And That’s a Wrap

For the past two months, our Juntos met and learned about the business of craft beer, with a focus on the Virginia craft brewery market. We have studied a range of topics including the craft beer market and segments, beer distribution, process of making beer and ingredients needed, and a case study of the Virginia Beer Company.

In 2014, the craft brewery market had revenues of $19.6 billion with an annual growth of 18.8% in the last five years. Specifically in Virginia, there are 78 craft breweries that produce 195,957 barrels of craft beer. Craft beer also has four market segments: microbreweries, brewpubs, contract brewery companies, and regional craft breweries. Microbreweries have less than 15,000 barrels produced per year. In Williamsburg, VA, there is currently only one microbrewery: Alewerks. We had the opportunity to travel to Alewerks and tour the facility to understand the making of beer. One takeaway from this experience was that the owners of Alewerks invested a starting capital of $200,000 to start the business.

Our class welcomed a guest speaker, Chris Smith, from the Virginia Beer Company to learn about the financial and legal issues entrepreneurs face when starting a microbrewery. Some key considerations were:

  • Need a connection to the location of the brewery to help raise capital
  • Types of beer, such as IPAs and Lagers
  • Relationship with other beer companies
  • Automatic bottling: $400K, automatic canning $150K, manual canning $16K
  • Property taxes are about $9,000 per year
  • Need attorneys that can cost $45,000

The process of making craft beer is made up of many steps, including mashing, boiling, wort filtration and cooling, fermentation, filtering, and packaging. The cost for the equipment can range from $100,000 for a 1 barrel system to $1,000,000 for 30 barrel systems.

Key ingredients in craft beer are: malt extract or wort, hops, yeast, water, and primary sugar. A dynamic part of making craft beer is hops, which are the female flowering seed cones of the humulus lupulus plants. Normally, hops are grown on small, independent farms and are labor and a time-intensive venture. Bines don’t maximize harvest until their third year, and an acre of hops cost over $68,000 to plant and harvest. An average price of hops per pound is $4.38. With the explosive growth of the craft beer industry, larger breweries have started to contract hops. This will lead to little excessive product from the small, independent farms and consequently, can make it difficult for start-up breweries to acquire hops.

Alcohol distribution has a three-tier system, which are brewers/importers, distributors, and retailers. This system allow smaller breweries to reach a range of retailers by providing the infrastructure, capital, and personnel.

Going forward, there are some considerations for the craft beer market. There will be continual industry growth with more locations in neighborhoods of bigger cities that lack of a brewpub/taproom. Craft beer has a goal of accounting for 20% of total market share. There will be more acquisitions because breweries are an attractive investment.

 

References:​

America’s Beer Distributors. Who Are America’s Beer Distributors? Retrieved from             https://www.nbwa.org/about/what-beer-distributor

American Homebrewers Association. Homebrewing Equipment List: Beginner. Retrieved from http://www.homebrewersassociation.org/how-to-brew/beginner/homebrew-equipment/

American Homebrewers Association. How to Harvest, Prepare and Store Homegrown Hops.  Retrieved from http://www.homebrewersassociation.org/how-to-brew/how-to-harvest-prepare-and-store-homegrown-hops/

Beeradvocate. Hop Guide. Retrieved from http://www.beeradvocate.com/beer/101/hops/

Brewers Association. Craft Brewer Defined. Retrieved from             https://www.brewersassociation.org/statistics/craft-brewer-defined/

Brewers Association. Craft Beer Industry Market Segments. Retrieved from             https://www.brewersassociation.org/statistics/market-segments/

Brewers Association. Craft Brewing Statistics. Retrieved from             http://www.craftbeer.com/breweries/support-your-local-brewery/craft-brewing-statistics

Brewing Process. Sint-Sebastiaan Belgian Microbrewery: The Brewing Specialist. Retrieved from http://www.sterkensbrew.be/sbm/beer_making.html

Crowell, C. (2013, September 10). Craft Beer Distribution: Study the Market, Distributors and your own Operations. Retrieved from http://www.craftbrewingbusiness.com/packaging-distribution/craft-beer-distribution-study-market-distributors-operations/

IBIS World. (2015, August). Craft Beer Production in the US: Market Research Report. Retrieved from http://www.ibisworld.com/industry/craft-beer-production.html

Martorana, D. (2010, April 1). The Short and Bitter History of Hops. Philly Beer Scene. Retrieved from http://www.beerscenemag.com/2010/04/the-short-and-bitter-history-of-hops/

Palmer, J. (2015). Chapter 5: How Are They Used? Retrieved from             http://howtobrew.com/book/section-1/hops/how-are-they-used

Pagnotta, C. 20 Things You Didn’t Know About Hops. Mens Journal. Retrieved from             http://www.mensjournal.com/food-drink/drinks/20-things-you-didnt-know-about-hops-20140909

Nicastro, S. (2015, April 8). Starting a Craft Brewery Requires Passion, Patience and Deep Pockets. Nerdwallet. Retrieved from http://www.nerdwallet.com/blog/small-business/how-much-does- it-cost-to-start-a-craft-brewery/

Notte, J. (2015, April 29). Why Craft Beer Will Be Almost Unrecognizable by the Year 2020. Retrieved from https://www.mainstreet.com/article/why-craft-beer-will-be-almost- unrecognizable-by-the-year-2020

The Electric Brewery. Kettles (Overview). Retrieved from             http://www.theelectricbrewery.com/kettles-overview

Usahops.org. (2008). Hop Industry Overview. Retrieved from m            http://www.usahops.org/index.cfm?fuseaction=hop_info

The Future of Craft Beer

The craft beer industry as a whole is beginning to embark on unknown territory. In late 2015, the number of craft breweries in the United States reached an all time historical high of 4,131. Those numbers have not been seen since the 1870’s, decades before the prohibition. In the 1970’s the U.S. passed laws that allowed people to legally brew beer at home, which lead to the craft beer industry skyrocketing from less than 100 breweries to it current number. People are currently leaning on the side of cautious optimism when looking into the future of the industry.

The Brewers Association has set forth a goal of capturing 20% share of the beer industry as a whole by 2020. By the end of 2015, craft beer held an 11% share of the industry and a 19% share of the dollar sales of beer. This may begin to spike upward quickly in the next few years in response to some grey area in terminology and due to larger companies acquiring the competitive craft breweries. In 2010, the Brewers Association changed the definition of a craft brewery from one that produces 2 million barrels to on producing 6 million barrels in order to include Samuel Adams’ Boston Beer, Sierra Nevada and New Belgium. Just a year later the definition was amended once again to include beers brewed from corn, rice, and other adjuncts, meaning large brews such as Yuengling, Straub, and Minhas are now considered craft beers. With the trend of increased acceptance of craft breweries by consumers, large companies, such as Anheuser Busch (AB), have begun to buy up the competition. AB currently owns Goose Island Brewing Co., 10 Barrel Brewing,Long Island Blue Point, Elysian Brewing, and many more. These acquisitions have sent a ripple through the craft brewing community for fear of “selling out” and, one day, possibly seeing the industry absorbed into large conglomerates that won’t celebrate or continue the culture of craft beer.

The sheer number of breweries opening in the market each year could add to the downfall. Over the course of a decade the number of craft breweries has grown from less than 1,500 to over 4,000, with 2,000 more breweries set to open. Widespread local support for craft brews has lead to an average of 2 new breweries opening every day. The movement has spread across the country and now 75% of the legal drinking aged adults in the United States lives within 10 miles of a local brewery. Though, there is still room for untouched geographical markets, for 64% of craft beer is made in just 10 states. These high density markets make it difficult to build a unique and coveted brand, giving way to the trend of small breweries selling out to large conglomerates. Since so many beers are on the market, small brew companies can only hope that their beer is being represented sufficiently by their distributors. But, now a days, it is not uncommon for distributors to have 2,000 SKU’s in their contracts, counting a lot of breweries out of the marketing game for a lack of a large budget to make sure their distributors make their specific beer a priority. These factors are leading people to believe that the 20% market share predicted in 2020 for craft brews will actually be mostly comprised of portfolio’s similar to AB’s.

Craft breweries have and will continue to add to local economies. In the state of Virginia craft brews generated $1.045 billion in revenue last year from its 78 breweries. In the U.S. over $55 billion is contributed to the economy and over 424,000 jobs. A survey has shown that one in every five dollars spent in the US is on beer and one in every 10 dollars is spent on craft beer. American craft breweries do not show any sign of slowing down openings in the future. As long as there is local demand for beer, breweries will continue to seek to be their neighborhood brew.

Trends in the upcoming year are moving in several different directions. The one that is making the biggest splash in terms of stealing market share is the creation of hard ciders. With the social and cultural trend towards healthier life styles and also appealing to women, the sale of ciders has grown exponentially in the past few years. Hard ciders are not technically a beer, usually classified more toward a sparkling wine or in its own category, but threaten to leave a huge dent in the craft beer market. Since the explosion of craft breweries in the U.S. there have also been and influx of flavor options to appeal to many different people. Women are the next segment to be targeted by craft breweries. It has been calculated that women have influence on about 80% of all purchases made, yet only around 23% of women that are drinking age choose to drink beer. Breweries are going to begin to appeal to the palettes of women creating notes that will attract an entirely new market segment.

As for the flavors of beer moving forward, there is constantly a roller coaster of “in” and “out” trends. Predictions for 2016 include, hard sodas, such as the Not Your Father’s Root Beer. Breweries have begun concocting variations on ginger ale and orange soda. Crowlers will become more popular in the next year. This is the can version of a glass growler. The can is a one time use, but allows for a longer shelf life after purchasing because it does not let light in. IPA’s will begin to grow less bitter as brew masters are appealing to a broader audience and bringing in the female segment. And lastly, based off of the success of bourbon barrel brews, companies are looking for the next big liquor based beer. The tallies are in and it has been predicted that the next big beer will tequila barrel beer.

 

SOURCES
http://www.pastemagazine.com/articles/2015/10/yes-the-future-of-craft-beer-is-in-question-dont-p.html
https://www.mainstreet.com/article/why-craft-beer-will-be-almost-unrecognizable-by-the-year-2020
http://www.craftbeer.com/craft-beer-muses/why-women-are-a-critical-part-of-the-future-of-u-s-craft-beer
http://www.nytimes.com/2015/10/22/opinion/craft-beer-is-booming-but-some-brewers-worry-about-the-future.html?_r=0
http://www.investopedia.com/articles/investing/102715/future-craft-beer-industry.asp
http://vinepair.com/wine-blog/craft-beer-bubble/
https://www.brewersassociation.org/statistics/economic-impact-data/
https://www.brewersassociation.org/statistics/economic-impact-data/
http://fortune.com/2016/01/09/craft-beer-trends-2016/

Beer Distribution

There are more than 3,000 independent beer distribution facilities that operate as local businesses in every state and district in the United States.  They buy, sell, store and deliver new brands to the market place.  Beer distributors operate in a three-tier system of alcohol distribution that was implemented after the end of Prohibition.  These three-tiers consist of producers, distributors and retailers.  This system limits the distribution cycle so the producers sell their product to a wholesaler who then sell it to the market preventing direct distribution.  A benefit of the distribution system is traceability- if there is a problem in the supply chain then distributors can quickly track the product and push or pull it from the market when needed.  The system also helps the states’ ability to collect taxes.  Figuring out a distribution strategy is a major concern for craft breweries, and it plays a pivotal role in their long-term approach.

The Virginia Beer Company (coming soon)

Chris Smith and Robby Willey started drinking beer together at the Green Leaf as William and Mary MBA students. 10 years later they are about to open The Virginia Beer Company right here in Williamsburg! The Virginia Beer Company is a craft brewery that will serve 8 beers at a time from its taproom and distribute their beer through local channels. They plan to open their doors at 401 2nd St, Williamsburg VA in the middle of March 2016. You can watch their Facebook page and website for updates:

https://www.facebook.com/VirginiaBeerCo/

http://www.virginiabeerco.com/

Today Chris came to talk with us about their journey into the world of craft beer.

Chris and Robby met as William and Mary MBA students then went to work in corporate America. Several years later they decided to pursue more fulfilling careers by starting a craft brewery. In 2011 they joined the Brewer’s Association and in 2012 selected Williamsburg as the site for their brewery. While they had experience with home brewing they wanted a brew master with even more experience that they could work with to start a new brewery. They found Jonathan Newman at Sweetwater and spent over 6 months tasting and developing different beers. Jon completes their current team of three full-time employees at The Virginia Beer Company.

The local economic development authority was very warm and welcomed them and their business to the community. They planned on opening the brewery in 2014, but the right types of buildings weren’t available. They finally found and completed a deal for their current building in December 2014. After a year of building renovations and equipment installations they started brewing on-site in January 2016. They are currently on the 7th batch with hopes that the 8th will be ready for an opening on the weekend of the 12th or 18th of March. They have 8 taps and plans to brew up to 60 beers each year. Four of those beers could be year round and the can designs and distribution plan for them is done. Those four are an IPA, a citrus wheat, an oatmeal stout, and a dry-hopped rye.

What makes The Virginia Beer Company unique is their ability to have a brand new high-quality beer available each week. They can do this because they have invested in two separate two vessel systems and a quality control lab. That means every batch of beer is held on-site and tested for about a week to ensure its quality. So every week they plan on releasing a new beer to keep the taproom fresh and new while maintaining consumer favorites.

Taproom hours will likely be 2pm until 10pm, but check the official sites above for specifics. They are working on deals with local food trucks so that customers can get something to eat without having to go too far. I am now really looking forward to the middle of March.

Hops: What are those?

Hops are the female flowering seed cone of the humulus lupulus plant. They grow on a bine (not to be confused with a vine!) between the 35th and 55th parallel. The plant requires long, hot summers and cold winters to successfully grow. The bine will use most of it’s time its first three years of life expanding its root system so it’s maximum yield won’t be attained until year 3. When fully mature, an acre of hop bines will produce over 1800 pounds of hops. The hop industry in the United States is centered in Yakima Valley, Washington. Over 90% of domestic hops are grown there. In 2015, the hop industry was measured at $345 million dollars, an 11% increase from 2014.

Before the craft beer explosion, hops were readily available to brewers. Now, new entrants into the beer brewing industry have a tougher time finding access to hops. Large breweries are signing multi-million dollar contracts with hop farmers for access to the quality and quantity they need to support their production schedule over the life of the contract. Hop farmers are then, in turn, only producing hops in quantities agreed upon in the contract plus what they can confidently sell, limiting the amount of excess hops that hit the open market. The growing popularity of hop-intensive IPAs are further stressing the hop industry.

References:

Craft Brewery Market

By definition, the craft brewery market “includes microbreweries and brewpubs that produce beer for resale or consumption on premises” (IBIS World, 2015). Major products in the industry include IPA, Seasonal, Pale Ale, Amber Ale, Wheat, and Lager. There are three main characteristics for the industry: small, independent, and traditional. The brewery must produce less than 6 million barrels per year. An industry member can own/control 25% of the brewery. Lastly, the brewery must be innovative (“Craft Beer Defined”).

In 2014, retail sales for the craft brewery industry were $19.6 billion (“Craft Brewing Statistics”). Between 2010 and 2015, there was an annual growth of 18.8%. Currently, there are 424,000 jobs and 3,794 businesses (IBIS World, 2015). As shown in the link, Number of Breweries Worldwide, the United States has the most breweries at about 4,000 compared to the next biggest at 723 (United Kingdom).

There are four segments in the craft brewery market: microbreweries, brewpubs, contract brewing companies, and regional craft breweries. Microbreweries are:

  • Less than 15,000 barrels per year
  • 75% beer sold off-site
  • Examples: Alewerks, Back Bay, Home Republic
Brewpubs are:
  • 25% or more sold on-site
  • Sold in restaurant and bar
  • Examples: Gordon Biersch, Great American Restaurants, Rock Bottom Brewery
Contract brewing companies are a business or brewery that hires a brewery to make its beer. Lastly, regional craft breweries are “independent regional brewery with  a majority of volume in ‘traditional’ or ‘innovative’ beers” (“Market Segments”).
References:

Alewerks Williamsburg’s Home Brew

AleWerks’ current home was a site of another brewery. They purchased the equipment and location 2006 with an initial investment of $200,000 dollars. Their first product was the Chesapeake Ale. AleWerks’ has won multiple awards including the best Virginia beer and titles at the U.S. Beer Tasting Championships.

They are the only microbrewery in Williamsburg producing 4,000 barrels and are hoping to expand to around the 5,000 barrel mark for 2016. The hardships faced by AleWerks comes from potential loss in product. If they had to dump a tank, they could potentially loss a month of product. An interesting fact in the brewing process done at AleWerks is the reuse of their yeast. Plus, efforts put forth by Alewerks involves giving local farmers feed for their cows with the grain by-products.

The highest percentage of sales comes from their on-site taproom. Their distribution network reaches Virginia, West Virginia, D.C., Maryland and is expanding with Philadelphia. You can also buy Alewerks in bottle in the Williamsburg area and can be found on draft in the local bars. Alewerks has now become an investor corporation.

During our visit, we tried six beers. The Wheat Ale was definitely a crowd-pleaser among the group with it’s citrus flavor. The Pumpkin Ale gave hints of cinnamon; one secret we were privy to was the use of Butternut Squash in their Pumpkin Ale. It is also considered one of the better ones to taste. The Coffee Stout was surprising drinkable and gave the drinker a kick given a half a cup of coffee. Their flagship beer, The Chesapeake Ale, was again all it lived up to be; smooth, refreshing and mildly hoppy. The Tavern Ale deep brown in color gave fruity notes with chocolate hints at the back end. Drake Tail citrus flavor is one to behold with the fruit finish was a great try. In the end, AleWerks is an up and coming and we can’t wait to see what they do next. They offer Year-round, Brewmaster, and Seasonal Offering.

The Brewing Process

Beer can be brewed in many different ways using different ingredients and brewing methods to make different types of beer.  However, there are some main ingredients and processes that are required to brew any type of beer.

4 Main Ingredients: 1) Malt 2) Hops 3) Yeast 4) Water

hops2

The basic brewing process follows this sequence of events: Mashing -> Lautering -> Boiling -> Wort Filtration -> Wort Cooling -> Fermentation -> Conditioning -> Filtering -> Packaging

Mashing: Malt is mixed with water and heated at specific temperatures to allow the enzymes in the malt to break down into a fermentible sugar.  This process typically takes 1 to 2 hours depending how the breweries recipe.

Lautering: This is where the liquid mixture created from mashing is separated from the remaining grain and other solids.  Once the lautering process is complete, the remaining liquid mixture is known as wort.

Boiling: The wort is combined with hops in a kettle or boiling tank to produce the beer’s bitterness, flavor, and aroma.  This process takes 50 minutes to 2 hours.

Wort Filtration: After being combined and boiled with the hops, the wort is strained again to remove the hops and other ingredients that were added during the boiling phase.

Wort Cooling: After straining the wort to remove solid particles, the wort must be cooled down before it can begin fermentation.

Fermentation: The cooled wort is placed in the fermentation tank to begin the process of fermentation.  This is where yeast is added to the wort.  The yeast interacts with the sugars that were created from mashing and releases to products: alcohol and CO2.  Once the yeast is placed into the fermentation tank, the liquid mixture is officially called beer.  Different types of yeast produce different kinds of beers and must be left in the fermentation tank different lengths of time.

Ale: Ferments at temperatures of 60 to 68 degrees which is warmer than most beers.  Ready to drink within 3 weeks of fermentation.

Lager: Ferments at temperatures of 50 degrees.  Takes months before lagers are ready to be consumed.

Conditioning: After the fermentation process is complete, the fermentation tank is cooled to near freezing temperatures which causes the yeast to stop interacting with the remaining sugars and settle.  Some beers must be left in the conditioning state for months before moving to the next step.

Filtering: Beer is again separated from solid particles through straining or other techniques.

Packaging: Most breweries have CO2 tanks that can put carbonation into the beer at the time of bottling.  For home breweries, priming sugar must be added during the bottling process to allow the remaining yeast to consume the sugar and produce CO2 for carbonation

http://www.homebrewersassociation.org/how-to-brew/beginner/homebrew-equipment/

http://www.beer-brewing.com/beer_brewing/beer_chapters/ch09_mashing.htm

https://www.google.com/searchq=lauter+tun&espv=2&biw=1280&bih=622&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjP4sKC_bbKAhUDrD4KHa3jDSMQ_AUICCgD&dpr=1.5#mgrc=Gu5d9r92J2HeDM%3A

http://www.theelectricbrewery.com/kettles-overview

https://www.google.com/searchq=craft+brewery+fermenter&espv=2&biw=1280&bih=622&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjG147A_rbKAhUE8z4KHebnBhMQ_AUIBigB#imgrc=SOewpUL2H1yk6M%3A

http://www.sterkensbrew.be/sbm/beer_making.html

http://www.nerdwallet.com/blog/small-business/how-much-does-it-cost-to-start-a-craft-brewery/

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Devil’s Backbone Review

Devil’s Backbone was founded Roseland, Virginia in 2008. They originally had a goal to produced 10,000 barrels per year and provide a world class beer for the people of Virginia, Maryland, and Washington D.C. BY 2011,  demand had grown so much for Devil’s Backbone it expanded to producing over 45,000 barrels per year.  Today, they have a secondary location as an outpost brewery and tap house in Lexington, VA. Since their inception the company has accumulated a number of world renowned accolades. By 2014 they had gained the title of the best Midsize Brewing Company & Brew Team of the Year. In 2015, the Virginia Lager won Gold at the Great American Beer Festival and Silver at the Virginia Craft Brewers Fest. The Vienna Lager is Devil’s Backbone’s flagship beer and most well known among craft beer drinkers.

Devils Backbone Eight Point I.P.A and Vienna Lager. Taken at Food Lion in Hampton, VA.

Devils Backbone Eight Point I.P.A and Vienna Lager. Taken at Food Lion in Hampton, VA.

To learn more about their exceptional brewery, visit their site http://dbbrewingcompany.com/about-us/our-story/?age-verified=a8caa048cb

 

Virginia Beer Info-graphic

Virginia Info Graphic

Virginia Craft Beer Sales Statistic

Currently in the State of Virginia there are 78 craft breweries, the 15th most in the country. The craft beer industry provides the state with 1.046 billion dollars for it’s economy. It also produces 1 gallon of beer per adult older than the age of 21. Currently the amount of Craft Brewers has risen each of the last 4 years. This info-graphic was done by the Brewers Association, a link to the graphic is below.

https://www.brewersassociation.org/statistics/by-state/?state=VA