When one of the hottest craft breweries in California and by extension the country abruptly announced in February that it was shuttering half of its taprooms and laying off roughly a third of its staff in a bid to stay afloat, its name — Modern Times — took on an unintended, ominous inflection. To address the “immediate and unavoidable peril” to the company’s financial solvency, the San Diego firm wrote that it planned to retrench its West Coast operations and refocus its business closer to home. “[F]our straight years of rapid, costly expansion followed by an unforeseen and financially devastating global health crisis, and an industry-wide decline in sales,” had forced the company into an “unsustainable” position.
It was a shocking setback. But Modern Times, which was sent reeling last summer by allegations of mismanagement and the corresponding resignation of its founder and CEO, is not alone in abandoning brick-and-mortar outposts in an attempt to shore up its core business. Another pair of venerable breweries made their own announcements last month as well: Magnolia Brewing closed the brewhouse, taproom, and events space it had operated for nine years in San Francisco’s Dogpatch neighborhood, and Oskar Blues closed a taproom that had served Boulder, Colo., for half a decade.
Three is a trend, as the saying goes in the heady, fluff-filled world of lifestyle journalism. But the United States’ craft brewing industry is a good deal more complicated than that, and the brewery-owned-and-operated, on-premise landscape requires deeper scrutiny. Because: Even as taprooms close in one part of the country, new ones are opening for business elsewhere; even as we enter year three of the coronavirus pandemic, breweries’ on-site sales have rebounded to levels roughly matching benchmarks from the Before Times.
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So… are taprooms in trouble? It depends on so many factors: from regional demographics and local politics, to debt loads and wholesaler relationships. Most of all, it depends on whom you ask. “We’re not just bullish” on taprooms, says Chris Frosaker, a co-founder of Asheville, N.C.’s Hi-Wire Brewing. “We’re actually accelerating.”
Here’s a look at why some breweries are hitting the gas on their approaches to on-premise while others are pumping the brakes.
The financial picture
“I was blown away when I heard that Modern Times news,” says Frosaker. Hi-Wire is on its way to opening its 10th taproom in Birmingham, with an additional location to-be-named in the works for later this year. “I’m like, ‘Man, we’re doubling down on this [multi-location taproom strategy] and it’s working for us. I wonder what happened?’”
The San Diego brewery’s financial disclosures offer at least a partial answer. In 2016, Modern Times was the 174th-largest craft brewery in the country by sales volume, according to the Brewers Association. In 2019, the brewery conducted an equity crowdfunding campaign that, fully subscribed, implied a valuation of $264 million. By 2020, it had vaulted into the 40th-largest position. By 2021 it was distributing its beers to nearly a dozen Western U.S. states and operating eight taprooms and a coffee roastery.
But behind the scenes, its growth was being powered not by sales revenue, but debt. The company’s most recent report to the Securities and Exchanges Commission, filed on June 12, 2020, indicates that it had closed out the previous year with tens of millions of dollars in debt and millions of dollars in net losses in the last two years of last decade. With craft beer’s salad days of double-digit, year-over-year growth in the rearview and a catastrophic pandemic just over the horizon, Modern Times’ pre-pandemic position is self-evidently precarious in hindsight. But hindsight is 20/20. Fueled by what the firm would later call the “unanchored optimism of the past,” Modern Times overextended itself through the back half of last decade.
“I think they were chasing growth and given some of the signs, the early signs, can you blame them?” Modern Times’ new CEO, Jennifer Briggs, told Good Beer Hunting in late February. (The brewery did not respond to an interview request for this story.) Briggs declined in the interview to provide reporter Kate Bernot with the firm’s current debt load; an updated valuation for the firm is due to employee stockholders later this spring.
As any FinTok influencer will eagerly tell you, debt is not de facto bad. But if it isn’t fueling growth, it can get bad, and quick. “The companies that [expansion] hasn’t worked out for took on debt one way or another that was used to build capacity and to sort of supply markets farther afield” before or even while their sales lose steam, says Chris Shepard, a senior editor of Beer Marketers Insights, a trade publication. In his analysis, Modern Times’ recent retreat fits a “fairly classic craft narrative of overexpansion. …We’ve seen that more commonly with distribution expansion that didn’t hold, but I think [Modern Times] is one of the best examples of expanding through on-premise and that not holding.”
Good Beer Hunting’s analysis of IRI scan data indicates that Modern Times’ distribution expansion wasn’t expanding its chain retail sales: They jumped from $4.6 million in 2018 to $8.3 million in 2020, then fell to $6.9 million last year. Without sales figures from the brewery’s taprooms, it’s impossible to say for sure whether that rocky road was reflected on-premise at Modern Times’ locations. But given the strenuous performance of taprooms generally over the past 18 months, and the significant, ongoing pandemic regulations in California (where seven of Modern Times’ eight taprooms were located; more on this in a bit) it’s possible — even likely — that sales struggled there.
Another financial consideration in the taproom calculus is how breweries allocate capital in brick-and-mortar expansions. Modern Times’ on-premise outposts were state of the art and featured spectacular layouts and features (the brewery’s Anaheim location boasts a swimming pool). But high-end taproom buildouts can get costly — all the more so if the location doubles as a production facility, like the brewer’s Belmont Fermentorium in Portland, Ore., did. “If the production is on site, then you have a lot of the capital requirements of any other brewery, along with the capital requirements of a restaurant or bar, so you’ve got a lot of debt tied up in that capital,” says Michael Uhrich, the founder and chief economist at the industry consultancy Seventh Point Analytics, and the former chief economist of the Beer Institute, a trade group.
Frosaker, who says Hi-Wire does not finance its taproom expansions with debt but reinvestment, spells out the danger. “At the end of the day, I’m selling the same $6 pints that they’re selling, and I’m doing it for way less money” thanks to his brewery’s less opulent design choices. “I think there are ways you can do [taprooms] without going into crippling debt. … If for every one of [Hi-Wire’s expansion] locations we were taking out $3 million in debt to build, that would be scary for me.”
Location, Location, Location
When it comes to the outlook for brewery taprooms, the old real estate maxim holds true — albeit in a different sense than originally intended. The country’s 9,000-plus breweries are not spread evenly across 50 states, and industry observers and attentive drinkers know that some regions simply produce more beer, and better beer, than others. Modern Times’ home turf of San Diego is an inalienable craft brewing hotbed, where competition for loyal taproom customers includes other world-class breweries (plus bars and restaurants, to the extent that the occasions overlap, which is a point of some contention we’ll get into later.)
So is the Pacific Northwest, where Breakside Brewing is located. “There’s just way more competition now,” says Ben Edmunds, brewmaster and co-owner of the Portland, Ore., company. “All of our locations, they sell less beer volume now than they did in 2015, and that’s not because our brand is losing velocity or our service is worse. It’s just that there’s more competition.” Despite the crowded field, Breakside has methodically expanded its brick-and-mortar footprint in greater Portland: From one location in 2010, it has opened five taprooms, with a sixth on the way. While there are no plans for another Breakside taproom after opening its newest one in Beaverton, Edmunds believes that there’s still room to expand at home. “In our own home market, we have so much in [our] favor,” he says. “We have so many resources here. I still meet people in Portland that have never had Breakside, and I feel we still have a ton of opportunity to grow even more in central Oregon and throughout the state.”
“We’re just trying to not repeat [other breweries’] mistakes by overextending ourselves,” he adds.
It’s a vision for incremental local and limited regional growth that bears only passing resemblance to Hi-Wire’s broad regional play. (Or, for that matter, Modern Times’ own all-state and PNW strategy, which now-CEO Briggs told Good Beer Hunting led to customers “perceiv[ing] us to be more like a regional franchise” than a unique addition to the local drinking landscape.) Hi-Wire opened for business in Asheville in 2013, but has since fanned out across the state with six locations, then to the surrounding region with another four in Knoxville, Tenn., Louisville, Ky., Cincinnati, and Birmingham, Ala. (The latter two will open later this year.) The Southeast has traditionally lagged behind the rest in terms of breweries per capita, meaning there’s plenty of room for Frosaker and co. to enter adjacent markets without stepping on toes or encountering sharp elbows.
“We’re not in the business of just throwing darts at the board,” he says, describing the factors that Hi-Wire considers before deciding on a new taproom location. Growth opportunities and competitive landscape are key. “One city I like to mention a lot that I don’t think we would look is Richmond, Va.,” he says. “Richmond’s beer scene is just super-local, and they’re really buying local as opposed to regional brands. So it might not make as much sense to go there as say, Birmingham, where our wholesale business is going crazy and it’s kind of a newer craft beer scene.”
Over the past couple years, geography has also influenced taprooms’ viability in the context of Covid-19 policies. “I would hypothesize that in areas where people are less inclined to be concerned about wearing masks or getting vaccines, the [pandemic-related] restrictions were probably always less and that there was probably less decline in on-premise business,” says Uhrich. His professional colleague, Brewers Association chief economist Bart Watson, makes the same observation. In the case of Modern Times, “it strikes me that they were in a lot of places that took Covid much more seriously,” he says. “Places in general that had on-premise traffic just got hit more than if those locations had been in, you know, Dallas, Texas, and you know, pick your city in Florida — that might be a different story.”
Frosaker believes a comparatively lax “code environment” in Southeastern states may have made Hi-Wire’s expansion slightly less arduous than counterparts in more locked-down states like California. But for breweries that have weathered the pandemic in more restrictive areas, the comparison is apples to apples, and less influential over long-term taproom strategy. “We were used to that from the beginning of the pandemic,” says Paul Reiter, co-founder and CEO at Great Notion Brewing, noting at the time of the phone interview that Portland’s mask mandate remained in place. (It has since been lifted.) “We’re choosing, though, to open another one on the West Coast. … We definitely want to open where people know us and where we know we’ll succeed.”
As it happens, the pandemic had less of an effect on Great Notion’s brick-and-mortar expansion strategy than did the developments at Modern Times: Reiter tells VinePair that his company revised its plans from three new taprooms in 2022 down to one after learning of the California brewery’s taproom troubles.
Strength of customer and wholesaler relationships
At Great Notion, Reiter uses data from the company’s e-commerce app, as well as demographic data from its Instagram account, as leading indicators of where the brewery’s fans are located. “Also, now that we’re allowed to ship within the state of California” — via the brewery’s Sacramento production facility — “we know that tons of people are purchasing our beer” there, he adds.
Such is the triangulation game that brewery owners looking to manage multi-location expansion play in order to gauge where their brands carry the most weight with potential customers. A general rule of thumb in the business is that the farther afield of a brewery’s home base, the more it will struggle to establish itself with drinkers. Examples abound. In December 2021, Oregon’s venerable Deschutes Brewing announced the closure of the Roanoke, Va., taproom it had opened four years prior, citing pandemic challenges and slowing growth; the move evoked comparisons to Southern California former heavyweights Ballast Point and Green Flash, which made and then abandoned their own expansions to the state late last decade.
“As always, what we see in craft is that local really matters, and that being places where your brand resonates is going to be a part of the recipe for success,” Watson says.
“It’s just harder for anyone to sell a huge amount of beer outside of their home market because there are just too many ‘hometown heroes,’” muses Edmunds. As popular as Breakside is in metro Portland, its “brand” may not resonate favorably with drinkers in, say, Kansas City, which has a beer culture all its own that’s serviced by its own popular brands. Establishing outposts too far outside the mothership’s orbit may pose operational challenges — staffing, knowledge sharing, etc. — but it also may threaten a brand’s cohesion and local cachet.
On the opposite side of the country, Frosaker emphasizes the point. “We don’t really think a Southeast brand in today’s environment is gonna really travel well further west. … I think we’ve seen in parts of Indiana, especially parts of Chicago, we become less and less relevant,” he says. “We’re really focusing on our current distribution footprint, and growing where we’re at.”
Speaking of distribution: The Hi-Wire co-founder notes that when the company opens a taproom in a new market, it typically corresponds with “a minimum 30 percent growth right off the bat” in off-premise sales. Frosaker attributes that uptick to the excitement that a tactile, tangible brick-and-mortar presence generates among wholesale partners, sales reps, and rank-and-file drinkers alike. “When people can walk in and feel and taste and smell our brand, it pays off huge dividends,” he says. (By the way: According to a January 2022 analysis of national point-of-sale data from the Arryved platform by the BA’s Watson, people are most definitely walking into taprooms again, and not just to buy beer to go. The data “suggests that actually the draft percentage at the brewery is back to where it was” pre-pandemic, he tells VinePair, adding that breweries’ draft sales are performing better than those for on-premise overall, which continue to lag.)
Taproom expansions aren’t categorically popular with the middle tier, though. Far from it. After all, a beer sold in a brewery-owned taproom is one that may have otherwise been sold in a bar serviced by that brewery’s distributor. In previous research, Uhrich has found that on average, between one-third and one-half of brewery taproom sales are “cannibalized from the distributed market.” In more developed, densely populated markets, wholesalers may consider taprooms operated by breweries in their portfolios less as a sales boon and more as a competitive threat to the bars and restaurants they supply.
Wholesaler buy-in on brick-and-mortar expansion is vital, because a brewery’s access to its off-premise retail customers — which can represent a huge chunk of overall sales, depending on the brewery in question — runs through the middle tier. This is true even for craft breweries with well-established, popular taprooms. For example: Even with five going on six locations, Edmunds notes, Breakside still sells 70 percent of its beer through wholesalers. Taprooms “are not huge volume movers,” he says.
It’s a tricky combination of logistics and relationship management that’s different for every brewery, and it can yield counterintuitive outcomes depending on the circumstance. “In Seattle, we’ve only been open a year up there, and we don’t distribute really,” says Great Notion’s Reiter. “So people that go to grocery stores or bottle shops don’t normally know about us, and that’s why it’s a good strategy for us to open more physical locations.”
It’s not an approach that would work for every brewery. But then again, no such approach exists in 2022. Hi-Wire has let distributed success lead its brick-and-mortar march across the Southeast. As Great Notion eyes a California location to leverage its app and expand its e-commerce business, Breakside is identifying underserved markets in greater Portland to plant its flag. Despite the headline-generating taproom closures by overextended, overleveraged breweries, the core thesis that people like drinking fresh beer in comfortable, locally resonant digs still holds. If there’s trouble with taprooms, it’s not the business model — it’s that there never was one model to begin with.