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Sunday, March 18, 2001
 
2001 Small Business profiles

Microbrews, microprofits

By Robert T. Nelson
Seattle Times business reporter


Greg Gilbert / The Seattle Times
Jack Schropp, left, and Malcolm Rankin toast to good fortune in the former Redmond transmission shop that is now home to Mac & Jack's Brewery.

Malcolm Rankin and Jack Schropp pause to consider the request, then Rankin responds: "No, we don't do interviews. No, we'd just as soon not have our photo taken. We are sort of a reclusive company."

In an industry where Anheuser-Busch annually spends an estimated $1 billion trying to persuade people to drink its beers, the owners of the Mac & Jack's Brewery try to lie low.

Though the two men eventually relent, they certainly don't act like the co-authors of Mac & Jack's African Amber, one of the hottest beers in the crowded Northwest specialty-beer market.

They spend virtually no money on marketing. And their brewery, in a former transmission shop in a low-slung business park in Redmond, looks to be the next-to-the-last place you'd brew a fine beer--the last place being Schropp's garage, which is where Mac & Jack's got its start and operated until 1997.

In an industry crowded with too much product and way too many companies, Mac & Jack's African Amber is one of two relatively new, upstart beers to have elbowed their way into pubs and onto supermarket shelves. The other is Fat Tire, a lighter amber beer from the New Belgium Brewery in Fort Collins, Colo.

During their rise to prominence in the Northwest, the two companies have taken decidedly different approaches to attract notice.

New Belgium is prone to splashy entrances complete with neon signs featuring Fat Tire's distinctive 1950s-era bicycle and sponsorship of the Tour de Fat bike races.

Rankin and Schropp come in the back door. When they supplanted Redhook on tap at the fashionable Cascadia Restaurant on First Avenue in downtown Seattle, they did it by playing on the owner's sympathy. "We're small, give us a chance," they pleaded.

"That's a very powerful sell," said Paul Shipman, Redhook Ale Brewery's founder and chief executive. "I built my business that way."

What separates Redhook from Mac & Jack's these days, other than size, is profitability. Though it remains the largest microbrewery in the country, Redhook's core business lost nearly $2 million last year selling 216,000 barrels of beer nationwide.

Working 24 hours a day at its nine-employee brewery, Mac & Jack's this year will eke out 24,000 barrels for sale in Washington and parts of Oregon and Idaho. Rankin and Schropp won't say how much they made selling beer last year, but they say profit estimates of $100,000 are in the ballpark.

The owners are having what Shipman calls "their day in the sun"--good times that, if not handled properly, could result in a costly expansion and the company's demise if supply outpaces demand.

"They're in a dangerous period," said Shipman. "They're in the charm phase. The charm phase is when people have a genuine sense of discovery when they drink one of your beers, and before you get a lot of media recognition.

"Once the media descends, the hop heads move on. In Seattle, when you get to be too hot, people don't like it. They want to get on to the next thing."

Shipman knows of what he speaks. Founded in 1981, Redhook had a long day in the sun that began to fade in 1994 when a quarter of the company was sold to Anheuser-Busch to finance expansion. The sale gave Redhook access to a nationwide distribution network, but at a price. Among beer aficionados, Shipman had joined forces with the devil.

A year later, Redhook went public, generating money to build breweries and pubs in Woodinville and Portsmouth, N.H.

Unfortunately for investors, none of that proved profitable. While the company's two breweries are capable of producing 350,000 barrels annually, and could easily expand to 500,000, that is twice as much beer as Redhook can sell. Having once traded at $35 a share, Redhook's stock is now hovering around $1.50.

"A year ago, it was much more embarrassing," said Shipman. "But since the dot-coms (fallout), I feel much more comfortable about where we are. I envision break-even and even profitability. But I'm not going to attach any dates to that."

Losing money is common, despite a generous excise-tax break that benefits small breweries in Washington. Three years ago, it was widely predicted there would be a shakeout, and that many Northwest brewers would close. A few did, but most have hung on and learned to operate more efficiently.

Jim Bates / The Seattle Times
Pat Foote, of Hale's Ales in Seattle's Fremont district, said many microbreweries overbuilt, thinking their products would be popular nationally.

"A lot of companies overbuilt, anticipating they were going to march right across the country," said Pat Foote, general manager of Hale's Ales in Seattle's Fremont district.

"The fact is, when you leave your region, there's a steep drop-off in what you sell. In the industry as a whole, there's been a necessary realization that you need to know how to run an efficient business."

Complicating matters is the fact small brewers aren't well-organized and have little economic or political clout. Two years ago, when the Legislature lowered the blood-alcohol level that defines intoxication to 0.08 percent, the law came as a surprise to microbrewers, who have since formed the Washington State Brewers Guild, a trade association.

One of the challenges facing small brewers is that unless a beer is wildly popular, selling it in kegs is what Shipman calls a public service and labor of love.

The potential for big profit is in bottled beer, but that requires capital and confidence that consumption will grow to support the investment and higher distribution costs.

Hale's Ales took the leap three years ago, so far with limited success. Mac & Jack's is at the point where the owners must begin deciding whether to grow or stay put.

At Diamond Knot Brewery in Mukilteo, widely regarded as producing some of the best, most innovative beers in the region, the owners long ago decided to keep their day jobs at Boeing and limit annual production to about 600 barrels (18,600 gallons) sold through the company's brew pub and at taverns between Snohomish and Tacoma.

"It was never our goal to be a Redhook or a Mac & Jack's," said Brian Sollenberger, co-owner of Diamond Knot. "I like brewing beer, don't get me wrong. But I've got 12 years at Boeing (as an engineer). I have health care and a retirement. That's a lot to walk away from. We've always wanted to make very unique and cult-following beers, understanding we'd be a small cult."

Shipman said the only thing separating Mac & Jack's from Diamond Knot is personal, total commitment by the owners.

"The difference is that Mac & Jack jumped off a cliff," said Shipman. "They gave up their jobs and had to succeed. The Diamond Knot guys kept their day jobs. If you reversed the situations, Diamond Knot would be the hot new beer and you might have heard of Mac & Jack's."

Washington licenses more than 120 companies to sell beer in this state. Of those, about 80 are small, local breweries fighting over the 10 percent of the market not taken by imports and large domestic brewers such as Anheuser-Busch. Shipman calls the battle for pub handles nothing short of "war."

Hale's Foote said he's been in sales a long time but has never seen competition as fierce as in the beer business. "People don't have any idea," he said. "There obviously are more brewers than customers out there to support them. It's a love affair. You make a good beer and assume everyone will want to buy it."

Microbrewers will tell you it was their friends who first encouraged them to turn their hobby into a business. Most have since concluded their friends simply wanted to continue having access to good beer, free.

Making a unique, good-tasting beer the first time is hard enough. Making the same beer consistently, and in large quantities, is a far greater challenge. Once that's been accomplished, persuading restaurant and bar owners to replace an existing beer tap with a new brew is the key to whether a beer's popularity widens beyond a small circle of admirers.

Diamond Knot's recognition came when a few industry magazines touted its beers.

For Rankin and Schropp, the breakthrough came late in 1994 when the owner of the Woodland Park Pub asked them to produce a house beer for his bar. They tinkered with their Amber Ale recipe, renaming it Mac & Jack's African Amber.

Today, even they can't explain why it has become the third-most-popular craft beer brewed in the state--topped only by Redhook and Pyramid Breweries, according to statistics of the state Liquor Control Board.

"Mac & Jack's makes a fine product, but most breweries make fine beer," said Foote.

"For some reason, it's cool to have their beer in your hand. There isn't a brewer who doesn't want to be in that position, to be the hot product. We believe it's the name. Mac & Jack's sounds cool. It's the only thing we can think of that explains their success. Same with Fat Tire."

Foote's company is one that Mac & Jack's shot past on its way to popularity. Though Hale's was one of the region's first microbreweries and developed its own amber and Hefeweizen ales, the company resisted bottling and didn't broaden its market.

Pyramid in Seattle and Widmer Brothers in Oregon both satisfied the Northwest's taste for Hefeweizen. Alaskan was the popular amber beer before Fat Tire and Mac & Jack's came along.

Hale's remains the most popular beer at Linda's Tavern on Capitol Hill, where manager Rob Astle calls its pale ale "an amazing-tasting, perfect drinking beer." But beyond the front door of Linda's, Hale's has stayed small, operating a brew pub and selling 20,000 barrels annually--70 percent of it in the Seattle area.

Six years ago, Foote was hired away from Nalley's Fine Foods of Tacoma to improve Hale's fortunes. One of the first things he did was to persuade founder Mike Hale to bottle his beers.

Today, one of the company's biggest challenges is to make sure its beer gets distributed to every Safeway store in the region so that Hale's can qualify to appear in Safeway's advertising.

Similarly at Pyramid, Gary McGrath, a former Pepsi and Miller beer salesman, was brought in to boost sales at a brewery that produced 115,000 barrels last year but made just $33,000--the first reported profit in four years.

"There's certainly still some romance in brewing craft beers," said McGrath. "We continue to have some very passionate brewers, but we needed a balance. To survive, you've got to care about both--the beer and the business."

Robert T. Nelson can be reached at 206-464-2996 or rnelson@seattletimes.com.

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