Even in a Craft Beer Mecca Like Seattle, Microbrewers Are Struggling

Seattle has long had one of the healthiest craft beer markets in the country, with microbreweries extending from Ballard to Georgetown. But with the rising price of raw ingredients, local brewers have fallen on tough times—and Pacific Rim might only be the first casualty. "What's the plan? Just try to survive," says George Hancock, founder and owner of Ballard's Maritime Pacific Brewing.

Redhook and Pyramid both began expanding dramatically in the mid-1990s. Each went public—Redhook in 1995 and Pyramid the following year—and is still traded on the Nasdaq stock exchange. But both companies' most recent financial reports are dire. In November, Redhook reported swinging from a $364,000 profit during the third quarter of 2006 to a $289,000 loss during the same time period last year. The company has yet to release its full annual earnings, but its stock is still hovering below $5, down from more than $8 last July.

Pyramid isn't doing any better, reporting a one-year loss of $488,000 for 2007. The SoDo brewer was saved from an even more dramatic dive into the red by the January 2007 sale of its Thomas Kemper brand to a Portland-based private equity group for $2.4 million. Nevertheless, the stock has been trading below $2 a share after consistently closing over $4 in February 2007.

Ann Gilpin, a brewing industry analyst for Morningstar, says the problems for craft brewers come down to commodity costs. To brew one keg of Maritime's pale ale, three-fourths of a pound of hops is required. But in 2006 farmers began switching from hops to more profitable crops like corn as the demand for ethanol exploded due to heightened interest in alternative energy. At the same time, the crops that did exist suffered random blows, including a fire that destroyed a 40,000-square-foot hop warehouse in Yakima in the fall of 2006.

Gilpin says that with the cost of business skyrocketing, microbrewers have had to raise their prices to cover rising costs. But in a weak economy, she says, craft brews aren't top priority for expendable income.

Even Manny Chao of Georgetown Brewing (where he brews his eponymous pale ale) says he's a little nervous about his thriving company's recent investment in new brewing facilities. "We're somewhat established; we're doing well," he says. "[But] prices are going to be going up for the consumer."

Gilpin says the next few years are going to be all about finding ways to make the margins work. Despite its challenges, she says, the market for microbrew is still hot. Both Pyramid and Redhook report that sales are up over last year, if not enough to cover the dramatically rising costs. Sales of standard domestic lagers, on the other hand, have been flat. So for microbrewers that can weather the tough times, they'll have drinkers ready and waiting when the business becomes profitable again.

The problem is getting there. Gilpin expects to start seeing some of the microbreweries gobbled up by the likes of Miller and Anheuser-Busch, which has a 33 percent stake in Redhook. "I think you could see more marrying between the big brewers and the craft brewers," she says. "The big brewers want it and the craft brewers are kind of in a pickle."

Gilpin says small brewers determined to stay independent will be reliant on raising prices and having their customers accept the increase. "But you can't raise prices forever." She adds that if hops suffer from additional problems in the future, continuing to push the prices up, she doesn't see many options for staying open beyond selling.

Seattle craft brewers haven't quite hit that point yet. Redhook's approach is to get bigger. In November, the company announced a merger with Portland-based Widmer Brothers. The newly formed company, the Craft Brewers Alliance, will allow the two Northwest breweries to cut costs by sharing expenses like administration and distribution.

Meanwhile, Pyramid is cutting back. Earlier this month, it announced 11 percent cuts in its salaried workforce and a delay in plans to expand in the Eastern U.S. Retail beer prices will also go up.