No small beer

TOM FENNELL June 17 1996

No small beer

TOM FENNELL June 17 1996

No small beer


Canada's specialty brewers have come of age

From the moment he launched his Guelph, Ont., brewery in 1988,

John Sleeman has traded shamelessly on his ancestors’ ties to the beer industry. In his office near the company’s copper brewing kettles, he keeps what he claims is his family’s original beer recipe book, a faded 19th-century volume given to him by his aunt Florian in 1984. And in his radio commercials, Sleeman flaunts the memory of his great-greatgrandfather’s founding of a small brewery in 1834. But while his forefathers were content to brew beer for small-town Ontario, John Sleeman’s ambitions are far greater. Last week,

Sleeman Breweries Ltd. began trading on the Toronto Stock Exchange in a public offering to raise money for a planned countrywide expansion. “It has never been a dream of mine to be a regional brewery,” Sleeman says.

“Our philosophy has always been that if there is demand in Canada, we should meet it.”

His timing could hardly be better. The so-called craft beer and microbrewing sector, spiced with exotic brands such as Dragon’s Breath Pale Ale,

Warthog Lager and Hammerhead Red, now accounts for about three per cent of the Canadian beer market. But at a time when overall sales of alcoholic beverages are stagnant because of the aging population and increased health concerns, the specialty beer market—dominated by premium beers aimed primarily at well-paid men in their 30s—is expanding by an estimated 25 per cent a year. In response, the giants of the Canadian beer industry, Molson Inc. and Labatt Breweries Ltd., have launched a string of competing products. And now, even some major distillers are trying to break into the business. Last week, Seagram Co. of Montreal

began test-marketing several new ales and lagers across the United States, under the brand name Devil Mountain. “It’s flattering to know,” says Sleeman, “that Seagram thinks this is the only part of the beer market that is growing.”

In short, the microbreweries have come of age. Some, such as Kitchener, Ont.-based Brick Brewing Co., have struck alliances that allow them to sell beer in various parts of the country. Others—including Sleeman, Big Rock Brewery Ltd. of Calgary and Upper Canada Brewing Co. of Toronto—have turned to the stock

market, hoping to raise money for expansion. Investors, apparently convinced that the sector will remain hot, have snapped up their shares. “Their appeal is still broadening,” says James Durran, an analyst who follows the sector for Marleau, Lemire Securities in Toronto. “We should still see 25-per-cent to 30-per-cent annual revenue growth.”

As part of its expansion strategy, Sleeman last month merged with Vancouver’s Allied Strategies Inc., which owns Okanagan Spring Brewery. Founded in 1985 in an old packing house in Vernon, B.C., Okanagan Spring is one of the oldest and best-known microbreweries in Western Canada, and its leading brands—including Okanagan Spring Pale Ale and Lager—are popular in their home region. Like Sleeman, however, the company lacks a strong national profile. By joining forces, the two companies—with combined sales of $75 million a year—hope to ensure their future growth. ‘We just finished expanding the Okanagan brewery,” says Sleeman. “But we have to expand again because it is selling all it can produce.”

Sleeman’s goal is to supplant Moosehead Breweries Ltd. of Saint John, N.B., currently the country’s third-largest brewery. Moosehead president Derek Oland, however, claims not to be concerned about his rival’s aggressive plans. The New Brunswick company,

which now exports to 10 countries, is continuing a slow expansion drive in Canada and abroad. And Oland does not plan to follow Sleeman and Upper Canada into the equity market, where he would run the risk of losing control of the company. “We’ve been around for six generations,” said Oland. “You have to have staying power, and that will be the challenge for John.”

While Sleeman Brewery endeavors to go national, Upper Canada is hoping to make further inroads in Ontario and the United States. The 12-year-old Toronto brewery picked up $16 million in a sold-out stock offering in April. The firm is growing at 24 per cent annually. To meet demand, it is currently expanding its operations to 20 million litres a year, and there is talk of building an additional brewery in 1998. “There are different ways to grow your business,” says founder and chairman Frank Heaps, who has so far rejected the mergers-and-acquisitions route. “If we continue to concentrate on quality, we will continue to expand.”

The same strategy guides Ed McNally, founder and chairman of Big Rock Brewery. Big Rock, one of the first small Canadian breweries to go public, has seen its shares climb from $4.50 (U.S.) four years ago to almost $10 on the U.S. NASDAQ exchange. Later this month, the company will open a new, larger brewery in Calgary. And while it is impossible to predict the future growth of the craft beer market, McNally believes it could eventually account for as much as 10 per cent of the total beer market. “Big Rock is already getting pretty big,” says McNally. “Every time I see the new brewery, I’m surprised by the size of it.” The growth in the specialized beer market, however, is attracting some powerful new competitors. Seagram, best-known for such brands as Chivas Regal scotch, Absolut Vodka and Tropicana juices, is now test-marketing a number of beers under the Devil Mountain brand—a name it purchased from a defunct brewery in California. Joseph Fisch, president of The Seagram Beverage Co., points out that the company previously developed low-alcohol beverages such as coolers and spritzers. The craft brew market, he says, is an equally promising niche. “Devil Mountain did very well in Northern California, where the craft beer phenomenon began,” Fisch adds. “We felt that the brand could extend itself nationwide.”

Microbrewers, however, accuse their bigger rivals of cashing in on the demand for specialized beer by trying to pass themselves off as small independents. Seagram, for example, will not put its name on Devil Mountain labels, just as Molson’s name does not appear on Rickard’s Red—an amber-colored draft that it introduced eight years ago to challenge the emerging micros. Upper Canada’s Heaps, for one, says that Rickard’s is actually just Molson Canadian with food coloring added to darken its color—a claim Molson vigorously denies. David Minnett, Molson’s Ontario vice-president of marketing, says that Rickard’s Red is a

genuine craft product brewed in small amounts using premium ingredients.

Other beverage giants are trying a number of marketing gimmicks to lure beer drinkers. Brown-Forman Corp. of Lynchburg, Tenn., which produces Jack Daniel’s bourbon, has built a small brewery near its main distillery where it is chopping up old whisky kegs and mixing pieces of oak into the fermenting beer to give it a smoky flavor. In its brochures, the company claims it is brewing a beer with “an old time quality,” similar to the beers in Jack Daniel’s time in the late 1800s. In reality, most of the production comes from the large Hudepohl-Schoenling Co. brewery in Cincinnati. Bermuda-based Bacardi Ltd. is following a similar strategy by resurrecting a beer that it says it produced in pre-Castro Cuba.

Upper Canada’s Heaps has nothing but scorn for such products. “The big guys are bringing phoney micros to the market,” he complains. “It is unmitigated horse hockey.” To flush out any pretenders, the eight-member Ontario Small Brewers Association plans to launch a quality assurance program next month that will award a special insignia to brewers that meet a long list of standards, including brewing without preservatives and in small batches. Even so, Heaps expects the big brewers and distillers to continue their aggressive push into the field. “The only growth sector is specialty beers, so they’re all trying to cash in on it.” Meanwhile, some of the small brewers are doing their best to join the ranks of the majors.