Microbreweries Growing Through Shrinkage

In this July 25, 2011 photo, beer bottles move along a conveyor belt after being filled at the Flying Dog Brewery in Frederick, Md. The company plans to end shipments to more than a dozen states beyond the east coast in order to burnish its image as a craft brewer and attract more consumers who are interested in buying local. (AP Photo/Patrick Semansky) (AP)

FREDERICK, Md. – Some craft brewers are growing by shrinking.

After years of shipping beer farther and farther away, many small brewers are now shrinking distribution to sell beer more profitably at home.

The strategy reflects the nation's growing thirst for boutique beers from independent breweries that simply can't produce enough to meet the demand of a larger market — so they're putting local customers first.

"The idea of leaving sales territories is not ideal, but demand locally is necessitating it," said Paul Gatza of the Brewers Association, a craft-beer trade group in Boulder, Colo.

It's a good problem for Frederick-based Flying Dog Brewery, known for highly-hopped ales with naughty names like Doggy Style and Raging Bitch. Chief Executive Jim Caruso announced in June the company was halting distribution in 13 Southern, Midwestern and Western states to bolster its position in what he called "the new world of craft beer."

The pullback leaves Flying Dog in 33 states — but probably not for long. In a July interview at the company's brewing plant in an industrial park, Caruso said he aims to shrink distribution further, with a goal of selling 70 percent of Flying Dog's output in Maryland, the District of Columbia and northern Virginia within three years. The region currently accounts for about 50 percent of the 1 million cases Flying Dog sells annually.

"If the market in Frederick were such that we could sell a million cases in Frederick, that would be my strategy," Caruso said.

At the same time, he's considering building a new brewery, three to five times bigger than the current plant. And Caruso figures he can sell virtually all that beer within a few hundred miles of home.

Brewers like Flying Dog are betting on local growth because there are so many drinkers left to convert. Craft breweries — those selling 6 million barrels or less a year — accounted for just 5 percent of the 204 million barrels of beer sold in the United States last year, according to the Brewers Association. A barrel holds 13.8 cases of beer.

And craft beer's growth is heady. Sales rose 11 percent by volume in 2010, at a time when overall beer sales slipped 1 percent, the association said.

Demand is so strong that craft brewers who've spread themselves too thin must ration their beer — supply some distributors and leave others short.

That can get annoying for tavern owners like Kathy Reeder. Her Hempen Hill BBQ in Hagerstown, Md., has a Starr Hill Brewery sign in its front window, but she had none of the Virginia-made beer on tap one recent July night.

She said occasional shortages are acceptable; they can even heighten a brand's mystique. And she wants to support regional craft brewers. But she can't let a tap sit idle too long.

"Sometimes we need to move on to other products," she said.

And there are plenty available. The number of craft brewers has mushroomed from eight in 1980 to more than 1,600 last year. Starr Hill, founded in 1999 in Charlottesville, has at least three newer competitors in northern Virginia alone.

Starr Hill founder Mark Thompson said he'd like to expand production but there's a long waiting list for necessary equipment, such as brewing kettles and fermenting tanks.

"We only have a certain amount of brewing capacity," he said. "We are all evaluating reducing the footprint we have and selling more in our local market. And that's considered a strength, not a weakness."

Pulling back also saves on shipping costs. Brewers and distributors sometimes swallow part of the transportation costs, but the brewers say they mostly suffer because shipping to far-flung states increases the price of the beer to consumers, making their beer less competitive in distant markets.

Eighteen-year-old New Glarus Brewing Co. of New Glarus, Wis., has thrived by selling beer only in its home state since the late 1990s. The company's slogan: "Drink indigenous."

"The idea of continually expanding your footprint and then pretending you're growing your business, I just don't see it," said Deb Carey, the company's president. "How can you say you're growing your business if all you're doing is expanding your territory?"

With annual production exceeding 100,000 barrels and sales running 20 percent above last year, Carey said she's more interested in making good beer and improving the lives of her 60 workers than in shipping beer cross-country.

"As a craft brewer, my goal is to be part of the fabric of Wisconsin, which is my home state and a place I love," she said.

Benj Stein, editor of brewing industry trade journal Beer Marketers' Insights, said craft brewing kingpin Boston Beer Co., maker of Samuel Adams, doesn't need to pull back because it's so well-established nationally. And Stein said big international brewers like Anheuser-Busch InBev NV and SABMiller PLC, aren't losing much to craft brewers because they're a relatively tiny part of the overall industry.

He said the fight among small craft brewers for local sales will produce some winners and losers, with the victors eventually expanding their reach once again.

"Wide distribution — ultimately, I think that would be the preference over time," Stein said.

And even as they strive to become known as your friendly or funky or edgy local brewery, craft brewers know that selling into their backyard is just good business, said Starr Hill's Thompson.

"At the end of the day, we all like to sell beer and make money," he said. "This is not a hobby for me."