The business of beer

Seventeen people sat around a long, narrow table at Hardywood Park Craft Brewery in Richmond one day in May and munched on sandwiches as a presentation began.

The group included brewers, brewery owners, state and local officials, and high-profile visitors from Colorado. The surroundings were colorful — on one wall, a mural depicted vibrant scenes from Hardywood’s past and present. At the front of the room, PowerPoint graphics gave glimpses of a potential future.

“I feel you guys are making a play to be on the map of meccas for beer. That is a huge, fantastic and possible goal,” said Julia Herz, craft beer program director for the Brewers Association, a national trade group based in Boulder, Colo.

She rattled off statistics: 52 percent annual growth in volume among Virginia craft breweries; a ranking of 15th in the nation in 2013 for the number of active breweries; and the possibility to nearly double that number in the next three to five years.

Still, compared with other beer meccas, Virginia is not quite there. Craft beers made in the Old Dominion represent about 2 percent of all brews sold in the state. In Portland, Ore., that number hangs at around 30 percent and can climb to 50 percent on special occasions.

“I think the potential is certainly there, on a large scale, to really appreciate, embrace and push the future of Virginia-brewed beer,” says Eric McKay, co-founder of Hardywood Park.

Virginia as a possible beer haven? What’s going on? Ten years ago, you could count all of the state’s breweries on your fingers and toes, ears and nose. Now, more than 90 licensed breweries feed a boom that — unlike the wine industry’s steady, extended growth — seems to have bubbled up out of nowhere. (see Beer timeline)

Virginia breweries have won some of the most prestigious beer awards in the U.S. and internationally. At last year’s Great American Beer Festival, Virginia ranked fourth among all states in the number of medals won. And it’s not just breweries that attract attention — Mekong Restaurant in Richmond was twice voted “Best Beer Bar in America” on craftbeer.com.

What’s going on, in the broadest terms, is this: A fundamental cultural shift is occurring in beer consumption and production. Craft brewers — small, independent operations using traditional ingredients — have found a ready market among people eager to explore flavorful beers. During tough economic times, the craft sector has recorded double-digit growth year after year while the overall beer market, a $100 billion industry, has stayed flat or decreased.

The beer bill
Multiple forces feed this shift. Young drinkers have never known a world without Sierra Nevada or Sam Adams. They, as well as older drinkers, seek creative and unique beers and breweries. The trend dovetails with food awareness and an “eat local, drink local” theme. Folks can go to a small brewery, meet the brewer, tour the facility and drink the beers right there in the tasting room.

The ability to have that experience can be traced to a seminal moment in Virginia beer history. In May 2012, Gov. Bob McDonnell met with a group of brewers, elected officials and industry representatives at Hardywood Park. Awaiting his signature was Senate Bill 604, which allowed retail sales of beer on brewery premises. The ceremony included combining ingredients for a celebratory brew, SB 604 Special Bitter.

“Having everybody there and collaborating, it was just a beautiful moment,” recalls Brett Vassey, president and CEO of the Virginia Manufacturers Association. “It was the point in time where our entire industry points to and says, ‘That was the turning point.’”

The impact was immediate. Breweries became destinations. Tasting rooms became hip. Small brewers could start on teeny systems and sell beer directly to customers.
“Our business here in the tasting room doubled overnight by being able to offer pints here in the tasting room,” Bill Butcher, founder of Port City Brewing Co. in Alexandria, says in the documentary film “From Grain to Growler” about beer brewing in Virginia.

Transformation was — and still is — underway.

“The pace at which the number of breweries is opening is something I would not have suspected,” says Mark Thompson, co-founder of Starr Hill Brewery and chair of the Virginia Craft Brewers Guild, an affiliate of the Virginia Manufacturers Association.

Effects on tourism
The effects of the industry’s growth on tourism skyrocketed beyond expectations. People from eight states, for example, stood in a line snaking around the Three Brothers Brewing building in Harrisonburg when the brewery released its Resolute Bourbon Barrel Imperial Stout last year.

Rita McClenny, president and CEO of the Virginia Tourism Corp., the commonwealth’s tourism promotion arm, views beer as part of a broader culinary context that includes food and other alcoholic beverages. “People are looking for unique experiences,” she says. “When they go to a destination, they can come home with a fantastic story of ‘I had this, I did this.’”

Tourism generated $21.2 billion in economic impact last year, and food and drink are a centerpiece in the state’s marketing strategy. One group, Richmond Region Tourism, produced a video about craft beer and collaborated with Center of the Universe Brewing Co. in Ashland to produce Thirsty Tour Guide ale.

Tourism dollars represent only one slice of the pie. The total economic impact from craft brewing in Virginia comes to $623 million and 8,163 jobs, according to the manufacturers association. Include the major players, MillerCoors in the Shenandoah Valley and Anheuser-Busch in Williamsburg, and you can add millions more. And there are support businesses. Ball Corp. has beverage packaging plants in Bristol and Williamsburg; Owens-Illinois’ facility in Toano manufactures bottles for beer.

There’s another factor that’s hard to quantify: People view craft beer as cool. It’s the social lubricant for the social media age, whether you’re posting a sour from Strangeways on Facebook or unlocking an IPA badge on Untappd with Lost Rhino Face Plant. (see Economic Contributions)

Economic development deals
Add up cool and cash, and you can see why localities put out the amber carpet for craft brewers. When Devils Backbone Brewing Co. looked to expand beyond its “Basecamp” brewpub in Nelson County, founder Steve Crandall discovered fertile ground near Lexington. Rockbridge County owned 12 acres available for a brewery site and was willing to offset or waive certain fees to attract the $6 million investment. Construction of the first phase began in the spring of 2011 with expectations of creating 10 jobs in three years and producing 30,000 barrels in 10 years. Instead, more than three dozen jobs have been created, two more construction phases have been completed, and the brewery forecasts 40,000 to 50,000 barrels this year, catapulting Devils Backbone into the lead among state craft brewers.

“I don’t think anybody really realized where this project was going to go at that time,” Sam Crickenberger, Rockbridge County’s director of community development, said at a February beer-and-business program. “We’re looking at tax revenue of approximately $50,000 a year, with just the second phase going in.”

Giving up some tax revenue actually helped Virginia Beach land San Diego’s Green Flash Brewing Co. for its East Coast expansion — a $20 million investment that will create a 58,000-square-foot facility and 40-plus jobs when it opens next year. Virginia Beach officials already had phased out the city’s machine and tools tax as a means to attract investment. That wasn’t the sole factor in landing Green Flash, but “it certainly played a role in their decision-making process because 85 to 90 percent of their investment is machinery and tools,” said Michelle Chapleau, a business development manager for Virginia Beach.

“We’re going to more than recoup what we theoretically would have lost in the tax in the new jobs created, the spinoffs from the jobs and other revenue streams,” she says.

Other incentives, such as industrial revenue bonds and historic tax credits, also are important financial tools. In Harrisonburg, federal grant funds have been channeled into a loan program providing up to $25,000 for each qualifying small business venture, said Brian Shull, the city’s economic development director.

“The money was immensely helpful in starting my business,” says Tim Brady, majority owner of Pale Fire Brewing Co., which is under construction in a former ice company building dating to 1934.

Nearby, Three Brothers is making good use of a former soda bottling plant. Adam Shifflett, one of the three brothers, says that since starting in late 2012, the brewery has grown from two to nine full-time jobs and added tanks to increase brewing capacity.

Even in wine-centric Loudoun County, quaint Purcellville has embraced beer. The town changed its zoning ordinance years ago to attract business, says former Mayor Bob Lazaro. Now two breweries — Adroit Theory and Corcoran — have opened with another in the works. Corcoran began with a vineyard in 2002, then became the state’s first winery/brewery in 2011.

The original mastermind of seeing the big picture in tourism, marketing, economic development and sustainable growth is Maureen Kelley. As economic development director for Nelson County, she helped promote local vineyards, then thought: Why not breweries as well? She brainstormed with area brewers and — voilà! The Brew Ridge Trail was born. The trail connects six breweries, mostly in the Charlottesville area. “These brewers have such an amazing connection with one another,” Kelley says. “It was easy for them and easy for me to bring them together to talk about the importance of the trail.”

Winning medals
The same spirit propelled the formation of the Virginia Craft Brewers Guild in 2009. “In order to pursue lofty goals, you have to get organized,” Kelley says.

One of those goals was securing legislation this year that is intended to put farm breweries, such as Lickinghole Creek Craft Brewery in Goochland County, on a more equal footing with wineries.

Agriculture, particularly growing hops, is one of the beneficiaries of the craft brewing boom. Beyond the farms, the craft beer engine supports homebrew shops, food trucks at breweries, beer tours, restaurants that feature food-beer pairings, at least one mobile canning operation, at least two documentary films and, of course, the festivals that dot the state every warm weekend.

The Big Lick Beertopia in Salem, for example, was offering live music, food and beer from 40-plus breweries and cideries the same June weekend as similar events in Richmond, Winchester and Williamsburg. The climax comes with the Virginia Craft Brewers Fest (part of Virginia Craft Beer Month) on Aug. 23 at the Devils Backbone Basecamp.

That event includes a competitive angle, the Virginia Craft Beer Cup, sponsored by the Virginia Tourism Corp. The awards honor quality and create motivation to seek out the best beers. “People want to brag when they go home, ‘I had the winning beer in Virginia,’” McClenny says.

Medals aside, brewers are keenly aware of the importance of quality. Many have made that a top priority in their investment plans. Hardywood Park, for example, this year hired Kate Lee, a veteran of Anheuser-Busch labs, to head the brewery’s quality assurance program. “There is not a meeting we have [of the brewers’ guild] that we don’t talk about quality and challenging the brewers to improve the quality of their beers,” Vassey says.

Three-tier system
Other challenges abound: Finding the right zoning. Securing water. Using sustainable environmental practices. Getting a good price on ingredients such as hops.

One of those challenges is navigating the three-tier system.  Put in place after Prohibition, the system is designed to regulate relations among brewers, wholesalers and retailers. Brewers make the beer, then wholesalers distribute it to stores, restaurants and other retailers. It’s a complex dance in a big business because many distributors carry mainstream lines — Bud Light or Miller Lite, for example — as well as imports and craft beers. Profit lies in finding the right mix for the market.

For one wholesaler, that dance led to some unique steps. Brown Distributing Co., a family-owned Anheuser-Busch distributor with operations in Virginia and Florida, initiated a “Taste the Local” concept at its Richmond site several years ago. (see Big brewers)

Mixing craft beer with the likes of Bud Light was not an easy sell at first, but now Brown distributes beers from all of Richmond’s local breweries. “We’re not just selling craft beer; we’re basically selling a connection between a local person and a local business,” says Jacob Brunow, craft and import director at Brown.

For retailers, the challenge has become supplying what’s in demand. The overall beer industry fell 1.9 percent in 2013 in terms of barrel volume while craft grew 17.2 percent, so you can see why restaurants are adding taps, grocers are filling growlers, and superstores such as Wal-Mart are expanding their beer business.

Total Wine & More, which operates 14 stores in Virginia, has carved out more space for beer at several sites and relocated its Virginia Beach store specifically to expand the craft beer presence, says Rob Hill, new programs manager. The chain now offers free beer booklets and beer education classes; shelves have been organized alphabetically and by style to help customers.

Capital Ale House has grown from its original location in downtown Richmond to four additional sites in Richmond, Harrisonburg and Fredericksburg largely by riding the craft beer wave. “When we started, I don’t think we even thought about multiple locations,” says Matthew Simmons, the company’s president and co-founder. Nor could he have foreseen offering more than 370 taps and employing 300-plus people.

Legal hurdles
Keeping all of those beers straight can be a delightful challenge for consumers. For brewers, it can lead to legal tangles in the realm of intellectual property.

“Trademark registration is one area where, particularly in the craft beer industry, there’s a lot of activity,” says Nicole Harrell, a Norfolk attorney with Kaufman & Canoles who specializes in alcohol licensing and compliance issues. A startup brewery on a limited budget might not investigate whether another outfit already has a legal lock on its brand or the name of its latest IPA, and changing can be expensive later.

Harrell also advises brewers on capitalization, their business structure, contingencies for expansion and navigating the regulatory process — licenses from the Virginia Department of Alcoholic Beverage Control, label approval from the U.S. Alcohol and Tobacco Tax and Trade Bureau and health inspections if food is served.

Weaving through that maze can be daunting. “An entrepreneur attempting to enter the brewing market in Virginia must complete at least five procedures at the federal level, five procedures at the state level and — depending on the locality — multiple procedures at the local level,” says a report from the Mercatus Center at George Mason University.

Local and state officials say they are trying to be sensitive to the changing landscape. ABC officials conducted a regulatory review in 2011, have met with craft brewery representatives to develop guidelines for compliance with regulations and have addressed issues such as the use of social media. They also have developed a booklet of “do’s and don’ts” for brewery operators, and this year they worked on a bill that reduces the cost of an ABC license for small brewers.

“It’s our job as an agency to help breweries succeed as a business and balance the important issue of public safety,” Carol Mawyer, public relations specialist with the Virginia ABC, says in an email.

Still, getting an ABC license can be time-consuming. ABC officials set a goal of processing applications in 60 days. Harrell advises clients to budget six months. ABC agents are responsive and helpful, she says, but the department is simply understaffed. “My clients are always anxious, and the ABC license is what they need to open their business,” she says.

Wine industry model
Much of this is a symptom of growing pains, and many brewers look to the Virginia wine industry as a model. “In many ways, our chemistry is very similar,” says Thompson of Starr Hill. “The wine guys have a proven track record of success.”

A big question is: Can craft beer’s level of growth be sustained? Herz and others say yes and point to market share. For craft, that amounts to 7.8 percent of the total U.S. beer volume and 14.3 percent of sales, numbers that have been steadily climbing as the overall beer industry has declined. Another positive lies in historical context. In the late 1800s, the country had thousands of breweries. Prohibition, grain shortages during the Depression, grain rationing in World War II and consolidation among breweries caused its own cultural shift. Craft beer lovers will tell you that what’s happening now is a cultural correction as much as a shift.

Those factors feed optimism on several levels. Brewers see solidarity within their community, local officials are embracing these new business partners and — most important — Virginia is establishing a reputation for high-quality, creative beer.

The good vibes were palpable at the May round table. Hardywood co-founder McKay said the state’s potential was a fundamental reason for choosing Richmond as a location.

“At the time, Virginia was 37th in the country in terms of breweries per capita. We felt like there was really nothing that would be preventing us from becoming a top-10 state in breweries per capita and to have a phenomenal craft beer scene,” McKay said.

“I hope it’s not long before anyone in the world hears the word ‘Virginia’ and immediately thinks of great beer.”