A Craft Beer Brand's Winning Recipe? Outsourcing
Aug. 20 (Bloomberg BusinessWeek) -- Beer lover Jeremy Cowan hadn’t ever brewed a single batch of beer when he launched his craft beer company, Shmaltz Brewing, out of his Mission District loft in San Francisco in 1996. Instead, Cowan, then a technology purchasing manager at a startup, paid a local brewer $1,500 to make and bottle the first 100 cases. In a nod to his Jewish heritage, Cowan named the ale He’brew Genesis. His other contribution to “the chosen beer,” as its tagline reads: the juice from eight crates of pomegranates, which he and a few friends squeezed by hand the night before the inaugural brew.
The Kosher-certified beer sold out in three weeks at high-end grocery stores in the Bay Area. In 2003, after trying out a few local contract brewers, Cowan struck a deal with Olde Saratoga in Saratoga Springs, N.Y., a subsidiary of storied Mendocino Brewing, to make his brews. (It had extra capacity, and Cowan had enough to pay for 2,800 cases, thanks to a $30,000 cash advance on his credit card.) Olde Saratoga now makes all 15 of Shmaltz’s varieties, which are available in 31 states, as well as Canada, Australia, and Japan. That’s wider distribution than established craft competitors such as Bell’s, Deschutes, and New Belgium. “[The brewmaster] and I collaborate very directly on the flavors of every beer we make, but the manufacturing nitty-gritty details are less romantic to me,” says Cowan, who expects $3 million in revenue this year.
So why is Cowan, who splits his time between New York City and San Francisco, opening his own brewery in Brooklyn, N.Y., this fall? The one-word answer: marketing. It will serve as a gathering place for his “tribe” (as he calls Shmaltz fans) to sample all his beers, including his Coney Island lagers, in one place. “The allure of putting a small batch brewery in the center of the biggest city in the U.S. and one of the fastest-growing craft beer scenes far outweighs the risk,” the Stanford English major explains. Olde Saratoga will still handle nearly all of Shmaltz’s brewing—currently more than 2 million bottles a year.
For an industry that trumpets the artisanal process and local origins of its independent brewers (Merriam-Webster added its definition of craft beer earlier this month) Shmaltz has been an unlikely hit. It was named the best craft brewer in the country by Beverage World magazine in 2010 and has won 14 gold and silver medals in the World Beer Championships in the past three years. And unlike many of the 2,126 craft breweries the Brewers Association says make up the $8.7 billion industry in the U.S., Cowan says Shmaltz has been profitable since 2005.
“A lot of brewers today started as homebrewers,” says Julia Herz, craft beer program director at the trade group. “They started brewpubs or tap rooms so they could be in touch with people in their own tasting room.” She notes that only 2 percent of the more than 11 million barrels of craft beer produced in the U.S. in 2011 were contract brewed.
Despite the decades-old reputation contract brews have had for being second-rate compared with other craft brews, Cowan chose the contract route because it was cheaper than buying a brewery, which starts around $30,000 and can exceed $1 million. “I didn’t have the money for it,” says Cowan, now 43. “There was no other way to do it.” Instead he focused on sales, distribution, and resolving problems such as patent disputes with potential rivals and finding hops during the 2008 “hop crisis” (when prices more than quintupled due to supply shortages).
Of course, outsourcing production created its own hurdles. Because he had to split the proceeds with his brewer, Cowan’s margins were too slim to turn a profit for the first eight years of business. To make ends meet, he maxed out his credit cards, borrowed $135,000 from friends and family, and couch-surfed at friends’ houses while on sales calls across the country. Even after he broke even in 2004, thanks to rising sales and higher profit margins that came from raising prices on his product, he still couldn’t get a business loan because he had no collateral in the form of property or equipment, he recalls in his 2011 memoir, Craft Beer Bar Mitzvah. “Banks wouldn’t touch it,” says Cowan.
Today, wary of the recent doubling of hops prices, Cowan is cautiously optimistic about Shmaltz’s prospects. He has 11 employees, a line of credit with a bank, and enough cash to stay in discount hotel rooms he books on Priceline. And while he remains passionate about craft beer, he’ll still get someone else to make it, 16 years after Shmaltz’s genesis.