The tasks involved with being an entrepreneur in a relatively new
area of business were sometimes daunting, yet Egelston plunged in as he had grown tired of
working in the large, structured, bureaucratic environment of the New York City School
System. The pull for him was the opportunity to build something from the ground up.
"Part of it is still a kind of ineffable thing. It's an art, it's a craft. It comes
down to aesthetics. How does the beer look? How does it taste? How does it feel in your
mouth as you're drinking it? For a new business like this to succeed there is an element
of being in the right place at the right time and during the early years they really had
to make it up as they went along, relying on few models. He said "the marketing,
sales, financial, production and distribution issues are considerable."
His third endeavor, Smuttynose, was created from a buy-out of a
bankrupt small craft brewing company in Portsmouth, NH. In 1994 a colleague told him that
the SBA had foreclosed on the Frank Jones Brewing Company and he took a risk and entered a
sealed bid for the assets of the then defunct brewery. By that year, however, the brewing
industry had begun to change and they could not at that point anticipate the changes that
are now taking place in their part of the beer industry, so while this brewery is very
successful the market for brew pubs has changed since they first began.
Egelston knows a lot about the history of brewing in the U.S. He
says "at the turn of the century there were close to 2,000 operating breweries. There
were two things that happened that reduced the number to the point where by the late 1970s
there were fewer than 40 operating breweries and most of those were producing a very
similar style of beer, a light American pilsner style which is typified by brands like
Budweiser, Coors, Strohs and Miller. " The recent growth of small breweries "is
actually to some extent a return to patterns in the brewing industry that had been long
established from the very founding of this country and even before in Europe." The
brewing industry had a difficult time recouping after Prohibition outlawed alcohol
altogether between the years 1919 and 1933 and after those years there was "just a
natural progression of consolidation."
The beer industry is unique in that the separation of the three
different areas of commerce, manufacturing, wholesale distribution and retail sales, has
been mandated by law,. If you have an interest, financially or operationally, in any of
these three areas you are not allowed to move into the other two, thus preventing the
establishment of vertically integrated monopolies. In this industry with huge suppliers
and huge retailers, it is the existence of the independent wholesalers in the middle that
allows the smaller, independent brewers to compete and for the consumer to have a wider
selection of beers on the market.
"By the early 1980s, small breweries started to pop up which
basically were naturally moving in to occupy a niche in the market that had largely been
abandoned by larger producers. That is to say they were making high quality, unique,
hand-crafted specialty beers. They didn't need to sell large quantities of them because
they were operating on this micro scale." These small businesses were "really
part of a reflection of a larger change or larger trend in changing consumer habits."
According to Egelston, "we see some of the same trends happening with other consumer
goods like coffee, ice cream and wine, where you don't have a limit of just a few generic
brands, but you've got a wide range from brands that appeal to people who are price
conscious to brands that have more kind of cache to them and are more expensive because
they're typically associated with higher quality."
The small craft brewing industry took off with sudden growth in the
late 1980s. This was due in part to the romance associated with this type of
manufacturing. He says "like any industry that has a high amount of romance
associated with it, and restaurants have that as well… a lot of people get in and
then a lot of people fall on their faces because they got in it for all the wrong
reasons." Like the hi tech industry where you had this stampede of people to get into
the industry, followed by a ruthless weeding out period…we're starting to see that in
the craft brewing industry as we approach that 2,000 brewer total again." Egelston
speculates that this sector may have reached a maximum level of growth. "Frankly it
is too many breweries." Smuttynose is refocusing their attention on their home
market, which is primarily New Hampshire.
Growth continues at a slower pace because "many new beer
drinkers are switching over to high quality, super-premium brands and that number
continues to grow at a sizeable amount." The market is still dominated by the
corporate giants, so this micro-brewing growth is relative, e.g. Anheuser-Busch has 45% of
the market, Miller has 21%, imports come in at 7% and micro-brewers register at about 3%.
Micro-brewers see themselves as producing virtually the same type of beer as the import
labels. A few years ago several major brewers dabbled in specialty beers, which they could
do very well with, but "due to the nature of their business they need to sell a lot
of beer in order for that brand to justify itself in their portfolio" and so they
concentrate in the labels that are already strong.
Some consumers, for example, will "spend more money for a
smaller container of a super premium ice cream like Ben and Jerry's because they're taking
advantage of…their whole story, of the local aspect, the high quality aspect"
and he finds this appeal holds for higher priced specialty beers. For a specialty beer
quality is not the only determinant of success. "The right choices in terms of
marketing and position" can have as much of an effect. Even with top quality product,
"part of it is just solid, business principles, how well capitalized you are, how
well is your company managed, how effective is your marketing."