to Anchorage or Seattle is about the same distance. We sold in Alaska for the first four years, and then went into Washington via Seattle. There is a real linkage between Washington and Alaska because that's where all our freight comes from.
We always were focused on the Northwest. Now the Northwest is growing to such an extent that we see plenty of opportunity in the region. When we entered Washington we grew the market slowly, but methodically. Last year, as every year before, ever one of our markets has grown significantly.
When you say focus, you mean an account-by-account building in a limited geography?
We start by going in and looking at the market, reviewing the status quo. We talk to wholesalers, and also to the retailers.
I hope that small brewers would agree as a group that wholesalers provide an important, vital function for small brewers. I hope that other small brewers would say that. We definitely say that. We embrace the three-tier system. It is remarkable for us, and very effective.
Anyway, after we take the market survey, which can be a lengthy process, we interview all the wholesalers. After we establish some rapport with them, and discuss our respective expectations, we make a final selection, and go forward. We start one account at a time, emphasizing on-premise. We try to build the brand using the sampling vehicle that the on-premise venue gives us. We want the consumer aware of us. When we've accomplished that, we start looking into chain authorizations and working our product off-premise.
What percentage of product is draft?
We're about 50-50.
It's all shipped by sea, correct?
Oh, yeah. In many ways we're a typical brewery, We have Sankey kegs coming off the line, and we shrink wrap. We probably do a lot more careful packaging, because we load it directly into ocean-going containers. It goes into these containers, gets loaded onto a barge, and goes down the inside Passage for six days going through whale-filled waters, heading south to Seattle. Then it gets unloaded, and put on trucks, in many ways, we re an import from right here in the United States.
The shipping aspect of our brewery has made all of our markets our neighbors. It goes out our back door, and there they are. Taking our first leap to Seattle was no big leap. All our raw materials come up from Seattle, and our production planning is very important. So for us, it's an interesting paradox. We ship fairly far afield, but it doesn't seem unnatural.
You have some additional costs that a brewer in the lower 48 would not incur?
One of our mantras here is "we have to be 15% better, because we're going to be 15% more expensive." Our six-pack price is 50 cents to a $1.00 more than our brethren. That's a cost we have embraced, because there is nothing we can do to alter the reality that we have chosen to brew beer in Alaska, and that it will cost more to do that.
When we put out a product, we never think of getting anything but the highest quality ingredients. Cost is a secondary issue for us, because we know we can't compete on price. We can only compete based on the quality of the product in the glass.
People ask about growth. Whenever we come to a point of adding equipment or facilities, the primacy driver is increasing the quality of our product. That has always been our mission statement. When we started to brew beer here, we knew that we faced some challenges in Alaska. But the imports have those same challenges, and they are succeeding.
When we started out, we did the research and knew there wasn't much volume being sold in our category. In those days, it was a fraction of a fraction of a percent. The imports were around 3.9% to 4%. They were selling around 6 million barrels. Fifteen years after the real start of the craft industry, we're selling about 6 million barrels. It took imports almost fifty years to get to 6 million barrels. It only took craft 15 years.
And as you mentioned earlier, the imports have been up and down over the years.
Yes. Of course, as isolationist Americans, we don't think about international exchange rates. Those are a variable that we tend to forget about. But the imports, while steadily increasing, have had periods of depressed sales performance. Comparatively, our category is on fire.
On the aggregate, I am very bullish on craft beer. The consumer is coming into our category, and is willing to pay an extra dollar or two a six-pack. What a value. For an extra dollar or two they get a world-class beer!
And there are now some world-class American beers now. The Brewing industry international Awards in Burton-on-Trent in England is a venue for professional beer judges that has been going on for 100 years. American beers are getting a lot of awards there now. We got two medals there this year, one for our Oatmeal Stout and one for our Smoked Porter.
I go back to that consumer. That consumer now has the opportunity to go to the shelf and take away something that is really world class, for a buck or two more.
The beer category overall offers an extraordinary value to the consumer. Once consumers realize that small brewers are producing something fresh and extraordinary and beautiful, I think we will get that attention. Long term, our prospects are very good. I think our short-term prospects are real good too.
Consumers are embracing specialty goods in a lot of categories. Does that translate into large share for craft down the line?
In 15 years craft matched what the imports did over 50. In another 15, I think craft will be where the imports are today. The imports now are at around 9.2%. We have 2.9%. I think in 15 years we'll be around 9%.
So higher-priced products could be over 20% of the US market?
The imports are part of the higher-priced product segment, and they have the image and the qualities that we in the craft segment aspire to and adopt. But I'm just going to forecast for our category. If consumers continue to trade up, and we get a trebling in our market share, we will see that kind of growth. That would be one part of the trebling. Other growth could be from the imports and the mainstream.
Look at what the wine industry has done. They have taken a domestically-made product, and put it on the top shelf, and in white-tablecloth restaurants. I think that is what is going to happen for us. So maybe we'll take a little from the imports. I don't think that it is unreasonable to think that high-priced beer could reach 20%. But I can't say what the imports will do. I just think that craft beer will treble in 15 years.
Do you think market access issues could put an artificial cap on craft growth?
There will always be challenges, and that is one of them. We're certainly experiencing limits to market now. This might be the environment that spawns a new breed of independent wholesaler, that will embrace this category. We could very well see the revitalization of the independent wholesaler. The dollars that we bring to the table can't be ignored by wholesalers, so it will come down to economics. But certainly there will be challenges.
The other day at the brewery we were talking about our crystal ball, and someone brought out a black bowling ball [laughs]. So I can't accurately forecast what will happen 5-10 years out. But I know we're producing some phenomenal products, and the consumer is in the driver's seat. The consumer wants variety, and the consumer rules.
There seems to be a time-lag between what the consumer wants, and when the system will provide it[ldots]
Yes, you're right. That time-lag may cause certain purveyors not to succeed, but as long as there is consumer demand it will be fulfilled. We plan to be one of those that will be out there fulfilling it.
Thanks for your time, Geoffrey.
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| Publication: | Modern Brewery Age |
|---|---|
| Article Type: | Interview |
| Geographic Code: | 1USA |
| Date: | May 8, 2000 |
| Words: | 2441 |
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