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Modern Brewery Age

Craft Brew Allies: an interview with CBA’s Terry Michaelson and Andy Thomas

May 8, 2012

Craft Brew Alliance is the biggest U.S. craft brewer that isn’t supposed to call itself a “craft brewer.” Since A-B InBev holds a 32.2% stake in the company, CBA does not meet Brewers Association criteria as a craft. Nonetheless, the company, which comprises the Widmer Brothers, Redhook and Kona, is the third or fourth largest craft beer supplier in the U.S., after Boston Beer and Sierra Nevada, and about on par with New Belgium. The company has been working to develop specific identities for each of its three brand families, with Kona and Redhook targeting consumers emigrating from the mainstream, and Widmer expanding in steadily more esoteric directions. CBA is fine-tuning its brands and adding products, and it is making some notable progress; In 2011 CBA had three of the top five new craft brands in Symphony IRI’s Food numbers. And in 2011, CBA CEO Terry Michaelson recruited Andy Thomas, the former CEO of Heineken USA, to serve as president of CBA. Our interview with Terry and Andy follows.

MBA: There was a sense a few years ago that Widmer and Redhook had lost their way—not much in the way of new products, sales lagging the craft segment…

Andy: It’s easy for me to say this as the new guy, but we talk about this all the time internally. So yes, sure, we had lost our way. Widmer and Redhook had become one dimensional. On the Widmer side, it had become all about Hefeweizen. In a world with one Hefeweizen, it’s very interesting, but in a world with Blue Moon and Shock Top, suddenly it doesn’t stand out so much, maybe it’s not as interesting, not state-of-the-art.

We stagnated on Hefe. When you look at the new Widmer beers coming out now, they are true to what Hefe was in the 1980s, bold and state-of-the-art. With Redhook, it became trying to be what people thought a craft beer should be. It was the elegant bottles, the off-beat brand names. We had a beer named Rope Swing! We joke about it now, but we all made that decision, you get caught up in it.

Terry: We did lose our way perhaps, but we are taking the road less traveled, and we are a unique representation of the craft brew segment, with our distribution and our national footprint. We took some time, putting into place the infrastructure, but that was necessary. To be successful, you have to have brands that resonate with consumers, you can’t lose your soul, but you have to be able to activate the marketplace. So quite frankly, there were challenges for us, but it makes me so proud, that we had a group willing to take that road, looking at how you put brands together, willing to look at how we sell to a Safeway or Krogers in a way that is meaningful, and we had the infrastructure.

At a certain point I contacted Andy, and said, I want you to come in, help us look at it differently, and I told our people, O.K. this guy is a consultant, but you’ll like him. And it took us all about 15 minutes to click. Andy allowed us to step back and look at things. The alignment was there.

As much hard work as it was, it was also fun. We got to sit and talk about brands, how they started and what they mean, that’s what this industry is about, it’s about interesting beers and interesting personalities. The consumer is so connected at this point, they are excited when they can discover something. Not just what they are tasting but how it makes them feel.

 

As a result of that process, you’ve rejiggered the brands a bit…

Andy: Sure, for example, we were so worked up about Redhook. We were trying to be crafty enough, doing limited releases, all that. We were speaking Widmer language for Redhook and convinced it was the right thing to do. You can get into your own head sometimes, but we are much more confident as a company now. So we can say to the beer geeks, if you don’t want to pick up Redhook, Redhook is fine with that. It turned out, we just had to listen to the brands. You know, the Redhook drinker loves holding that bottle. The Redhook drinker loves drinking that kind of beer, and is comfortable with that beer. Somebody might come up and say, Redhook is not the hoppiest beer out there. but the Redhook drinker says, ‘Hey, that’s fine.’

Last year we talked internally about Longhammer IPA, over and over, asking ourselves, ‘what should we do?’ And while we were busy talking about changing the name, and fine-tuning the style, and what else we should change, the brand very quietly grew 14% in the fourth quarter. Sometimes if you do the right thing, it just fits. We looked at that, Long Hammer up 14% nationally off a pretty good base, and said ‘alrighty then.’

I like what you did with the Redhook bottle, by the way, the elongated stubby, that’s a great bottle…

Andy: I’m glad to hear you say that. Danielle Katcher [CBA v.p. marketing] and her team developed this. We looked at a lot of different designs, we looked at stubbies, we looked at everything. When we came to that design, everyone said, ‘Hey, that really fits.’ The idea was not to go backwards, putting ourselves in an old bottle, in a stubby, that was too easy. This bottle is a throwback to what we were about, but also bringing that forward in a new way. Redhook has grown up. We had a bottle that was not very Redhook, a decorated bottle, split label, it was a little precious for Redhook. Redhook might be embarrassed to be walking around in the outfit we dressed him in. Once we started thinking about it and once we started listening to the brand, we were able to make that change.

Craft has been around for a couple of decades now, are we seeing some of the older brands hit a generational slump?

Andy: You hear about this in the marketplace— Redhook is tired, Hefeweizen is tired. If you listen to the chatter too much, you start to believe the story, and you let others define you, instead of being who you are. How old is Betty White? And she is as relevant today as 40 years ago. She is who she is, she appeals to millennials, baby boomers, etc. She’s funny and talented, it’s not a matter of trying to reinvent yourself for a new generation, it’s being who you are. She has really been successful being who she is. As relevant in 2012, as in 1960…

If we look at Hefe, and some of the other older craft brands, we see some softness, even as smaller brands grow…

Andy: There’s a little of a lot of things contributing to that. I can speak for Hefe at least. Clinically if I look at what is driving the declines for Hefe, we are losing a lot of draft, so you start to peel it back, why is that happening? That’s because ten years ago, if you had a place with 8-10 tap handles, and if you have one handle that’s wheat, it’s Widmer Hefe. Fast forward ten years, now you’re fighting for that handle. Once they make a decision for wheat, you are fighting with a bunch of craft brewers, and Blue Moon and Shock Top, for that tap handle. From a very clinical standpoint, you’ve gone from being the only game in town to being one of many. That’s the clinical part. And I’ve said we stagnated. Hefe is a great entree in craft beer, a great entree to wheat beer, an easy-drinking introduction. People will stay there for awhile, but then they will start experimenting. We gave them the gateway, but didn’t follow up with other styles to drink. So you are getting hit from two sides. You are not the only game in town anymore and your brand isn’t as interesting as it used to be.

Terry: Hefe still has a lot of loyal drinkers, it is not going away. There are a lot of accounts where we’re still their number one, but they’ve also got Blue Moon on, so instead of selling 6 kegs a week, we’re selling 4 kegs a week. So overall volume its down, but it’s still resonating.

And of course Hefe is not fully developed in all markets…

Terry: If we look at the East Coast, people will find Hefeweizen now because of Widmer IPA. Widmer is growing really well on the East Coast but consumers are exploring all the Widmer brands now, not just Hefeweizen.

Andy: We have the intelligence, the knowledge that when the portfolio is more than just Hefeweizen—when Widmer in a store is not just one SKU of Hefe, or several SKUs of Hefe—we’re seeing the whole portfolio do better, and Hefe do better. People start to know us for our other Widmer brands in a lot of markets, and it halos back on hefe. They are more willing to pay a little more for a great wheat beer, because they pay a little more for the IPA and other styles that they would expect to cost more.

In new markets, in the East for example, Widmer may be identified more as an IPA brewer than as a Hefe brewer…

Terry: Sure, once the consumer finds the brand, and it’s interesting, then they are more likely to try it whether its entry-level or a more aggressive beer. It goes across lines. It goes to what we have been talking about. Andy has made the foundation of it, looking at occasions. There are a lot of different drinking occasions, so you are going to drink a different brand depending on what you are doing.

You seem to be turning the Widmer brewers loose more often these days….

Terry: Oh, yeah. We now have a lot of different elements for them to experiment within. We have more room to do stuff that is more esoteric and experimental, which is interesting for our brewers, and for the consumer.

Andy: Because of the location of the Widmer brewery, and our relationships with hop farmers, we have access to lots of experimental hops. We recently had an X series of experimental IPAs we were pouring at our Widmer gasthaus. Brewers took same grain bill and recipe, and using four different hop varieties. It was really cool. Four different X beers pouring and they all taste so different! Its amazing what a difference the hops can make, how they can completely change the beer.

The next beer out in the Widmer Brothers Reserve is a brown ale brewed with molasses and brown sugar, and aged in rum barrels. How do they come up with this stuff? Who had that idea? They are experimenting with so many, but I remember that one, just because it sounded so good! As many beers as we have in the Widmer Brothers portfolio, they are all different. We have three IPAs from Widmer, all fundamentally different: Nelson, Pitch Black and Rotator. Couldn’t be any more different. And Redhook, with Long Hammer, again is quite different, it’s a great sessionable IPA, which is why we are excited to be coming out with that in cans.

On that topic, I have to share this story. We’re just launching Longboard more widely in the East, and so I was having a beer with Kurt Widmer, and we were sampling cans of Longboard. And when I cracked open the cans, he was like a little boy, his face lighted up, and he said, “I’ve got to tell you, I’m a guy who has been doing bottles for 17 years, but I love the sound of that can opening, it’s awesome!

Andy, the company where you spent a big part of your career, Heineken USA, was an early adopter of import cans…

Andy: It was formative for me, in the way I look at the beer category. When Heineken launched in cans, everyone said ‘imports aren’t in cans, imports are in bottles.’ The head of our marketing, a guy named Steve Davis, and the brand manager, Ken Kunze, had both come from Pepsi, and they just challenged the convention. They said ‘You’ve got someone who buys Heineken in a bottle in a bar, and then they are at the pool and can’t have a glass bottle, so they don’t buy Heineken. It’s not that they don’t want to buy a Heineken at the pool, it’s that you are not allowing them to buy Heineken at the pool.’ And it was such a rational argument! We said, ‘Hey, that makes sense!’ It was a matter of saying ‘OK, so the reason that imports aren’t in cans, is because imports aren’t in cans.’ And the Keg Can took off, and you had people taking them to the beach, and poolside, and stadiums. And the same thing is happening with Long Board, when you are on the golf course, or at a beach bar.

Terry: The irony is that the aluminum can a great package for beer, and keeps the beer from being lightstruck. One of the things we did, was to try to break through people’s perceptions internally. Our guys took Longboard from cans, put it bottles, and asked our tasting panel to taste the difference. There wasn’t any—except sometimes the beer from cans got a better score, because cans are good for beer. It’s not about lowering the image of beer, it’s about offering the consumer a different option.

Even though Widmer is your designated specialty craft brewer, will you continue to do local specialty beers for Redhook?

Andy: We’ll keep cranking up interesting beers locally. it’s good for the personality of the brand when you do that. Broadly speaking, Widmer Brothers is all about the beer and the hops and the grain; Redhook, broadly, is all about the personality and the experience. But, in its local markets, where Redhook has a local following, we will continue to crank out beers that make it more locally relevant. Maybe they will be interesting styles, maybe they will be interesting ideas. So maybe it’s a beer done for specifically for the Seattle Sounders, we did that in the Blue Light series, 22s and draft, and it’s gone a little insane. That took us by surprise, but that’s a Redhooky way, doing things outside the portfolio.

Redhooky?

Andy: We use that term all the time internally. When we say Redhooky, we mean irreverent, someone who can laugh at himself, Redhook is the one who will push your boundaries, but won’t push you over, Redhook is the fun guy to hang with. In Redhook’s DNA, is the stuff that Seattle was about in the 1980s—Starbuck’s coffee, and Microsoft. Redhook is smart, unique, irreverent. Not a typical domestic.

Since you’ve assigned an identity to each brand family, doesn’t it work best in markets where you have all three?

Andy: Florida is the best example right now, all three brand families doing exceedingly well. Kona is far and away the fastest growing brand family for us in Florida. That makes sense, Longboard Lager is a refreshing beer in a warm weather market that already has an affinity for lagers. Redhook also does really well. Redhook is a step up from what is big in the market. And Widmer can take you on the craft journey, and Widmer is developing rapidly in that market, Drifter is doing great. From Drifter, it’s not a huge step to Rotator and the seasonals. Brands are like relationships. Widmer hasn’t let you down before. Maybe you’re a guy who a year ago would have been intimidated to buy Rotator, now you have a good comfort level. We’re seeing all brand families in Florida do well.

Terry: For the retailer that becomes the power of our portfolio. Because you look at all those consumers out there, Redhook will get this customer, Widmer that customer, and Kona another group entirely. They feed off each other, and that is happening more and more. And that is what we are able to activate now, when before it was kind of piecemeal. In most of our markets, we are getting close to getting there.

What markets in particular?

Terry: The Northwest is strongest in terms of development, and in California we have a very strong position. The West is developing, but there is still upside. East of the Rockies, we are just really beginning.

Andy: It’s interesting, Widmer Bros is growing faster on the East Coast than Kona. Which is remarkable, and it’s not like Kona is growing slowly. We are almost fully covered in Florida. With Redhook and Widmer, the only markets we’re activating in Midwest are Chicago, Minneapolis, and a couple of cities in Ohio. In the East, outside the orbit of New Hampshire brewery, we’re in Boston, and D.C. We’re just launching in Metro NY, we have three reps now. We are launching in Pennsylvania and Delaware. We are doing well in D.C. and the Mid-Atlantic growing, but then there is an opportunity gap all the way down to Florida. So there are a lot of holes.

As a light lager, Longboard is one of a growing number of craft brands that trespasses on mainstream turf…

Andy: Just to play a little bit, why is that trespassing? The reason I say that, Sam Adams Boston Lager was the flagship for craft for many years, that was a lager. I’m saying craft has as much license to compete in lager as anybody does. And I think we are finally getting comfortable in getting there, and saying that there are a lot of people who like this profile of beer.

I think it’s interesting because it will allow craft to source yet more volume from the mainstream…

Terry: On that point, I was with four or five guys at a basketball game recently, and the group started talking about how they liked sitting down and drinking a nice flavorful easy-to-drink beer. So we’re having this whole conversation, and I had to start asking them what kind of beers they drink— they knew I worked for CBA—and the interesting thing for them, is that they are looking for a different experience. They talked about Stella, about Sam Adams, about Longboard. Those beers, to them, gave them a better experience than a mainstream light. So even if they wanted something sessionable, they wanted it to have more flavor. And it’s not all consumers that are looking for that, but I was pretty interested that these guys, who ten years ago would have been drinking Miller Lite, are thinking about beer in a different way. It may look like we are competing in the same arena with Longboard, because the domestics have historically provided that lighter drinking experience. But if you talk to the consumer, they are often saying, ‘No, even in that session situation, I won’t choose a light domestic, because I want more flavor.’

Do you see a continuing trend towards lighter sessionable crafts?

Terry: It’s driven by where the consumer is going. We wouldn’t be putting out Longboard Lager, if there wasn’t a market for it. A lot of consumers are in that space. They want something sessionable, but they want flavor too. It’s so different from the way we used to think about craft. It used to be, ‘OK craft is over there, and domestics are here, and they better not cross over.’ For a lot of years, people said the big domestics wouldn’t be able to put out a craft beer, and I think Blue Moon proved that wrong. They may not be making double IPAs, but they can make craft-type beer.

Andy: There is a school of thought, and some evidence to suggest, that when beer loses share to cocktails and wines, the taste experience that people are looking for is lighter. On those occasions, they drink gin & tonics, vodka tonics, light white wines. Consumers are looking for something lighter, but they also want it to be different. A richer experience. A richer product profile, they are not looking for the same old lagers. They are not looking for the shininess of an import; or the sameness of a domestic light beer, but they are looking for this. If if you can match that lighter taste experience, that profile, with a little richer experience, a richer story, then you are on to something. On that occasion, craft is as much about the beer as it is the beer experience, and that’s where we can start to win as a beer category again. I get heated when people say craft is bad for beer…

Who is saying that?

Andy: The big guys. It’s déjà vu all over again. I can close my eyes, and it’s 1998, and everyone is saying imports are bad for beer. They are running ads about skunky beer, and date coding, and saying imports are bad for beer. Now, 15 years later, imports are now 14-15 share, and thank God they grew the way they did. Now people— and I’m talking about the big brewers— are saying craft is bad for beer. I don’t hear anyone saying that premium spirits are bad for spirits. I don’t hear anyone saying esoteric cocktails are bad for spirits, or boutique wineries are bad for wine, yet the beer business eats its young.

You’re talking about A-B and MillerCoors hinting that craft is siphoning away profitability from retailers?

Terry: That’s right. MillerCoors made a presentation at Harry Schuhmacher’s Beer Summit about how we have to protect premium light. And just think about the absurdity of that assumption, that if we don’t offer them a craft beer, they will drink premium light….that the consumer will drink whatever you put in front of them! I’m going to have a cabernet, or a martini or a domestic premium light. Wait a minute, how about an IPA instead, with a really nice hop profile! In the beer industry, too often, we get caught up in a strategy, if we push it hard enough, the consumer will swallow it. But consumers are saying, no, I won’t, not if you don’t give me something that interests me. If you are going to offer me just light beer, maybe I’ll have a martini instead. You better give me something that excites me!

And the consumer will not be denied…

Andy: Exactly. There was a great case study of Ben & Jerry’s, that covers a period when they were running into questionable trading practices from Haagen-Daaz. Pillsbury, that owned Haagen-Daaz, was trying to knock Ben & Jerry’s out of distribution. So Ben & Jerry’s developed this campaign with the tag-line ‘What’s The Doughboy Afraid Of.’ It was a whole assault on Pillsbury, on why they were afraid to compete. It got so bad, Pillsbury settled, and pledged to stop using those questionable trade practices, and Ben & Jerry’s had to promise never to use the ‘What’s The Doughboy Afraid Of’ campaign again. Never to even talk about it to the trade press! That was in the 1980s. It’s a great study on power of the consumer, because the consumer always prevails. Even in that case, the consumer prevailed. It’s interesting to me, that Anheuser-Busch InBev and MillerCoors are telling people ‘if you don’t stock it, they won’t buy it.’ There is no evidence of that being a sustainable, tenable, long-term strategy. Even in ice cream, where you can control the frozen space. Even there, the consumer won. And it’s interesting. Whenever I hear these big guys talking about excluding craft, I think to myself, ‘What’s the Doughboy Afraid of?’

Terry: There has been so much discussion about beer losing share to spirits and wine. Compare the growth of craft to spirits and wine! Craft is outgrowing spirits and wine. It’s not about choosing wine and spirits over beer, it’s choosing what fits the occasion. Take craft beer out of the equation, and you have to ask yourself what would happen to beer.

What’s your take on the current state of the craft business, with so many new entrants…

Andy: Small guys are popping up. That’s part of the challenge. To me it’s an indication, that the interest is there and the category is developing. But a lot of the smaller players are not yet to the point where they are delivering consistent beers. When we taste some of these beers, it drives our taste panel guys crazy, they are fanatics about quality and consistency. One of the non-negotiables for us, is to deliver a great beer anywhere in the country, stable and reliable, and that makes us a little unique.

We have a couple thousand small breweries, and maybe a thousand more in the pipeline, how many is too many?

Andy: We are bumping up to 2000 breweries. A lot depends on what people want to do with their little breweries. If you are comfortable with the old German model, selling around the chimney, as they say, in a 5-10 mile radius, a 5000- to 10,000-barrel brewery, yeah, that’s sustainable. But beyond that, it becomes challenging from a distribution, sales, and brand perspective. Being local is a real good reason to be a brand. Outside your area, it becomes challenging to become relevant to those consumers. And the stability of the beer will become an issue.

Shakeout?  I don’t know. A lot of these breweries can’t sell off premise, they might not be able to bottle, they won’t have the sales organization to sell, they won’t be able to serve a chain from the footprint perspective, and they might not be able to distribute over state lines if they don’t have the network. Yes, I think there will be a shakeout with those guys. It will be nothing to do with their beer, nothing to do with how great their brands are. That business model just won’t allow you to survive. For those that can reconcile in their minds that the business side is as important as the production side, and can win in their local draft accounts and compete locally with the independents and maybe the chains that will service you in two or three of their stores—those guys will have a decent chance.

In the craft segment, when you have a marketing department, and a sales organization, there is this perception that you have sold out. From my perspective, it’s not about selling out, it’s about being true to who you are. If I want to take our beer to more places, I’ve got to have that business system, or I can’t do it. If your beer is not stable, you can’t ship it across the country. If you are going to satisfy consumers with fresh beer on both coasts, you have to have breweries on both coasts. If you are true to yourself, you have to do those things.

We talk about our company having the body of a big brewery, and the soul of a craft brewer. We have ambitions to bring our beers to more consumers in more places, so we have to have the business system to do that. We remain true to who we are—we are not selling out—but we want to replicate the local experience of drinking our beers all over the country.

Thanks for your time, Terry and Andy.

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