A tale of two breweries

Yesterday's announcement that The Commons will be closing is tragic. But there's also plenty to learn from the success of San Diego's Modern Times.

Source: Modern Times Beer

Some people are now calling it a shakeout.  Despite years of confident assertions that there is no bubble in craft beer, there are businesses going under at a pretty punchy cadence, and it’s taking people by surprise.

This may not be the result of a bubble – we’re still talking very few tangible data points after all.  But those few that garner coverage tend to hurt, and therefore generate a feeling of doom.  The announcement yesterday that Portland, Oregon’s The Commons is on the way out has made plenty of craft believers unhappy, and nervous.

(Just two years ago, The Commons owner Mike Wright featured on the Steal This Beer podcast, and host Augie Carton joked, “You’ve been open five years and at this rate in five more years you’ll need a 60 barrel brewhouse!”.  If only Augie had been knocking on wood as he spoke.)

The stylish, spacious tasting room of The Commons Brewery. Source: The Commons Facebook

But the flip of The Commons’s closure – planned for the end of 2017, unless circumstances change – is equally remarkable.  In a deal that has been in planning for some time, The Commons will lease its 100-year-old brewing and taproom space to San Diego’s Modern Times.

Per Modern Times’s founder and CEO Jacob McKean’s statement, the only financial relationship between the two businesses is that Modern Times will be leasing The Commons’s current 10,000 square foot space from Wright.  Oh, and they’re also taking out a lease on the building next door, another 10,000 square foot of space.  Whether they will buy, lease or borrow equipment, fixtures and furnishings remains to be seen, but, like The Commons, McKean intends the building on Belmont Street to be a functioning brewery, fermentation space and tap room.  He’s dubbed it The Belmont Fermentorium.

I have been to The Commons and Modern Times.  They’re both excellent.  They have a fantastic vibe, are both popular and “cool” and, critically, both make world class, high quality beer.  Each was founded by a passionate homebrewer who could not be more authentic, and both have become darlings in two of the leading beer cities in the world.  And they’re both young: The Commons was founded in 2010 (though it only really started motoring in 2015, when it moved into its current space and started brewing on a 15 BBL system) and Modern Times began in 2013.

Why, then, is one severely foundering while the other is on a seemingly relentless march to becoming, at the least, a regional powerhouse? (Modern Times already has two locations in San Diego and three more in planning – in LA, Anaheim and Encinitas in north San Diego County.  The Belmont Fermentorium will be one of six locations, if all goes to plan.)

It might be illustrative to look less at what The Commons didn’t do, as to what Modern Times has done.  It’s almost exactly two years since I visited Modern Times on a recommendation that it was “the coolest brewery in downtown San Diego right now”, and I’ve been keeping an eye on it.  I think Modern Times’s rapid expansion says as much about craft beer in 2017 as the tragic impending closure of The Commons.

  1. A STANDOUT BRAND

Jacob McKean is a sharp guy.  Prior to opening Modern Times, he was Stone’s social media voice and one of their lead marketers.  He openly said when he planned his own brewery that the rate of openings in late 2012 (when he left Stone) was unsustainable.  He gave it a go anyways, but he knew he would need to stand out.  And in San Diego, that’s no mean feat.

McKean names his brewery after an experimental “utopian community” from the 1850s, which was all about collaboration and forward-thinking. It appears McKean, a long time homebrewer and beer geek with no professional brewing experience, knew what he didn’t know.  So he brought in the best consultants, graphic designers and brewers he could find.

What emerged was a brewery branded as well as the taste of its beer.  Simple, colorful logos on plain backgrounds; futuristic but comforting imagery; clean but interesting décor; and, above all, utter consistency.

  1. DIVERSITY

Is Modern Times an IPA house?  It has excellent hoppy beers, sure, but it also has a coffee stout that sells plenty, some balanced saisons, canned fruit sours and barrel-aged beers, both sour and clean.  The brewery recently launched a pils, called Ice, in packaging that looks like an FMB.  Oh, and they roast, package and sell their own coffee beans.

In short, Modern Times is a brewery that has a clear, identifiable brand, but is not easy to pigeon-hole.  That provides stability and agility, which, if you’re launching a brewery in 2013 when styles seems to ebb and flow like the tide at Pacific Beach, is a pretty smart move.

(Coffee.  They roast and sell coffee.  It’s pretty darn good, too.)

Okay, so I put these two next to each other. But still, both are available in my local Whole Foods in Santa Monica, which is remarkable in itself.

  1. GIVING THE PEOPLE WHAT THEY WANT

So I said I wouldn’t deride The Commons by pointing out “missteps”, and I won’t.  But when Mike Wright proclaimed he wouldn’t brew IPAs, he knew he was taking a risk.  As Jeff Alworth noted in his noticeably heart-broken reaction to the news of one of his favorite breweries closing yesterday, when punters would come in and ask for an IPA  “they were absurdly guiding people to Myrtle, a saison in which astute drinkers might detect the presence of hop aroma”.

Modern Times may release a broad array of beers, but they are not afraid to throw a few juicy IPAs straight down the throat of Hophead Nation.  Take a look at the beer I drank last night, Critical Band.  The brewery calls it a juicy, tropical IPA.  You could be forgiven for thinking I took this photograph somewhere in New England…

Modern Times Critical Band

Modern Times making thoroughly modern beer.

  1. BUILDING A TRUSTING COMMUNITY

How Jacob McKean finds time to sleep is beyond me.  One presumes running a fast-growing brewery takes up a decent chunk of his working day, but somehow the man makes it feel like everything that comes out of Modern Times has his personal touch.  He tweets prolifically, he writes his own blog on the company’s website, and he guests on other people’s all the time.  The man was a social media professional, and it shows.

And he does it really well!  He said at the beginning that he would run an open, transparent business, and that certainly seems to be the case.  Whether it’s the opening of a new location, or the recent sale of 30% of the business to its employees, you hear it first from McKean’s laptop.

This builds trust.  Before it began to grow like a weed, Modern Times established deep roots in San Diego.  Within two years it was voted the city’s favorite brewery.  It’s an age-old business parable, that to build a skyscraper you need very deep foundations.  In beer, it’s received wisdom that you need a passionate cult following in your home town before you try to build your brand elsewhere.

  1. BUILDING A BIG REPUTATION

When I returned home to New York (where I lived at the time) from visiting San Diego in 2015, I felt like I had found a hidden gem.  “Oh yeah, Stone and Green Flash are all very well guys, but I know the real cool brewery of San Diego.”

Within 6 months, however, everyone knew about Modern Times.  And not by accident.  McKean has been collaborating like a rabbit, making beer with everyone from New York’s Other Half, to Athens, Georgia’s Creature Comforts, to San Francisco’s Cellarmaker, to Manchester, England’s Cloudwater.  Heck, they’ve collaborated with The Commons twice already.

They also send the occasional shipment to far flung markets.  The reason everyone in New York got to know them was a few pallets of beer arriving and a load of tap takeovers during a focus week in NYC; and they’ve done the same thing as far away as the UK.

Just two weeks ago, Modern Times hosted the third annual Festival Of Dankness on the San Diego Waterfront, inviting all the cool kids of craft to come show off their stickiest IPAs.

And then there was that viral blog post, in which Mr McKean took apart a slightly fawning piece about ABI’s High End with precision, flair and authenticity.  What was essentially a corporate statement was voted one of the most influential pieces of beer writing of 2016, drawing nods of respect from all corners of the industry.

Though the brand is only sold consistently in six west coast states, the brewery now has a global reputation.

From Modern Times’s Instagram, April 2016

  1. A CLEAR PACKAGING AND SALES STRATEGY

8 is a magical number in two places: China, and the beer industry.  It’s the difference in ounces between a 4 pack of 16oz cans (64oz) and a six pack of 12oz cans or bottles (72oz).  If you look in your local bottle shop, you’ll see both SKUs (stock keeping units) on the shelf, and chances are they’re priced the same.  In other words, you’re paying the same for 8 fewer ounces of beer, and retailer, distributor and brewer all benefit from this.

And how many occasions (as we beer marketers like to say) does it take to drink six bottles versus four cans?  Chances are, with a 4 pack you’re done sooner, then you’re back for more.

These intuitive reasons, coupled with the relatively low costs of packaging with and shipping cans, means the 4 x 16oz can is a sweet format to use.

How does Modern Times sell the majority of their output?  They were pioneers of the tall can, which stand out like elegant lighthouses on the shelves of grocery stores around California.

Whether it was McKean himself or one of the consultants he worked with that wrote the commercial strategy part of the Modern Times business plan, hindsight shows it was on the money.  (As mentioned above, McKean seems open about knowing what he doesn’t know, which is actually a rare and immensely valuable trait in business.)

Modern Times got with distributors from the outset, starting, unsurprisingly, with Stone in SoCal.  Within a year, Modern Times cans, bottles and tap handles were prolific – and I take my hat off to the fact they seemed able to manage their capacity seamlessly while doing so. (Grocery chains are not big fans of out-of-stocks.)

Modern Times Beer cans

Again, from a Whole Foods in Santa Monica. Impressive.

  1. PERSISTENT BUT MANAGEABLE GROWTH

In almost all recent statements and blog posts, McKean states clearly that he doesn’t want to grow for the sake of growing.  Instead, he’s looking for sustainable, healthy growth, which is a major driver of multiple brewing locations instead of one big, expensive brewery in a “dreary suburban industrial park”.

But grow the brewery has done, and it seems to have been steady and persistent.  A recent article reports they produced 42,000 barrels in 2016, which is pretty stunning for a brewery born in 2013.

(The only other young breweries knocking out numbers like that tend to be in under-developed markets, and San Diego is far from under-developed.)

As PDX-based professor of economics, Patrick Emerson, is fond of reminding us, beer makes profit when brewed at scale.  If you have the fixed costs of a brewery, the semi-fixed cost of labor and the low marginal incremental costs of ingredients (which are cheaper the more you buy), your profit will be exponentially higher the more you brew.  Breweries don’t *have* to grow, but real profitability can only be achieved at scale.

Like its savvy sales strategy, this fact appears to have been baked into Modern Times’s business plan.

  1. THE X FACTOR – FINANCIAL STABILITY

Ultimately, as Mike Wright learned at The Commons, getting a start-up business through a fledgling phase all comes down to costs, revenue and debt.  In his words:

Unfortunately, this is a classic small business cash flow story. Sure, there is plenty of industry nuance and hindsight that can be evaluated, but this boiled down to simple debits and credits. That’s the sinister simplicity of a cash flow problem. Your debt is clearly defined, but revenue is a rollercoaster. The belief was that we’d eventually break out and get past those challenges. We did not.

A brewery’s finances are the X factor, especially in a market that’s fast maturing, as appears to be happening in craft beer.  From 2010-2015, craft beer appeared to be an unstoppable freight train, and all you had to do was strap in to succeed.  A lot of breweries obtained debt based on sales projections that have turned out to be overly optimistic.

With his characteristic openness, Jacob McKean wrote extensively about his approach to finance when he opened.  He obtained most of his money from private investors, which he appears to have done by presenting a thoroughly thought-through business plan.

(In that podcast from 2015 I mentioned above, Mike Wright utters the perhaps prophetic words, “If I had a business plan…”)

Private investment is the hardest to obtain but the most stable source of finance for a start-up.  Depending on the terms of your agreements, you are essentially transferring a lot of risk to your investors.  Unlike banks loans, you are unlikely to have painful compound interest to deal with, and it’s also unlikely your investors have the power to “call in” your debt. Instead, you promise them a very high return one day in the future, and it’s up to you to convince them they’re not flushing their money round the U-bend.  (And the investors in Modern Times’s neighbor Ballast Point will have been extraordinarily happy with their decision to pony up some savings when Constellation came calling.)

I’m going to try my darndest to get up to Portland by the end of the year and pay my respects to The Commons while it still has a potable presence in this world.  And I sincerely hope that somehow, some way, Mike Wright is able to keep producing excellent beer.

But as this Saturday morning missive hopefully shows, in the topsy-turvy world of craft beer entrepreneurship, there are significant lessons to be learned from success as well as from failure.

Source: The Commons

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