Interviews

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10/26/03: Magic Hat co-founder Alan Newman:

"It’s tough. I keep saying that."

Alan Newman’s Magic Hat Brewing looks like they’re doing well — no, scratch that; they are doing well. They’ve pushed hard in the competitive New England market and attained almost 40,000 barrels a year in sales, no mean feat in the backyard of Sam Adams and Harpoon.

The Magic Hat ales are established, with #9 leading the way and the consistent psychedelic packaging making one of the more colorful shelf sets on the market. The big-bottle Humdinger specialty series is breaking new ground with beers like the honey mead/beer hybrid Braggot. The newest addition is a real departure: Mother Lager, a shot at the European import market segment. Busy times at Magic Hat for Newman and partner Bob Johnson.

But there’s no rest for the weary. Newman sees a new struggle every day. "Every day, I’m constantly amazed," he said, "but nothing gets any easier. I’m serious. It never gets easier, it never gets less expensive, it never gets less complicated. The competition is brutal, and every day you have to say, "How am I going to do better than I did yesterday?" The minute you stop asking that… I’m telling you, it’s tough."

I asked Newman a number of questions, about Mother Lager, about his summer seasonal, and about the craft brewing industry. His answers were (as always) brutally frank, well thought-out, and somewhat controversial. But as he said, "That’s my thinking. My guess is that other people won’t like it. And you know what they can do if they don’t."

Pure Newman. He’s tough. Better believe it.

Alan: We’d be thrilled with 40 or 42 thousand barrels, but I think we’re going to have all we can do to make 40,000 this year. It’s really a matter of what our distributors can do about inventory as we hit November and December. It’s been a tough year, and all the distributors are so tight. I don’t know a distributor who had a good year. I’m worried that at the end of November, after Thanksgiving, they’re going to say, okay, that’s it. Every year they start reducing their inventory in January or February. I’m worried they’ll start in November or December. In November, we’re okay. But I’m sweating out December a little bit. We need a decent December to come in, not where we originally expected, but where we’d like to be for the year.

I think it’s everything. We started the year with things like wars and economies, and fear of joblessness, and then just as people started to perk up a bit, summer started to not come. We didn’t have a nice weekend in the Northeast until the week after the 4th of July. I was down on the Cape in mid-June, and when I got back, our director of sales asked, "How did we look?" We looked great! It looked like we had our whole house decorated for this fabulous party, cases stacked everywhere, we were in the coolers, point of purchase everywhere, and the party started at 7, it’s now 9, and…nobody’s there! The numbers I heard in the summer resort areas were down 30-40%, through the month of June. You don’t make that back.

That’s a beer that we’ve been making, in one variation or another in the brewery since back in Flynn Avenue days. It’s a beer a lot of people around the brewery like. We like hops. Northeast IPA drinkers don’t really like huge hops. We always made it for us, and there were always a handful of people who liked it, and who’d always ask for it. We were looking for something to do this summer, and we thought, you know, we really like this beer. It doesn’t have to do a whole lot for us, but we wanted to put something out in a 22.

The results surprised us. It was going to be a one-off, then we said we’d do a second batch, and I think we wound up making five batches. Not a huge amount of beer, but given the effort we put behind, the amount of promotion we gave it…I mean, we didn’t do diddley. All we did was put it out. We were happy with how it went, so happy, we’re looking at re-doing the label and re-introducing it next year. I loved the concept, and never felt we executed the concept well. But we just wanted to get the beer out, and didn’t expect much from a couple small markets for a few people who like hops. Go figure. It did much better than we ever dreamed. It was fun, we liked the beer. My guess is it will come out again next summer as a seasonal.

I am a believer that there is always opportunity. I am not one of those people who say all the options are taken, and there is no room to start another fill-in-the-blank: another brewery, another dot.com, whatever. But I sure as hell would not be wanting to open a brewery today. I’m very glad that we are not opening today. It’s a tough world out there.

We’ve got 300 players vying for 3% of the market. It doesn’t take a genius to figure out that’s hard. That’s 300 people vying for sustainability. History doesn’t bode well for these kinds of numbers, be it beer, cars, dot.coms…pick an industry.

There’s a flow to new segments, and if we’re going to start making a dent in the market share, well, that’s what we’re going to have to do. For 300 of us to continue beating on each others’ heads, that’s about as stupid as you can get. Unless we can start aiming at some of the other segments and getting some of that business, we’re going to continue eating our own young for lunch. And I gotta tell you, that doesn’t make a lot of sense to me.

That’s my concern: how do you create a viable, sustainable industry of small brewers? If you take a look at history, we have to get our numbers down. We remain too confusing to the customer. There’s a real aficionado to whom there can’t be too many breweries, but that’s a small part of the market. In my mind, as a megatrend, I would look to see the industry somehow winnowing out and getting down to fewer players so we can grow our market share up into the 10% range, which is my sense of where we need to get to.

Absolutely. It’s pretty damned simple. The craft category has 3%, the import category has 12%, and the corn lagers have 85%. We can’t go after the 85%. We don’t have the economics, we don’t have the products, we don’t have anything to help us get to that 85%. And it’s at a price where we can not be competitive.

But the imports, Heineken, Stella Artois, Becks, St. Pauli Girl, Pilsner Urquell, that whole group in there, they’re at our price-point, at the high end of our price-point. They produce a beer that we can make and be price-competitive with. More importantly, because we’re here, and we can monitor our distribution, and we can keep that distribution chain moving quicker, we can do it better because we can do it fresher.

I’ve always seen Magic Hat as a niche brewery. So we’ve been taking our niche out of the 3%. And there are a bunch of people, in my opinion, who are fans of Magic Hat, but who quite frankly say, "We can’t drink your beer. We’re really sorry, but we just can’t support you. We don’t like your ales." Well, our job is to make beers that our customers want. It struck us that the European lager category, a growth category, is sitting there and nobody’s really taken a run at them.

We’ve got our share of lagers, but none of them are positioned against the European imports. They’re really positioned against the crafts. You know…Brooklyn Lager. It positions itself against Magic Hat #9, and against Sierra Nevada Pale Ale, and against, you name it! I’m not picking on anyone in particular. We said, well, what if we just build a better mousetrap? What if we brew a better Heineken, a better St. Pauli Girl, Becks? Would people try it?

We took a look at eastern European packaging vs. western European packaging. We actually had made the decision to go looking more western European than eastern European. At the last minute, I thought that the eastern European look was just too striking to leave on the table, so we plunged.

We decided to make a beer that is reminiscent of that European-style lager. Our tagline is "The Evolved European-style Lager." We’ve evolved it, taken the American craft technology and applied it to the European lager category. We’re exporting it from the People’s Republic of Vermont. We think if we do that it will be fresher and taste better, and we think we have a very competitive product to the Euro-lagers.

What we find is that if we can get that beer into people’s hands, they like the beer. They like drinking it, and they will drink it all night. But the competition to get it in their hands, on-premise…it’s ugly out there! It’s a crowded market. So we’re back at the drawing board, re-doing our label packaging at the moment. We don’t think the label pops at the bar. Have you seen it?

Have you tried it?

I think it’s got a real Euro-style flavor to it, and it’s incredibly drinkable. To be quite honest, it’s my drink of choice these days, which shocks me, because I just don’t drink lagers. I find I can sit and drink it all night.

What we’re finding is that the six-pack and the mother case, we’re tweaking them, but they fundamentally work (off-premise). It’s the bottle label that goes away on-premise. We tried to do something with the foil, but it frankly just didn’t work. So we’re re-doing the labels. We really need to develop some strong on-premise point of purchase materials.

That’s our current focus of attention, to get the label so that you can see it, and to get some point of purchase so people will go "What the hell is that? Can I try that?" And we’re working on a lot of sampling. We don’t have the budget that Heineken or Interbrew have, or even SAB, so we’ve got to do it the same as we did Magic Hat ales: glass by glass, bottle by bottle. Get it into people’s hands and get them talking about it. "Hey, this is a good alternative, I’m going to drink this alternative to Heineken or the Euro-lagers." If we can do that, we’re getting our niche in 12% of the market, not 3% of the market. We’d like to keep our niche in the 3%, we’d like to keep our ale business, that’s where we came from, that’s our first love, but I gotta tell you, we’ve got to get out of our own way here.

The problem with 3% of the market is that no one can afford to advertise. Nobody can afford to go after anyone else because our market share is so small that our advertising cost per 1,000 is deadly. So until we start getting a bigger part of the business, and a bigger share of the business, and until we figure out how to go after the bigger players, I think we have a serious problem.

That’s the idea behind Mother Lager. I would hope that was fairly obvious. We’ve been talking about this for a while. It’s kind of an interesting story on how it evolved. We’d been talking about doing a Euro-style lager, it’s been in the works for a long time. I was down visiting my cousin, two summers ago. We’re sitting around shooting the breeze on a beautiful Saturday afternoon in his backyard, and he’s sitting there drinking Heineken. I said, "Rick, why are you drinking Heineken?"

He says, "I’ve been drinking Heineken for years, I love Heineken."

"I understand that, but tell me why."

"Well," he said, "it’s just got this really distinctive flavor that I think is really about the quality of the beer."

I said, "Let me ask you a question. Do you care, that the special flavor you’re referring to, do you care that it’s what’s referred to in the industry as an off-flavor? Something that most brewers work hard to avoid?"

And he looked at me and said, "Huh? No, why would I care?"

And like a ton of bricks, falling on me, I thought, duh. Give the customer what they want, not what we think they should be drinking. All of a sudden, it was like, there are a big percentage of people who are drinking Heineken, and Corona, and the Euro-style lagers, and they associate that flavor profile with quality European imports.

So either we’re going to go around and one-by-one re-train all those people, or we’re going to give them what they want. I decided at age 57 that I was too old to try to re-train them! For once, I’m going to try going with the flow. Let’s see what happens.

The project was moving along in those days, but that moved it into the green bottle. And after the gasps and yelps from our brew staff, they kind of got into it, and they’ve gotten used to doing lagers in general. Now that we’ve started doing lagers, it’s opened a whole new field for them to play with.

It’s a win-win all around. We’re pretty excited about it, there’s a lot of hope for it, we’ll see. We’ll see if we can make it work now. It’s one thing to have a great product, it’s another thing to get it into the mainstream of consciousness of the drinker. That’s what our challenge is now. If you look at our original product brief, what we wanted to accomplish with the packaging, with the naming, with the style of the beer, what we wanted the beer to taste like, we really hit exactly what we set out to do, about as dead-on as anybody could do. The question now is, does anybody care? That I can’t tell you about, ask me in 6-9 months. I think we’ve produced a beer that is really easy drinking, has interesting flavor to it. If someone out there is a Heineken drinker, a Stella drinker, a Beck’s drinker, they like that Euro-lager flavor. If we can get our beer in their hands, I think we’ve got a better beer. The concept of it being imported from the People’s Republic of Vermont is interesting, and we can get some interest and enthusiasm out there.

There couldn’t, in my opinion, be a worse time to introduce a new product…but what the hey! It’s right up there with opening up a new brewery.

Absolutely. We’re proud of it. What we did was—on our normal Magic Hat line, we call it 80% Magic Hat, 20% product. So you look at a Magic Hat product, it’s overwhelmingly Magic Hat, and oh, by the way, this one’s #9. By the way, this one’s Blind Faith.

On Mother Lager, we swapped that. So we scream, MOTHER LAGER, IMPORTED FROM THE PEOPLE’S REPUBLIC OF VERMONT!!! …made by magic hat.

If we’re successful, we will get outside the Magic Hat customer, we will get outside the ale drinker, and start nibbling at the Euro-lager drinker. If we can do that, we’re successful, if not, then it didn’t do what we wanted. It may still be a good beer, may still stick around, but it clearly didn’t hit what our mark was.

We have a new batch of Braggot that just came out. The problem is that the volumes are so small, that when they come out, they don’t last, they literally evaporate. We just had a release of the Braggot and doubled what we did last year, but I don’t expect it to last on the market. I hope to have Humdingers out all year, to have enough Braggot out there that when Thumbsucker, and Chaotic Chemistry come out, there’s enough that all of them will on the shelf, a whole shelf of Humdingers.

But we can’t do that until we can afford to mechanize the process. It’s all hand-labor, and we were losing money at $15 a bottle. What’s wrong with this picture?! If you hand do everything, it’s just not feasible. We’re continuing to do it, and increasing the volume, because we’re kind of curious to see what the demand is like out there. The corking and labeling is all hand-done. We’re trying to put aside the money to mechanize it. We love it, we love the series, they’re fascinating beers. We’re adding to what people think of as beer.

Hopefully, as we get volumes up and get prices down, we can find out how much demand is out there. The supply is so small, we can’t really tell what’s out there. I guess I kind of see it as our overall strategy: Humdingers on the high end, changing people’s concept of what beer is, a $30 bottle of beer you’ll take to a friend’s house instead of a $30 bottle of wine. Then there’s our ales, made for the American craft beer drinker who really likes world-class ales made right in this region, distinctive, delicious stuff. And we have this Euro-lager, which if it works for us will be a completely different segment. Our goal is to see if we can drive those three categories, see what volume is in the geographic areas we cover.

We’re definitely up. The category’s up, but most of the growth has been in the regional players. It’s the same thing, when back in the late 80s and we all had quality control and confusion problems, and I think we drove a lot of our customers to the imports. They had the patina of quality control that people respected. Over the past five or ten years that’s shifted, and the regionals have increased their labs and quality control, watched their product dating and rotated beer through the market, and worked with distributors. They’ve stepped out of the pack. They are the majority of the growth in the category.

The smaller, more local ones may have grown 8%, but it was on 2,200 barrels. They’re committed, they’re frequently husbands and wives, and they’re eking out a living, but their life is not getting any easier. It’s the most difficult place to be right now, and it’s hard to stand out of that crowd. The Deschutes of the world, the New Belgiums, the Harpoons, the Sierra Nevadas, the Saranacs, hopefully the Magic Hats, have created some awareness out there, not a lot, but some! We do a better job of rotating our product. If you’re too small to do that, you’re always chasing the next 20% of your business. If you get the next 20% of distribution, then they’ve got to make a capital investment to support that 20%. If you can’t do that, you run out of your capacity. It’s a very tough business out there, it’s very competitive. You don’t have someone to make the chain calls, to service them, to service the distributors. To be successful, it costs money.

It’s a tough pack to come out of, and it’s a big pack. There are some great beer out there. But it’s got nothing to do with bad beer, there’s great beer. The saying goes, "There’s no bad beer at the brewery." But you get it out in the market, to the distributor’s warehouse, and God knows how long it sits there, finally the distributor moves it to the retailer, and it sits. It’s tough.

The bigger have gotten stronger, they’ve seen the greater growth in the segment. Some people have expanded too fast, and they’re going to get to the end of their easy distribution and then they’re going to have to grind it out and they don’t have the resources or the equity to grind it out. They’re going to run up against a wall. The companies that continue to win have world-class beer and world-class quality control.

It’s tough. I keep saying that. Anyone who’s succeeding today, God bless you. Keep doing what you’re doing. We’ve got to continue improving quality control and product rotation, we’ve got to continue getting great beers into the hands of the customers in the condition we’d want them to drink them in.

If you’re not doing that, please go home. Because we’ve got to get out of this 3% eating our own young situation. We’ve got to expand the market, and my guess is that the number of players has to diminish in order for our market share to go up. It’s probably going to come from a lot of the small players out there. They’re going to look at this and say, you know, I’ve been doing this for seven years. All I’m seeing is an endless cycle of minor gains and endless investment. And at some point, something has to give. I’m not going to tell you what that is, because I don’t have a clue.

I was reading a fascinating article about the car industry. Around the turn of the last century, there was something like 130 car manufacturers. Whatever industry you look at, cars, motorcycles, electronics, dot.coms, there is always a rush to get in the market. But it only grows when there are fewer players, because they need the resources to be able to promote and get the mindshare.

That’s our challenge now. We’re up against the Euro-lagers, who are spending a lot to gain mindshare. We’re up against the corn lager brewers, who are spending ungodly amounts of money. And then we have our band of 300 merry craft brewers who are rubbing two sticks together. If we’re to have a chance of getting above 5, 7, or even 10% of the market, we’ve got to find a way to get enough resources into the category to make it viable.

That’s my thinking. My guess is that other people won’t like it.

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