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Posted: September 01, 2008

All hopped up but still a ways to grow

Surging sales in Colorado's beer industry tempered by price spikes for ingredients

Jennie Dorris

Last year, Colorado’s breweries faced a unique situation. Big brewers merged, craft brewery sales surged, but ingredients — from malts to hops to glass for the bottles — went through the roof.

Colorado ranks first in the country in overall beer production and, with 92 active craft breweries, the state weighs in as the third largest craft brewing producer of any state. In 2007, the beer industry pumped close to $6 billion into the state’s economy.

The breweries are also spending on themselves — Great Divide Brewing just sank $1.2 million in a new bottling line after seeing 45 percent sales growth last year. Left Hand Brewing just welcomed a new brewhouse and tanks, nearly doubling their output. Oskar Blues built a 35,000-square-foot facility that opened in April and tripled capacity with new brewing and canning systems. And New Belgium announced in June that Fat Tire will be offered in cans.

However, breweries big and small are struggling to keep up with the price of ingredients — hops prices rose at least fourfold, and malt prices doubled. Earlier this year, the rising cost of beer ingredients was one of the reasons cited by Flying Dog Brewery — Colorado’s second biggest craft brewery — to move to Frederick, Md.

Craft beer’s changing economy
Last fall, craft brewers were faced with a sudden hops shortage for a variety of reasons. First, a warehouse fire in Washington destroyed 4 percent of the world's hops crop. Growers also weren't making money on their hops, and had incentives to replant with corn for ethanol. Finally, bad crops abroad had European and Asian breweries buying U.S. hops.

The end result is that breweries have seen prices jump from $6 a pound to $30 a pound. This year, 8,000 new acres of hops were planted in the United States, but due to the worldwide shortage, farmers are growing bittering hops rather than aroma and flavoring hops as favored by craft brewers.

"This is really hitting breweries hard," says Paul Gatza, director of the Boulder-based Brewers Association.

Marty Jones, director of publicity and marketing for Lyons-based Oskar Blues, says the shortages were a surprise. "Right when we’re in the throes of building a new brewery we got blindsided — no one saw this coming."

Hops haven’t been the only problem — Europe and Australia have both suffered from a drought that has affected the volume of harvestable barley. Also, because corn has been associated closely with ethanol production, it was moved out of the livestock and feed market. Barley and oats moved into the category to replace it, resulting in less barley available for brewing purposes.

Finally, Gatza says there’s "another shoe to drop" with barley. There is a limited malting capacity, he says, because there isn’t interest in building new malting facilities until there’s a guaranteed 95 percent capacity on a new facility.

Brian Dunn, president of Great Divide Brewing, says the hops shortage more than just raised prices; the two new beers Great Divide was scheduled to release this year had to be shelved. And while the Denver company raised prices 50 cents per six pack, the additional cost for consumers doesn’t offset the costs the brewery is facing.

"It’s a tough environment to do business, but it’s not tragic. It just means we’ll have a margin squeeze," Dunn says.

Despite the setback, Dunn doesn’t have any intentions of changing his ingredients. After all, Titan IPA, one of Great Divide’s hoppiest beers, is the fastest growing beer for them. "We’re still going to make our beers the way we want to make them," he says.

Chris Lennert, director of sales and marketing for Left Hand Brewing, says it has raised prices in 2008 and will raise them again in 2009. However, Lennert says the Longmont company is still up 30 percent for the first six months of 2008. And it’s not worried about the hops shortage in terms of its new beers — Lennert promises Left Hand is hard at work on a new IPA.

Charlie Papazian, president of the Brewers Association, says he hasn’t seen major fallout from the hike in ingredient prices.

"There are some businesses thinking of starting up that may delay their business plans to wait until things stabilize," he says. "I think the craft brewers have been enjoying 12 percent growth for the last two or three years, and with a year as tough as this one I think we’ll be happy to see 6 percent growth."

Papazian thinks brewers will find sustainability in the recent push to buy local.

"I think people are not just thinking that they like the taste — they also can relate to the personality behind the label, the personality of the company," he says.

Merging big beers
The market didn’t just change for craft brewers — this summer InBev acquired Anheuser-Busch and formed the world's biggest brewing company. The merger brings together Budweiser, Michelob, Stella Artois and Bass. Miller and Coors also merged operations this July, and the joint venture is now known as MillerCoors. Miller’s sales have been down across the board, while Coors has seen success with almost all of its brands.

Anheuser-Busch InBev has to sell off $7 billion worth of assets to make this work, Gatza says, and this may mean that Anheuser-Busch’s theme parks and resort properties are soon to be a thing of the past.

"We’re seeing a time when there’s some uncertainty because of mergers and joint ventures," Gatza says.

Gatza predicts that consumers will see Budweiser promoted internationally, but domestically beer drinkers will start to see Stella promoted on tap at bars and restaurants. Miller, in turn, is going to reframe MGD Light as MGD 64, a 64-calorie beer.

Speculation has it that SABMiller would like to be acquired, and Gatza hears rumors that InBev may be interested in SAB, and Miller may be sold to Coors.

"Just because we had some changes now doesn't mean it’s over yet," he says.

Creative collaborations
Craft beers are getting increasingly more creative as they try to find new consumers, and one of the most successful trends is the pairing of beer and food.

"Five or 10 years ago this was a notion that very few restaurants would consider," Papazian says. "Now some of the top chefs in the country are realizing that accompanying meals with special kinds of beer can create a really enjoyable experience."

Dunn says Great Divide has been on board with pairings, scheduling them twice a month at the brewery’s tasting room and pairing six beers with six cheeses, chocolates or meats. Lennert says that Left Hand has done beer dinners around the country. Avery Brewing also has been instrumental in promoting beer-and-food pairings, and the Great American Beer Festival in Denver, scheduled for Oct. 9-11 this year, has started featuring a beer-and-food pairing demonstration as a regular event.

"Wine has a fraction of the taste of a gourmet beer," says Jones, and adds that Oskar Blues does a beer-and-food pairing monthly.

Breweries have also gotten creative by collaborating with other craft breweries. New Belgium and Elysian Breweries have started what they're calling an "artisanal collaboration" — and plan to brew their individual beers using each other’s facilities.

"I think we’ll be seeing more of that — particularly with transportation costs. You can get labels and ideas to another part of the country without leaving a gigantic carbon footprint," Papazian says.

Other collaborative ventures have been even more creative. When Avery Brewing and Russian River brewing discovered they both have beers called Salvation, they decided to work together on a "Collaboration Not Litigation" ale. Left Hand is starting a collaboration with Terrapin Beer Co. to produce a black rye lager called Terra-rye’zd to be released at the Great American Beer Festival.

With the annual Great American Beer Festival and a growing number of microbreweries, it's never been a question that Colorado is one of the hubs of the craft-brewing scene. After Time magazine called Colorado "The Napa Valley of Beer" this April, it seemed the name had finally stuck, and Colorado was more than a hub, it was a trendsetter.

Dunn says Great Divide has benefited from the press. "We now see people who travel to tour breweries to taste beers," he says.

Jones was hoping for a different title.

"I’d like to be called the Garden of Eden of craft beer," he says. "To me, this is where it started, and there are riches of liquid temptation."

Great American Beer Festival
When: Oct. 9, 10, and 11
Where: Colorado Convention Center, 700 14th St.
How much: Individual tickets, $50
More information: www.greatamericanbeerfestival.com

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