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Today, the 42-year-old Steronko runs Milwaukie-based Peak Northwest Brewing. But Steronko's dream has begun to sour. He puts in 100-hour weeks and has remortgaged his home to keep the brewery going. He hasn't gotten a paycheck in seven months, and he sees his wife only when she comes in after work to help him. Occasionally he has thoughts about calling his former employers--not to get his old job back, but to have his head examined. "I love being here," Steronko says, standing next to his gleaming fermentation tanks, "but it'd be a lot more fun if we were making money." In the past 10 years, microbreweries have become as much a part of the local scene as moss, beater cars and fleece jackets. There is no other American city in which they are so entrenched. More than recycling, urban planning or non-fat lattes, microbrews have come to define Portland. But the party's over. Sales growth has slowed to a trickle, and the once-cozy fraternity of brewers threatens to turn cannibalistic. Last year saw the high-profile failure of Nor'Wester Brewing, but that bankruptcy had more to do with irresponsible management than the structural problems that now plague the entire industry. Those new difficulties stem from overcapacity, competition and normal growing pains. But the toughest, perhaps most frightening, opponent the local brewers face is Anheuser-Busch, the spiteful giant upon whose turf the micros have dared to venture. Imagine Goliath, pumped up on steroids, putting the squeeze on David's underfed, disorganized little brother, and you have some idea of what happens when the worlds of industrial and micro brewing collide. "Bud," says local beer expert Fred Eckhardt, "doesn't want any competition." Most Portlanders would probably be surprised to learn that local brewers are having trouble. From the 105 taps at the Dublin Pub--most of which dispense Oregon beers--to the Oregon Brewers Festival, which attracts 80,000 devotees to the riverfront each July, you can't throw a Frisbee in this town without hitting a McMenamins or a self-proclaimed "beer geek." In how many other cities could a beer-swilling alpine billy goat ramble from one dark-paneled bar to the next to publicize the release of a new beer--as the Saxer Brewing mascot recently did--without anyone batting an eye? Indeed, Oregon absorbs microbrew like an unemployed son-in-law. More than half the draft beer sold in Portland is microbrewed, as is more than 10 percent of the beer sold statewide--a share four times the national average. And the growth continues: Last year, in-state sales rose 5 percent. Outside Oregon, though, conditions look ominous. For the six biggest local brewers--Widmer, Full Sail, Deschutes, Portland Brewing, Rogue and BridgePort--crucial out-of-state sales slipped 7 percent last year, and there's no reason to think they'll rebound soon. "We used to sell a tremendous amount of beer in Southern California," says Fred Bowman, co-founder of Portland Brewing. "Sales are down 60 percent from 1995." Other brewers have suffered similarly. Making the pain more acute is that Widmer, Full Sail, Portland Brewing and BridgePort underwent large expansions just before sales slowed. The four currently have a total of 380,000 barrels of new brewing capacity that is not being used. Either a lot more beer goes out of state, or somebody goes out of business. "Additional capacity," says Widmer Brothers President Kurt Widmer, "was absolutely predicated on geographical growth." Instead, what has grown is competition. Since 1995, the number of breweries in the country has exploded--from more than 650 to more than 1,300 (this figure includes brewpubs). Saxer Brewing used to sell all the Lemon Lager in Florida that it could ship, says company president Steve Goebel, but now that several craft brewers have sprung up in that state, Saxer's market has evaporated. "It's simple," Goebel says. "People want to drink local beers." Contract brewers have also hurt the micro crowd. The most successful is Jim Koch, owner of the Boston Beer Co., the maker of Sam Adams. Microbrewers tend to regard Koch as a wife regards a mistress: While they built breweries from scratch, he "contract-brewed" his beer in idle capacity at large industrial plants, then labeled it "microbrewed." Not having to invest money in a brewery allowed him to spend more on advertising--while capitalizing on the affection consumers have for small breweries. "Samuel Adams is a marketing shell," says Kurt Widmer. In Southern California, for example, Portland Brewing owned the honey-beer market, Bowman says. When sales slowed, Bowman discovered that a mysterious new company named Oregon Ale & Beer Co. was offering honey beer much cheaper. Oregon Ale, it turned out, was just a label that Koch had slapped on beer he produced at Portland's Blitz-Weinhard plant. The major breweries, led by Miller and Coors, also launched pseudo-micros, such as Plank Road and Blue Moon. Although none has been particularly successful, that didn't stop Anheuser-Busch from bringing out its own line more recently--Michelob Specialty Ales and Lagers. Though Michelob Hefeweizen and the like may be about as authentic as cubic zirconium, the copycats have had a major impact. They've hoovered up precious shelf space and tap handles, while also undercutting micro prices by a couple of bucks a six-pack. Having risked literally everything he owns on Peak Northwest's success, Steronko regularly wakes up in the middle of the night worrying about the competitive pressures he faces. Simply making good beer is not enough to guarantee success, he has found, and the challenges will only get stiffer. But like any entrepreneur, Steronko is responding. He has brought out a new ale and completely redesigned his packaging. But the challenge for which he has no response, the one that scares the hell out of him and every single brewer in the microbrew industry, is Anheuser-Busch's insatiable thirst for market dominance. The company already claims 46 percent of the U.S. market and has said repeatedly that it wants 60 percent. Anheuser-Busch is the largest brewer in the world. In the U.S. last year, the St. Louis-based colossus sold the equivalent of 30 billion cans of beer. Unfortunately for brewers, the beer market is deader than Kennewick Man. Total sales have been stagnant for more than a decade, and Anheuser-Busch's stock has languished. The only way to increase market share is to take customers from somebody else. Although the entire micro sector accounts for less than 3 percent of the national market, each micro consumer was essentially stolen--and guess who wants them back? Three years ago, Anheuser-Busch began to attack the little guys. "I think it all started," Bowman says, "with August Busch getting irritated with Jim Koch and putting the brakes on things." In addition to bringing out its own pseudo-micros, the company launched a national advertising campaign belittling Koch and questioning both the legality of Koch's labeling and the quality of craft brews. Covering all bases, it also invested in one of the leaders of the micro revolution, Seattle's Redhook Ale Brewery. In the1997 book Beer Blast, author Philip Van Munching sums up Anheuser-Busch's guiding strategy as "denigrate, regulate and replicate." The moves that Anheuser-Busch made initially were the sort that any savvy, aggressive company might make to protect its business. But in the past two years, Anheuser-Busch has struck back in a way that many regard as dirty, if not downright illegal. The company has used its clout to "encourage" beer distributors to carry any non-Anheuser-Busch beers on their trucks. For all its might, Anheuser-Busch can't stop people such as Steronko from opening breweries, and it can't force people to buy Anheuser-Busch products. What it can do, however, is make it difficult for Steronko and other microbrewers to get their beer to retailers. Since Prohibition was repealed, the beer market has consisted of what's called the "three-tier" system, consisting of brewers, distributors and retailers. With limited exceptions, brewers cannot own distributors; except for brewpubs, they cannot even own retail establishments. One of the principal aims of the three-tier system is that distributors should be independent, able to deliver beer for whomever they want. In theory, Budweiser distributors could also distribute Coors, Guinness and Full Sail, for example. But in the past year and a half, many observers charge, Anheuser-Busch has tightened its grip on the 860-plus distributors who transport its beer nationwide, making a mockery of their independence. Using such inducements as 2 cents per-case cash payments and giving distributors a $1,500 per-truck painting allowance, Anheuser-Busch has pushed for what it refers to as "100-percent mind share." Put simply, the company wants distributors to give their undivided attention to Anheuser-Busch products, at the expense of all others. "There are only so many competitive brands a distributor can represent," says Gary Fish, owner of Deschutes Brewing. "According to Anheuser-Busch, there are none." Although Anheuser-Busch's policy is aimed at all competitors, it hits microbrewers hardest, because more established brands such as Coors or Heineken have longtime distribution arrangements. The options for microbrewers are fewer every day. The number of beer distributors has shrunk by nearly 500 in the past decade, declining nearly as quickly as breweries have multiplied. Says David Edgar, director of the Institute for Brewing Studies in Boulder, Colo., "The bottleneck for craft brewers is definitely at the distribution level." Anheuser-Busch's policy has tightened that bottleneck. Last year, several distributors who carry Bud decided to cease distributing for four California microbreweries. The four breweries then filed separate lawsuits, which have now been combined into a class action proceeding in San Francisco. Shortly afterwards, the federal Justice Department launched an anti-trust investigation. This February, Miller Brewing sued Anheuser-Busch for insisting on preferential treatment from the 54 distributors the two brewers share (Anheuser-Busch counter-sued). All the legal proceedings focus squarely on Anheuser-Busch's attempts to control distribution channels--a practice Bill Gates could attest draws regulatory scrutiny. Says Jim Kennedy, founder of Admiralty Beverage Co., the largest craft-beer distributor in Oregon, "Microsoft and Bud are doing the same thing." In other states, local microbrewers have already had to scramble for alternatives. Several California Anheuser-Busch distributors who once carried Full Sail and Portland Brewing have dropped the local companies. Full Sail was also dropped in Hawaii by an Anheuser-Busch distributor. After a recent American Brewers Association gathering, Irene Firmat, Full Sail's marketing director, said, "Almost everybody in the group has had a similar experience, but no one wants to talk about it publicly." It was Anheuser-Busch's distribution muscle, not money, that caused Kurt Widmer to agree to one of the most unlikely marriages since Michael Jackson hooked up with Lisa Marie. Widmer is a purist, elected by his peers as current president of the Oregon Brewers Guild. A few years ago, he says, he and his brother determined there were five imperatives for success: financing, equipment, people, a differentiated product--and distribution. They possessed the first four, but realized that without an alliance with a national brewer, a lack of distribution could kill the company. At the height of the micro explosion, the Widmers had more suitors than a barmaid at closing time. Only Anheuser-Busch didn't call--so Kurt Widmer called them, selling 31 percent of his company for numbers rumored to be around $20 million. His reasoning was simple: "They are the best at distributing beer." Within Oregon, local microbrewers have largely been spared the wrath of Bud. They don't feel the pinch of Anheuser-Busch policies as much here, because they are such a big part of distributors' businesses. Not all of Anheuser-Busch's distributors have caved in, either. Portland's largest Bud distributor, Maletis Beverage, continues to carry Heineken and even Nor'Wester. Anheuser-Busch officials were reluctant to discuss distribution issues, declining WW's request for telephone interviews and copies of documents relating to the "100 percent mindshare" policy. A company official wrote in response to WW's questions that incentives offered to distributors were common business practice and that distribution participation was entirely voluntary. David English, vice president of Anheuser-Busch's Michelob brands, added, "Anheuser-Busch's 100 Percent Mindshare program has nothing to do with the growth decline in the microbrew segment." Many believe that because of slowing growth, the microbrew industry will soon be tested by the kind of unpleasant realities it has largely been able to avoid so far. Everyone's biggest fear is price wars. The two big contract brewers--Boston and Pete's--frequently sell their beer for $4.99 a six pack. No true micros have followed yet, but at least one believes it's inevitable. "Price pressure is around the corner," says Jack Joyce, co-owner of Rogue Ales. He fears market pressures will seduce financial managers into sacrificing margins to boost sales: "Any idiot can operate a pencil." Second, nearly everyone concedes a shake-out is inevitable. "There will have to be consolidation," says Paula Fasano, marketing director at BridgePort Brewing Co., "or people going out of business." It's not clear what form consolidation will take. Although rumors circulate that national brewers are shopping, most insiders share the view of Pyramid Brewing President George Hancock: "Miller and Coors will not buy," he says. Mergers between microbrewers are also problematic. Each brewery enjoys a tax break of $11 per barrel on the first 60,000 barrels produced, which means that combining operating microbreweries carries an automatic penalty of $660,000. Secondly, there's little incentive to merge companies that have overcapacity. Still, true believers in the industry--and there are many--are convinced they have created an enduring market. Steronko is one of them. He delivers his own beer in Portland, just as Kurt and Rob Widmer did not so long ago, sometimes belting kegs into the front seat of his 1976 Datsun 280Z. The wiry, almost gaunt brewer spends a lot of time lifting kegs and cases, which is just as well, since he can no longer afford a gym membership. "I've lost 20 pounds since I started brewing," he says. "There isn't a day when I don't wake up sore." Steronko is cautiously optimistic--he just got a 1,300-case order for his from a beer-of-the-month club. The buyer liked his new packaging. "We're hoping we can hang in there financially," he says, weary but exhilarated after staying up most of the night brewing. "It's a constant struggle."
GOOD BEER GONE WRONG
WHY DON'T THE BEST BEERS SELL WELL? WHY ASK WHY?
BY JEFF ALWORTH
243-2122 ext. 348
Capitalism is an imperfect science. Otherwise, the best-selling beers would be the tastiest. Even in the world of craft brewing, the vagaries of marketing, distribution and regional tastes dictate that occasionally some exceptional beers won't sell well. Below are examples of five beers that, despite being exceptional, have a limited or rapidly declining Portland clientele.
PORTLAND BREWING'S BAVARIAN WEIZEN
This spicy, crisp wheat ale sold so poorly that, in Portland, it's only available at the main brewery and Flanders Street Pub. Everything up front on the beer is tangy, from the pungent aroma to the peppery, slightly bready first taste. One can detect some clove, perhaps from the high fermentation temperature, and it finishes dry and crisp, nicely thirst-quenching. Perhaps because of the powerful flavor profile, Northwesterners never took to it, but in the Midwest, with its large German population, the brewery still markets it in bottles.
WILD RIVER HARBOR LIGHTS KÖLSH-STYLE ALE
A golden, crisp summer ale, the kölsh style hails from Cologne (Köln in German), and authentic examples are rare in America. Wild River's version is fresh, tart and of delicate complexity. It won the silver medal at the 1997 Great American Beer Festival. The color and clarity of a pilsner, it has the slight fruitiness of ale with a clean, refreshing finish. The Grants Pass brewery, like many small breweries outside Portland, has difficulty not in brewing good beer (see also its exceptional imperial stout) but in finding shelf space. ROGUE YOUNGER'S SPECIAL BITTER
The first place you could buy Rogue was the Horse Brass, and the pub's owner, Don Younger, was honored by being the namesake of this fine bitter. A deep amber-red, it has a caramelly, malty aroma. Unlike some of Rogue's super-hoppy ales, YSB has a rich, roasty malt flavor, complemented by the modest hop signature. According to the A.C. Neilsen report, sales of YSB were down 44 percent for the year ending in January, and the brewery reports that its award-winning beers sell better on the East Coast than in the Rose City. REDHOOK RYE Of all Redhook's products, Rye sells the worst, not just in Portland, but everywhere. I am at a loss to explain why. This unfiltered pale ale is plenty robust and hoppy for even the most ardent Portland hophead. The rye contributes its own spicy bitterness, but it mingles with the hops for a resinous, sharp quality. Although a pale ale, Redhook Rye has enough substance to satisfy on cold, drizzly nights. SAXER STOUT LAGER
Actually more like a German-style black beer, this beer was marketed (unsuccessfully) as a stout to appeal to ale drinkers. This is unfortunate, because it is simply one of the finest beers I've tasted. It pours up a rich, fluffy head and stays frothy until the last swallow. Principally sweet, but with hints of roast coffee and nuts, it's a wonderfully thick, creamy beer. There are still some bottles on the shelves, but no more will be made; buy them quickly. This cautionary tale illustrates what can happen to even exceptional beers marketed improperly. |
