What Happens to Small Companies Now?

Earlier this week I mentioned the surprisingly important role that craft brewing had played in downtown renewal across the country over the past decade. And I talked with one of the pioneers of that movement, Jim Koch of the Boston Beer Company, about how this part of America’s startup economy was likely to fare.

Here are reports from two companies of a similar spirit but entirely different scale from Koch’s nationally distributed Samuel Adams brand. One is in northern Minnesota; the other, on the edge of the Mojave desert in Southern California. Each illustrates a path small, locally conscious firms are taking to survive the current economic and public health disaster.

Duluth, Minnesota: Over the past four years, I’ve visited and written about the small Bent Paddle Brewing Company of Duluth—and have retained interest because the saga of this startup has involved a lot more than its (very good) craft beer.

The two young couples who founded the company ten years ago—Karen and Bryon Tonnis, and Laura and Colin Mullen—wanted to see if their new little business could be part of a larger revival in the tattered, ex-industrial Lincoln Park district of Duluth. As Deb Fallows and I saw in repeat visits and reported here and here, they had begun succeeding in that neighborhood-revival role—plus others, like being part of a Duluth’s emergence as an outdoors and tourist destination, and helping protect the waters of deep, cold Lake Superior, on whose western tip Duluth sits.

Each time we’ve visited their part of town, we’ve seen a few more visitors, another restaurant or food truck, another little office or store. Meanwhile, Bent Paddle’s main business, as a taproom and brewery, continued to grow. Every time we talked, the four founders stressed that they’d grown mainly thanks to community supports (including advice from local business people and loans from local banks), so they felt an obligation to be part of the community’s long-term development.

But what now? This spring, Bent Paddle’s own taproom was of course closed, as were the restaurants and bars through which it sold most of its output. Could a little business like this survive, and could its surrounding neighborhood? This week I spoke with Laura Mullen in Duluth to ask how Bent Paddle had fared.

“During March and April our business was down about 50 percent,” she said. “No events at our site,” which had been an ever-busier civic gathering center. (We once saw a local-writer’s club holding a meeting in a side room.) “No sales to bars or restaurants,” which were about half of its total volume. “Draft beer was not happening anywhere.” Bent Paddle had to buy back some of the kegs it had shipped to bars and restaurants. Other kegs, already in warehouses, went past their shelf life and could no longer be sold.

Fortunately from the brewers’ point of view, Minnesota classified liquor stores as some of the “essential” businesses that could stay open despite a general lockdown. “That made us ‘essential workers,’” Mullen said, “because we were supplying products to liquor stores.”

Among the customers they could still reach in Duluth and elsewhere, Bent Paddle saw the same pattern that Jim Koch, of Sam Adams, recently described to me: People who would otherwise have gone out to a restaurant or bar were in many cases “trading up” to buy nicer food or drink to have at home, still for a lower overall cost. (A fascinating report in Nielsen.com shows exactly how much at-home drinking would have to increase to offset the near-elimination of bar and restaurant revenues. Medical experts are on the alert for evidence that increased home drinking is creating medical or behavioral risks—beyond those of the pandemic itself.)

Laura Mullen said that she expected this year’s sales, overall, to be about 20 percent lower than last year’s. Of the company’s 44 staff members before the shutdowns, it laid off 10. All but one has now returned. The company received a PPP loan to help cover the salaries. For the moment, Minnesota has allowed bars and restaurants to reopen for distanced outside service, and at 50 percent previous capacity indoor.

What were the lessons of this company’s survival, so far? Laura Mullen suggested these:

• An immediate pivot: “When the taproom closed, we could still do to-go beer,” she said. “The minute [the state order] hit, after we shut the taproom we created all these signs and online videos,” promoting the idea that Bent Paddle was still open and explaining how to buy very safely canned beer to take home.  

• Going all-in on masks and distancing: None of the signs and videos that Bent Paddle put up were about resisting or working around the shutdown or distancing order. All were about how to work with the rules. On March 20, they posted a three-minute Facebook video in which Laura Mullen walked potential customers all through the stages of picking up beer safely from their brewery. “We get a few Yelp comments complaining about our procedures,” she told me. “But we got many more complimenting us and saying that our safety protocols were top-notch, and they could feel comfortable coming here.”

• Reliance on the local: When I first met them, the four Bent Paddle founders told me how important local-bank support had been when they started the company. Laura Mullen said the same was true for surviving the current emergency. “A lot of people who had bigger-bank relationships had trouble getting their PPP loans,” she said. “We have a small local bank,” whose officers the company had worked with for years, “and we were able to get things arranged very quickly. We’ve heard that across the board, that people dealing with smaller banks are in better shape.”

• Concern for the neighborhood: Bend Paddle’s success has been an important part of the Lincoln Park area’s revitalization. Now people are still coming to pick up beer, but not staying to shop in the little boutiques and smaller businesses. Their margins are thinner, and their products are less recession-proof than beer. Mullen said that she was even more concerned about longer-term effects on the neighborhood than on her own company.

Redlands, California: More than a dozen years ago, when I was living in China, I visited my original hometown of Redlands several times (for family-illness reasons) and noted the emergence of a craft-brew industry there. The pioneering local company was sited right at a small airport and was named, with an aviation theme, Hangar 24.

On recent visits to Redlands I’ve noted the emergence of a new company, called Escape Craft Brewery. It’s located in an unglamorous commercial complex not far from Interstate 10, but its vibe and style are of the tropical carefree getaway. “We designed the name Escape for that idea,” Melissa Fisher, who cofounded the brewery with her husband Josh six years ago, told me last week. “You can’t always get away. But you can always escape. You can sit outside, open a beer, and be someplace else for a few minutes.”

Before opening the company, Josh Fisher was an avid home brewer, with a day job as a firefighter. Melissa worked as an aesthetician in a salon. They spent two years scouting the area for an appropriate site—with parking, brewing space and facilities, affordable rent, appropriate zoning, outdoor patio space for the usually warm Southern California weather, and so on.

They found it in a modest storefront close to the I-10 freeway, amid discount stores and carpet-cleaning shops. Based mainly on the quality of their products, Escape’s beers and ambience grew in popularity. It expanded into a next-door property and had 10,000 square feet of space, about half of it for a tasting-room and taproom, and half for a game room where, according to Melissa Fisher, they also had live music, private parties, “dog adoptions” and other civic events. This August they had been planning to open a second site in Redlands, with renovation of an an abandoned warehouse building much closer to downtown. They were also preparing for an expansion to the resort-coastal city of Laguna Niguel.

In March, most of their business went away, all at once. No taproom traffic, which had been almost 80 percent of their total revenue. No private events, no live music, no community gatherings—and on top of that, no sales to the bars and restaurants that had been carrying Escape’s beers. “A couple of places even asked if they could send their kegs back,” Melissa Fisher said. “Usually that’s illegal, but the rules were lifted this time”—and they were legally able to re-package some of the product as “beer to go.”

How would they survive? “I think that if this had been in our first year or two, it would have been monumentally bad for us,” Melissa Fisher said. “We probably could not have made it.” But in Escape’s six years of operation, it had built a local following, and the Fishers had saved their profits to invest in their planned expansions (and instead are using them to cushion losses now).

Like Bent Paddle, Escape quickly shifted, mainly to take-out sales. Instead of draft beer poured into glasses in the tap rooms, they would sell beer in cans for customers to pick up. (Side note: a decade ago, I was surprised by the shift among craft brewers from glass bottles to aluminum cans. Now the shift is all but complete. I can barely remember the last time I bought beer that came in a bottle.) It quickly put up a website for online orders of to-go beer and saw many of its longtime customers make that change.

This kept the doors open, but with an unpleasant real-world surprise. In the previous post I mentioned the all-important role of something most beer customers are barely aware of: the beer-wholesalers business. In the case of Escape, the challenging practicality was how hard and expensive it could be for a small operation like theirs to try to switch to canned-beer sales.

Start with the cans themselves. “A big brewer might pay 8 or 10 cents per can,” Fisher said. Because they’re buying in small volume, “We’re paying somewhere between 34 and 74 cents per can, and that’s before we put the label on it”—or the beer into it. “Then you run into the shortages because there’s a rush on everything”—of cans, of labels, of glass growler bottles, of aluminum “crowler” cans. Before the pandemic, state regulators had to pre-approve the labels for canned beer. Now they have waived some of the rules, and Fisher and her team have been filling in part of the label information with Sharpies.

At the taproom, a pint of beer might have sold for six or seven dollars, so a round of four pints would bring in more than $25. Those same four pints, as a take-out order, go for $10 or $12, of which three dollars or more would be just for the labels and cans.

So the Fishers are selling beer but at a tiny margin, which barely covers their costs. Before, with full service, they would typically have six or seven employees on a Friday night. Now, to manage take-out, they have one or two. (Several of the employees have voluntarily reduced their hours, so others can have them.) Escape has expanded outdoor seating, in the parking areas and loading dock outside their tap room. “We’re lucky to have that space,” Melissa Fisher said. “But when it’s 98 to 102 degrees—even when we have cooling machines, even with a beer—not everyone can handle being outside.” Like many other brewers and distillers, they’ve also been selling a line of hand sanitizer.

“What we’re making now, is keeping the lights on,” she said. “And we’ve had a huge amount of support from people who’ve become our friends.” Because of their savings, and adaptability, they expect to keep going, and ultimately to expand. But what they’re doing now isn’t sustainable, she said. “Something has to change.”

Something does. Stories like these deserve notice, in my view, because little businesses like Bent Paddle and Escape have played such an outsize role in bringing vitality and local-connectedness to so many American towns.

Coming next, two other stories, with other implications, from northern Florida and the Bay Area of California. And after the jump, reactions from two brewers.

In response to the item earlier this week, Jim Koch, of Boston Beer Company adds this point. He is discussing the recent change in Massachusetts beer-distributor laws, which his company support even though it will help all local beer companies except his:

I realized there was one major thing I missed in our discussion that makes what happened in MA surprising in a business context.  That is the craft beer ethos that we are as much colleagues as competitors and that if we all act for the good of each other, we will all, in the long term, benefit even if there is short term sacrifice.  

I think that attitude, which often means sharing “trade secrets” and ideas and helping each other out with ingredients or equipment, has been an important part of our success and is rare in US business.  It also makes for a happier professional life if you can look at your competitors as colleagues and friends.  It is exemplified in the craft brewer practice that when you’re having beers with each other, each of you orders the other’s beer rather than your own.  

And, a note from someone on the other end of the craft-brewing spectrum from Koch. This person writes from Florida, and from a small, newish company, but he shares Koch’s concern about arcane distribution laws. He writes:

As a small craft brewer in Florida … we will survive due to the support of our community and our location. Some of my good friends in this industry may not make it. [One reason is …] beer distributors and their death grip on the craft beer industry – it’s important to our overall survival.

We have a very good relationship with our distributor. They are good people and our goals are aligned. But Florida franchise law, as it is, makes me pray these goals remain aligned because should they diverge, just like any Florida brewer – I will most certainly be on the losing side of any dispute. I’d like to see this inequity balanced for the good of the industry.”