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What you need to know for 11/20/2017

Why craft beer is a big, tough business

Why craft beer is a big, tough business

Investors hear about strength, challenges of market sector at Shmaltz Brewing event
Why craft beer is a big, tough business
Some of the 100,000 Bronx Brewery cans waiting to be filled with beer at Shmaltz Brewing Co. in Clifton Park.
Photographer: John Cropley

CLIFTON PARK — After 21 years of growth, veteran craft beer maker Shmaltz Brewing is still looking to grow and still facing the money obstacles younger brewers face.

Shmaltz founder and CEO Jeremy Cowan last week hosted an evening event at his Clifton Park brewery with Upstate Capital Association of New York, which connects investors with companies seeking investments.

The event’s title, “The Business of Beer,” alludes to what should be obvious in recent years: Craft beer is a big business. A lot of brewers and would-be brewers are looking for startup and expansion capital. More than a few venture capitalists are probably getting pitches or looking for ways to invest.

Craft beer is popular and growing more popular, particularly among the coveted youngest consumers, to the point that mass-market beverage companies are buying some of the most successful or distinctive craft breweries. 

The number of craft breweries is growing significantly each year.

Paul Leone, executive director of the New York State Brewers Association, said this trend is especially pronounced in New York, thanks in part to policies put in place by Gov. Andrew Cuomo that benefit craft beverage producers.

shmaltz 3 cropley 1nov2017.JPG

The number of breweries in New York has gone from 48 in 2008 to 120 in 2013 to 375 today. It is on track early next year to surpass the all-time high of 393 breweries in New York, set back in 1876.

Despite what the numbers might suggest, Leone said, the market is not overcrowded or building toward a bubble. Many of those 375 New York breweries are small operations that only run a taproom, and perhaps distribute kegs to a few nearby bars and restaurants. Seven counties in the state don’t have a single brewery. Those communities that do have multiple breweries can become a destination because of them.

Leone said only five New York breweries have closed since he became the association executive director in 2013, and four of those were for personal reasons on the part of the owner.

“There’s room for growth,” he said.

It must be noted, however, that while market share and sales value are growing strongly and consistently, craft beer still accounts for only 12 percent of the U.S. beer market. The bulk of beer drunk in America is produced by corporations on an industrial scale. The Brewers Association breaks out U.S. sales in 2016 as 24 million barrels of craft beer, 33 million barrels of import beer and 139 million barrels of other domestic beer. 

In this environment, where retail shelves are crowded with a staggering array of craft beers from brewers near and far, Cowan is hoping to expand his brewing capacity and working to grow his sales. 

Shmaltz Brewing Co. is a success story in the craft beer world. It began 21 years ago in California as the literal interpretation of a running joke among Cowan and his high school drinking buddies. For 17 years it was brewed under contract by other breweries, until Cowan opened the Clifton Park brewery in 2013, near his current home in Troy.

With product on shelves in 35 states, and sales expected to be in the $4.2 million range for 2017, and a brewery that can produce 30,000 barrels (930,000 gallons) of beer per year, Shmaltz is ranked 118th largest out of more than 5,000 breweries nationwide.

Shmaltz now has a healthy contract brewing business of its own — Bronx Brewery is its largest customer at this point — and is working to land more contracts for 2018.

The problem with contract brewing is that Shmaltz makes $15 to $50 per barrel on beers it brews for others to sell, versus $125 to $200 per barrel for beers it will label and sell itself. The ratio is running around three barrels of contract beer to one barrel Shmaltz will sell under its own brands: Alphabet City, EQX, Star Trek, 518/838 Craft and Shmaltz.

To shift the balance, and sell more of his own beer, Cowan is planning to boost the size of the sales staff. 

He's expanding the retail presence, as well — with more beers in the Clifton Park taproom and construction of a second taproom in downtown Troy, which he expects to produce a significant income boost.

Cowan also may try to boost the production capacity of his brewery, which he’s already doubled in square footage and production capacity since 2013. 

The nice thing is that much of the heavy spending is done, Cowan told the audience at the Upstate Capital event Wednesday: Shmaltz could add 50 percent capacity with as little as $150,000 worth of additional equipment, 100 percent for about $250,000, and 200 percent for about $500,000.

He told The Daily Gazette that his work is different in details from when he started out so long ago, but essentially the same in its goals.

As he got Shmaltz started, Cowan rolled debt between credit cards, borrowed money from friends and family and strangers, took out Small Business Administration loans and drew on lines of credit as he hand-bottled his beer and delivered it in a Volvo.

Now Shmaltz owns a constellation of beer competition medals, has a recognizable Jewish-themed shtick and operates out of a high-tech brewery worth about $3.75 million. 

And Cowan wants to grow it further. He's looking for equity investments from angel investors and other outside sources to raise working capital with which to expand the sales of Shmaltz's proprietary brands, open the Troy tasting room and increase efficiencies. Infrastructure upgrades, such as another brewery expansion, would more likely be financed through bank debt, but aren't being planned at this time. 

He faces the same marketing struggle as 20 years ago, but this time because craft beer is too well-known instead of too obscure.

“Instead of selling craft beer as a concept you have to sell your brewery over all others,” Cowan said. “To sell craft beer you have to educate, you have to sample just like you used to.”

He said the dozens of entrepreneurs preparing to open breweries in New York and the hundreds around the nation have an even tougher hill to climb than Shmaltz does as an established craft brewer.

“It’s kind of astounding that anyone’s still opening breweries,” he said. “It’s pretty challenging now.”

Cowan said there still is room for good craft brewers, but they’ll have to blend good beer with the right style and branding to stand out and catch on in the marketplace.

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