Memories of Shakeouts Past

Tony Gomes of Saxer Brewing. Source:   Oregonian

Tony Gomes of Saxer Brewing. Source: Oregonian

Twenty years ago, the era of craft brewing suffered its first serious setback. The early years, from the late 70s to the mid-80s, birthed the nascent industry but produced precious little beer. It was during the next decade that the most successful breweries grew into serious businesses. By the mid-1990s, speculators were attracted by the dollars companies like Boston Beer and Pete's Wicked were earning, and they rushed to get into the market. They mostly were not beer people, and the products they offered were opportunistic knock-offs of popular beer (or worse, cynical concoctions that were more likely to challenge Zima and other flavored malt beverages than Budweiser). That moment of speculation turned into a froth, and by about 1997 the froth had collapsed, leading to the failure of a number of high-profile breweries.

Fifteen years later, from about 2012-2015) a similar pattern seemed to be repeating the earlier one: growth figures for the industry were in double digits, and some breweries were posting triple-digit year-over-year growth; the number of breweries soared. To respond to spiking demand, larger breweries bought huge, expensive breweries, usually on credit. For a few years, breweries looked like money-printing presses.

I revisited this era when I recently returned to Pete Dunlop's excellent history, Portland Beer.  The book covers the whole sweep of Portland's brewing history, but it was a later section on the craft era that caught my attention. As Pete was walking through that mid-90s stretch, I was reminded of another lesson from that era. It's not the small breweries that fail during a market correction, it's the big, seemingly successful ones. The case in point is Portland Brewing, which became an unexpected focal point for how quickly breweries can collapse. The brewery still exists, but is a living tar pit containing the bones of two deceased breweries, and the struggling, trapped bodies of a couple more. There seems to be something in the story worth repeating here in 2017.

Let's begin with Saxer Brewing, one of the break-out critical success of the 1990s in Oregon. Helmed by German-trained brewmaster Tony Gomes, they made stellar lagers that won a case full of medals. This was not an opportunistic brewery by any stretch: Gomes used decoction mashing, aged his lagers for weeks or months, and refused to tart them up with hops, as was becoming the fashion among other local breweries. Unfortunately, Oregon was not ready for a brewery with a low-hop bock as its flagship, and so despite the critical raves, the brewery had a hard time turning a profit.

Next we have the experiment of one of those speculators, Jim Bernau, a winemaker who was trying to build a national network of breweries. His idea was to invent a brewery, Nor'Wester, built for large volume, to effectively flood the market and grab a large share. He promptly hired Karl Ockert from BridgePort to head the brewhouse, and his vision for the beer line was pure dilettantism. Here's Karl describing those his approach, which was emblematic of the entire project. (To fully understand this, it's important to know that Widmer's Hefeweizen was by far the biggest-selling beer in the Northwest, so much so that it attracted many imitators. Together that style dominated the overall market.)

"I was working for Nor’Wester Brewery, and Jim Bernau was looking and going, ‘What’s the most popular style of beer? Wheat beer. That’s what we’re going to make.’ So we made our own Hefeweizen, and we did quite well with it. And then, because Berry Weizen was big, we made a Raspberry Weizen. (It was awful beer, but it did quite well.)"

Bernau approached Nor'Wester like it was a standard widget-maker, applying the kind of business strategy that would sell shoes or soda. He wrapped his bottles of wheat beer up in glossy branding and invested a mint to inject as much beer into the market as he could. The flagship Hefeweizen--stolen wholesale from Widmer--was at one time the best-selling bottled beer in the state. (And that was the factor that convinced Widmer it was time to start bottling themselves.)

Source:  Oregonian

Source: Oregonian

Nor'Wester turned out to be a shooting star. They were heavily overleveraged, betting on continued geometric growth when that hiccup hit the industry in the mid-90s. Overall sales didn't decline, but they basically stopped growing. Nor'Wester wasn't prepared for that and folded after a few years.

At Saxer, owner Steve Goebel was trying to figure out how to pay for Gomes' expensive German lagers, and the brewery dabbled in a 99-calorie light beer and a lemon-flavored light lager. They helped the bottom line, but it was clear that Oregon's future was in ales, not lagers, so in 1998, Saxer bought Nor'Wester. At the time, it was an 20,000-barrel brewery. With Nor'Wester, Goebel was making a huge gamble that further debt would bring the sales he needed to hit the black. He hoped buying Nor'Wester would double production.

Can you hear that big sucking noise? That’s the sound of money going out of this place. We ha[av] to have a major breakthrough.
— Steve Goebel, quoted in the Oregon Business Journal, April 1998

Because Saxer is now one of the largest and most successful Oregon craft breweries, you know how that bet went. (Bust, obviously.) Less than two years later, Goebel was looking for a buyer. He found Portland Brewing, which bought Saxer/Nor'Wester in 2000. Portland Brewing, like Saxer before it, thought adding brands would give it a bigger regional footprint. Instead, it sowed the seeds of insolvency. The whole Portland Brewing tale--how an octogenarian purchased and renamed the brewery after himself--is worthy of its own post. But let's just skip forward and say that by 2004, the mortal wound dealt by picking up two moribund brands (which I think by that time Portland wasn't even brewing anymore) led owners to sell Portland to Seattle's Pyramid.

The rolling catastrophe lumbered forward. Pyramid, the country's sixth largest craft brewery in when it bought Portland, went through its own collapse and Vermont's Magic Hat ending up buying Pyramid/Portland in 2008. Magic Hat, in turn, was purchased by Genesee's parent company, North American Breweries, in 2010. To complete this delightful tale, the final purchaser of Saxer/Nor'Wester/Portland/Pyramid/Magic Hat/Genesee was the Costa Rican company with a Simpson's-like name: Florida Ice and Farm Company.

North American Breweries is the fifth-largest brewery in the country today, but that's almost entirely due to Genny sales. Portland/Pyramid account for about 100,000 barrels of the two million plus made by the company. In a weird twist, Pyramid's collapse was so complete that its production, once spread across several locations in Washington and California, was moved back to Portland Brewing's facility.

To recap: in the mid 1990s, some of Oregon's biggest and seemingly most-successful breweries collapsed very quickly. We can add to the danger cautionary tales of the other Oregon bigs: BridgePort, which was sold to Gambrinus in 1995, Full Sail, which barely escaped a takeover bid in the late 90s, and Widmer, which sold a minority stake to Anheuser-Busch in 1997. Four of five of the earliest Oregon breweries would become the biggest--BridgePort, Portland, Full Sail, Widmer--and thanks to that five-year plateau in craft beer sales in the 1990s, none is wholly independent today. (Full Sail, escaping the takeover, became employee-owned, but then the employees opted to sell to private equity in 2015.) The sole independent from those early days is the McMenamin brewpub empire.

I've long maintained the view that the US isn't experiencing a brewery bubble right now. But that may not be comforting to breweries like Speakeasy, which experienced a 90s-esque leverage-induced failure earlier this year. It doesn't take a bubble, just a slowdown, to create a shakeout. Breweries today should study this lessons of the last time this happened.