The Dangers of Expansion

Just a quick follow-up to that Deschutes post. As so often happens, it precipitated a nice discussion on Facebook--which no blog readers would have seen. In the post, I alluded briefly to "tough sledding" for Deschutes as they move forward. I didn't unpack that at all, and I think there's some benefit in doing so.

No one outside the Pacific NW has any idea what this is or how it relates to Deschutes Beer.

Every brewery faces business challenges. If you're a brewpub, you must get people in the door. If you're a small production brewery, you have to compete in the craft market with very efficient large breweries even while making comparatively more expensive beer. If you're a mid-sized regional, you have to develop a mass market approach, but you don't have the might to defend against better-funded national brands. Of course, each of these has certain advantages, too. They're all local, and have a home-court advantage on sales. Brewpubs appeal not just through their beer, but the ambiance and food at the pub. Regional breweries are more responsive to local trends.

Every time a brewery expands, though, it takes on a new level of risk. Most outright brewery failures happen during expansion. You predict where the market will be and how you'll fit into it, take on a bunch of debt, and then hope you weren't wrong. Nowhere is the risk greater than when a brewery wants to go national. The barriers, costs, and complexity are immense:

• You have to establish relationships with distributors in every market;
• You have to understand the vagaries of each market with respect to retail access (some states only sell beer in liquor stores; others have restricted hours, etc, etc) and build a national sales force;
• Laws governing beer sales differ in every state;
• You have to create national brands that will sell in places as diverse as NYC, Houston, San Francisco, and Des Moines;
• You take on a ton of debt and can't afford to suffer through too many years of underperforming sales;
• You're competing against breweries backed by multinational corporations with almost unlimited resources to secure distribution, advertise, play hardball at the retail level, run promotions, and staff giant sales forces;
• You have to maintain your identity as a local brewery that's from a place while at the same time create a bridge to people with no natural affinity or interest in that place. Deschutes is a case in point: people in distant states don't even know how to pronounce the brewery's name, much less have any idea what Mirror Pond or Black Butte are;
• You have to predict where the market will be nationally in five, ten, and twenty years and make sure your brand can continue to compete with national brands that might seem more current or sexy.

There's nothing to say that Deschutes can't pull this off. If you think of the 4,000 breweries in the US, there are only about twenty that have any kind of shot at this, and Deschutes is definitely one of them. They have one of the strongest and most diverse line-ups in beer, a great brand, and they've been incredibly astute about anticipating trends (think of the timely releases of Chainbreaker White IPA, Red Chair, and Fresh-Squeezed). But they will also be competing against companies that could afford to drop hundreds of millions of dollars just to acquire a brand--never mind the millions they're prepared to spend establishing them. So it is a pretty ballsy move and carries with it huge risk. If the bet fails, the brewery may end up a slowly-receding brand in the AB InBev portfolio in twenty years--the fate of so many other brands over the past century.