Top Menu

Martin Kelly on breweries ‘grown up’

On April 29, Magic Hat brewing in Vermont and Pyramid Breweries in Washington announced a deal in which Magic Hat would acquire Pyramid.

Magic Hat CEO Martin Kelly previously served as CEO at Pyramid. I interviewed him in 2002 for a lengthy story that appeared in The New Brewer, a trade publication for what is now the Brewers Association. It’s a business story, but if you are interested here it is.

Not long after putting together the deal in which Pyramid acquired Portland Brewing in 2004 he left Pyramid, shortly thereafter joining Magic Hat. (More here.)

From 2002

It’s safe to say that Martin Kelly doesn’t own any rose-colored glasses. He cut his business teeth working for two of the world’s largest and most successful corporations, Coca-Cola and Philip Morris. By the time he signed on as Pyramid Breweries president and CEO in 1999, the days of craft beer IPOs and 50% per year growth were long gone. Pyramid stock, in the mid-20s after its own initial public offering in 1995, slid below $5 a share by the end of 1996 and was less than $2 when Kelly took the job.

Yet he’s a believer. He drinks not only Pyramid beers, but seeks out local craft products when he’s traveling. When speaking about small brewers he often uses the words “we” and “us.” “For those who survived the future looks good,” he said. “That’s why I have some skin in the game.” He boosted his stake in the company to more than 5% during 2001.

You don’t do that just because you like the beer, or solely because of demographics and trends that favor craft beer in the next 10 years. When you have a family with four children, you had better have a plan.

He made the challenges clear during a presentation last fall at the Brewers’ Association of America convention. Consolidation at all levels – including breweries, distributors and retailers – means sales and distribution strategies that worked just a few years ago may no longer be effective.

If “sanitation, sanitation, sanitation” is the secret to brewing good beer, then “distribution, distribution, distribution” is the key to selling it. Kelly focused on that subject during an interview with The New Brewer, and also took the time to discuss branding and the future of the “craft beer” industry.

“After distribution, the biggest challenge facing microbrewers is increasing the relevance of our brands,” he said. “We are competing in the world of better beer – call it higher priced beer, whatever you want to call it – not just with other micros.”

Certainly the link between distribution and branding is strong. Kelly learned that working for Coca-Cola from 1980 through 1992. He spent much of his time as a bottler during a time of consolidation. “There were still a lot of local bottlers when I started, and they put a heavy emphasis on being local,” he said. “They were generally pretty active in the communities where they did business.”

Kelly acquired important DSD (Direct Store-Delivery) experience with Coca-Cola, learning about distribution in the trenches. Beyond the obvious (Thomas Kemper soda accounts for 17% of Pyramid sales), it was here he gained his knowledge of the economics of beer distribution as well as the parallels between selling beer and soda.

“I learned about channel selling,” he said. “That selling to grocery stores is different than selling to convenience stores. How soft drink guys sell differently to each one and how important that is.”

In his BAA presentation he offered facts to make it clear just how important that has also become for brewers:

– Three channels (supermarkets, convenience stores, and on-premise) account for 65% of beer sales.
– Beer sales growth is coming in chain-dominated channels (supermarkets +10%, convenience +5%, club stores +11% and super centers +37%).
– Craft beer sales are strongest in the channels that are experiencing the least growth (package stores, on-premise).

The push of consolidation in all three tiers comes to shove right here. Consider just some of the numbers Kelly provides, starting with brewery consolidation. The four largest breweries in the world now produce 25% of the volume, and in the United States the top three brewers represent more than 80% of volume.

In retail, more than 80% of grocery sales are done in chains, and the top 10 chains control 65% of the market. The 10 largest convenience chains operate 28% of such stores, and they are consolidating. Just three players control the club stores. On premise, outlets grew by 24,000 in 2000, with most of that from multi-unit operators executing expansion plans.

The squeeze that Anheuser-Busch started six years ago when it told its distributors to “consider giving 100 percent of their selling effort in support of Anheuser-Busch brands” continues. A-B’s distributors control 54% of the market and more than 60% of its affiliates sell only A-B products or those of partners such as Widmer and Redhook. Miller is pushing the houses it is in for similar service. Meanwhile, several Miller and Coors distributors have merged, and horizontal consolidations have created more regional distributors and fewer local ones.

This hasn’t always been bad. Anheuser-Busch probably did some microbreweries a favor by forcing them to look elsewhere for distribution in the mid-’90s. “The A-B guys are really, really good at power football, at running off tackle,” Kelly said. However, many distributors weren’t prepared to sell any other way.

“Small brewers have had to gravitate to other options,” Kelly said. “You might be going to a place that better appreciates your brand, but you are also going to have learn to sell in a world of clutter. In a lot of markets there may be just two houses, A-B and everybody else.”

Kelly knew all about the challenges when he left Philip Morris subsidiary Miller Brewing Co. for Pyramid. He worked as a Miller region vice president from 1994 through 1999, overseeing distribution in 23 Western states and $1.3 billion in sales. He gained his category experience from high up on the ladder, but also got a view from the lower rungs, serving as operations director for Jacob Leinenkugel Brewing Co. beginning in 1997.

“Sitting in the Miller (distribution) system we had to be realistic with what we could expect from distributors,” he said. “How much share of mind and time they were going to devote to Leinenkugel.”

Miller bought into three smaller breweries – Leinenkugel, Celis Brewery and Shipyard Brewing – in the mid-1990s. It since has sold Shipyard back to the original owners, and purchased full control of Celis before closing that brewery, but Leinenkugel has thrived.

“Working with Leinenkugel, I clearly learned the benefits of focus. We tried for a while to be a bigger brand and that didn’t work,” Kelly said. “When we got more focused, and had an understanding of our customers and our brand, the outdoor connection, that worked.

“They always stay on that theme. They talk about being from the Northwoods consistently and religiously,” he said.

“I also learned about the power of personality,” Kelly said. “Jake Leinenkugel is such a charismatic figure. … And it’s not just the Jake show. The whole Leinenkugel family is so involved. A lot of that has to do with Jake himself. He is a very driven guy and committed to his brand.”

Kelly brought that focus to Pyramid. Because Pyramid beers remain available in more than 30 states, and the company works with many of the same distributors as before, the changes aren’t always obvious. “(First) we looked at where we were allocating our resources,” he said. “We’re still spending a significant sum of money in the eastern part of the country, but we decided we couldn’t afford to provide (as much) support for the brand in some places. We continue to sell them there.”

Pyramid evaluated its brands from the same perspective. “We were selling lots and lots of styles of beer, many of which didn’t carry their weight,” Kelly said. The company pruned its product line, and where particular beers are available.

“We didn’t cut expenses,” Kelly said. “We just moved them. We are still in most of those markets. We are not trying to withdraw from areas where consumers want our beer. … If there is interest there, we want to sell beer. But (distributors) are more reliant on themselves to develop the brand.”

Kelly paused, preparing to make a point. “That is the fundamental decision micros must make,” he said. “You have to decide which markets matter to you. In those markets you need to take more control of your own destiny.

“In the early days (of microbreweries) a distributor may have helped build brands. It’s unrealistic to expect they’ll nurture your brand like you will.”

Brewers who get over the notion that distributors and wholesalers are selling rather than delivering beer should be ready to fairly evaluate whom they work with or if they need to consider alternatives such as self distribution. “We are making market-by-market decisions,” Kelly said. In December, for instance, Pyramid awarded distribution rights for Thurston County (south of Seattle, and including Olympia) to Black Hill Distributing. It was one of several distribution changes made in the last two years, and part of an overall distribution strategy.

“They are the ones we feel communicate a message of value to constituents,” Kelly said. “They give us the right combination of things to be successful in that market.”

Kelly sits down with the head of sales each quarter to discuss possible distribution changes. Part of the discussion is about how distributors are performing, the other about possible changes in the landscape. “There isn’t one deciding factor, you have to consider each market,” Kelly said. “You could be working with a Coors house and tomorrow it may be a Miller-Coors house.”

Pyramid expects to see such things coming. “You have to track not only what’s going on but what’s going to happen in these markets in the future,” he said.

At the BAA convention, Kelly asked brewery operators, “What do you want to be when you grow up?” The implication was clear. Pyramid, Anheuser-Busch and Interbrew are the competition. Whether it is Pyramid, with about $30 million in annual sales, or A-B, with more than $12 billion, they have a plan for distribution and they have a plan for everything else. To thrive, a business must have a competitive advantage, whether it comes from being a monopoly, from pricing or from differentiating themselves in the marketplace. The last is where branding comes in.

“The craft beer world has not done a particularly great job of building brands,” Kelly said. “Regionally, more specifically locally, some breweries have done better.”

He defines brand as, “The consumer’s total experience with a product. The product itself, packaging, advertising, point of sale, even the decision-making that goes into purchasing the beer. … In our case it includes the experiences in our alehouses.”

Experimenting and sampling have remained a vital part of the craft beer experience since the beginning, but only a part. In the early 1990s, craft or microbrewed beer constituted something of an über brand. “The category was pretty much the brand,” Kelly said. “But the category wasn’t enough to keep the consumer coming back. They wanted to know, ‘What else are you telling me?'”

In its annual report, Interbrew explains one reason it has trademarked the term the “World’s Local Brewer”: “The brands that find a way to be local, in the community, part of people’s life, and something they relate to, are the ones that are chosen — accounting for 90% of all sales around the world today.”

Kelly agrees. “There are a percentage of consumers who are focused just on the beer, but that’s not where you get the lion’s share of your volume,” he said. “If your focus is only on the beer that’s not relevant enough.

“We need to build our brands on relevance that already exists and to develop them along those lines.”

That’s what the competition is doing. Also from Interbrew: “Brand cycles are very long with beer brands being built over the course of many years and brand strength often lasting for decades. We intend to continue to invest heavily to maintain and enhance our brands.”

A company in business only a few years may find it harder to play for decades. “I know my crystal ball doesn’t see that far out,” Kelly said. “As a young business it is important to evaluate how this (initiative or action) will help me in the long run and how it will help me in the short run.

“A classic there is pricing. Some people used it in the early days. Over-reliance on pricing hurts your brand in the long run, unless you want to be the low price brand. Pricing is a real challenge, and craft brewers have been their own worst enemies on the issue. If you don’t have a brand, all price promotion does is shift volume from one period to another and it doesn’t build share.”

Because of over-capacity in the beer industry and the micro segment alike, pricing pressure will continue. “The good news is that domestics continue to push up prices,” Kelly said. “Also Constellation Brands (which distributes Corona in the western United States) announced it is boosting Corona prices 5%.”

Imports have recently and easily outperformed microbreweries in part because of pricing, particularly of Mexican-produced beers. However Nielsen data indicates that while import sales on the West Coast grew in 2001, the growth rate slowed. Kelly acknowledges they are formidable competition, but also points to micros’ many competitive advantages: lower transportation costs, no importation duties, proximity to and familiarity with local consumers, a higher degree of product freshness, etc.

“Hopefully craft brewers will continued to build their brands,” he said. “We are local, we are in Seattle. An import can’t be from Seattle, they can’t. We have to ask ourselves how we evoke responses on the local level. That doesn’t take the B-52s on television.”

Imports are just part of the mix. Michelob Specialty beers are seldom discussed, but in the 12 months after A-B rolled out the line in 1997 only Boston Beer Co. sold more specialty beer. Michelob just recently ran the first national television advertising for Amber Bock. And although so-called “malternatives” got that name because they are alternatives to traditional beer, they are competing in the same arena. Smirnoff Ice captured 1.8% of U.S. beer sales in less than a year on the market, and wasn’t shy about targeting Heineken and Corona drinkers.

“The category is better beer, not just craft beer,” Kelly said. He knows the opportunities. “With the so-called echo boomers we are looking at 10 years or so of growth, creating new beer drinkers,” he said. “There’s ample evidence that premier products will continue to do well. Cheese, ice cream, specialty bread, etc. The center of gravity is moving higher.”

Not every brewery open today will be around to take advantage. “If they don’t pay attention to the consumers and make their brands relevant. If they keep their heads in the sand and don’t manage relationships with distributors differently,” Kelly said, starting a list. “The ones who don’t have the resources are not going to be able to fight the fight, and if they don’t have a plan they won’t be around even if they do (have the resources).”

That doesn’t mean a brewery must have multiple millions of dollars in sales. “These (smaller breweries) are the guys who need to be thinking about controlling their own destiny, to stay focused on cultivating a local following,” he said. Getting specific, he explained that a small brewer might covet a spot in the local supermarket. The brewer had better understand how the chains play into the distribution process, and what he’d be expected to provide beyond a few cases of beer to the store around the corner.

Kelly’s point: The same basic rule applies across all size breweries. “Define where you want to go and have a plan to get there,” he said.

Powered by WordPress