This week we meet Sam Holloway, the Bay Area Distinguished Professor of Management & Entrepreneurship at the University of Portland and talk about business strategies for craft brewers.

Sam is a beer lover and in addition to being on the board of a brewery, developed Crafting A Strategy an online, digital curriculum that gives craft brewing entrepreneurs the tools, wisdom, and knowledge to go out and improve the world, one community at a time, one craft beer business at a time.

He’s in Australia and next week, on February 19th will be presenting an IBA Mash Up in Sydney at Wayward Brewing. We caught up with him by phone before he left to discuss the challenges facing small breweries and how they can adapt to the rapidly changing industry.

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Full transcript

Matt Kirkegaard: And that’s just what we’re here to do, talk about beer.

I’m Brews News Editor Matt Kirkegaard, and thanks to Cryer Malt this is Beer is a Conversation, our weekly sit down with the people shaping the beer industry and through these conversations we dig a little deeper into the stories behind the business of beer and brewing.

The Australian brewing landscape is evolving rapidly, and here we try and make sense of what is happening, and better understand the issues shaping the industry.

This week, Professor Sam Holloway. Sam Holloway is the Bay Area Distinguished Professor of Management and Entrepreneurship at University of Portland. He’s also a beer lover, and in addition to being on the board of a brewery, he developed Crafting A Strategy, an online digital curriculum that gives brewing entrepreneurs the tools, wisdom and knowledge to go out and improve the world one brewery at a time, one craft beer business at a time.

He’s currently in Australia, and next week, on February 19, he will be presenting an IBA mashup in Sydney at Wayward Brewing. We caught up with him by phone before he left to discuss the challenges facing small breweries, and how they can adapt to the rapidly changing beer industry.

If you’d like to learn more about Crafting A Strategy, there’s a link in the show notes, as well as to the event information for the IBA mashup.

And here is my conversation with Sam Holloway.

Sam Holloway, welcome to Beer Is A Conversation.

Sam Holloway: Thank you for having me, it’s a delight to be talking to you.

Matt Kirkegaard: How could I not talk to you when I was offered the chance to discuss one of the articles that was shared with me ran with the headline, “Can You Imagine A World Without Budweiser? We Can.”? Tell us a little bit about your background in beer and how you came to take that view of the world.

Sam Holloway: Well I have to give credit to my editor, Brian, at thecoversation.com, he helped us come up with that title and a few of the other catch phrases. One of the challenges of being a professor, or a professional nerd, is sometimes we need help from real journalists to get to the point, and I think that title speaks for itself.

For me, being a professor I have one of the best jobs in the world. I happened to fall in love with the craft beer industry and meet a brewer while I was earning my doctorate and wanted to help in any way that I could, from helping him stand up tanks to placing concrete to drinking as much of his beer as I could to make him a commercial success, although that wasn’t the best health decision, I still tried.

And you know, as a professor there’s only two things that are bad about a professor’s job. Any professor that tells you they love to grade papers is lying, but the other thing that’s limiting about being a professor, at least in the case of my job at the University of Portland is, it’s a wonderful place, but I can really only help the people that have the time and the money, and are geographically close to me, to sit in class. And Crafting A Strategy was something that a few of us, three founders, we really wanted to develop something that could go beyond the walls of the University and really get the information that we felt small breweries needed in their hands.

Because most MBA programs, they basically teach one strategy, which is to get large, to get big. And if little breweries all over the world think that the only way to succeed is to get large, they’re actually playing right into the hands of Anheuser-Busch InBev and Heineken and some of these large players, because they’re never gonna win that way. And so we’re using Crafting A Strategy as a medium to let people know that there’s plenty of other ways to grow, and there’s plenty of other ways to be successful.

And that article is really the culmination of about five years of previous research and us just putting something out there that says, gosh, let’s try to explain what the world would look like if drinking occasions if returned to more of a personal experience with friends in a pub, versus buying the cheapest product available at a grocery store, etc., particularly in the US and in Europe.

Matt Kirkegaard: It’s funny that you say that if you set yourself up to compete with the AB InBevs then you’re almost setting yourself up to fail, because in a lot of ways that was the mindset that we saw with a lot of the breweries get big real quick.

Sam Holloway: I should correct that. I think that if you entered the beer industry 25 years ago, getting big through the old methods was the right strategy, but I think if you’re trying to get big and enjoy some of the advantages of being big and you’re starting now, you’re 20 to 25 years too late. So I think in the current market it’s, unless you start with extremely deep pockets, which most craft breweries don’t, you’re really gonna be playing in a game that requires deep pockets and deep expertise and bargaining power and in the case of the United States, AB InBev owns most of the wholesale channels in addition to that.

So it just never made sense to us professors to keep teaching folks that the only way they could compete head-to-head was to play by the same game. I think fundamentally strategy is about doing things differently than your rivals, and that’s really what the craft beer global revolution is, is people believing in different and more varieties of beer, different flavors, more intense flavors. And with that comes a very fragile product that doesn’t ship very well, and so if you can’t ship your product long distances and keep it shelf stable, then why are you playing that game? At least in my opinion.

There’s so much in that that we’ll unpack over the course of the next 30 minutes, but I guess, again, just going back to 25 years ago there was a strategy, and I guess we’ve recently seen some of the breweries that date back to around about that period. New Belgium, Sierra Nevada, grew very quickly. They reached a certain size, but then certainly in the case of some of the breweries like Stone and New Belgium, once they expanded to try and take it to the next level, they seem to have hit a glass ceiling of some sort.

Can craft compete with big?

Matt Kirkegaard: Do you think that even those big older breweries have the ability to compete with Sierra Nevada, or did they overreach? Compete with AB InBev, I should say.

Sam Holloway: Sure, sure. I think it’s a great question, and I’ll start with New Belgium. I think it’s a really interesting case study of a company that, for a long time, was fiercely independent and really one of the leaders, along with Sierra Nevada and Stone, in growing the market in America and showing a path forward for little breweries with a certain set of beliefs, and how business can be and how to treat people, and certainly in New Belgium’s case, how to treat the environment is core to who they are.

But even that company, they did some wonderful things like set up an employee stock ownership plan for their employees, but even if you read between the lines of this final sale that they just made, the burden of having a very large company with a lot of people that are getting ready to retire and having to fund those agreements that were made in the past, along with just increasing competition against the larger and larger breweries, meant that they had to sell to someone with even deeper pockets than New Belgium had. And I think that New Belgium is a great case of, this is just competition the way that it is once you reach a certain size.

If you recall, the founders had already done the employee stock ownership plans, sort of taken their chips off the table many years before, but in their role as advisors they said, “It’s time for us to get access to deeper pockets and relationships in order to continue to behave the way that we want.” So I think it’s a cautionary tale.

Stone Brewing as well, they’re fiercely independent, but they’ve also taken money from private equity to continue the growth curve that they had hoped to do, so you have to watch what you wish for as a brewery that is one of these legacy breweries that is, let’s say half a million hectoliters or half a million barrels big and continuing to grow, you’re gonna start coming up against market forces and bargaining power differences of the Heinekens and the Carlsbergs and all of these large international companies. And, quite frankly, they’re better at it. So you either have to get the resources to play at their game, which we’re seeing, or you have to, maybe in the case of most of the breweries that use Crafting A Strategy, make a strategic choice to stay small and thrive without this burdensome growth that we saw 20 years ago.

Can craft breweries get too big? Is there a ceiling?

Matt Kirkegaard: Can a craft brewery be big? Or is there just something in the promise of craft and independence that when you do get to a certain size your traditional base no longer sees you as the thing that they supported to begin with? But then you’re also not big enough to take one the breweries that aren’t seen as being in that space, and you almost exist in a netherworld between the two?

Sam Holloway: That’s a very complex question to unpack. I’ll do my best.

I think the number one thing to remember is, there’s never been a better time to be a beer consumer ever, probably, in the history of the world that right now. Consumers have more choices, more new choices, more variety in choices. But with that, it’s much harder to build a beer business when all people want is what’s new. I use the word promiscuous to describe beer drinkers all over the world. They never have any loyalty, they’re not loyal to any one brand, and they’re always wanting what’s new and different. And it can be really difficult to build a business that way.

That being said, I’m really only referring to these legacy-poor consumers that have been in craft for many years, they’re still, even in a country like the United States, there are still huge segments of the population that either don’t drink beer at all, or don’t drink craft beer, that are now more willing to move over than ever before.

And I think the Sierra Nevadas of the world have just done an amazing job of staying independent and growing and providing that case study of someone who was able, even though they were there a long time ago and they largely built the category, they’re still able to keep doing it.

We’ve seen some other legacy craft brewers join up recently, I think you’re gonna see a lot more of the top 200 breweries in the United States merge with each other as they’re trying to drive down their average cost of goods sold and compete with the large international breweries. So I think we’re gonna see a lot more consolidation at the top, and a lot more new entrants and fragmentation at the bottom, regardless of which country you’re in.

Matt Kirkegaard:    Is Sierra Nevada still growing? I know that they, around 2017 everyone experienced a few [inaudible 00:11:37], but has Sierra Nevada returned to growth?

Sam Holloway: I would bet that they are flat to down. I don’t have the figures right in front of me, but they’re maintaining where they’re at better than some folks are. But again, that’s a cautionary tale. Most of the top 100 craft breweries in the United States were flat or down last year, with the exception of those that, like Founders, that accessed deep pockets of Mahou-San Miguel and Lagunitas which has a relationship, or an investment, or actually now it’s wholly owned by [inaudible 00:12:09].

Has the Brewers Association become too big to succeed?

Matt Kirkegaard:    It’s interesting, because another article that I turned to when I was doing some reading was an article that you co-authored just over a year ago posing a question, “Has The Brewers Association Become Too Big To Succeed?” Looking at how big the association that represents breweries has grown, and the trouble it has in representing all of the many interests as the market becomes fragmented.

Sam Holloway: Yeah I mean, there’s a lot of people at the Brewers Association that I highly respect, and they’re, in some ways, a victim of their own success. They need to ensure, and that’s what this blog talked about, and a couple other blogs I’ve written, they need to ensure that the largest breweries in their membership are well represented, and they’ve done a good job with that. They’ve gotten the excise tax law passed in the United States, which if you’re more than 10 thousand barrels of beer produced a year, let’s say that’s 13 thousand hectoliters or so, then a few cents per barrel decrease in tax starts to make a really big difference. I think the challenge is that 98% of the breweries in the United States, and probably 95% of the breweries in their membership, are so small that that 35 cent decrease really has no effect.

So that’s the challenges when you’re… I think the other challenge for the Brewers Association in the United States is that their definition of what craft is has become a little bit problematic, in my opinion. It worked so well when all the breweries were small and we were banding together to fight against the large industrial brewers, and it was a wonderful rallying point for any craft brewery to look at. And the challenge now is that they’re reporting statistics that suggest the market share for their definition of craft is at about 13% or so and not growing very fast.

The challenge that I’d like to point out is there are still a lot of well made beers by former craft breweries that have been bought by InBev and Heineken that are actually growing the market share tremendously, maybe even 17, 18, 19%. And the challenge that I have as a small brewery shareholder, and as someone that studies the industry is, if the only statistic that gets reported is that we’re hovering around 13% and we’re not growing, what if a bank or a landlord starts to listen to that? And they don’t know that, act      ually, fuller flavored beer, which our boss and the Chief Economist came out and stated, that fuller flavored beer actually accounts for more like 17% of the market and it’s growing. I believe he even said we have another 20 share to go.

If banks and landlords only hear that 13% number and only hear that the definition of craft for the Brewers Association isn’t getting bigger, they might start to look to other industries to rent to. They might think that the industry is not a great place to offer debt, or for investors, they might think “Well gosh, it’s hovering.” When the truth is, more people are drinking fuller flavored beer, to use that quote, in the United States, than ever before.

And we’ve, if you follow innovation theory like I do, we’ve crossed the chasm. If 16% of the market adopts a new innovation or starts buying a certain product, that opens up what we call the early majority and the late majority, which is over 60% of the market. If we include all the formerly craft brewers in that definition, we’re well beyond it. And we’re growing. And it’s an exciting industry to be in.

Where does ‘Independence’ sit

Matt Kirkegaard:    Where do you sit, then, on such things as the definition of independence? Because Australia is one of the countries that the debate around craft did become moot because it was hard to say that a brewery wasn’t craft when it was still owned by one of the multinationals. We moved, a couple of years ago, do the idea of independence. So where do you see that as a branding and a marketing term?

Sam Holloway: I think it’s a good ambition to have a clearly defined set of standards. I think the challenges, the line between independence and not independent craft, and crafty or non craft, it’s blurring. As things grow in popularity, as the industry grows in popularity, and I’m excited to get down to Australia and talk to more people. I think it’s really dangerous to have too tight of a definition because at the end of the day, all entrepreneurs are looking for growth opportunities, and growth often means success.

I don’t ever have a problem with an entrepreneur doing what’s right for their business if it means getting access to more capital. Now sometimes this comes from maybe what aren’t considered independent breweries in Australia, but that’s better for that company, it’s better for their employees, it’s better for the types of benefits that those entrepreneurs can provide to their employees. So it’s a tough spot. And sure, there’s gonna be some consumers that get really upset over something like that, like you mentioned before, you know, “Gosh, I helped these folks get from almost nothing to something special, and they had to go and do this”, but at the end of the day, that means that they’re gonna be able to get more fuller flavored beer to more people. And I don’t see how that’s bad.

Advice to new breweries

Matt Kirkegaard:    What then is your advice to breweries that maybe started in the last four or five years?

Sam Holloway: Number one advice is learn how to grow and stay small. And I say that intentionally.

The old model of growth, which was to grow the volume of beer that you made and to grow through scale and put beer into bottles and cans and get into supermarkets and grocery stores, again I think that model is gonna always be, it’s always a losing proposition when you start to compete head to head with the multinational companies. So instead of, if you’re a two to five thousand hectoliter brewpub with maybe one or two outlets in a great city like Brisbane, instead of trying to get your beer across the country in grocery stores, maybe open up a third place nearby.

Even in Portland, Oregon, where I live, there are, and we have over 100 breweries in the city limits, there are still neighborhoods that are just yearning for their chance to call something their own. They’re yearning for their local brewery. And if you look at the numbers, if you run a really nice taproom where you make and sell your own beer over the counter at $6 or $7 a pint, sometimes $5 or $6 a pint depending on where you’re at in US dollars, you can run a $800,000.00 a year taproom business with a 20% risk margin, or you could try to run a $2-3 million dollar wholesale business at almost no margin. Which one would you rather do?

And I think that the new growth that we are seeing is at brewery sales, at brewery on taproom sales, beer to go sales directly from the brewery, those are the things that allow you to grow your profitability, to reduce your risk, to deleverage yourself. That’s the kind of growth that I think any brewery started in the last five to seven years should focus on. Not trying to get huge and ship your beer all over the country.

Matt Kirkegaard:    It’s interesting you say that, because in a lot of ways that flies in the face of the model that a lot of brewers set out trying to do. Where it was get bigger, get your cost of goods down, as I was told probably 15, 18 years ago when I first started, beer is a unit cost game. To duplicate your taprooms and your business, essentially, is almost to lock in the costs in a lot of ways.

Sam Holloway: You know, you’re right. But the fundamental assumption of that choice, that strategic choice, is that your firm has some level of bargaining power, that your firm is gonna be able to bargain with their wholesale partners to be able to get a better deal. And I think if you were early into the craft movement and maybe you were selling to the wholesaler that also distributed Budweiser in Australia or that distributed Heineken in Australia…

Let me check real quick, We have this three-tiered system in the United States, before I go talk much about Australia, do you have a similar arrangement? So how does it work in Australia?

Matt Kirkegaard:    And you’re actually anticipating my next question, which is, how dependent is it on the legislation and the structure of the industry?

In Australia, breweries can sell directly to venues, so they don’t have the three-tier system, but just as you said, the distribution is pretty much locked in by the big breweries.

Sam Holloway: So it may not be legislated, but some of the same challenges still occur, is that fair to say?

Matt Kirkegaard:    Absolutely. Breweries can contract directly, the big breweries can contract directly with venues. Hotels, pubs, and essentially lock out opposition by directly contracting.

Sam Holloway: It makes sense, too. If you’re a large hotel chain and you’re the beer buyer, would you rather talk to one supplier, maybe somebody that controls 35 breweries and can offer you all the variety? Or would you rather have to talk to 25 independent small breweries? Your life’s gonna be easier if you go big, too.

So again, I think for the breweries, the little breweries that want to grow, playing by those old rules, I think you’re making things more difficult on yourself than you need to. But it does take a different way of thinking. You do have to have the courage to go away from the ideals that you launched with.

Again, it’s a little bit scary, and that’s one of the reasons we developed Crafting A Strategy was, gosh, everything that normal business teaches you is to get big, but what if you’re not? What if you’re not big and you don’t plan to get huge? Or maybe legislation like in the United States prevents you from switching wholesalers? Or what if market forces prevent you from getting into some of these big hotels in a place like Australia? What do you do then? And that’s really what Crafting A Strategy is, is we have over 150 content pieces where business professors sat down and said, “Okay, if the old rules of getting big don’t apply anymore, how do we have to change what we’re teaching?”

And that’s what craftingastrategy.com is, is a living, breathing, online community of knowledge and information about doing business a different way.

Matt Kirkegaard:    And we’ll be linking in the show notes to the website.

For somebody that says that as an academic they need help from a journalist, some of your headlines are certainly very captivating. One of the ones I was just reading, “Has Craft Beer Flavor Innovation Played Itself Out?” It’s interesting that flavor innovation is one of the things that small brewpubs are very much focusing on.

You think that maybe they’ve gone too far? Or that it’s not an advantage anymore?

Matt Kirkegaard: it’s one of these hard truths, right? I mean, the number of new entrants, the sophistication of consumers, I think the promiscuity of consumers is…

Sam Holloway: There’s a standard thing in business that, well, “You should listen to your customers and give them what they want.” I certainly don’t disagree with that, the challenge is when your customer continuously wants something new and different than you gave them before, you can get to the point where you run out of new ideas.

It’s actually really nice of a real journalist to compliment one of my headlines, thank you for that. But I can’t take credit for it. Tommy Arthur, who was one of the first brewery founders I interviewed when I started my academic career, it was his idea. And it was his quote, and he emailed me, I hadn’t talked to him in probably 5 or 6 years, and I was very flattered. He emailed me and said, “This is a really hard problem, what innovation theory out there could help me explain it? Because I think we’re reaching the end.”

And what I said in that blog, and what we said in trying to help Tommy answer the question is yeah, you’re right. If the only thing that you’re innovating on are the inputs, the hops, the yeasts, the incremental product inputs, then yes, you’re gonna quickly run out of innovation. And in the United States I think we’re seeing that right now. Consumers are a little bit fatigued with the next Milkshake IPA, Brut IPA, Hazy IPA. And the last thing we wanna do is have so much, what the blog and what innovation theory calls “incremental product innovation”, that we turn people off.

And so what I tried to say in the blog and in helping Tommy answer the question was, there’s actually four types of innovation. While incremental innovation is the one that home brewers love, it’s the one that motivated our initial idea to go pro as a home brewer, there are two other types of innovation: modular innovation and architectural innovation, that can offer you incredibly new ways to please consumers if you run out of the ability to buy that next hop, get access to the next hop. And if it’s okay with you, I’m trying not to get too academic here, which is my tendency, I’ll apologize in advance, but let me just give a quick example of a modular innovation is, or what an architectural innovation is, is that okay?

Matt Kirkegaard:    Yeah, absolutely.

Sam Holloway: Okay, so if incremental product innovations are what everybody’s doing, and sounds like that’s really popular in Australia as people compete to have the next coolest beer, if those start to get confusing in the minds of consumers or you yourself develop innovation fatigue, what can you do?

What a modular innovation says is that’s when a new core technology is plugged into a fundamentally unchanged product architecture. So what does that mean? Examples would be barrel aging, decoction mashing, right? Also if you’re a large company and you can afford the equipment, that’s when you can use traditional dealcoholization by reverse osmosis, and we see Dry January in the United States being promoted by the firms that can afford that half a million dollar piece of equipment. But you’re not seeing a lot of small companies do it because they can’t afford it. Example beer styles for a modular innovation, and again, this is just plugging and playing some new technology in the existing architecture, this is how you get Belgian Lambics and Bourbon Barrel-Aged Stouts.

The other thing you can change is, instead of plugging and playing with one of the processes, maybe you can change how the processes talk to each other. This requires very little money, very little investment, you’re just looking at, “Let’s look at how I make beer right now, and how the equipment that I have and the order of things, the order of operations to make the beers that I like, if I make small tweaks here or there I can improve aspects of the beer.”

One of the things is if you bottle condition your beer you can improve its shelf life by still making the same beers, and so [inaudible 00:00:01] a couple years ago, they added an additional port midway up the side wall of their brite tank in order to circulate their beer to allow for a more homogeneous mixture of priming sugar. That’s an architectural innovation. If you’re doing kettle sours, there’s other ways to develop a sour beer. I had a brewer help me with this, again, I’m not a brewer, but talking about a lactobacillus reaction and pH drop in the fermenter instead of the kettle so that you can scale up to the fermenter size beyond what the kettle allows. And then you boil after the pH dropped to produce sour beers. So again, that’s just taking equipment you already have and having them talk to each other in a different order.

And this is also how you make seltzer. So I know hard seltzer is scary to a lot of brewers all over the world that don’t have the equipment, but hard seltzer is, I don’t need the brewhouse anymore. I’ve got fermentation and packaging equipment only, I can start producing hard seltzer and selling that maybe to a customer group that isn’t extremely interested in the bitterness of the beers that I make.

And so those are just some examples of innovations that any brewery of any size can make if they just think a little bit beyond incremental product innovation.

Is radical innovation easier?

Matt Kirkegaard:    Listening to you talk about that, and perhaps I’m a little bit cynical, but radical innovation sounds like a much easier sell in a very noisy marketplace. Modular innovation and architectural innovation sound like the storytelling required to tell people about the innovation would be a much harder sell.

Sam Holloway: I always come at it from the cost side. Sorry, I’m an economizing, cost-driven entrepreneur and advice giver, and radical innovation generally takes deep pockets. Modular innovation, for that matter, takes deeper pockets than architectural innovation. And so radical innovation is the cool buzzword, there’s no doubt about it. It’s the thing that people like to talk about and get excited about.

Matt Kirkegaard:    It’s what gets you on social media, though, whereas modular innovation, talking about decoction mashing, doesn’t light up Instagram and it doesn’t light up Untappd.

Sam Holloway: You’re probably right there, however, like a lot of people in the United States, they use the word “radical innovation” because it is eye-catching and because it is click-bait, but it doesn’t match with the theory.

Now maybe that’s why I’m a professor and not a journalist, because I stick with what the theory says, I guess.

Matt Kirkegaard:    Well funnily enough our approach as a website isn’t click-bait and radical innovation, it is trying to tell the harder stories. So it makes for gentler, more organic growth.

Sam Holloway: Yeah, and cheaper. I think keeping that in mind. The example I give in the blog for a radical innovation is this wonderful beer called Playground IPA made by a small craft brewery in Utrecht, Netherlands, and they have a very proprietary yeast strain that is able to go through the fermentation process without producing any alcohol. Just barely trace amounts, and then they couple that with a slightly different pasteurization technique just on that beer. You know, a lot of craft brewers, pasteurization is a no-no that removes flavor and is a nod to a shelf-stable beer versus a very fresh beer, and a lot of craft brewers just won’t do it.

But this company, I’ve tried the beer several times, it tastes wonderful, the non-alcoholic beer driven by Heineken in the Netherlands is growing tremendously, and Playground IPA is the non-alcoholic craft beer of choice in that country. So again, for them, they made a big bet and it worked. But that’s risky, it’s expensive, and if you’re able to do it you can reap the rewards like they are, but for a brewery that is doing pretty well making traditional IPAs, stouts and lagers, to make that jump to radical innovation, you’re inviting a lot of risk and a lot of trial and error that you need the deep pockets to survive.

How hard is it to stick to your guns?

Matt Kirkegaard:    As a small brewery where you are in the bubble, the craft beer bubble that is very noisy, there’s a million Facebook groups, social media all pinging and telling you about what your competitors are doing, seeing people share…

How hard is it to stick to your guns and stay focused on your own business in light of all that noise and distraction?

Sam Holloway: Well there’s a long history in business literature of founders and business operators taking their eye off the ball. One of the most common and most tragic is when businesses get ready to grow, the founders have to spend a lot of their time fund raising, and they can often take their eye off the ball in terms of the operation of their business. There’s many merger and acquisition deals that go south because in the six months of due diligence that are occurring, they miss their numbers and they aren’t performing as well because the person in charge has been spending all their time talking to investors and pitching to investors, and that can be a challenge.

I think for a craft brewery, and certainly for the breweries that are members of Crafting A Strategy, we’re constantly taking a hard look at what we are as a brewery, what we’ve become, but also, why did we get into this business? And maybe we’d like to take a vacation e condition your beer you can improve its shelf life by sti or have a weekend off sometimes. How do we make sure we meet our commitments and please our customers, but also find balance in our personal life? And those sorts of questions are much harder to answer, and that’s the blog you referenced earlier, “In A Year That Soured, Here Are Some Winning Strategies”, these are firms that took their foot off the gas and said, “I’m not gonna continue to win.”

You know strategy is always about winning, and if winning only means growing through volume and losing money and increasing my risk, I better redefine what winning means for me. And that’s really what we try to do at Crafting A Strategy, is say there are so many more ways to win. You’re not gonna get rich, you’re 25 years too late to be purchased by one of these huge multinationals. It’ll still happen, they’ll still pick and choose their spots, but I don’t believe it’s a good strategy for the average successful craft brewery, so let’s redefine ways of winning that does appeal to us, and let’s look at those goals. And that’s really what that blog was, which was, let’s take strategic theory and apply it to little breweries that are choosing a different future than growing volume.

Is there still  a place for flagships?

Matt Kirkegaard:    Another one of the articles that caught my eye when we talked, when I was preparing, was “Don’t Get Stuck In The Middle: European Ownership, Flagship Strategies, and Craft Beer Market Growth”, and the flagship particularly, I’m in the middle of writing an article for Flagship February, which was a whole month of articles celebrating the flagship beers around the world in the face of what was the perception that there was growing consumer indifference to flagships.

So maybe you can answer the question, is there still a place for a flagship-driven beer business?

Sam Holloway: I think the largest craft breweries out there sure hope so. I think a lot of Flagship February was driven by the fact that they’re in a tough spot. If you’re Sierra Nevada or, in my hometown most recently when Craft Brew line sold the rest of their business to AB InBev, just imagine if it’s 15 years ago and you make the decision to grow your flagship beer and sell it all over the country, that means you’re gonna buy assets like brew houses and fermentation tanks that are huge and designed to make huge volumes of one beer. And 15 years ago that was absolutely the right decision.

But now you’ve got an increasingly promiscuous consumer that always wants something different. And they may love your Hefeweizen, your Widmer Hefeweizen, they may love your Sierra Nevada Pale Ale, they may buy it occasionally, but they’re not buying it in the previous volumes that they were. And so I think flagships are a great strategy, and what I talk about in that article, about don’t get stuck in the middle, is if we’re going to drive craft beer into the early majority and get up to 40, 50, 60% of all beer drank in a given market to be craft, then we absolutely need flagships.

That’s the strategy we need to appeal to someone that’s not gonna take a risk on a Milkshake IPA, they want something that tastes a lot like the beer they’ve had before. And that’s where Sierra Nevada Pale Ale can be absolutely a flagship that brings more and new beer drinkers into the craft beer fold. That’s where the breweries that have been acquired by AB InBev and Heineken, like Lagunitas and 10 Barrel, that’s where they can absolutely bring a former light industrial lager drinker into craft, by having something that appeals to that large majority.

But again, the flagship strategy is only really, in my opinion, valuable if you’re already big. And the rest of us small folks, we can offer that variety and fill in the vacuum behind the flagships folks. Just a quick example, my dad, who’s a great guy, he grew up drinking Coors, that’s still his favorite beer. He knows his son is an owner in a craft brewery, he knows his son gets to talk on programs like this podcast about craft beer. He doesn’t drink it. And it’s mostly because it’s got too much alcohol in it, and it’s a little bit intimidating. He doesn’t want to have to learn. And so the beer that he will drink with me is made here locally in Portland, it’s call Dad Beer. And it’s made with corn. And it tastes a lot like Coors when he was growing up. And it’s safe. And that beer appeals to people like my dad, who are in the late majority to craft.

So my dad’s always gonna, if he ever moves over to IPA, he’s the kinda guy that’s gonna find one, choose it, drink it, and never switch. The challenge is, so that’s where the flagships can still really work. The challenge for most of us who are appealing to these promiscuous consumers is they won’t respond well to us investing in flagships. We need to have smaller tanks, more tanks, more variety, and deliver that to them.

Are brew pubs about the liquid or experience?

Matt Kirkegaard:    How much do you think that that smaller, venue-based strategy is driven, not so much by the liquid, but about the experience? We hear a lot about the younger consumers are all about the experience, whether it’s travel or life, they don’t buy things they buy experiences. How much is the sitting and having a beer in the brewery more about the experience of sitting in the shadow of the stainless, rather than actually having the beer itself?

Sam Holloway: Well I think it’s the only competitive advantage that the small breweries have. Point blank. Very blunt.

The experience we sell is the only reason someone would choose to pay $6 a pint in our pub when they could get the same beer, or a beer of equal quality, for $4 a pint in a grocery store if they buy it by the bottle. And I’ve got another blog that, I hate to try to plug my stuff too much, but I’ve got another blog that talks about the sources of value that drive buying decisions. The idea is that the technical value, which is again, that’s what we get excited about as home brewers and young craft beer professionals. The technical value of a beer is IBUs, it’s flavor profile, it’s mouthfeel, it’s all of those really good, wonderful things. And people that get really excited about the technical value are the ones that go on Untappd and the ones that blog about it.

But that’s only 1/3 of the total value in a product or service. The other two sources of value are the installed base. Who else is using this product that, when I use it, it increases the value of that product to me? The classic example we use in business school is iPhones and iMessage. The huge installed base of iPhone users that can freely use iMessage and FaceTime to talk to each other anywhere they have a WiFi connection, for free, that’s a huge value of the installed base.

In a microcosm of a craft brewery, the installed base are all of the other people, and the brew master, and the pub tender, and the person cleaning the tanks behind the glass. All of those people that are involved in this product and in this company increase the value of us consuming inside the taproom or the brewery, versus drinking at home by ourselves.

And then the third source of value is what are called complementary assets. Going to a taproom where they have tulip-shaped glasses or the perfect glass for that pint that I’m interested in, those sorts of things are really critical to us being able to offer the consumer surplus value through experiences, like you mentioned, versus only competing on the technical aspect of the beer. Which is what increasingly happens in these crowded grocery store aisles. Then the game becomes advertising and expensive ways to communicate, versus sitting across the bar from someone and saying, “Hey I see you’re a regular and I know you normally like the bitterness of an IPA or a Double IPA, I have this pretty cool sour beer that you should try. In fact, let me give you a free one. You may not think you’ll enjoy sour beers, but it’s summer in Australia right now, this is incredibly refreshing, it’s low alcohol, you can have more than two. Why don’t you give it a try?”

That sort of sales approach doesn’t happen in most grocery stores. It can happen at your brewery.

Matt Kirkegaard:    We’re speaking to you because you’re soon to be packing to come and visit down here. You’re coming down to meet with craft breweries and do some presentations.

Sam Holloway: Yeah I’m really excited. My friend Andre Sammartino, who’s a business professor at the University of Melbourne.

Matt Kirkegaard:    And occasional contributor to Brews News.

Sam Holloway: Okay, you found the right person. So Andre and I have been friends for a few years and we’re starting to write papers together. We went to, again, we have the best job in the world. We flew to Pilsen, Czech Republic last year for the Beeronomics Society Conference, and talked about our research of collaboration brews between international breweries.

Anyway, we struck up this friendship and I’ve been trying to figure out a way to get him to Portland, Oregon, and he’s been trying to figure out a way to get me to come down to Australia. It worked out that we’re gonna be at an academic conference of the International Business Academy in Sydney, and then Andre introduced me to you and he introduced me to some other folks, including Kate Paterson from the Independent Brewers Association.

We’re gonna do a mashup at Wayward Brewing on Wednesday the 19th of February, and there we’re gonna talk about has flavor innovation played itself out? I’m also gonna share some research that I have on product portfolio sizes, so how many beers you should offer if you still want to grow and be profitable, versus just copying what everyone else is doing. What are the limits on the cost side to that? I’ll share some information that I have in that area as well.

Matt Kirkegaard:    Terrific. Well we’ll certainly link to all of that so people know where to find you and how to find you, and Sam, thank you very much for joining us on Beer Is A Conversation, and this fascinating conversation about the business of beer.

Sam Holloway: Well thank you very much. I’ve really enjoyed talking about what we do, and what we do as a community. We’re entrepreneurs spread across 19 countries that really wanna make sure every neighborhood in every part of the world has their own brewery.

Thank you for giving me this opportunity and this voice, and also for teaching me about the Australian beer market. Now I know that there’s no three-tiered system and I need to come down and learn some more.

Matt Kirkegaard:    No troubles, and hopefully next time we have a chat we’ll get to have a beer in hand.

Sam Holloway: Let’s do it, absolutely.

Matt Kirkegaard:    And that was Professor Sam Holloway.

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