by Tom Acitelli
Regardless, the first wave of craft beer IPOs that ended in the spring of 1996 with Frederick Brewing raising $4.8 million off $6 shares for a company not even four years old appeared to give an entirely different impression. It was an era, after all, of quick growth and quick profits, of a bull stock market that everyone could sense was historic, that was seeing more attention than ever thanks to a new medium not only covering it but involved in it as well—the Internet. As incongruous—incomprehensible!—as it might have seemed only a few short years before, craft beer now fit the financial times: fresh, bold, growing by leaps and bounds. And the performance of these stocks and others in the months that followed their initial offerings only confirmed a sense of their staying power: craft beer stocks were trading thirty-seven times higher than projected 1996 earnings, while the average American stock was trading just fourteen times higher. Besides, had Anheuser-Busch not started small, too? Who was to say that Boston Beer’s market share would stay around 1 percent? Or that Pete’s wouldn’t open not only the Northern California brewery but one, two, five more and amp its production exponentially? Or that more Big Beer brands, with a much longer and beefier track record than smaller competitors, would jump in with capital and further investor confidence? To question the wisdom of the market in the mid-1990s, moreover, was to miss out. Wall Street, whose underwriters, lawyers, and analysts were making not-insignificant fees shepherding these IPOs, was bullish on craft beer; that’s all a lot of people needed to know. Redhook’s IPO, as one analyst put it, “lit the fuse for an exploding new industry. Craft beer has become the ‘in’ thing.”
*Frank Jones was resurrected as a brand briefly in the 1980s and early 1990s.
LAST CALL FOR THE OLD DAYS
Hopland, CA; Portland, OR; Portland, ME | 1995-1997
Sometime in 1984, after Ron Lindenbusch relocated from St. Louis, where he grew up, to Santa Rosa in Northern California, where he had a job, an old friend put a glass of Anchor Steam in his hand. Lindenbusch’s beer curriculum had commenced years before with Busch (it was St. Louis, after all, and there was his surname’s third syllable) and then had advanced to Heineken Dark, the most exotic beer he could get for a little bar he owned after college. Now he tried the Anchor Steam. “That’s the most bitter beer I’ve ever tasted,” Lindenbusch thought. He gave it the old postcollege try, though, and halfway through the beer from Fritz Maytag’s Mariposa Street operation it began to grow on him. By the end of that first Anchor Steam, Lindenbusch knew it would not be his last. On the way back northward to his friend’s place in Humboldt County they stopped off at the Mendocino Brewing Company’s Hopland Brewery, where he tried his first Red Tail Ale; although he liked it well enough, the Black Hawk Stout was the one that really caught his fancy. That, and the surroundings. The brewpub, the second oldest in the nation, struck him as “the coolest place on the planet to drink a beer.” The selection of beer brewed on-site was ahead of its time; there was live music, even a sandbox for the kids; and patrons could pluck a cone from the hop trellises growing over the beer garden and toss it in their beers.
Lindenbusch returned to Hopland time and again over the next few years, blasting through the temperate evenings on his Yamaha 750 shaft drive to take in the beer and more than that the atmosphere, especially the music. He was managing Sizzler restaurants one at a time in Santa Rosa and Petaluma, getting gradually fed up with their corporate approaches and running headlong into a quarter-life crisis. One morning when he had about reached his breaking point, his wife handed him the paper; the Hopland brewpub was hiring a general manager. Lindenbusch got the job. The twenty-eight-year-old took his tie off, put on jeans and an “Eye of the Hawk” T-shirt, and never looked back. After the Hopland, he would eventually land a top position at Tony Magee’s equally sartorially laid-back Lagunitas Brewing.
Lindenbusch’s story would be familiar to so many others who joined the movement professionally in the late 1980s and early 1990s, a movement that was irreversibly changing—though no one quite knew by how much. The Hopland’s status was proof of the change. When it opened off Highway 101 in the summer of 1983, it was a revelation, part of only a handful of craft-brewing operations. Not only that, but Hopland could trace its ancestry through brew-master Don Barkley back to Jack McAuliffe’s New Albion Brewing, the first start-up craft brewery in the United States. Fast-forward to just 1989, when Lindenbusch started work there, and several more breweries and brewpubs had joined the party in every region of the country; and, as we’ve seen, hundreds more would follow in the next five years alone. The Hopland and its ilk no longer seemed so unique.
A newcomer like Lindenbusch, then, caught the craft beer movement at the very end of its innocence. Larger-scale players like Anheuser-Busch had been circling it for years, awaiting their chances, and throughout the mid-1990s they struck.
In the summer of 1997, a reporter from Forbes magazine climbed aboard a 165-foot yacht called Indian Achiever, moored off the West Side of Manhattan. The yacht’s owner, Vijay Mallya, only just on the other side of forty, sat “lord-like” in an ornate chair, beyond him the sun shining upon the imperious Manhattan skyline dominated by the World Trade Center towers. He talked excitedly about his global conglomerate’s latest venture: American craft beer. “The prices at which Bernau was buying glass bottles were ridiculous,” he said. “If I control fifteen or twenty microbreweries, I can negotiate better prices.”
The “Bernau” was James Bernau, who had undertaken multiple public stock offerings to get his various vineyards and breweries off the ground, including Nor’wester in Portland, Oregon. The plan had been to open a chain of brewpubs and breweries, and, for a while, Bernau succeeded. Locations opened as diffusely as Woodinville, Washington, and Saratoga Springs, New York, as well as in Denver and Irvine, California. Then things went from bad to worse: shares in Nor’wester (still trading under ALES) peaked at $9.50 after opening at $7 in January 1996, and then they dropped precipitously to $2. Mallya called him out of the blue that summer; the two men didn’t know each other; Mallya was driving around Napa Valley, checking out vineyards, but he told Bernau he wanted to invest in his craft beer chain. Fine by Bernau. He and Mallya arranged a deal that gave the billionaire a 40 percent stake for $5.5 million, while Bernau retained 10 percent and the remaining Nor’wester shareholders 50 percent. The brewery in Saratoga Springs was put up as collateral for Mallya’s infusion.
Mallya’s interest wasn’t entirely incongruous. He headed a multibillion-dollar firm, UB Group, that had been in his family since the birth of modern India in 1947. It dabbled in fertilizer, computer software, and liquor, but perhaps its best-known brand was Kingfisher lager, which had become synonymous in the West with Indian beer. Through it and thirteen other brands, UB dominated more than 40 percent of the Indian beer market and had made significant inroads overseas. In the United States, 115 distributors sold more than fifteen thousand barrels of Kingfisher a year, mostly to restaurants. It was also particularly ubiquitous in South Africa and the United Kingdom, where UB also controlled the venerable Wiltshire Brewing Company, including its dozens of pubs. Mallya, who took over the family business at age twenty-eight, had renamed Wiltshire United Breweries.
Around the time he invested in Bernau’s five operations, Mallya also invested $3.5 million in the Mendocino Brewing Company, roughly the amount in sales that the Hopland operation would do in 1996. He also pumped $1.75 million into Humboldt Brewing, started in 1987 in Arcata on the Northern California coast and now producing about eighteen thousand barrels and $4 million in annual sales. These were all small amounts for Mallya—his UB Group was estimated to do $1.4 billion in annual revenue through fifty companies in twenty countries—but he had big, big plans for these IPAs and amber ales. On his yacht that sunny summer afternoon, his future in the American craft beer movement stretching before him, Mallya hinted that those plans might include a direct assault on Big Beer. “I’ll have a lot more clout going in with five or six brands, each distinct and not si
milar,” he said in response to a question about challenging Big Beer vis-à-vis distribution, “I’ll make sure of that.”
On the other side of the country and shortly before Mallya held court in New York Harbor, the owners of one of the most beloved monikers in the craft beer movement were ceding control. BridgePort Brewing Company had been, after its late 1984 opening, the first craft brewery to really take hold in Oregon (Cartwright Portland had already folded after barely two years of dubious quality); BridgePort and the brewpub that opened alongside it in 1986 were instrumental in transforming Portland’s industrial northwest into a hip area; and more than anything, BridgePort helped to place both the city and the state on the beer map. That Oregon, along with the rest of the Northwest, would have become a craft beer Mecca without Dick and Nancy Ponzi’s operation seemed almost unimaginable. But, ten years in, the Ponzis faced a choice. “We could draw the line at expansion to distant markets,” as Dick Ponzi saw it. “We could invest in expansion on our own, or we could sell to a proven sales and marketing organization.”
They were victims of their own success in a business that required lots of capital to keep up with consumer demand and, more important, with competitors. BridgePort was producing twenty-five thousand barrels a year—but competitors like the Widmer Brothers, once on that same unremarkable side of the Willamette River and now greatly expanded on the other side, and Full Sail Brewing Company, some sixty miles up the Columbia River in Hood River, Oregon, were producing more. And these were just the nearby competitors; the Ponzis also had to contend with the dozens of craft-brewing companies that now had wide distribution reaches, not least Boston Beer and Pete’s Brewing. Then there was the IPO wave of 1995, with these same competitors receiving infusions of capital unimaginable in 1984.
So the Ponzis sold the brewery to Gambrinus in the fall of 1995 for an undisclosed price. Gambrinus was started in San Antonio, Texas, in 1986 and grew quickly into one of the ten largest beer importers in the United States. Its biggest acquisition thus far had been the eighty-six-year-old Spoetzl Brewery, which was in 1989 on the brink of closing like so many other regionals when Gambrinus stepped in. By 1993 it was selling one million cases of beer annually, including its popular Shiner Bock brand—the first time the brewery had ever reached that sales mark.
BridgePort’s quality continued unabated under Gambrinus, overseen as it still was by Karl Ockert, who had studied under Michael Lewis at UC-Davis. For many of these craft breweries saved by mergers and acquisitions, or by cash infusions like those of Vijay Mallya and Anheuser-Busch, life continued as before in the mid-1990s, and it’s not entirely clear whether consumers even noticed the changes in ownership. The craft beer trade media had limited reach in this darkness right before the web’s dawn, and the deals and the IPOs tended to get more coverage besides in business publications like Forbes and the Wall Street Journal. There was nothing to suggest that it was a bad thing existentially for a Big Beer operation—or a bigger operation, period—to step in, especially not when the movement had already had numerous closures and there were rumblings of a gigantic shakeout. It was a boost to marketing and to productivity especially, not to mention a way to quickly pay down debt.
That was basically the pitch the Shipyard Brewing Company, based in the other Portland, made around the same time as the BridgePort-Gambrinus deal. The craft brewery a stone’s throw from the ruddy Atlantic, started by prodigious brewmaster Alan Pugsley and brewpub entrepreneur Fred Forsley in early 1994, sold a 50 percent stake to a Miller subsidiary in the fall of 1995 for undisclosed terms. What was clear was that Miller wanted in on craft beer. It had watched Anheuser-Busch, its mortal rival throughout the 1970s and 1980s, gain a toehold through Redhook in what was the fastest-growing segment of American brewing—this at a time when Miller’s phantom-craft stab, the Reserve series, was dying an embarrassing death, never able to sell more than two hundred thousand barrels annually, a pittance for the Big Beer operation that had let the world have Lite. And, anyway, Shipyard had debt it needed to pay down, and it wanted to expand both its brewery and its production, from 54,000 barrels annually to 108,000, and get into the New York market. Miller’s new subsidiary, the American Specialty and Craft Beer Company, could allow it to do all that without sacrificing its quality.
Pugsley said at a Thursday morning press conference announcing the deal that it fulfilled his “lifelong wish list” for what a smaller-scale brewery could be. Miller wasn’t Forsley and Pugsley’s first choice—they explored an IPO (they were all the rage) but realized Shipyard didn’t yet have the financial track record after barely a year in operation. Miller had a spot of a track record besides. In the eight years since it bought the Jacob Leinenkugel Brewing Company, the northern Wisconsin regional’s sales had only grown, and the same Miller subsidiary that bought 50 percent of Shipyard had, earlier in 1995, bought a controlling stake in the well-regarded Celis Brewery. (Celis was started by Pierre Celis, a former milkman who almost single-handedly resurrected the Belgian white style, first in his native Flanders and later through a brewery out of Austin, Texas.) So Miller it was. But just as with the IPO wave, the Anheuser-Busch interest in Redhook, or Vijay Mallya’s stakes in Mendocino, Humboldt, and Nor’wester, it wasn’t entirely clear yet what Miller’s share meant beyond more money for another craft brewery to expand and another toehold for Big Beer.
David Geary, for his part, was magnanimous toward his competitor’s move (in stark contrast to Jim Koch’s reaction to the Anheuser-Busch deal with Redhook). It made his D. L. Geary, also in Portland and already the oldest, the biggest independent craft brewery in Maine. “I don’t think,” Geary said at the time, “anything has changed for us.”
BIG BEER’S BIGGEST WEAPON
Merriam, KS; Chico, CA | 1996
David Geary’s matter-of-fact reaction might have belied the bigger fish that the craft beer movement had to fry—courtesy, again, of Anheuser-Busch. The world’s biggest brewer had launched a squeeze on distribution through what it called by the decidedly Orwellian name “100 percent share of mind.” It all started in March 1996, when August Busch III told a national wholesalers conference, “Each of you [must] exert your undivided attention and total efforts on Anheuser-Busch products. If you sell our competitors’ products, can you still give us your best efforts? I don’t think so.” It was threat draped in gossamer: the world’s biggest and most reliable brewer was asking distributors nationwide carrying their brands to focus only on those to the exclusion of others. If they didn’t, well … Anheuser-Busch could not say out loud that they would take their tens of millions of marbles and go home—that might have put them afoul of antitrust laws—but the possibility was clearly put out there. Distributors, starting only months after Busch’s comments, began to play ball one by one.
Distribution was already a crucible for craft brewers. More than anything save the capital costs for starting up and (if lucky) expanding, distribution could make or break an operation. “Go home and hug your wholesaler,” Fritz Maytag told a gathering of craft brewers earlier in the decade. He meant it—the day that Don Saccani started distributing his Anchor brands was a game changer for the brewery. The problem, however, was that the standard three-tier system in place in most areas of producers, distributors, and retailers did not favor craft brewers; it favored larger, better-known producers who could guarantee turnover. Craft brewers were often treated as a side business that could be ignored or indulged at whim, depending on the distributor. Kim Jordan and Jeff Lebesch, in the early days of their New Belgium in Fort Collins, Colorado, left a couple of palettes with a distributor down in Denver. They called the distributor regularly to see if it needed the supply refreshed, only to be told everything was fine; after a while, incredulous, they dropped in on the distributor unannounced and found both palettes still under their original plastic wrapping. The distributor had done nothing illegal by letting their beer linger and lying to them about it (luckily, New Belgium had not yet signed a contract with the distributo
r and took the beer back).
A no-less-august defender of the free market than the Wall Street Journal, in an editorial, excoriated how the three-tier system stymied competition. The editorial was in response to the so-called Twenty-First Amendment Enforcement Act passed by Congress in 2000, which allowed state attorneys general to use the federal courts to stop alcohol shipments coming from producers outside their states directly to consumers. Ostensibly meant to prevent underage consumers from ordering alcohol online, it seemed to the Journal and many others just another way to keep distributors in the middle:
Think of it this way. You live in Indianapolis and order a flannel shirt from L. L. Bean in Maine. No one would think of saying that you can’t do that, or you have to buy it through a licensed Indiana flannel-shirt distributor. But when it comes to California chardonnay or New York cabernet sauvignon, that’s the argument…. [T]he laws regulating alcohol sales are themselves of dubious vintage, a legacy of post-Prohibition attempts to create a distribution system the mob could not control. Hence the legislation providing for a state-licensed middleman between you and the producer; hence too the dozens of related laws, such as the one in New York prohibiting alcohol chains, that today raise prices and keep out competition….
In the late summer of 1996, Robert Eilert, cofounder of the Flying Monkey Brewery in the small eastern Kansas city of Merriam, got a letter from an Anheuser-Busch executive. The letter was in response to one from Eilert contending that the Big Beer operation had forced Flying Monkey’s distributors in Wichita and Lawrence to stop carrying its only-three-month-old brand. Eilert had returned to the area he had grown up in after spending three years in Breckenridge, Colorado, where he worked at the craft brewery of the same name founded by avowed ski bum and avid homebrewer Richard Squire in 1990. Flying Monkey was the seventh Kansas brewery or brewpub since state legislators changed the liquor laws in 1987 after more than a century of actual and quasi-Prohibition. Kansas held a special place in teetotaler lore: Prohibitionist Carrie Nation lived in the state for ten years around the turn of the century as her saloon-busting campaign got under way. You could trace a straight line from her fanaticism toward the turn of the century to Prohibition in 1920, though Kansas itself beat the rest of the nation to the punch when it instituted a ban on alcohol production in 1881. At that time, the state might have had as many as ninety breweries, a staggering sum for the Great Plains (neighboring Oklahoma, for instance, had none). The legal changes of the late 1980s led to Chuck Magerl, a University of Kansas graduate student, opening a brewpub, the Free State Brewery, in downtown Lawrence in early 1989—the state’s first legal brewery since the 1881 ban.