Goose Island: What if acquiring capital cannibalizes your market?

Lynne Kiesling

Last week, Chicago craft brewery Goose Island agreed to be acquired by Anheuser-Busch, which purchased a 58% equity stake in the brewery. Goose Island founder John Hall argues that the deal enables Goose Island to make investments to increase capacity, an investment necessary for continued profitability. He recognizes that some may be skeptical about the deal:

But Anheuser-Busch didn’t buy us to change us. It bought us because we can do things its people can’t. They’re megabig, so it’s harder to get people who sell huge brands to really push new products. As in a lot of industries, it’s the small guys who are really creative, because they have to be creative. That’s what’s made us what we are.

It’s wonderful our customers feel they have a vested interest in us. That’s something we’re all proud of, and we want to continue that tradition.

The reality, however, is that we’re in a capital-intensive business, and it takes an awful lot of money. Not counting our two brewpubs, we’ve up to 115 to 120 regular employees, having added about 20 people just last year.

To deal with that lack of creativity in the “megabig” firm, one of Anheuser-Busch’s strategies over the past decade has been to enter into distribution agreements with craft breweries, and then over time acquire majority ownership stakes in the craft brewery. Before Goose Island, A-B did this with Redhook from Seattle and Widmer Brothers from Portland (through which A-B had a distribution agreement with Goose Island).

Here’s the challenge, though, for growing craft brewers and for A-B: once the craft brewer is acquired by A-B, lots of the people who make up the craft brewer’s traditional market lose interest. Almost all consumption goods are multi-dimensional, and beer is no exception — those who form the traditional market for craft beers value two dimensions that diminish when the brewery is acquired by A-B: independence and localness. Sure, the brewery is still physically operated locally, but it’s a really tough line to follow to grow nationally while maintaining the local relationships and local touch.

Independence is an interesting aspect here. For many craft brewing consumers, once the brewery is no longer independent they lose interest in the beer. Part of what those consumers are buying is, for example, what we enjoyed at Green Man Brewing in Asheville, NC over spring break: sitting at the brewery’s bar, enjoying a beer brewed on premises, and having a really engaging conversation with people who are intimately involved in the production of the beer. BTW, the Green Man IPA really, really rocks. That connection, that intimacy, gets lost as the brewery grows, and certainly is threatened if not destroyed when the brewery is acquired by A-B.

Part of this, I admit, is snobbery regarding mass-market beers, but part of that snobbery is grounded in the fact that the form creativity takes in craft brewing is often the emphasis on unusual flavors or the amplification of intense flavors (one reason why so many craft brewing consumers consider themselves “hop-heads”). Thus a lot of craft beers intentionally appeal to a small sliver of the overall market, and there’s a large concern that A-B acquisition will lead to the “watering down” of the beers and the modification of the recipes to make the flavors less distinctive or intense. But clearly the craft brewing market is growing, so is there a chance that A-B acquisition will not lead to recipe modification at Goose Island?

Another aspect of the localness is that the growth in the craft brewing industry is also manifesting itself in an increase in small local breweries. Between the local breweries in Chicago (Half Acre is in my neighborhood, and Three Floyds in northern Indiana is outstanding, and there are others; in fact, Half Acre’s web page pulls up in my browser saying “Half Acre is a LOCAL Chicago brewing company”) and our retail access to craft beers from other locations (Victory, Dogfish Head, Lagunitas, etc.), the craft brewing market is incredibly rivalrous.

If, at the margin, the sense of localness and the independence make a difference between my choosing a Half Acre Daisycutter over a Goose Island IPA, then Goose Island will be reducing some of its market in its move to increase capacity and try to acquire a larger national market. I hope that they succeed in doing so, but I do think that they will lose some customers who value independence and localness in the process.

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8 thoughts on “Goose Island: What if acquiring capital cannibalizes your market?

  1. Widmer? Really. Now I’m not going to enjoy the few Widmer Broken Halo IPA that I have left quite so much. Of course the mere presence of a beer in the supermarket here means it probably has a national distribution agreement with one of the big guys. (But we can get Stone Brewing Co. products and a few others including a little Dogfish Head. Stone isn’t touched by A-B is it? Please please please let the answer be no.)

    Sadly, only one place locally to get a locally brewed craft beer: Triple J. They do good work most of the time, and occasionally great work, but they need some competition.

  2. STONE! I was trying to remember their name to include in my list with Victory. Stone is awesome, and as far as I know, has no commercial relationship with A-B. Their IPA makes me smile.

  3. And their Arrogant Bastard. Amazing. And if you ever get a chance to try the Oaked Arrogant Bastard, DO. Not for the faint of heart, and definitely not for all tastes, but really, really interesting and unusual. Not a beer you could throw back a few of after playing soccer, though …

  4. Lynne-

    Multiply the distaste for A-B products by a factor of three, now that they have been bought by InBev. Even down here in St. Louis, it is no longer considered the local brew.

    As for me, Bell’s, or Weihenstephan Hefewiesen. Das Schmeckt!!! (sorry for the spelling)

  5. Bell’s FTW! Love, love, love. Their Two-Hearted Ale is outstanding.

    Funny you should mention Weihenstephan; we have a fairly new neighborhood pub called The Fountainhead that features really interesting craft beers and has decent food, and they opened their newly-arrived Weihenstephan keg over the weekend. We haven’t been, though.

    What on earth are you doing in St. Louis ;-)?

  6. A pub named The Fountainhead. Even a non-Randian can love that!

    Victory Hop Devil is great when you want your hops forward. Same for Tupper’s Hop Pocket Ale (by Old Dominion Brewing in Northern Virginia).

    One of the few virtues of the local supermarkets is we do get the Arrogant Bastard. And maybe I’m too harsh. We get Left Hand Brewing – love their Milk Stout – and get a variety of other things from Sierra Nevada IPA to Oskar Blues’ Dales Pale Ale. My objection is probably that the prices are all a $1 or two too high.

  7. Weihenstephan is the oldest brewery in the world. I discovered it by staying at the Courtyard Marriott in a little town called Freising just across the autobahn from the Munich airport. Freising is the home of Weihenstephan.

    For a small chuckle, check out their print advertisements. They really play on their monastic heritage.

    WRT the premise of the article, is it not like the exclusivity trap? Customers sometimes want the “craft” cache of exclusivity, and are willing to pay for it, especially if the better quality of the product is evident. Once you go assembly-line with increased production, you loose that exclusivity, and perhaps the cache….

    Beer as a luxury good. How the world turns….

  8. Long story. Married to a smart (of course) wonderful woman. Three kids, small farm, etc., etc. Running marathons / half-marathons, but nothing in Chicago. Note new email address….

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