Is Minnesota brewing a craft beer bubble?

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Could the Twin Cities become the beer-crazy Portland of the Midwest? Getty Images/iStockphoto

Craft brewing used to be quaint. Its brewers were humble artisans. Its beer was a congenial good, like hand-knit mittens or organic squash. Then the gold rush hit.

Minnesota is a boomtown. Growth of 355 percent over five years. Breweries opening at a rate of 30 per year. Drink menus lengthening to absurdity with IPAs, double IPAs, and Belgian IPAs — all made within a 10-block radius.

Today, there are nearly 120 breweries in Minnesota, two-thirds of them opened since 2011. Since then, production has more than doubled from 308,000 barrels per year to nearly 632,000. In 2014, breweries brought in $1.3 billion in sales. That’s nearly half of what iron mining contributed to the local economy the same year.

Beer halls are sprouting like mushrooms in every corner of northeast Minneapolis and West Seventh in St. Paul and spreading deep into suburbs like Eagan, Lakeville, and Burnsville. And when you’re not hearing about a brewery opening, you’re hearing about an existing one like Fair State, Surly, or Fulton adding exponents to their output.

Any armchair economist can tell you that all booms go bust. And nothing’s booming in Minnesota like craft beer. With all that golden ale flooding into the marketplace, it’s gotta be too good to be true.
Right?

Garage to Glory

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Will Hubbard started Broken Clock Brewing Cooperative in the kind of garage where you’d expect to find lawn darts and bowling trophies.

He bought his first brewing system on deep discount from Groupon in 2010, and it wasn’t immediately clear whether the stovetop kit would end up alongside the other relics of junked hobbies in the carport of his Oakdale rambler. It didn’t. Hubbard took to brewing like he never did to woodworking or welding, developing a pretty mean Oktoberfest in the process.

This January, he’ll walk away from his full-time marketing gig and move his operation — everything but the lawnmower and his pale-eyed Husky, Skye — into 56 Brewing’s current location in Northeast.

When it finally does open, Broken Clock won’t stay Minnesota’s newest brewery for long. In today’s beer economy, that title turns over like a dryer drum.

“We’re at around 118 [breweries] for Minnesota, and that’s exciting to see,” says Hubbard, enjoying one of his Oktoberfests on his deck. “You don’t hear about a lot of them dwindling or closing, only expanding. It’s almost shocking to believe that.”

Hubbard’s estimation of local breweries is close to right. It’s hard to say: The proliferation moves faster than the beer press can tally. But in 2016, the number surpassed 112, bringing Minnesota to its highest total since the term “craft beer” was coined in the ’80s.

It’s a high-water mark for a cresting business. Craft brewing is a $22 billion enterprise in the United States. Yet even those sales don’t seem to be enough to persuade Joe Six Pack that the whole industry isn’t about to fall on its ass.

Bubbling Up

Adults in 2016 are primed to be economic skeptics. No decade epitomized boom and bust like the 1990s, which started only three years after the largest single-day stock market crash in history.

Then, the dawn of the internet came, bringing with it the promise of a new, recession-proof economy. Investors gobbled up every IPO from eBay to Pets.com, handing out ludicrous valuations based on blind faith. Tech turned out to be a false savior. The bottom fell out of the market as share prices plummeted. From 2000-2002, investors lost a total of $6.2 trillion. The bubble had burst.

After the failure of the New Economy, Wall Street went back to the old one, taking only five years to destroy one of the sturdiest, most reliable markets in American history — real estate. Speculation-driven investment brought home prices to an all-time high, well exceeding value, leading to mass default and foreclosures and, ultimately, the loss of over $6 trillion in household wealth.

No wonder then, with breweries opening at a rate of two a day, people are bracing for beer’s Big Short moment.

The long shadow of the dot-com and housing crashes keeps the word “bubble” on the lips of every American consumer. Financial publications actively encourage this talk. In the last few years, Fortune, Business Insider, and the Wall Street Journal have all speculated about a large-scale collapse in the brewing business. “As any college freshman knows, even the best keg party is often followed by a brutal hangover,” Business Insider quipped in 2013.

And yet most people have a pretty hazy idea of just what a bubble is.

In economic speak, a bubble (or “speculative mania,” if you wear a bowtie to work) occurs when something’s price differs significantly from its value. In the words of prim Nobel laureate and New York Times economist Paul Krugman, a bubble is “a situation in which asset prices appear to be based on implausible or inconsistent views about the future.”

Put simply, it’s whenever something costs more than it should — and then suddenly doesn’t. With both the dot-com and housing bubbles, the fantasy of unlimited return made people rush into investment, only to have their investments suddenly become worthless.

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Fulton Brewing has grown so much, it was legally obliged to cease growler sales.

“We’re all used to anything good [resulting in] a bubble,” says Jeffrey O’Brien, a Minneapolis-based business lawyer who specializes in brewery law. “I think people just want to put a name on or explain what’s going on here. I think what’s actually going on is a paradigm shift.”

A Brewing Deficit

In 1965, when Fritz Maytag bought Anchor Steam Brewing, the brewery had $128 in its bank account. Forty-five years later, Maytag unloaded it to the booze tycoons behind Skyy Vodka for an undisclosed bounty. Late last year, California IPA pioneer Lagunitas sold half its business to Heineken for a speculated $500 million.

Two months later, Constellation Brands (which owns Corona and Modelo) bought San Diego craft powerhouse Ballast Point outright for a billion.

That same day, popular music streaming service Rdio was acquired by Pandora for $75 million. We now live in a world where a Silicon Valley entertainment startup is worth only 13 percent of a good craft beer. It’s certainly bubbly behavior, but O’Brien urges people to think rationally.

“It’s still a very capital-intensive, highly regulated business,” he says. “Every homebrewer on the planet would be starting a brewery if there was a bubble. That’s not the case.”

“Bubble” is a lazy term. One Forbes writer remarked that “it would be hard to find a more worthless word” in economic criticism. O’Brien helped build Dangerous Man, Lift Bridge, Insight, and Urban Growler into top-order local brewhouses, and he knows firsthand how fast things are moving. But he also believes the growing brewery scene is a sign of maturation, not a harbinger of the financial apocalypse.

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Surly Brewing Co. founder Omar Ansari, at left, on opening day of his $34 million "destination brewery."

“I’m not having as many breweries coming to me wanting to open as in years past, and that’s contrary evidence of a bubble,” he says. “We’re not opening 50 breweries a year in Minnesota anymore, we’re getting to the right point.”

The current population can certainly sustain the amount of beer hitting shelves and tap lines. That’s because, unlike in a bubble, supply still lags demand. We’re running a craft beer deficit.

Before Prohibition, there were roughly 112 breweries in Minnesota servicing a population of 2.4 million (one brewery for every 21,429 people). Now, 118 breweries serve 5.4 million (one brewery for every 45,763). And a larger portion (about 40 percent, according to Gallup) of our populace is drinking beer today than ever in history.

Local brewers are constantly forced to say no to orders because they don’t have the capacity to fill them. Rob Miller began Dangerous Man intending to distribute kegs and cans, but his taproom was so successful that he couldn’t brew enough beer to keep his own lines flowing. The market told him to keep his operation on premise.

Successes like Miller’s have primed gads of entrepreneurs to swoop in and fill the demand he couldn’t. That has been the drive behind the brewery wave. O’Brien admits that the scene is saturating and that the public is fatiguing, but it’s positive for brewers either way.

“Put it this way, the novelty has worn off,” he says. “Because of how sharp our first wave of craft breweries was and is, they set the bar high for those who came behind them. And that’s a good thing.”

Unshaken by the Shakeout

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“Right now, we have a certain degree of arrogance from people who are making beer,” Summit founder Mark Stutrud says.

Tod Fyten speaks in eras. The owner of the Fytenburg, Mantorville, and St. Croix Breweries has been an authority on the beer industry for 32 years. He cannot contain the history he’s accumulated — it unspools out of him in lengthy, detailed yarns.

When asked whether he believes craft brewing in Minnesota is a bubble, he answers for 17 minutes uninterrupted. His anecdotes about his halcyon days with James Page Brewing in the ’80s segue into his experience co-authoring the Surly Bill in 2011. Names like Jim Koch, Jacob Leinenkugel, and Fritz Maytag fall out in non-sequential asides. When he’s finished, he breathes in hoarse gasps.

The gist: He’s not convinced.

“What’s happening right now is that the finance people are analyzing things from the outside in,” Fyten says, pausing for a breath. “They look at it from 30,000 feet down. What they’re seeing is the raw numbers: that we were at 16 percent growth in the first half of last year, and now we’re at 8 percent, and they’re like, ‘Oh my god, the sky is falling, it dropped by half!’”

As the publisher of Brewer’s Digest, Fyten has documented one craft beer crash before. Known colloquially as “The Shakeout,” there was a sudden and dramatic failure in the beer industry that took place in 1996.

From the mid-’80s, when stalwart breweries like Anchor Steam, Samuel Adams, and Summit Brewing were opening, until 1995, craft beer grew at an average rate of 52 percent per year. There was wanton buy-in, with investors throwing money and commercial-grade equipment at any brewer they could find in hopes of turning a profit.

In 1996, growth fell to 25 percent. The next year, 2 percent. Then 0 percent. From 2001 to 2006, the number of breweries in America actually decreased — the first negative growth period since 1978.

Bubble. Burst.

“What we saw in the ’90s was wholesale liquidations — businesses literally failing and being sold for 10 cents on the dollar,” Fyten says. “When you start seeing that, that’s when you know the bubble is here and it’s burst.”

During this time, Fyten remembers going to an auction in Chicago with eventual Lakefront Brewery president Russ Klisch. Klisch had missed out on scoring a shuttered brewery’s 50-barrel kettle and was bummed, but Fyten reminded him that, with the way things were going, a better deal was liable to come along.

“A few months later, he went to an auction in Pennsylvania and bought a beautiful 50-barrel brewhouse from Germany that these guys had brought over without knowing what the hell they were doing and went bankrupt in the first year,” Fyten recalls. “He was the only brewer to show up at the auction. Everyone else were scrap dealers.”

In 2015, 617 microbreweries and brewpubs opened nationally. Only 67 closed, a failure rate of 11 percent. In Minnesota, only three breweries (Stillwater’s Staples Mill Brewing, Walker’s Leech Lake, and Dubrue Brewery in Duluth) have closed in the last five years, giving a local success rate of 95.7 percent over that period.

By comparison, tech startups fail at a rate of 90 percent, and people have been calling Silicon Valley a bubble since 2002. Restaurants and bars fail at a rate of 60 percent within the first year alone.

“The big problem before was there were too many people with no experience,” he says, recalling a convention in Boston in 1997. “All of a sudden, the suits show up. I’ll never forget, I walked in with Larry Bell from Bell’s Brewery, and he looked at me and said, ‘Gentlemen, this is the end of the beginning.’”

The same sharks are already sniffing at the beer industry again, but Fyten thinks memories of the Shakeout have spooked enough capitalists to stem another mass fallout. There’s no guarantee of success, but he assures that the industry is tempered to endure some loss when it inevitably comes.

“Some will struggle. There will be difficult days ahead for some. There will be challenges, but the industry will evolve and work through it.”

Portland of the Midwest

Place your finger on a map of the United States. Right at the corner where the U.S. meets Canada and the Pacific. Swipe downward, all the way to Mexico.

This is the American Beer Belt. It holds 903 breweries across nearly 1,400 miles. In 2014, this stretch accounted for over a quarter of all the operating breweries nationwide, including billion-dollar snatch-ups Lagunitas and Ballast Point. The nucleus of this beer-flush region is Portland, Oregon, the most mature beer town in America. It’s rumored that 53 percent of the beer consumed in Portland is brewed in Portland. It’s a town where craft beer sales make up almost half of total beer purchases.

In 2002, Omar Ansari looked at Minneapolis and wondered why it wasn’t the same.

Sure, there was Summit, which even then was ubiquitous, but there was no true craft beer culture. Ansari founded Surly Brewing as just the second craft brewer in the state with the hope of turning the Twin Cities into a destination for beer nuts — a landlocked PDX.

But he’d need to change some laws first.

Passed in 2011, the Surly Bill was the single biggest piece of alcohol legislation in state history. By allowing breweries to serve their product on premise, the bill destroyed the single biggest barrier to entry for new brewers — namely, distribution. The effect was like pulling the keystone out of a breaching dam. Over the next five years, the number of operating breweries in state tripled.

“It was obvious after traveling around and seeing what was going on around the country, you knew that was gonna happen everywhere,” Ansari says. “Whether you like all the craft breweries or not, it’s certainly a more vibrant, interesting scene than five years ago, and having all those breweries is part of it.”

By successfully reversing the anti-taproom laws and building a $34 million landmark taproom in Prospect Park, Ansari knew he’d be setting the jumper cables to a Minnesota tradition that had flatlined with the Volstead Act. What he didn’t predict is that, no more than a year later, the public would be throwing their hands up and calling the whole thing a bust.

“Are we in a bubble? Are we gonna burst? That question’s been going around for a few years,” Ansari says. “In Portland, the percentage of craft beer drunk in town is over 50 percent. I don’t know what [the percentage] is in the Twin Cities, but say we get to 50 percent, we wouldn’t have enough breweries.”

According to the Brewer’s Association, 5 gallons of craft beer are produced per adult Minnesotan annually. In Oregon, it’s 11.3. In Colorado, 14.1. Even the pacifist hamlet of Vermont trounces Minnesota’s output at 17.4 gallons — despite the fact that their largest city has roughly the population of Mankato and its core demographic is 30-year-olds who ride longboards to work.

Minnesota doesn’t even place in the top 10 of breweries or production per capita by state. It hasn’t since 2012. If we were to continue at our current rate of 11 percent growth, it’d take roughly 30 years to catch up to where Oregon is now.

But a hell of a lot can happen in 30 years.

In 1986, Minnesota craft brewing didn’t exist. It took the wherewithal of bullish North Dakotan Mark Stutrud to kick off the movement that Ansari would later galvanize into a phenomenon.

Setting up shop in an old auto parts warehouse on University Avenue, Stutrud established Summit Brewing as the first craft brewery in Minnesota. Thirty years in, Summit is the second biggest beer producer in Minnesota and the 29th largest by volume in the nation, distributing to 14 states. Though Summit now shares its home state with 117 competitors, they’re the only locals putting grain to glass with a national and generational outlook.

And that kind of perspective can make you a little wary of the prospectors rooting around your backyard.

“Right now, we have a certain degree of arrogance from people who are making beer,” Stutrud says in a tempered drawl. “It’s a very short-term focus. There are people who are getting into the business who are saying, ‘Oh shit, all I need to do is get a cool beer, sell it for a couple years, and I’ll flip it.’ Like they’re redoing blighted real estate.”

It’s worth noting that none of our local brewers has actually flipped an operation to turn a profit. But Stutrud’s concern is that, like in the ’90s, people are rushing to market to try to strike it rich. Or that they’re taking advantage of the locavore’s natural trust of all things homegrown to prop up a shoddy business.

Either way, he’s adamant that people coming into the beer world need to think well into the future. The greatest threat he sees of a bubble or another Shakeout is posed by owners who focus on just getting the doors open and winging it from there.

“When one of these new brewers comes up to me and says, ‘Hey man, this is like jazz,’ I look at that person, and I say, ‘You are totally fucked up,”’ Stutrud says. “Jazz is the most structured form of music that we know. Being trained and knowing the fundamentals of music gives you the base to innovate and improvise. Are you telling me that Miles Davis never did rehearsals to do 'Kind of Blue'? Get the fuck out of my face!”

Stutrud doesn’t name names, but he assures that there is substandard beer entering the market, just like in the late ’90s. Summit’s dogma is quality over pizazz, consistency over cachet. These principles are buzzkills to folks leaping from basement to market on raw ambition, but it’s the key if Minneapolis/St. Paul ever wants to be in the same conversation as the West Coast.

Last year, Summit hired quality manager Rebecca Newman. A 31-year veteran of the industry, Newman helped build Sierra Nevada, Samuel Adams, and Dogfish Head into national brands. She knows the right way to turn a go-kart into an Indy car.

“I don’t think we necessarily have too many breweries, but breweries need to put out good beer,” Newman says. “I’m really appreciative of all these homebrewers that are now becoming national brewers, and I’m asking them, ‘Well, what’s your education? Where did you learn that?’ because there’s so much that they don’t understand about the technical merit that’s required to be a packaging brewer.”

Newman isn’t sure there’s a true bubble. She’s experienced enough to know how detached that word is from reality. It didn’t mean anything when the market dove in ’96, and it doesn’t mean anything now. The perils of the industry are the same regardless of the economic jargon you use to describe it.

“I wish we could reframe the entire conversation,” Newman says. “I think you’ll see an implosion rather than an explosion. The brewers that come in with the arrogant attitude of, ‘I’m this award-winning homebrewer’ or ‘I kicked ass at this other brewery for 12 months, and now I’m over here,’ it’s like, OK, what do you bring to the table? Where’s your education? That is gonna sell beer into the future — it’s technical merit.”

Broken Clock, Perfect Timing

The sky is purpling in Oakdale as Hubbard, his wife Stephanie, and their Broken Clock business partner Jeremy Mathison switch from beer to coffee. Moths tap against the sliding door as the sun gradually disappears, the dog reclining beneath Hubbard’s chair. It’s the kind of drowsy afternoon where the three would meet to look at the brewing world and determine whether they had something to add.

As Anheuser-Busch and SABMiller have proven in their desperate $101 billion merger, the time of the international mega-brewer is coming to a halt. The slowdown to 8 percent growth that has amateur economists sweating can largely be attributed to big breweries losing market share to community taphouses like Broken Clock Brewing Cooperative.

“Craft brewing is rising while the rest of the industry is falling, and to me, that’s an indicator that we’re not approaching a bubble,” says Stephanie Hubbard, who heads up community outreach at Broken Clock. “I don’t think every single brewery that comes up will succeed, but I think people are hungry for breweries that serve a niche.”

Stephanie is a music therapist in the St. Paul public school system, and she’s not giving up that vocation this winter when Broken Clock cuts the ribbon. But she’s found that working with the brewery has invigorated her love of community.

“I’ve always had this heart for service,” she says. “A lot of brewers I talk to don’t care if they get big. They just wanna brew good beer and succeed in their community. That just made sense to us.”

Broken Clock will sell growlers, but they won’t can or bottle their beers. The 750-square-foot former paint warehouse they’re moving into doesn’t have a taproom, so they can’t even pour pints. They’re basically trading a two-car garage in the ’burbs for a three-car garage in the city. It’s not much, but it’s enough to get their beer to the people.

The start-up’s commitment to community is its business model. As a co-op brewery — the second in Minnesota after the hugely successful Fair State — it’s funded and governed by member-owners, all of whom have a single vote in the future of the business.

“We’re not really beholden to making a certain bottom line,” says Mathison. “As long as we make enough beer to sustain our operation and provide the members with what they need, that’s all that matters to us.”

Like 56 Brewing before it, Broken Clock has ambition that outsizes these 750 square feet of brewery. Hubbard and Mathison fantasize about owning a farm and making farm-to-table brews. But they’ll let the market — and their customers — decide when and if that happens.

“[Beer] is such a communal thing,” Mathison adds. “It’s like coffee shops. You can have coffee shops pop up everywhere because it’s more of a gathering space and a social environment than it is a product.”

When asked if they’re worried about the bubble bursting, the three shake their heads wearily. Sitting on the porch ’round back from the garage, they know they left the easy days down in the driveway next to the soldering iron and jigsaw. Perhaps once they’re up and running that pervasive cultural dread will seep in.

But first there’s beer that needs making. 


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