STRATEGY

Beer Drinkers Wanted More. The Brewer Had No Room to Expand.

How could it keep the taps flowing?
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It was the beer scare of April 2004-when Boulevard Brewing came close to running out of brew-that got the fast-growing company contemplating its future.

Boulevard, a regional brewer that bills itself as the second-largest beer company in Missouri (that's a little joke, since the biggest is Anheuser-Busch), had increased its sales by at least 17 percent a year for nearly a decade up until 2004. Revenue was $11.8 million in 2003. The Kansas City company had built a following among college-town beerhounds in 10 states. But demand was on the verge of outstripping the capacity of Boulevard's creaky 70-year-old brewhouse, which company founder John McDonald had imported from Bavaria and dropped into a turn-of-the-century brick building on K.C.'s Southwest Boulevard. The facility had been souped up to produce nearly 17 times its intended capacity of 6,000 barrels per year, but the tight urban footprint prevented more expansion.

Unable to stockpile enough beer during the slow winter months to meet rising spring demand, the company began asking some distributors to wait two or three weeks for orders. "The biggest fear was, what if something broke down that couldn't be fixed for a month? We'd be out of beer. There was no contingency plan," says Bob Sullivan, vice president of sales and marketing. He had nightmares of walking into bars and seeing plastic cups over Boulevard taphandles, the kegs gone dry. Boulevard survived that spring, but the close call hammered home a reality: High growth in a shoebox production facility wasn't sustainable. Should the company pull back? Expand? Move?

While growing up in rural Kansas, John McDonald drank a lot of beer. At the University of Kansas in the late 1970s, he studied fine arts. Back then, a handful of green-bottled import beers were the only alternative to the big national brands. On trips to Europe, McDonald discovered a diverse beer culture. Every town had its own brew, and he strove to sample most of them. He became an avid homebrewer and decided to start his own brewery. McDonald wanted his to be a truly regional brewery, with no aspirations for national distribution. His timing was auspicious. In the 1980s, quality craft brews like Anchor Steam, Sierra Nevada, and Samuel Adams were catching fire.

He had taken a course in brewing biology at one of the top brewing schools in the U.S. But McDonald's lack of experience in commercial brewing made fundraising difficult. He priced company shares at $15,000 apiece and figured he needed $750,000 to launch. But throughout 1987 and 1988, McDonald managed to sell only a half-share, to his girlfriend. Finally, a family friend decided to purchase seven shares, and others followed. He got his father to spot him a six-figure sum. McDonald hired an expert commercial brewmaster, Charles McElvey, who helped locate some 1930s-era Bavarian brewing equipment capable of producing 3,500 barrels a year and put it in a 15,000-square-foot leased building. McDonald named the company after its location on Southwest Boulevard.

In the fall of 1989, Boulevard produced its first batch of Boulevard Pale Ale. McDonald delivered the first keg in the back of his pickup truck to Ponak's Mexican Kitchen two blocks away. By 1992, Boulevard was producing multiple types of beer totaling 7,000 barrels per year. McDonald more than doubled that output over the next two years to 15,000 barrels, and sales rose to $3 million. At that point the founder brought in CFO Jeff Krum and Sullivan. Krum had a background in finance and real estate development. Sullivan represented the fourth generation of his family to work in the beer business and he had strong distribution experience with large companies as well as an innate understanding of the Midwest suds market. For a decade the trio expanded Boulevard's sales by greater than 15 percent per year. Revenue rose to $14.2 million in 2004. By 2005, the year after the first spring crunch, Boulevard was anticipating revenue of nearly $17 million. But with production of roughly 90,000 barrels in 2004, the facility already was running batches of eight types of beers around the clock, seven days per week. "Our brewhouse was out of capacity. There weren't any small steps we could take to keep growing that would make sense," says McDonald.

What big step made sense? McDonald knew the easiest option would be just to cap production, and perhaps raise prices. Boulevard had healthy operating margins in the low 50 percent range. It was profitable and large enough to provide a rich return to shareholders and top executives.

It could expand. The company could build a new brewery outside Kansas City on a greenfield site. Building in the suburbs would be much cheaper than building downtown, and far easier in terms of permits and land acquisition. But McDonald wasn't sure he wanted to leave downtown. Rather, he had been contemplating a more radical option: a $15 million project to develop a 70,000-square-foot building on four acres adjacent to the existing location. It could have enough space to produce 700,000 barrels per year, plus additional office space for organizational growth. Recalls McDonald, "Jeff said to me, 'Are you sure? If we do this, there's no going back. We're going to have keep growing to pay for the loans. Are you sure you don't want to sit around, play golf, and raise our beer prices?"

Boulevard secured a rock-bottom 7 percent, 15-year bank loan commitment for a considerable portion of the project. It would mean annual principal and interest payments in the $2 million range. Any hiccup in sales could prove fatal. Boulevard's firm decision to not sell beyond the Midwest limited its revenue possibilities. Should Sullivan, Krum, and McDonald lock themselves into inflexible growth targets or hit the links?

The Decision

To McDonald, the idea of taking time to enjoy life a bit more after 15 years of hectic growth had its appeal. "After Jeff made that comment about raising prices and playing golf, I thought about that for a little while," he recalls. Building the new facility would be almost like starting a new company, between the construction headaches and the required growth. Sullivan worried for Boulevard's close-knit employee culture in a bigger facility. What would happen to office camaraderie when the brewing staff had to walk to the other side of a four-acre site to talk to the marketing people? He worried that competition would heat up as the big breweries bought up craft brewers and continued to aggressively market brands dressed up to look like small brewery products but actually produced in megafacilities.

But the executives realized no growth was not an option. "I worried that people would go to the store, not find us on the shelves, and buy something else. Eventually, they'd stop looking for us," says Sullivan. Krum and McDonald decided against relocating to the suburbs. "A greenfield for pure economics would have been a smart move. But we are committed urbanists," says Krum, who owns several residential buildings in downtown Kansas City. In March 2005, they signed for an $18 million bank loan, and construction began. The new Boulevard complex would subsume the old brick building.

The final tally came in at $23 million; everything from materials to professional services came in above budget. Boulevard dedicated the facility on September 14, 2006. Through April 2007, Boulevard had managed to sustain its double-digit growth rate, logging 15.1 percent. The sales mix is shifting from 52 percent draft and 48 percent packaged beers to more packaged sales, improving profitability. Tours of the facility have upped visibility of the company. Sullivan says beer lovers will see Boulevard in more Midwest cities soon. Says McDonald, "At the end of the day I'm in the beer business and people will always drink beer. It's been around for 7,000 years."

The Experts Weigh In

Bank loan a good idea

Using a bank loan to finance the expansion might seem to be taking on a heavy burden, but that option lets the executive team maintain control. It's much easier to keep their strategy intact if they can maintain strong control. Over the long run, it should be less expensive for the company, because banks do not expect the same return on investment as equity investors. Once the debt is paid off, the bottom line can flow to the current set of investors or go to fuel additional growth.

Marilyn L. Taylor
Business Professor
University of Missouri
Kansas City

Buy or rent beer?

They shouldn't fall in love with heavy metal. It's alluring to have it all running on your own facility, but it's not economical or environmentally friendly. You are paying for a bottling line that runs far less efficiently than at a larger facility. We brew at someone else's facility, but we maintain control by buying our own materials, brewing ourselves, and staying on top of quality control. I also wonder if they could enhance efficiency in other ways before opting for this expansion. Could they cut back on the number of beers they brew?

Mattson Davis
President and CEO
Kona Brewing
Kailua-Kona, Hawaii

Idealism is worth a risk

It struck me as a very personal decision. Their whole growth history is "We're having fun, people like our stuff, why not keep growing?" I can totally relate to their decision. We are out of capacity right now. We have also committed to staying in the city of Boston. Still, taking on a big loan to grow is a big leap, and you can take a big fall. If it turns out there were more complexities than they had anticipated, they will have less margin for error down the road. That's where not being super analytical can be a bit risky.

Trish Karter
CEO and Founder
Dancing Deer Baking
Boston

Last updated: Oct 1, 2007




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