SEATTLE -- Microbrews are not a fad item, but a rapidly growing phenomenon in the beer industry that will soon account for close to one out of every 10 beers sold in the United States, according to the head of one fast-growing microbrewer here.
"We think that the microbrewery beer segment is going to represent, together with the import beer segment, perhaps as much as 10% of the beer business. Right now it is just crossing the 1% threshold," said Paul Shipman, chairman and chief executive officer of Red Hook Ale Brewery.
"What the microbrewers represent to consumers is the flavor profile of imported beers with the freshness of the fact that the beers are made here in the United States and that the brewery is accessible to the consumer. It is a relationship between the consumer and the producer in an industry where there was no such relationship," Shipman said.
"The typical microbrew customer is much broader than people think. There is definitely interest on the part of people from minimum age up and there is still a lot of sampling going on. There is participation by both baby boomers and Generation Xers," he said.
Partly because of the growing popularity of microbrews, Shipman sees other drastic changes on the horizon for the industry, including:
· Contract brewers will fail retailers and give the industry a black eye.
· Regional brewers will become extinct and the industry will be dominated by large brewers like Anheuser-Busch and Miller, as well as microbrewers and imports.
· Unfiltered beers will be a big trend.
· Domestic microbrews will take market share from imports.
Founded 14 years ago in a former Lee Myles transmission shop here, Red Hook now operates a microbrewery in a former trolley barn in the Fremont section, as well as a brewery in suburban Woodinville, with combined annual sales of $25 million.
In addition, Red Hook just broke ground for its third brewery, a 100,000-square-foot structure in Portsmouth, N.H., that will supply the New England market when it opens next summer. At least initially it will make the same types of beers produced at Red Hill's other breweries, including its most popular beer, Red Hook ESP (Extra Special Bitter).
Red Hook also is now examining other areas of the country, including the Mid-Atlantic states and the Upper Midwest for sites for additional breweries as part of its quest to become a nationwide microbrewer.
Fueling Red Hook's growth is an alliance with Anheuser-Busch, completed late last year. As part of the alliance, the St. Louis-based brewing giant maintains a 25% equity ownership in Red Hook and Red Hook is tied into Anheuser-Busch's distribution system. Anheuser-Busch cannot increase its equity in Red Hook for five years, and Red Hook maintains the right to adopt a poison pill strategy to stop additional unwanted investment.
Supermarkets have been instrumental in spearheading the growth of the microbrew industry, Shipman said, noting that Red Hook is currently stocked in most major West Coast chains, including Safeway, Albertson's, QFC, Top Foods, Vons, Lucky Stores and Ralphs.
"We've found that buyers in supermarkets in the regions where we are coming in are devoting more and more space to the microbrewery sets. They are following the trends and actually paving the way in demanding these products. Thus, we have found the supermarket environment to be very hospitable," he said, citing Albertson's, QFC and Safeway as having strong microbrew departments.
On the downside, Shipman said, single-bottle sets of microbrews have not done well in supermarkets. "Those ultimately are labor-intensive and represent a lot of breakage. And at the end of the day the consumer tends to already have been sampling the product off-premises anyhow, and likes to make six-pack decisions.
Also key to the success of microbrews is on-premise consumption in local bars, pubs, restaurants and at the breweries themselves.
"One of the reasons why we've had a lot of success in the supermarket setting is because we tend to lead Red Hook on premises, and approximately 50% of the beer that we make is draft beer, which is only consumed on premises," he said.
In Shipman's eyes, a microbrewer has to brew its own beer in small batches, with local distribution, and be open to the public for tours or for purchasing.
"We think it is essential that breweries be close to their markets and be in places where consumers can visit them, see them and learn about beer in that setting. We also want to be close to where our retailers are so that we can build very strong relationships with them," he said.
"Restaurants and tasting rooms are consistent with the beer business, as well as the on-premise focus. At Red Hook brewery we always have a place where you can come and drink the beer at the brewery, and we will have that in New Hampshire as well. We will also have a pub in New Hampshire offering tasty and hearty food," he said.
Shipman sees contract brewers -- those without their own production facilities, but who instead contract their work to other breweries -- as being the bottom of the barrel in the beer industry.
"Contract brewers represent a negative impact in the industry. They contract their production to breweries that would otherwise be bankrupt. Because the struggling breweries in the United States are really destined to fail, these contract brewers have a good chance of disappointing and failing to serve their retailers. I think the retailers have not looked closely at the consequences of favoring the contract brewers."
Many of the contract brewers use large, regional breweries, which Shipman predicts will soon disappear from the landscape.
"Many regionals are big, but failing. We see a phenomenon in the beer business that we call barbelling. That is when the industry gravitates towards big and little, and everybody in the middle gets fried.
"In the beer industry it is going to be the big three, no second-tier, and then the micros and brew pubs. Acquisition time for breweries is over. The struggling survivors of today are the Studebakers, Hudsons and Packards of the industry," he said.
Although industry sales have been basically flat over the last few years, Shipman said unfiltered beers, like the new Crossroads line being test-marketed by Anheuser-Busch, may be the next trend that will bring some additional sales to the category.
"I think that the unfiltered beer category has a lot of potential and that the level of activity in this category in the United States is going to skyrocket," he said.
Shipman also sees the growth of the microbrews coming at the expense of the imports.
"Over time the microbreweries will take sales away from the imports because of the freshness advantage that they offer. The freshness advantage is the key attribute to this business. Secondly, because we build the breweries in the United States and make it so that the consumers can visit them, the consumers will feel closer to our breweries, and react better to our brands," he said.
One way Red Hook is seeking to boost sales is through a new program of limited-production specialty and experimental beers that it is merchandising under the Red Hook Blue Line label. Currently only available on tap, Red Hook expects to market 22-ounce bottles of Blue Line to retailers later this year.
"Blue Line is an experimental beer, so it is something new for consumers. Concept to execution is as little as 45 days. We judge consumer response and then decide if we are going to commit more resources and have it actually be a brand. It also is very stimulating for the brewers and everybody associated with the production process," Shipman said.
