Stones Talks German Expansion

RealClear Staff


     In 1997, when Stone Brewing availed its Arrogant Bastard Ale, it marked an end to being stuck with boring, corporate-beer sales. These days, with craft kings like Stone, it’s pretty easy to obtain obscure brews (from stouts to sour mashes) in Podunk pubs and grocery-store shelves alike.

[Image/label: Stone Brewing Company]

This elite Escondido-based brewer is turning to a new town to trump its odd-ball ales—a far-and-away destination that holds suds so sacred they limit their libation recipes to a 500-year-old purity law that allows only hops, barley, water and yeast to be part of their beer equation.

In June, 2016, Stone directed their sights on Deutschland—they erected a brewery in Berlin. They’re amid the first American, craft breweries to give it a go in Germany. Their efforts in the Fatherland represent a first step not just for Stone itself but a plethora of hoppers that made a craft-mash mark in America but have not yet gone global.

The abroad operations come from craft breweries having to somewhat step on the brakes in the US. For years, artisan alers were experiencing a golden age, blooming big time in a market hungry for newfound foam. Now, established craft breweries are colliding with their cronies who sought to become as big as the craft kings—it has happened. Not only are the smaller sudsers proving to be competition, but big-label behemoths have burgeoned beers comparable to their craft cousins. Some indie alers are being absorbed by beverage conglomerates or are following in large, libation companies’ footsteps in terms of putting gumption in global markets.

“Two-thousand-fifteen seemed to be the first year that growth may be reaching a plateau,” Senior Analyst Nick Petrillo said in an interview. “Craft beer isn’t stalling, but it’s going to reach a point of maturity in the sense its growth isn’t going to be as massive.”

[Image label: Stone Brewing Co.]

While Stone sopped up $200 million in their 2015 sales, the boisterous brewery isn’t immune to these issues. In October (2016), the company had to kick 60 employees to the curb—about five percent of its 1,200-employee outfit. Stone CEO Dominick Engels said the layoffs were “the simple evolution of business.”

“Restructuring was a necessary course correction we needed to do to match our growth trajectory and spending trajectory,” he added. “Pressures from Big Beer are a reality in the craft industry and will continue to impact the industry’s growth.”

And Stone has soared in terms of tactical, business manoeuvers. In the summer of 2016, they built a brewery in Richmond, VA. They’ve also laid groundwork to launch a restaurant in 2018. In addition to having their headquarters in California, these lager lads are licensing their name to another entity’s effort of erecting a Stone Brewery-branded hotel—of course it’s beer-themed. They’re also making their way into wine country, as Stone’s set to build a pilot brewery and tap room in Napa Valley this year.

All this to set the 20-year-old crafters apart from the hundreds of hop houses making headway in America—San Diego County alone avails 131 breweries (sheesh)!

Stone’s strides in Europe are a real roll of the dice for its future as a universal-ale player. In addition to their Berlin block, the brewery built a beer garden and accompanying restaurant there in late 2016.

[Video: courtesy of Stone Brewing Co.]

Engels also said their Berlin bounty is simply a stake in a larger piece of land entailing Stone to “shape” the international market. It’s not a total shock the US’s 10th-largest craft brewery solidified their spot in the European-continent conquest. That place is popping with regional influences and countries maturing at different rates in terms of craft beer.

“It’s something we need to start now so it can be of substance later,” he continued. “There is no such thing as a homogeneous, European approach that makes sense. It's going to have to be done market by market.”

But analysts have argued Stone’s worldly winnings are no guarantee. According to Managing Director Robert Wegner at the Assn. of Export Brewers of Northern, Western and Southwestern Germany, Germans aren’t exactly jolted on American beers. They also feel American ales are weak and bland. “The import markets are quite limited still,” Wegner said.

In 2015, roughly 132,000 gallons of US beer were imported to Europe—and that was out of 172 million, imported gallons in total, Wegner elaborated. Also last year (according to the German Brewers’ Federation), the total, domestic consumption of imports was about 6.8 percent. That’s not nearly enough when compared with imports to America, which was nearly 16 percent of total, domestic consumption (according to the Brewers Assn.).

Usually, most import mashes into Germany are from other European countries (e.g., Belgium)—but that has seen steady decline. And the overall, beer sales of German beers (as well as domestic consumption) are falling fast too.

[The production room at Stone Brewery in Escondido | Photo: Gina Ferazzi]

But fortunately for Stone and other, American, foam factories, some Germans feel the injustice in their country’s traditional ingredients—re: the purity law. This has slowed suds innovation and ultimately aided in the beer-consumption drop. It’s argued that these issues have halted young Germans’ efforts in creating their own craft breweries. But Wegner explained most Germans have been privy to only local, craft brews.

Wegner thinks Stone’s making a smart move in their Berlin-brewery plan—it’s a cosmopolitan community stoked on outside influences. Whereas places such as Munich are more traditional—e.g., the annual lederhosen-and-beer-basted Oktoberfest.

“In Munich, the people are very proud of their own beer, and the cultural inheritance is much stronger in Bavaria,” he said. “It may be harder to convince them.”

Over the years, Stone co-founder Greg Koch kicked the captain’s crown to Engels in order to usher in the next phase of their foamy future. While Koch kept his chairman seat, Engels is now CEO. Even though Engels has never known the nature of the beer beast, he possesses plenty of experience in leadership—the man led Wonderful Co.’s (LA snack and juice maker) international division to a dutiful-sales feat of $4.8 billion.

“When we opened our doors 20 years was the largest company I had ever worked for,” Koch said—he considers himself “a classic-entrepreneur type.” “Having some additional ability for heavy lifting is a very important thing now.”

[Hops being poured into a brew kettle at Stone Brewery | Photo: Gina Ferazzi]

Engels himself is excited to implement new methods and organization into their Europe and east coast expansion. While this wasn’t needed beforehand, they’re certainly seeking this kind of leadership now. Engels said Stone’s new structure’s mandatory for their move into multiple time zones. This entails new supply-chain issues that were non-existent when Stone was a single-location operation.

“How do you service more customers when some of your products are made in one location and some products are made in other locations?” he said. “Those are the muscles that have to be built in a more purposeful way.”

Engels isn’t a completely lost on liquids. The Pasadena-born CEO put power behind POM Wonderful pomegranate juice—that extended to Europe, the Middle East and Africa. He also assumed command for Fiji Water’s European division.

“You can draw a lot of parallels through those experiences,” he said. In both instances, “you have a US-centric or even California-centric mothership with international assets.”

He also majored in German when in college and plans on drawing from that benefit while in Berlin. “It’s my Manchurian-candidate thing,” he laughed. “As soon as I get there and people start talking, it’s pretty good.”

Some have said Stone may determine the direction of Southern California’s craft industry.

[The array of taps in the Stone Brewery tap room at the Escondido location. | Photo: GIna Ferazzi]

And Stone has actually invited an outside investor. According to SEC records, Private-equity firm VMG Partners is pouring $89.5 million into a limited partnership dubbed VMG Stone Brewing Coinvestment. But in light of this outside investment, SoCal’s beer sceners say Stone (the brewery to make San Diego an American-beer capital) is probably a crucial conduit in keeping small brewers’ indie spirit aflame.

“They are the pioneers in San Diego,” said longtime, beer aficionado and South Park Brewing Co.-owner Scot Blair said. (He also owns a plethora of local pubs, including Hamilton’s Tavern.) “As big as they are, they are the generals.”

Stone’s step into Europe has created a trail for other, local companies to take. San Diego-based yeast-manufacturer White Labs labored out a production facility in Copenhagen in 2015. They became easily available to their European customers—as well as a supplier to Stone’s Berlin Brewery.  CEO Chris White said the latter was the key reason for their expansion.

“This craft-breweries movement is being exported actively,” While added. “A lot of Americans are being hired to be brewers in other countries.”

According to Engels and Koch, there are no, other expansion plans popping up. They explained Berlin’s and Richmond’s project timelines simply coincided with one another. While these endeavors seemed to ignite out of nowhere, Stone had actually sketched out these plans long ago—years.

However, Koch and co-founder Steve Wagner have one surprise up their professionally conjoined sleeve. They’ve plans to power up an investment group called True Craft. This effort will safely absorb minority stakes in breweries that would otherwise have to hand over the keys to Big Beer.

“To see some of the comrades we have been fighting alongside now instead be tools of their corporate overlords against us—it can be a little disheartening,” Koch said.

And if you think Stone will ever sell out to Big Beer (or anyone), Engels said that chance is about “zero point zero-zero-never percent.”



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