"It's a Crazy, Cards-Stacked-Against-You Industry"

Discussion in 'Beer News' started by JackHorzempa, Jun 19, 2019.

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  1. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    “This week, TrimTab CEO Harris Stewart published a long, impassioned blog post on the company’s website, entitled “Join the beer business they said. It’ll be fun they said.” In it, he laments the difficulties inherent in the modern beer industry that spring from the confounding system of hop contracts, which routinely require breweries to plan their exact hop needs years in advance. Obviously, this is near impossible in an industry where trends flare to life seemingly overnight, making one varietal suddenly “must have.”

    Using TrimTab’s highly sought-after The Original 006 Hazy Double IPA as an example, Stewart explains why the company is only able to both produce the beer in small quantities and exclusively sell it via their own taproom. To do it any other way would be accepting losing money on the beer. He says the following about trying to acquire enough Galaxy hops to make The Original 006 in the first place…”

    https://www.pastemagazine.com/artic...ewing-ceo-on-confounding-hop-shortages-i.html

    Cheers!

    @honkey @SierraTerence @BillManley @brianhink @SixpointMikey @RobH
     
  2. officerbill

    officerbill Pooh-Bah (2,228) Feb 9, 2019 New York
    Pooh-Bah Trader

    From the blog (any emphasis is mine)
    Well yeah. Commercial growers need to know in advance the varieties and amounts to grow. Farmers aren't going to plant their crops "on spec". If the brewer guesses wrong about the hop demand they can change the formula or brew less; if the farmer guesses wrong he could go under.

    Maybe he should base those decisions on market analysis rather than relying on a gypsy fortune teller
    Seems like a good reason to use the secondary market he's complaining about.

    Unless you still have 4 years left at $7/lb on that suddenly hot hop that's more selling for $14/lb, then it's the farmer & wholesaler taking the hit.

    hhmm, if only he had renewed the contracts to lock in a guaranteed supply of an ingredient crucial to his most popular product.

    I don't have a business degree either, but I’m pretty sure somewhere in the curriculum it says "mage sure you have a steady, reliable source for the essential components of your product".

    I sympathize with him, but he took a gamble on the price and availability of Galaxy hops and lost. Sell off some of those "thousands of pounds of hops" on storage to offset the increased cost of the Galaxy.
     
  3. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    “Obviously, this is near impossible in an industry where trends flare to life seemingly overnight, making one varietal suddenly “must have.”

    I suppose we could ‘debate’ about which aspect of the beer industry should shoulder the burden of the risk here. At the moment it appears to me that it is predominantly the breweries who accept the lion share of the risk as regards which will be the ‘popular’ hops this year and for the next x years. This seems to be a particularly onerous thing for small breweries.

    Perhaps there could be a better way to distribute this risk between various facets of the beer industry: breweries, hop brokers, hop farmers?

    Cheers!

    P.S. Needless to say but the fickle nature of we end consumers who are constantly seeking the next ‘shiny new thing’ are a significant part of creating this challenging business dynamic.
     
  4. Alexmc2

    Alexmc2 Pundit (808) Jul 29, 2006 New Hampshire

    Nailed it. Learn business friend, this isn't a hobby, its a business and one in an extremely competitive industry. Want to make cool beers and not have to worry about profit? Homebrew.

    The steps to being a successful business include more than the ability to simply make your product well. You must know your customer, manage your supply chain and plan. Sorry that it isn't sunshine and rainbows. Sorry if I sound super harsh about this, but I see so many dreamers and former hobbyists in this industry trying to make a go at it without knowing what the heck they're doing. You're about 10-15 years late if you're entering this industry as a "former homebrewer trying to make it big".
     
  5. MNAle

    MNAle Initiate (0) Sep 6, 2011 Minnesota

    ... or, stop using the OSIO inventory management system.

    Selling on contract is not uncommon in several agricultural commodities. The farmer is not risk-free here. In addition to "selling low" that @officerbill mentioned, if he has a crop failure, he is still under the contract to supply the amount of product he agreed to.

    I'm sorry, but that whole screed reads more like "poor ol' me" whining. Man up and run your business.
     
  6. Alexmc2

    Alexmc2 Pundit (808) Jul 29, 2006 New Hampshire

    In terms of risk, without those futures contracts, the farmers have no incentive to plant the fields. In year 1 (link) the yield is zero for a given field. Year 2 its 50%, year 3 -75% with full yield only in year 4 or 5! That's a resource being tied up for 5 years! Meanwhile, the farmer could be growing ::insert cash crop here:: in the same field and have a harvest in year 1.

    Farmers can't bear that risk, breweries must as they're the buyers here. This is part of the reason you see consolidation in the industry right now. Access to the best ingredients takes buying power and planning. In my opinion, raw materials are a fraction of the COGS for beer as a product though, with the majority going to labor and energy (plus distribution and packaging of course).
     
  7. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    I am well aware since I grow my own hops.
    And I would not suggest that solely on their own they should.
    And that is certainly how it is now (as I understand it). I was merely asking if perhaps there may be a 'better' way going forward where the risks are distributed.
    That is indeed the case for a number of beer styles. For example the AAL beer style's cost is not driven by the cost of hops. Now, for a small brewery making 'NEIPA' type beers I would disagree with you that hop costs are not a big concern. As a homebrewer I recently became aware of Galaxy hops being available via Yakima Valley Hops but I personally chose to not buy them since they were too damn expensive.

    You are a wizened beer industry person, do you have any other ideas on how this issue can be addressed? Or is is the 'answer' F@$% the small breweries?

    Cheers!
     
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  8. emannths

    emannths Initiate (0) Sep 21, 2007 Massachusetts

    Brewers have plenty of ways to mitigate this risk. They can change recipes. They can contract for hops. They can buy hops on the spot market. If the supply chain risk is so great that it puts the brewery's profitability at risk and the brewery does nothing to mitigate that risk, that's simply bad management.

    Brewing may be something like art or science, but running a brewing company is an exercise in management and finance.
     
  9. rgordon

    rgordon Pooh-Bah (2,701) Apr 26, 2012 North Carolina
    Pooh-Bah

    Your last sentence is a big story about the business for many years..
     
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  10. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    They can indeed do this and this will 'work' as long as the customers are willing to purchase these 'changed' beers. But... the customers want 'sexy' now so...
    And if they enter a multi-year contract (which is the way it works as I understand it) and those hops are no longer considered 'sexy' by customers they are 'stuck' with thousands of dollars of 'inventory' which is not something they can readily utilize (or sell off to other breweries).
    Which can result in unprofitable beers like Harris Stewart discussed concerning Original 006 Hazy Double IPA.

    If your thought is the status quo is OK then so be it for you.

    Cheers!
     
  11. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    But that is the case for many industries. The customer (fickle or non-fickle) demands to be served and the businesses that succeed are the ones that best serve their customers.

    Perhaps there is way to systemically improve this particular situation for the beer industry? Since you have some experience in the beer industry, do you have any ideas as to how best 'manage' the aspect of hop supply?

    Cheers!
     
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  12. emannths

    emannths Initiate (0) Sep 21, 2007 Massachusetts

    If you need to have the sexy hops for your business to be successful, you need to figure out a way to get them at a price that makes sense. Otherwise you have a bad business. I think that status quo is fine.
     
  13. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    But what is considered sexy in 2019 is not what is considered sexy in 2020. And the sexy hop of 2020 is not longer sexy in 2021.

    How does this 'work' when breweries are obligated to enter into 5 year contracts?

    Cheers!
     
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  14. emannths

    emannths Initiate (0) Sep 21, 2007 Massachusetts

    If your business is built around getting sexy hops, and you need to sign 5 year contracts, and you can't predict what the sexy hop will be 5 years out, it sounds like you have a bad business.
     
  15. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    I suppose you could conclude that small breweries today = "bad business"?

    I personally am not prepared to reach that conclusion.

    Cheers!
     
  16. Alexmc2

    Alexmc2 Pundit (808) Jul 29, 2006 New Hampshire

    I don't think the answer is F%* 'em. However - you can't expect to compete in the new hotness of a trend with an under capitalized brewery. The answer on the brewing side is innovation. Can't buy Galaxy hops? Well, find something new and different - maybe its utilizing an older hop varietal in a unique way. Maybe its kettle sours or a novel yeast strain. If their only method of competing in the industry is copying a trend at a higher cost of production, should the company really be around?

    Again, harsh, but you have to innovate, plan and be well capitalized in this industry.
     
  17. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    That is a potential strategy but unless you can accurately predict that Strata hops will be the next 'BIG thing' for the following 5 years and you quickly establish a hop contract...
    I have attended a number of presentations where industry folks encourage new, small breweries to 're-discover' Cascade hops but for every local small brewery that tried this there just was not enthusiastic response from their customers. The customers simply do not want that old 'Sierra Nevada' hop,
    I have seen some local small breweries try this but again just not an enthusiastic response from their customers. Their Gose beers will sell a bit during the summer but then... The beers brewed with Kveik yeast strains have been hit or miss with the customer base (mostly miss).

    What the customers want right now are 'NEIPA" beers brewed with Galaxy (or similar) hops. Will these be the high demand beers in 2020, 2021,...? Who really knows but small breweries know what their customers want now.

    It just seems to me that some distribution of risks would be of benefit to the beer industry, an overall benefit to all.

    Hopefully some other BAs will have some good ideas on this specific topic.

    Cheers!
     
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  18. emannths

    emannths Initiate (0) Sep 21, 2007 Massachusetts

    No, I think it's a bad business to run a brewery that's only successful if it can source sexy hops and you don't have some secret sauce for getting those hops. But most breweries (including TrimTab, I expect) don't actually fit that description--they are perfectly able to make do with what they can get at reasonable prices. Heck, even TrimTab was able to make it work--they just withheld it from distro.

    Also, for every loser there's a winner. The winners here are likely other breweries that bought Galaxy futures, so it's not like the industry as a whole is really suffering.
     
  19. Jaycase

    Jaycase Grand Pooh-Bah (3,858) Jan 13, 2007 Illinois
    BA4LYFE Society Pooh-Bah Trader

    From an IPA perspective, what's sexy now (and has been for some time) is haze. I don't think the hops are as critical to haze success as to other qualities such as mouthfeel, haze level, etc. Sure, folks love galaxy and nelson but I don't think not having these hops in a haze is putting a damper on haze sales.
     
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  20. JackHorzempa

    JackHorzempa Grand Pooh-Bah (3,375) Dec 15, 2005 Pennsylvania
    Society Pooh-Bah

    The hop varieties that are utilized to brew 'NEIPA' beers are indeed critical. Hops like Galaxy provide the quality of "juicy" as well as the polyphenols they provide lead to the permahaze of these beers.

    Cheers!
     
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