The Evolution of Buy-outs
Back in the early 1990s, there were around 400 "microbreweries," and they were making a tiny percentage of beer in the US (as recently as 2006, it was just 3.4%, so I'm guessing it was less than 2% of the market). Big beer was starting to feel the first of the turbulence that would lead to our current situation, but they were nowhere near taking these little guys seriously. In 1993, when there were 446 micros out there, Redhook CEO Paul Shipman did something interesting--he decided to reach out to Anheuser-Busch. That phone call would eventually lead to the first investments by big beer into smaller breweries, as the company bought minority stakes in Redhook and later Widmer.
I'm currently writing a biography of Kurt and Rob Widmer for Craft Brewers Alliance, and I spoke to two people inside AB at the time. It was fascinating to hear what a company like AB thought about craft at the time, and why they decided to get involved with what were, by volume standards, very small breweries. It sheds a fair amount of light on the way thinking evolved over the next two decades, when AB pursued a different strategy of buying craft breweries outright. In trying to understand this time, I spoke to Mitch Steele, who would later go to Stone and then found his own brewery in Atlanta. At the time, he was doing new product support at AB. I also spoke to Tony Short, a senior executive then working as the Director of Business and Wholesaler Involvement.
“And then there was the contingent that thought it was a joke. They don’t know anything about brewing and they’re brewing these beers that taste like smoke and taste like electrical fires and taste like hop resin and what the hell are they doing?”
Below are their reports, which I'll connect with comments as they go along. One thing that's important to note is that the company was just beginning to explore the world of craft and had no fixed position on how to proceed. It was a big company and there were different factions who were more or less interested in entering the craft segment. There wasn't yet a "party line"--and in fact, this is the story of the initial thinking that would evolve, many years later, into what became the current party line.
When Shipman first contacted AB, the company had already been trying to make craft-like beer. That was Steele's field, and he knew first hand it wasn't working:
“I got involved in this because we were trying to do our own kind of craft brand at the time—and they weren’t selling. Some of them were really good beers. Some of them were just amped up Budweiser lagers, but some of them were really quite good. And we couldn’t sell ‘em. It was partially due to the fact that our marketing and sales didn’t really know how to sell them.”
Anheuser-Busch was aware of the problem. They knew it because the sales numbers told them, but they also had internal research that revealed why. Here's Tony Short:
“At the time, the market research that Anheuser-Busch was doing indicated that consumers viewed craft-like offerings from big brewers differently than they viewed craft products produced by small breweriess. When I looked at that research, I concluded that if this segment keeps growing and consumers continue to differentiate product offerings from craft brewers from the same types of products produced by the big brewers, then by definition we’re going to be shut out of the segment. It was always my view that we should participate in every segment of the beer business.”
Internally, there were some who were craft-curious, and others who were ... not. Steele tells this amusing anecdote:
“On the brewing side, it was kind of mixed. There were people who thought craft was kind of neat and the beers with a lot of flavor were really great and it was good for the beer business. And there was definitely a contingent at Anheuser Busch that felt that way—it’s like, hey, a little variety’s not a bad thing and it keeps beer interesting, it keeps it relevant. And then there was the contingent that thought it was a joke. They looked at it and said, these guys don’t know what the hell they’re doing. They don’t know anything about brewing and they’re brewing these beers that taste like smoke and taste like electrical fires and taste like hop resin and what the hell are they doing?”
The little guys and their electrical fires wouldn't have been a problem worth sweating--the numbers then were still so tiny, particularly for a company selling over a hundred million barrels of beer. Except for one thing: wholesalers. Anheuser-Busch had certain distributors in its network that were losing real money to craft breweries. Anheuser-Busch had just initiated a program called "100% share of mind" to encourage its wholesalers to carry only AB products. And AB didn't have any craft offerings. Mitch Steele summarized the issue.
“So when the company started looking at that, my impression was they looked at the fact that our craft beers weren’t selling, other people’s in the wholesalers’ network were. Real craft brewers’ beer were selling that were being carried by Budweiser distributors, and so they wanted to take ownership of that somehow. They came up with ‘100% Share of Mind.’ The explanation I got was: if we—AB—were going to require our wholesalers to be 100% exclusive, we gotta give ‘em some offerings that make them competitive. That’s where this whole thing started.”
Short adds:
“There were always a lot of naysayers going, ‘Why are we screwing around with something so small?’ And what I would always tell people at Anheuser-Busch is to consider this an insurance policy. If the craft segment dies out, we made these small investments and had very little headache and in the meantime we’ve brought to our wholesalers a product that we cannot by definition bring them. They’re our partners, they’re largely exclusive, and we owe our wholesaler family products in every segment in order to compete. So it was a win win win. For very little risk, we were able to check a lot of boxes.”
All of this makes sense, right? But why not buy them outright? This is what AB would ultimately decide to do, so why fiddle around with minority investments in breweries whose production was a rounding error in St. Louis? It goes back to that market research about which beer customers were willing to buy, and AB's failure to sell their own brands. Short explains:
“It was a consideration, but remember the problem we were trying to solve for: at the time, what we believed was that we had this situation where the consumer viewed products from large breweries differently than they viewed them from craft brewers, so by taking minority stakes we were able to effectively claim—and it was true, of course—that, look: we’re not running the company. These are still craft brewers. These are still true craft brewers, and all of the romance and consumer perception and benefit that comes with being small craft was maintained. That was the whole premise. If we buy a majority of the company, then those consumers are going to look at them as though they sold out, they’re big beer now, and we’ll lose a large segment of the consumer base. That was the cornerstone of the strategy; it was anchored in that belief.”
There was a competing theory about why AB got involved in Redhook and Widmer--a darker one. Steele describes it.
“The thinking was, ‘We’re going to get into this category and we’re going to kill it.’ I remember sitting in a meeting and I was talking about a beer and how great it was and I was frustrated with the marketing department and I said why the heck don’t we want to sell it? People at the Great American Beer Festival said it was the best beer we had at the table. It’s a guaranteed winner. And a guy pulled me out the meeting and goes, ‘You know, we don’t want to grow this category.’ I’m like, “What are you talking about?’ And he said, ‘We don’t want to grow this category; we want to [get] to the point where our beers take over the rest of them and the rest of them go away.’ And certainly that was the way Anheuser Busch operated in other categories like ice beer and back then the ackaged-draft beer and things like that. That was AB’s tactic, to let someone else do it first and then swoop in with their own thing and eventually knock it back to the point where Budweiser was still the king of beers. That was the AB process at the time.”
That view--one of many at the company, didn't pan out. Craft was growing, and Short's notion of an insurance policy benefited AB far more than trying to kill the category--which Steel acknowledged:
“In all fairness, I think that’s changed. I think it changed a little bit with the Redhook/Widmer deals, because I think they recognized that a well-made craft beer had potential to be a growth vehicle for the beer business.
Of course, AB ultimately learned that ownership didn't matter. Locally, some people in Seattle and Portland did consider Redhook and Widmer sell-outs, but it didn't affect sales. AB learned that ownership really doesn't matter; people don't track who owns which breweries, so long as they have a local plant and look independent. It may seem incidental now, but recall that Goose Island was AB's first wholesale acquisition. And Goose Island was, at the time, part of the collective company Widmer and Redhook formed called Craft Brew Alliance. AB's first outright purchase came inside the AB family of craft breweries.
“at the time, what we believed was that we had this situation where the consumer viewed products from large breweries differently than they viewed them from craft brewers, so by taking minority stakes we were able to effectively claim—and it was true, of course—that, look: we’re not running the company.”
As the experiment went along, Widmer and Redhook learned a lot from AB, particularly about technical issues and quality assurance. Anheuser-Busch, for it's part, also learned a lot about craft. This was one element of the deal neither Short nor Steele mentioned: in buying minority stakes in Redhook and Widmer, AB got a front row seat at the craft show. They learned quite a bit about how to package and sell craft, and that, given a second round of purchases, it was a whole lot easier just to buy breweries lock, stock, and barrels. Which, of course, is the future in which we now live. Twenty years ago, that approach wasn't so obvious--it took Anheuser-Busch's experience with Redhook and Widmer to lead them to this point.