Game of Levers: Pull Wisely
Winter isn’t just coming for the Top 50 craft breweries and beyond, it’s already here. Keeping pace with the fast-changing demands of today’s customers is a complex game and the zombie breweries are making their way North to claim what they believe to be theirs. Alliances can be formed and chess moves remain in play, but each one comes at a toll that the brewery must understand and be willing to pay. How to innovate without cannibalizing? How to go deeper and expand distribution, without killing freshness? How to successfully build brands, while keeping up with the constant desire for new? What to do with a popular SKU that has little runway left to grow? To answer these questions and stay atop their throne, breweries must play the game of levers. And play it well.
A favorite term that I’ve hearing a lot lately is the concept of pulling a lever. A lever is a strategic move kept in one's back pocket until circumstances dictate that it’s necessary. Pulling a lever isn’t necessarily a bad thing, but once that safety valve is used, it’s gone for good. Kind of like a “Get Out of Jail Free” card, you feel a lot better when you still have it, versus once it’s used up. In the beer world, a lever could be anything really, but I associate the term most commonly as the introduction of a new retail channel, packaging format, territory expansion, or price change.
New Channels
Beyond the startup phase, finding growth today often requires entering a new category of retail. Examples include sports & concert venues, grocery stores, gas stations, drug stores, convenience stores, club stores, delivery services, etc. Reaching a segment of customers who otherwise may not cross paths with the brand helps expand their audience and increase sales. Whether or not the brewery is adequately prepared for the challenges however, is no guarantee. Each channel has a specific customer base with their own fickle tendencies.
Prior to Three Floyds’ big expansion in Muenster, IN just outside of Chicago, the brand was most often found at smaller, independent stores and in the case of fan favorite Zombie Dust, famously limited to 1 case/week. In both 2017 and 2018 however, they vaulted up the Brewers Association Top 50 craft brewery list, in part by pulling the grocery channel lever. By making brands like Alpha King, Gumballhead, and even Zombie Dust more widely available, where most consumers do their shopping, they were able to expose their brands to a significantly wider audience and grow 41% in Illinois IRI last year. The move makes freshness a more crucial variable because at 1 case/week and sky high demand, freshness controls itself. Alternatively, when beer is getting stacked up and 1-2 months worth are brought in by a retailer at a time, freshness becomes harder for any brewery to maintain.
Another example of a channel that mature brands consider beyond grocery is club stores. Consumers who pay for annual memberships to Costco or Sam’s Club are in search of a price break. With margins on beer being thin already, club stores accommodate a deal by working on a lower margin, but selling in volume (typically by the case) and negotiating deals for buying entire pallets. It’s not a no-brainer for breweries, as fear of price degradation sets in, making it harder to sell the brand elsewhere at the undiscounted price. To compensate, some breweries will design variety packages specifically for club stores in an effort to protect the perceived value of their SKUs sold outside of the club. On one hand it’s a new consumer and a way to push more volume, but on the other hand, they’re training those consumers to undervalue their beer, which can have long term consequences. There’s no right or wrong answer to pulling the club store lever, it just comes down to weighing pros and cons, which vary depending on the stage the brewery is at in its life cycle.
New Formats
Playing ball in these new channels may require pulling a lever on a new format, introducing an additional size and/or vessel that the customer demands. Sales may be hitting a wall and need a boost, or the brewery may just be putting their foot on the gas pedal. Regardless, new formats have some inevitable, but difficult to predict cannibalization. They’re not going to double sales for the brand just by introducing its second format, not even close, but it's assuredly going to increase sales upon launch. The most successful launches of secondary formats are going to be well thought out, with clear division of which are sold where. The additional format will complicate operations, freshness initiatives, distribution, and sales, so pull wisely.
Allagash pulled a major format lever in early 2019, adding four-packs of 16oz cans of their flagship White. In the off-premise, younger demographics more and more are skipping the bottle section altogether and steering straight for cans to make their selection. The reasons don’t seem to be tied to any logical advantages that cans provide over bottles (weight, transportability, exposure to light, etc.). Instead, it seems more tied to the trend, with most new and “cool” releases being put in cans these days. Cans these day, amiright?
The new format represents a tremendous opportunity for Allagash. White bottles were up an impressive 11% last year in IRI, so the cans seems like a sure fire way to continue that momentum. New releases often get off to a hot start with consumers trying it once, then the vanity quickly wears off. In the case of White however, the brand transcends a lot of standard rules. It’s likely that they’ll see declines in 12oz bottles once the cans fully penetrate the market in a year or two, but the increased distribution for the overall brand will position it for a big surge. The timing feels perfect for this lever and with an initial roll-out only the Northeast for the 16oz cans, the Midwest and West coast levers remain in tact for when their production is able to catch up.
Going back to Three Floyds, they made a similar move into cans just recently with their beloved classics, Alpha King and Gumballhead. Similar to Allagash White, these brands predate a lot of today’s madness and aren’t as subject to the short lifespans of new brands we’re seeing today. That powerful foundation positions them for a very nice boost by using the can lever, and they wisely saved Zombie Dust cans for a future pull.
The 19.2 can is another fascinating lever that I can speak personally to, as it has fascinated me since Revolution launched Anti-Hero in a 19.2oz format back in late 2017. I noticed most craft beer writers and enthusiasts were confused by the extra tall can and thought they were just a gimmick, but that’s really not the case at all. The single-serve beer consumer is a huge segment, they just don’t leave a paper trail on the internet or social media, so we don’t know much about them. Each time I happen to see someone buy a Rev 19.2 at a store, I try to make conversation in the least creepy way possible, and find out why they like that size. It’s always clear that they are very brand loyal and don’t buy the tallboy exclusively, but pick it up on quick stops for a specific, on-the-go occasion. In Chicago and New York, they’re very popular with commuters on the trains heading home to the suburbs or into the city for a concert or sporting event.
The single serve can is a necessary format to enter channels like convenience stores and gas stations, where that’s mostly all that’s carried. Consumers keep their check low, but come at high frequency and only buy one beer at a time. That buying pattern is becoming more common in the grocery channel these days as shoppers are more conscious of freshness in food. Stores are responding with more shelf-space dedicated to grab n’ go and thus, more opportunity for the format. As I was editing, I saw Peter Frost of MillerCoors drop a nice piece on their blog with some research on this topic. One of many challenges for craft with 19.2s is the amount of cans that have to be ordered (and paid for) all up front, which can be over a years worth, or more, depending on the size and distribution a brewery gets out of the format. That’s part of the reason that you don’t see many small breweries dabbling in this size yet. They don’t have the outlets at their disposal to sell that many individual cans, nor the adequate quantities available to them, but soon enough I’m sure this will become a thing will smaller breweries.
New Markets
New territories make for an obvious lever. Many don’t realize however, just how drastic of a difference the volume is between the brewery’s home market and an away market. Even when located in a smaller city like Richmond, VA and expanding into New York City, a lot more beer will still be sold in the smaller hometown, by a hefty multiple in most cases too. This is even more so the case in today’s crowded market, but the principle dates back to the high growth days of craft, as well.
It’s not as much about the population of the market, but the brewery’s status within it, relationships, and ability to get placements. A strong hometown brewery could earn themselves 5, 10, 15, hell even 20 SKUs at their major Wine/Liquor superstores (Binny’s, Bevmo, Total Wine, etc.), but a few states away, the ceiling is a small fraction. There is truly no place like home in this industry. Even when a global conglomerate gets their hands on a craft brewery and uses their powerful distribution and relationships to set set flight for new lands and breathe fire down upon us all, it's original local market is unlikely to be beat.
Price Changes
When dealing with the 3-Tier system and chain stores, pricing is probably the most complicated decision for a brewery and not something I’m going to dive far into this time around. Changes are a necessary lever to pull and are very common. From the consumers eyes, the pricing lever is most often thought to take take a brewery down in price which triggers more volume, earning you smaller margin percentages but higher total margin overall. This can be a temporary maneuver to speed up the tastings and trials of the beer and hopefully building loyalty along the way, or it could be a permanent approach to repositioning the brand. Many curmudgeons call this the Race to the Bottom. At the capacity and efficiency that the Top 50 have reached and the clout they have locally, they can afford to throw punches with the big guys on their own turf, if they so choose, but it’s usually a battle best avoided.
It’s common for a strong brewery to not just hold the line, aka maintain price, but to go up. This effort to further premiumize the brand against its competition will compensate each tier for the rising costs of doing business. It will also bring economics into play by putting the beer’s elasticity to the test. Under the right set of circumstances, raising price can be an effective strategy to distance a brand from what’s perceived to be lower quality alternatives. Back when Ballast Point first expanded out of San Diego, a big reason for the high price point of Sculpin six-packs ($14.99 - $15.99) was not the cost of ingredients, but instead to distance itself from Lagunitas IPA, its primary local competitor at the time.
Wrap-up
Levers aren’t good or bad, they’re simply a sign of the obvious need for breweries to continue evolving as they navigate the market. Pulling too many can result in SKU proliferation, illogical or inconsistent pricing, and over extending a brand beyond what it's back end can support. Pulling just the right amount, at the perfect time, will allow a brewery to meticulously capture more share. You’ll notice I don’t mention innovation as a lever, though many probably would. I prefer to look at innovation as the Yin, and levers as the Yang. A harmonious balance of the two ensures that a brewery is competing to win in the big leagues, while building a successful farm system of new ideas, and levers to pull, to remain on their throne for generations to come.