The Audacity of Hops: The History of America's Craft Beer Revolution (41 page)

Around the time he invested in Bernau's five operations, Mallya also invested $3.5 million in the Mendocino Brewing Company, roughly the amount in sales that the Hopland operation would do in 1996. He also pumped $1.75 million into Humboldt Brewing, started in 1987 in Arcata on the Northern California coast and now producing about eighteen thousand barrels and $4 million in annual sales. These were all small amounts for Mallya—his UB Group was estimated to do $1.4 billion in annual revenue through fifty companies
in twenty countries—but he had big, big plans for these IPAs and amber ales. On his yacht that sunny summer afternoon, his future in the American craft beer movement stretching before him, Mallya hinted that those plans might include a direct assault on Big Beer. “I'll have a lot more clout going in with five or six brands, each distinct and not similar,” he said in response to a question about challenging Big Beer vis-à-vis distribution, “I'll make sure of that.”

On the other side of the country and shortly before Mallya held court in New York Harbor, the owners of one of the most beloved monikers in the craft beer movement were ceding control. BridgePort Brewing Company had been, after its late 1984 opening, the first craft brewery to really take hold in Oregon (Cartwright Portland had already folded after barely two years of dubious quality); BridgePort and the brewpub that opened alongside it in 1986 were instrumental in transforming Portland's industrial northwest into a hip area; and more than anything, BridgePort helped to place both the city and the state on the beer map. That Oregon, along with the rest of the Northwest, would have become a craft beer Mecca without Dick and Nancy Ponzi's operation seemed almost unimaginable. But, ten years in, the Ponzis faced a choice. “We could draw the line at expansion to distant markets,” as Dick Ponzi saw it. “We could invest in expansion on our own, or we could sell to a proven sales and marketing organization.”

They were victims of their own success in a business that required lots of capital to keep up with consumer demand and, more important, with competitors. BridgePort was producing twenty-five thousand barrels a year—but competitors like the Widmer Brothers, once on that same unremarkable side of the Willamette River and now greatly expanded on the other side, and Full Sail Brewing Company, some sixty miles up the Columbia River in Hood River, Oregon, were producing more. And these were just the nearby competitors; the Ponzis also had to contend with the dozens of craft-brewing companies that now had wide distribution reaches, not least Boston Beer and Pete's Brewing. Then there was the IPO wave of 1995, with these same competitors receiving infusions of capital unimaginable in 1984.

So the Ponzis sold the brewery to Gambrinus in the fall of 1995 for an undisclosed price. Gambrinus was started in San Antonio, Texas, in 1986 and grew quickly into one of the ten largest beer importers in the United States. Its biggest acquisition thus far had been the eighty-six-year-old Spoetzl Brewery, which was in 1989 on the brink of closing like so many other regionals when Gambrinus stepped in. By 1993 it was selling one million cases of beer
annually, including its popular Shiner Bock brand—the first time the brewery had ever reached that sales mark.

BridgePort's quality continued unabated under Gambrinus, overseen as it still was by Karl Ockert, who had studied under Michael Lewis at UC-Davis. For many of these craft breweries saved by mergers and acquisitions, or by cash infusions like those of Vijay Mallya and Anheuser-Busch, life continued as before in the mid-1990s, and it's not entirely clear whether consumers even noticed the changes in ownership. The craft beer trade media had limited reach in this darkness right before the web's dawn, and the deals and the IPOs tended to get more coverage besides in business publications like
Forbes
and the
Wall Street Journal.
There was nothing to suggest that it was a bad thing existentially for a Big Beer operation—or a bigger operation, period—to step in, especially not when the movement had already had numerous closures and there were rumblings of a gigantic shakeout. It was a boost to marketing and to productivity especially, not to mention a way to quickly pay down debt.

That was basically the pitch the Shipyard Brewing Company, based in the other Portland, made around the same time as the BridgePort-Gambrinus deal. The craft brewery a stone's throw from the ruddy Atlantic, started by prodigious brewmaster Alan Pugsley and brewpub entrepreneur Fred Forsley in early 1994, sold a 50 percent stake to a Miller subsidiary in the fall of 1995 for undisclosed terms. What was clear was that Miller wanted in on craft beer. It had watched Anheuser-Busch, its mortal rival throughout the 1970s and 1980s, gain a toehold through Redhook in what was the fastest-growing segment of American brewing—this at a time when Miller's phantom-craft stab, the Reserve series, was dying an embarrassing death, never able to sell more than two hundred thousand barrels annually, a pittance for the Big Beer operation that had let the world have Lite. And, anyway, Shipyard had debt it needed to pay down, and it wanted to expand both its brewery and its production, from 54,000 barrels annually to 108,000, and get into the New York market. Miller's new subsidiary, the American Specialty and Craft Beer Company, could allow it to do all that without sacrificing its quality.

Pugsley said at a Thursday morning press conference announcing the deal that it fulfilled his “lifelong wish list” for what a smaller-scale brewery could be. Miller wasn't Forsley and Pugsley's first choice—they explored an IPO (they were all the rage) but realized Shipyard didn't yet have the financial track record after barely a year in operation. Miller had a spot of a track record besides. In the eight years since it bought the Jacob Leinenkugel Brewing Company, the northern Wisconsin regional's sales had only grown, and the same Miller subsidiary that bought 50 percent of Shipyard had, earlier in
1995, bought a controlling stake in the well-regarded Celis Brewery. (Celis was started by Pierre Celis, a former milkman who almost single-handedly resurrected the Belgian white style, first in his native Flanders and later through a brewery out of Austin, Texas.) So Miller it was. But just as with the IPO wave, the Anheuser-Busch interest in Redhook, or Vijay Mallya's stakes in Mendocino, Humboldt, and Nor'wester, it wasn't entirely clear yet what Miller's share meant beyond more money for another craft brewery to expand and another toehold for Big Beer.

David Geary, for his part, was magnanimous toward his competitor's move (in stark contrast to Jim Koch's reaction to the Anheuser-Busch deal with Redhook). It made his D. L. Geary, also in Portland and already the oldest, the biggest independent craft brewery in Maine. “I don't think,” Geary said at the time, “anything has changed for us.”

D
avid Geary's matter-of-fact reaction
might have belied the bigger fish that the craft beer movement had to fry—courtesy, again, of Anheuser-Busch. The world's biggest brewer had launched a squeeze on distribution through what it called by the decidedly Orwellian name “100 percent share of mind.” It all started in March 1996, when August Busch III told a national wholesalers conference, “Each of you [must] exert your undivided attention and total efforts on Anheuser-Busch products. If you sell our competitors' products, can you still give us your best efforts? I don't think so.” It was threat draped in gossamer: the world's biggest and most reliable brewer was asking distributors nationwide carrying their brands to focus only on those to the exclusion of others. If they didn't, well … Anheuser-Busch could not say out loud that they would take their tens of millions of marbles and go home—that might have put them afoul of antitrust laws—but the possibility was clearly put out there. Distributors, starting only months after Busch's comments, began to play ball one by one.

Distribution was already a crucible for craft brewers. More than anything save the capital costs for starting up and (if lucky) expanding, distribution
could make or break an operation. “Go home and hug your wholesaler,” Fritz Maytag told a gathering of craft brewers earlier in the decade. He meant it—the day that Don Saccani started distributing his Anchor brands was a game changer for the brewery. The problem, however, was that the standard three-tier system in place in most areas of producers, distributors, and retailers did not favor craft brewers; it favored larger, better-known producers who could guarantee turnover. Craft brewers were often treated as a side business that could be ignored or indulged at whim, depending on the distributor. Kim Jordan and Jeff Lebesch, in the early days of their New Belgium in Fort Collins, Colorado, left a couple of palettes with a distributor down in Denver. They called the distributor regularly to see if it needed the supply refreshed, only to be told everything was fine; after a while, incredulous, they dropped in on the distributor unannounced and found both palettes still under their original plastic wrapping. The distributor had done nothing illegal by letting their beer linger and lying to them about it (luckily, New Belgium had not yet signed a contract with the distributor and took the beer back).

A no-less-august defender of the free market than the
Wall Street Journal,
in an editorial, excoriated how the three-tier system stymied competition. The editorial was in response to the so-called Twenty-First Amendment Enforcement Act passed by Congress in 2000, which allowed state attorneys general to use the federal courts to stop alcohol shipments coming from producers outside their states directly to consumers. Ostensibly meant to prevent underage consumers from ordering alcohol online, it seemed to the
Journal
and many others just another way to keep distributors in the middle:

Think of it this way. You live in Indianapolis and order a flannel shirt from L. L. Bean in Maine. No one would think of saying that you can't do that, or you have to buy it through a licensed Indiana flannel-shirt distributor. But when it comes to California chardonnay or New York cabernet sauvignon, that's the argument…. [T]he laws regulating alcohol sales are themselves of dubious vintage, a legacy of post-Prohibition attempts to create a distribution system the mob could not control. Hence the legislation providing for a state-licensed middleman between you and the producer; hence too the dozens of related laws, such as the one in New York prohibiting alcohol chains, that today raise prices and keep out competition….

In the late summer of 1996, Robert Eilert, cofounder of the Flying Monkey Brewery in the small eastern Kansas city of Merriam, got a letter from an Anheuser-Busch executive. The letter was in response to one from Eilert contending
that the Big Beer operation had forced Flying Monkey's distributors in Wichita and Lawrence to stop carrying its only-three-month-old brand. Eilert had returned to the area he had grown up in after spending three years in Breckenridge, Colorado, where he worked at the craft brewery of the same name founded by avowed ski bum and avid homebrewer Richard Squire in 1990. Flying Monkey was the seventh Kansas brewery or brewpub since state legislators changed the liquor laws in 1987 after more than a century of actual and quasi-Prohibition. Kansas held a special place in teetotaler lore: Prohibitionist Carrie Nation lived in the state for ten years around the turn of the century as her saloon-busting campaign got under way. You could trace a straight line from her fanaticism toward the turn of the century to Prohibition in 1920, though Kansas itself beat the rest of the nation to the punch when it instituted a ban on alcohol production in 1881. At that time, the state might have had as many as ninety breweries, a staggering sum for the Great Plains (neighboring Oklahoma, for instance, had none). The legal changes of the late 1980s led to Chuck Magerl, a University of Kansas graduate student, opening a brewpub, the Free State Brewery, in downtown Lawrence in early 1989—the state's first legal brewery since the 1881 ban.

Others, nearly all brewpubs, followed, though the most ubiquitous craft brewery for the eastern part of Kansas where Flying Monkey opened was actually located in Missouri just across the Mississippi River. John McDonald grew up in the small north-central Kansas town of Osborne (population approximately two thousand), where he began homebrewing at the entirely reasonable age of twelve, he and a friend selling what they could conjure to teenagers at the drive-in (one skunky batch they unloaded on the unsuspecting teens had them laying low for a few days). After studying art at the University of Kansas, McDonald moved to Kansas City, Missouri, to work as a carpenter; then he and his wife won a raffle for a free trip to Europe, including to Belgium and West Germany. It was there that he hatched the idea to do his adolescent hobby on a much grander scale back in Kansas City.

McDonald would deliver in his own pickup the first kegs of the Boulevard Brewing Company's signature pale ale in November 1989, from the brewery on Southwest Boulevard near Interstate 35 (which included a brewhouse McDonald imported from Bavaria), to a restaurant a few blocks away. Boulevard was the first brewery to open in the Kansas City area since a Schlitz plant closed in 1973, though Missouri as a whole was dominated by the 119-acre Anheuser-Busch headquarters in St. Louis, which had been in operation on and off since 1852.
*

And Anheuser-Busch's attempt to cement such domination, at the regional and national levels, through 100 percent share of mind was what had prompted Robert Eilert at the new Flying Monkey in Merriam to write to that same St. Louis headquarters, questioning the pressure Anheuser-Busch exerted on Kansas distributors. The letter Eilert got back was nonchalant: Anheuser-Busch did not use any “bullying” tactics to enforce the share of mind, but it did think “it is best for our wholesalers to be exclusive Anheuser-Busch distributors.” Nor did the company propagate publicly what incentives it might offer distributors to focus on its brands exclusive of craft ones; instead, as Ed Maletis, president of Columbia Distributing in Portland, Oregon, a big distributor of craft brands as well as Coors and Miller, put it: distributors' “financial incentive is called Budweiser and Bud Light.” Lose those and you lose a lot of saleable product you couldn't make up with Christmas ales and Russian imperial stouts.