Lagunitas on the Barriers to Craft Growth

March 23, 2011

Lagunitas on the Barriers to Craft Growth

Dear Client:

Sobering stuff, ironically, at the Lagunitas portion of the pre CBC journalist retreat today. First, Tony Magee talked about the $9.5 million brewhouse expansion that we reported on in BBD last week, likening the 7-month process of the normally two-year augmentation to an “open heart transplant on an awake patient … on the back of a galloping horse.” Classic Tony.

But it’s true. Things like this need to be done if the 100,000 barrel, 1%-of-craft-share brewer is to avoid back orders and pulling out of markets. Part and parcel of that is managing supply, and Tony admitted his secret weapon: 2-year-old COO Todd Stevenson, restless Diageo alum. Todd and CFO Leon Sharyon shared some telling “challenges in craft brewing,” focusing on central conundrums for the industry.

STATE OF THE UNION ADDRESS. It’s a fragmented industry, says Todd, which we knew. But it’s also highly concentrated in volume, where 8% of craft companies account for 80% of volume. The fastest-growing segment is the third tier, comprised of 50-99K barrels, at 15% Compounded Annual Growth Rate (to 2010). The top fivers, in contrast, are growing at a 9% CAGR. Still a boatload of growth at the top. Food/drug/convenience dollar sales were strongest in the West, then California as of July 11 2010 YTD data; but the Southeast has the highest growth rate in all three outlets, at 24.6% growth.

MILLENIAL FOCUS. The aforementioned is the macroview. A high-res stance shows more opportunity. As Nielsen’s Nick Lake flagged at our BBD summit earlier this month, Millennials pose a great opportunity for craft. Per Todd et al., they account for 15% of beer spending vs. 6% for other age groups. Also, 30% of the M. segment are over 21, but in the next 7 years, the entire 21-40 age group will be. Legal Drinking Age Millennials are already larger than all of Gen-X.

But speaking of Gen-X, there’s a disturbing trend when you compare Millenials’ beer drinking habits as compared to their elders’ younger leanings way back when. Nick Lake revealed how 72% of Gen-Xers’ bev alc. volume distribution was beer in 1999; in 2009, it dwindled to 49%. Millenials beer bev alc. volume for 2009 was 42%. Will it shrink or grow?

How to grow? Millennials are the most multi-cultural segment. They shop in new channels and have different taste profiles (driving Cajun, Thai, Caribbean flavor adoption), per Nick. Back to Todd, he points out that young consumers reject mass marketing, and instead want to know who is behind the brew. Thus grassroots marketing, and daring, exotic flavors become more important. And of course, this segment is the most plug-ed-in, sending over 1,000 texts per day (says Nick), with obvious implications.

CENTRAL CHALLENGES: DISLOYAL CRAFT CONSUMERS; OVERLOADED DISTRIBS. Sure, we went over other challenges, including the ever-crowded space, rapid growth and ensuing supply-side issues, and the difficulty of grabbing distributor attention. But Todd spent the most time discussing the fact that craft drinkers have very little loyalty to specific brands, especially in the on-premise occasion. By Todd’s estimates, 70% of the beer business is off-premise. But the rest of the 30% on channel is a battleground where hearts can be won by trial: “The challenge is to build brands in a fragmented market.” So how to exceed? Todd and Leon flagged two opportunities: experiential touch points (festivals, donations, etc.), and establishing relationships with bar owners so they evangelize for particular brands. “We don’t have money for advertising … but one thing we do have is beer,” says Leon. “And it’s cheap. Drives sampling.”

The other big challenge reflects craft’s victimization of its own success. There are so many craft brands now, and so much growth, that (most) every distributor wants a piece of them. But they have so many brands, how do suppliers get their wholesalers attention? Lagunitas has a trail-blazing tool to help get noticed by its 90-odd distributors, and it’s signature Tony. Each distributor gets e-mailed a benchmark tracker each month, featuring the Lagunitas dog animated with Tony’s voice telling them where they are YTD with a few choice SKUs: soft, down, or “crankin'” if they’re up.


BREAKTHROUGH FOR TEXAS BILL 602, which would allow the state’s microbreweries to send brewery tourists away with packaged beer, has cultivated some distributor support. According to, “Keith Strama, an attorney for the politically powerful Wholesale Beer Distributors of Texas, told a House committee that the group is ‘very happy’ to support a substitute version of House Bill 602, which would let breweries hand visitors a small amount of beer after tours of their facilities.”

DOGFISH debuted its Hellhound on my Ale during CBC week, saying it will likely come out ’round May 1. The hoppy brew, fermented with with orange peel, paid homage to Mississippi guitarist’s Robert Johnson’s 100th birthday.

YAKIMA HOP GROWERS Jason Perrault and John Segal shared some hop growers secrets Tuesday, including caveats re: time from development of a new varietal to market release (e.g., Simcoe, was developed in ’89 and didn’t come into favor until mid 2000’s) to secrets of marketing (brewers are starting to want to name the farms hops come from, in line with the growing single hop style trend).

BREWPIC: Your editor with Stone’s Greg Koch and Dogfish Head’s Sam Calagione. Let the CBC games begin.

Until tomorrow, Jenn

“Idealism is what precedes experience; cynicism is what follows.”
-David Wolf

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