Sierra Nevada Still Growing in 2010 More Big Plans for 2011

FILED AUGUST 6, 2010

Dear Client:

Sierra Nevada is growing another 10% so far this year, with every region of the country posting gains, and hot newish double IPA Torpedo draft isn't even rolled out everywhere. Seasonals are up 21.1%, and Torpedo up 84% (the number one IPA now). Your editor spent two days at the brewer, brewing beer at their Beer Camp, tasting brews, and chatting with execs. If you've never made it out to Chico to see the brewery, it is a sight to behold. Over 80% of their electrical needs come from solar power or their fuel cells. Every supportable roof has solar panels on it. They are below a 3:1 water to beer ratio, and they have their own hop and wheat fields for their estate ales. They also grow vegetables on the property for their restaurant, and a new composter is en route to turn bio-trash into rich soil, among many other innovations.

Sierra has gone from 71 SKUs in 2005 to 204 SKUs in 2010. But the big news was that they will be rolling out, on allocation, a new hoppy beer called Hoptimum in 24oz bottles and 5 gallon kegs in January 2011. Also possibly look for a new Lime and Limb (UPDATE: oops, typo alert, it's Life and Limb) collaboration with Sam Calagione. But what got the most oohs and ahs was a new collaboration with a nearby Trappist Monastery to create an abbey dubbel ale called Ovila. Lots of action in the hopper for Sierra Nevada, and getting mighty close to breaking the million barrel mark. (I am writing this in Brian Grossman's office as he has running a meeting, and have mostly resisted the temptation to go through his papers).

A-B OUT WITH PRICING; WILL MILLERCOORS FOLLOW?

That's what's on the minds of several A-B distributors yesterday. I got word from some distributors that MillerCoors has followed, but is waiting a month (October) to go up on price, and from other distributors that say MillerCoors distributors have yet to issue price letters. Some are conjecturing that MC will take up Coors Light more than Miller Lite, but we haven't seen that yet. Let me know what you're seeing out there, hs@beernet.com.


CRAFT GROWING, BUT WHAT ARE THE CHALLENGES

ED. NOTE: The following is an excerpt from a speech I gave at Sierra Nevada's company-wide Town Hall meeting on the future challenges and success of craft beer. I actually diverted substantially from the speech, but this is an excerpt of what I was supposed to say.

When Joe Whitney asked me to speak at your Town Hall meeting on the state of the beer industry, I was very excited. When he asked that my presentation involve giving predictions, less so. Predicting the future is very difficult for three reasons: Number one is that the future hasn't happened yet, so you lose the value of hindsight. It's hard. It's easier to predict the present, because at least it's just now happening. And the easiest, of course, is predicting the past, because it's already happened. I can predict that past with almost 100% accuracy. Secondly, it's hard because you tend to predict what you want to happen, rather than what will actually happen. And finally, the future hinges on the outcome of trillions of random variables and decisions, all of which are impossible to keep track of or even be aware of. I do know a lot about the beer business, given that it's been my life for over twenty years. But while what I know I know very well, what I don't know I suspect doesn't exist. This is the cloak of vanity that shrouds all those who attempt to predict the future. So take what I say with a grain of crystal meth.

Even my old standby prediction bears fresh scrutiny. That prediction being: Beer will always be heavy relative to its price and alcohol content. This is an important prediction because as long as beer remains heavy relative to its price, it will likely continue to be distributed in the same ways it has since Repeal -- through the DSD system. Shipping beer direct to consumers doesn't make sense when the shipping costs of something so heavy so far exceeds the price of the actual beer. The consumer just won't do it. I was reasonably confident in this prediction because gravity and Newton's inverse square is not likely to change. But what has changed is that craft brewers have changed the pricing equation so far upward, and even alcohol contents have pushed the limits. I expect that more and more beers, particularly higher priced with higher ABVs in 750ml bottles, will be sold on the Internet. Will it reach wine proportions? Probably not, because most beer is still sold in 12oz bottles and is still heavy relative to its price.

One prediction that's being bandied about a lot lately is that craft beer, which is currently at about 5% of the market, will grow to 10 or 15 or even 20% of the market. Jim Koch often says, give them a number or give them the date, but never both. So I'll give you neither. But while there are many on the other side who believe the law of big numbers will soon catch up with craft brewers, and their growth will start to slow, that hasn't happened yet. It continues to accelerate, in fact, as a new generation of consumers, raised on Starbucks and Red Bull, increasingly looks to more flavorful beers. The rise of sour beers gives credence to this notion.

But what about what happened in the mid-1990s, when craft was soaring and then suddenly slowed dramatically after hundreds of fly-by-night companies entered the arena (remember Rhino Chasers?). Well, in these times we have fewer of these charlatans. Brewers, even very small ones, are making consistently high quality beers, rather than putting out their latest science experiments. Chains aren't as likely today to add a beer just because it has a clever name. It has to prove itself first in the on-premise beer culture and find its legs before a chain will even consider it. So the growth today doesn't resemble the wild west of the 1990s. It has the whiff of sustainability about it.

But there are challenges to craft beer rising to 15 or 20% of total beer sales. As usual, it involves math. It takes about $100 a barrel to build additional brewing capacity, or $200 if you do it like Ken. If craft brewers can drive consumer demand to sell 30 million extra barrels to gain 15 points in market share, that's $6 billion in investment. That's a lot of money for craft brewers to raise. The other challenge is shelf space. The larger brewers aren't just going to hand it over without a fight. They control the category management mouse, and that gives them the benefit of inertia, not to mention that they are focusing on the craft segment like never before.

On the other hand, the consumer ultimately decides. If that ends up being what they want, then the capital markets and the category managers will comply. But it will be a long process. Older generations still like their light lagers, and that category has only very recently shown softness. It's still up in the air whether those beers will make a comeback once the recession abates.

The other challenge craft brewers face is their historical tendency to under-index in the rapidly growing Hispanic and African American consumer segments. Crafts have made some strides here, but if you can't get these groups to drink craft beer in larger numbers, getting to 20% will be tough.

But I can safely make one prediction for the near future: craft will continue to grow, and it will continue to grow faster than the rest of the industry. The numbers don't lie. Craft has broken into the mainstream and continues to do so every day. How far can it go? Much of that depends on you. And with the level of congeniality and enthusiasm I've seen here the past two days, I think you've got a great shot at continued growth.

Now I'd like to talk about branding. Thankfully in this industry, brands still matter. But there's been a trend lately for bars and even off-premise establishments to rotate new brands into and out of accounts on a weekly basis so the drinker can "try what's new." I'm not sure this is a healthy practice for our business. I'm not talking about seasonals here. Seasonals are in-and-out packages but they are branded for the season. That's a good thing. But what we must guard against is the craft industry falling into the wine trap: where brands are less important and consumers are trained to switch around promiscuously. In the wine business, only big companies make money, while the smaller wineries are either on the brink of chapter 11 or they are funded by rich guys. That's a hard industry business model to invest behind. In beer, brands still matter, and we must ensure that we keep it that way.

Finally, let's talk about your favorite subject: me. I want you to know how much I appreciate you letting me spend these few days haunting your brewery, creating a beer in your pilot brewery, judging your homebrew competition, getting to know some of you, and enjoying this extraordinary establishment. You have built a truly beautiful and sustainable brewery here that is the envy of the world. I salute you for that. And I especially thank Ken and Steve Grossman, Joe Whitney, and all of you for your hospitality. I look forward to seeing each of you across this great nation of ours.

Until tomorrow, Harry

"I am always ready to learn although I do not always like being taught." ~Winston Churchill

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