Looking For A Bubble To Happen

More and more I’m hearing about how the craft beer bubble is going to burst for a myriad of reasons, none of which are too separate from day to day issues we see in many other industries in our banking world. Most breweries are small businesses that face the usual round of challenges. Is the craft bubble going to burst? I say no, but like with most things that see rapid growth, we are in for a serious market correction and when it starts to happen the land will decry that the bubble has officially burst. This isn’t new, at least in VT, we saw this 20+ years ago when the first round of what was then called micro brews came, and most went, for very similar reasons that we are seeing today, history certainly does repeat itself. Many small breweries came and went, and in many cases they closed for all the usual reasons, not the least being product quality, management and an overleveraged balance sheet (look up Catamount for a nice case study on too much too quick). Worth noting are there are some survivors from that initial movement, to include the likes of Magic Hat and Long Trail.

 

It is a great time to be a beer drinker but becoming increasingly crowded as a beer producer. I think a market correction might be good for the long term sustainability of the craft industry. Just walk into any craft beer store and you will be overwhelmed with the myriad of choices in not only brands but also styles. IPA continues to be the style of choice in our region, with new variations being offered up all the time (juice bombs sound familiar). Let’s not forget the latest trend, which is sours (which I happily subscribe to and can’t get enough of).  I’m in VT, the home of the east coast IPA, which boasts more breweries per person than any other state in the union, and couldn’t be happier to be here. Seriously, a client call to a brewery far exceeds many of the other ways we as lenders get to spend our time. I find that I’m in perpetual need of documents from my brewing customers and more often than not I’m going to find a way to go there in person to pick them up!

A market correction will mean banks will suffer from bad financing decisions, in particular some banks are very late to the game and seem ready and willing to throw money at anyone that makes beer, good or bad. The real challenge is who determines what is good and what is bad, in particular when you have a flashy group of out of state investors imitating what they think is “hip” and thus you get these banks financing 30 bbl systems for folks that are just coming on to the scene. The familiar story is a few folks in another industry want a change, pool their funds, find a brewer and voila, you have yourself a brewery. If this group shows up at the bank with some liquidity, hipster beards and a flashy business plan it seems banks are ready to party (having more often than not even sampled the product).

I’m always concerned when I see a new brewery business model that is dependent on pushing product out of state to garner more sales, and to some degree riding the VT name and beer reputation isn’t a bad play. At issue is there is a lot of good beer out there state to state and shelves are overflowing. As Bankers we need to take a hard look at sales projections that assume significant out of state sales. Looks good, as most projections do, but know that these shelves they plan to land on are overflowing with all sorts of creative bottles and cans, and often from more local producers than the product they plan to send in. What does that mean? You need to ask yourself, how can your client’s product stand out, get to the front of the crowded case? Here is how. It has to be good, real good. AND it has to have a story, one that people will like and feel good about. Sounds easy right but there has been an influx of new breweries producing sub par product, and craft beer fans are fickle, you get one maybe two shots to become a part of their drinking cycle, and if you aren’t bringing you’re A game, you aren’t going to last long.  Now take that crowded case risk and couple that with products that “evolve” as they live on a shelf (and often not in a good way) and you not only need to stand out, but you also need to see good turns so that your beer isn’t sitting on a shelf and losing quality because of it. People aren’t going to give a “stale” beer a second shot usually, not with so many options.  

What about getting on lines at the myriad of craft beer bars that have opened up in the past 8 years? Good luck. These are hard fought lines to be on, and even harder to stay on with a par product, these places have reputations to preserve and need to make sure they are dedicating lines to what is hot and what are proven winners. Fold in the distribution angle and getting a line (and staying on) gets even more difficult.

I can’t stress enough how staying true to your story is critical. Craft beer drinkers can sniff out those that are in it for the genuine craft, and those that are at the table because there is money to be made.  Just as important is that a brewery stay loyal, local and involved in its community. That harkens to my focus on making sure the “story” is right, and that the people making the beer are making it for the right reasons, and of course that the beer is crushable.

So when these “create the demand” breweries, more often not these are 30 bbl plus sized breweries, aren’t sustainable and their product starts to sit on shelves we’ll see places starting to fold up and the world will declare “the boom is over” when in reality it isn’t, it’s just sorting out the mediocre from the quality, and in my opinion we are going to see this happen sooner than later.  If any model seems to be working on a consistent basis it is the smaller sized breweries, selling direct to consumers from their location, and self-distributing initially, which equals a better experience for the consumer and better margins for the brewer.

I spoke to Jen Kimmich, co-owner of The Alchemist Brewery, brewer of some of the best beer in the world (yes they make Heady Topper, but have been reintroducing the world to some of their other offerings from the pub days, Crusher? Focal Banger? Luscious?) to get her insights on current craft trends. She cites access to raw materials, specifically hops as a number one concern as more and more breweries hop (see what I did there) on the IPA train. Kimmich states “there are challenges with securing high quality hops. We are fortunate that we have been in business 14 years so we have strong relationships and contracts with our growers. I hear from new brewery owners that they often have difficulty acquiring the hops they planned on using for their flagship beers”. That challenge will only grow as more breweries enter the fray and as mid to larger breweries secure larger percentages of the crop. So as bankers looking at these businesses we need to be asking these supply side questions often and early!

Bart Watson, Chief Economist for the National Brewer’s Association provided a more national perspective and very much disagrees that we are in for a bubble burst. Instead he cites the increased competition as the main driver behind anticipated industry stabilization. He states “Although I do think we’ll see closings rise in the future, I don’t currently see signs that we’re entering a bubble”. As to a lender’s role in this he notes “while there might be some sloppy lending out there, I think a lot of lenders have scaled back expectations as market growth has slowed”. He goes on to note that the issue is less with the number of breweries and more with the middle of the market producers that are focused on production and distribution/retail presence. Reiterating points above he notes “the vast majority of breweries (70%+) are 1,000 barrels or less and selling a high percentage of their beer direct (with correspondingly higher margins). Many of them will still go out of business (since running a small business is hard and there are a million places to screw up), but I’d expect success rates to still stay well above many comparable industries (restaurants for instance)”. He concludes that the predicted  bubble is better represented as a normal competitive marketplace. For us lenders his last comment was perhaps the most telling and one we should heed “we’ve been somewhat spoiled in the brewing industry with openings:closings running 8-10:1. That’s the unusual part. By being in the midst of rapidly expanding demand growth there was a window where nearly everyone could succeed. That window is closing and/or closed depending on your geography. Yes, more breweries are likely to close – but that’s something that many (including myself) have expected for years”.

Does this mean you should steer clear of craft beer? Of course not, but you need to really dig in to the whole story, and look at the competition, and look closely at the immediate market. I attended a meeting recently where a popular brewer noted that every community can support a nice 7 to 10 barrel brew pub, and that model which includes direct sales out the front door of beer, will make for a nice living if they put out a nice product. This is a more organic and sustainable model that could someday grow into something more. I subscribe to incremental growth and thus far that focus has been successful for the parties I work with. We’ll see how this all shakes out over the next 24 to 36 months but all I can say is be ready for some closings, don’t be surprised by them, and most importantly don’t give up on craft beer when it happens, there will always be a place for this incredible industry full of great jobs, great people and great products. We as bankers can still support this very vibrant industry and act as critical business partners going forward.

 

Pride and Banking

Has there been a shift in how your banker interacts with you. Or conversely how you deal with your banker. What has changed? Communication is a two way street and if that breaks down, generally the relationship breaks down, no matter what the relationship is. This is no different in your business life. Did something happen that you didn't tell your banker about and now has negatively impacted your operation? Has there been a key change in your management, in your industry, that you should have told your partners about sooner? Know this, IT IS NEVER TOO LATE to bring your banker up to speed. Do not be afraid, even if you think it is too late, to air your dirty laundry. Bankers can't help if we don't know and we certainly can't help if its too late.

So often we get the phone call or email with the need for some permanent working capital, and that likely is money needed to catch up for some business event that has already happened, not in anticipation of something happening. How could this have worked better? Let's use an example: your sales are off due to weather, you are falling behind a bit on payables and you are worried that you will continue to fall behind unless there is an injection of cash to help you through a slow period (FYI, everyone has a slow period, business is cyclical, frustratingly so). You SHOULD call your banker at this point and talk through options but you don't, why? Pride seems to be the culprit in most cases, you just can't accept outside help because it is your business and you will handle it. Sometimes that works out ok, sometimes it doesn't. Another reason is you are embarrassed that this is happening to you, well that emotion is also natural but don't let it cripple your judgment.

If you can remember one thing from this rambling, know that your banker is your partner, you owe the bank money, but the bank has invested that money in you and your business so if there is a way to help before its too late we will try to help you find that solution. I encourage frequent interaction with your banking partners, the more you can work collaboratively with your bank, the less surprises you will see in the relationship and you will likely avoid experiencing banker fatigue.

jb

Unofficial Bring My Kid to Work Day

It started yesterday, the cough, the nose blowing, the complaint of his chest hurting. Alas, we've been back to school for 3 weeks so we were due for our first sick day. And a sick day we had. My boy, now in the 4th grade, clearly needed a quiet day, but I didn't think that necessarily meant sitting on the couch watching Clone Wars (although that is awesome too). Instead I brought him along on a customer call in the morning after we dropped off his sister.

I prepped him on where we were going and what business we were visiting (no specifics but it was pretty bad ass for any 9 year old boy to visit). My challenge to him was he would run the meeting for the first 5 minutes so he needed to come up with some good questions about the business.

The client was a great sport at first, chuckling as the first few questions flew out "how many rooms are here", "what time do you open", but then something awesome happened, the business owner shifted in his seat and really started answering without the "this is cute' grin. The questions that grabbed him were "how many employees do you have", how many "widgets" are on the floor right now", "how else do you make money" and "why did you decide to do this"? Wow, seriously, the kid is a natural. The only guidance I gave him was to ask questions he generally wanted an answer to, and he totally nailed it!

Ultimately he excused himself so he could go check out the "widgets" but not before impressing his dear old dad and the business owner with his casual interest in the goings on there. I think that meeting more than made up for a missed day at school, after all the first and best skill (in my opinion) is the ability to engage people and be genuine, to that point the boy did very well.

I've mentioned before that we've done this in the past, but never with these results (do note that I never challenged him to ask questions before either). I'll do this with my daughter soon, on her next sick day, to see how the mind of a soon to be 7 year old does in a Q and A jam, that is definitely something to look forward to.

After the meeting I quizzed him on his Q and A to see if he retained what he learned and to my amazement and delight he retained every answer (and even had a few follow up questions that we may put out there at some point).

Anyway, what a great, albeit unofficial, bring your kid to work day today, I'll do this way more often, after all there are some things you just can't learn in school!

Nice post on Community Banks

http://www.huffingtonpost.com/one-world-with-deepak-chopra/josh-siegel-the-art-of-co_b_5133866.html 

To Interview or not to Interview?

We have all had that wonderfully flattering solicitation from headhunters, you know, the one where they call with a job opportunity in your market that is "just perfect for you". After the initial warm and fuzzy feeling subsides the real questions begin: Should I take the interview? Am I interested in a life changing work realignment? Am I really unhappy where I am?

I suggest that at least once every few years you take on one of these interviews. I received advice very early on in my career to try and interview at least every few years to keep your interviewing skills sharp. What I learned was that not only was this a good practice but there were other benefits as well.

First you have the benefit of seeing what the most up to date interviewers are looking for. Is your current compensation package comparable to what is currently being offered in the marketplace? Vacation time? Flex time? Are your skill sets desirable? Is there an area that you need to brush up on to make yourself even more marketable? If so then make a real effort to brush up on your existing skills or take some classes to learn something new. Information is power and getting out to see where you stack up in the marketplace is invaluable.

Second, you have the chance to revisit your resume and make any necessary updates. With the not so recent advent of sites like Linkedin this is becoming easier to do but frankly many of us don't have the time to troll that site and update our information as often as we would like to. Interviewing periodically forces us to make those updates and maybe even get a new picture in our profile that does not predate the Blackberry.

Finally, do not underestimate the power of the network. After all if you are sitting down to talk about a new job opportunity, chances are you will be sitting with your potential new boss. Leave a good impression and follow up with this new connection regardless of whether you take the job or not. Be forthright from the outset that you are not convinced that a job change is in the cards but that you are all ears about the opportunity. This level of honesty will be appreciated and the interviewers won't feel it was wasted time. What you will find is that you will develop a relationship with the folks you meet with and your name will perpetually be on top of the list as new opportunities arise. And lets face it, if you are in sales you know that to close a deal sometimes you simply need to catch your prospect (or in this case lender) on a bad day. Having an existing network of potential new homes never hurts, think of it as a work contingency plan.

So get out there and kick some tires every once in a while. Set a goal to interview in the coming year. Don't do it because you are necessarily unhappy where you are, do it for the reasons listed above.

Hogwarts Birthday

The following is the culmination of 60 days worth of planning for our daughter's 6th birthday party. Man were we excited when she said she wanted a Harry Potter birthday party. First off we had to get our costumes in order. The kids (Ben 8 and Allie the birthday girl) costumed up in authentic Gryffindor house robes and ties. I got to work on a Hagrid costume and my wife was set to play Professor McGonagall. A close friend also agreed to play Professor Trelawney, and did some timely divination with the kids as we waited for everyone to arrive. The house was decorated with a series of Harry Potter themed signage for the guests as they came up the driveway. Hargid was set up on the front to greet the 13 guests we were expecting. All the guests arrived in some sort of wizard or witch attire, further adding the fun and atmosphere.

Once we had all our guests they were escorted to the first floor, candle lit with a roaring fire in the fireplace, for the sorting ceremony. This was a big hit with the kids! Hagrid discretely acted as the voice of the sorting hat, starting off by singing the sorting hat song from book 1. We had mostly Gryffindors in the group with a few Hufflepuffs!

From there we passed out Marauders Maps to all the kids, and after the required reciting of "I solemnly swear I am up to no good", they were led around the Hogwarts grounds on a scavenger hunt. The culmination was unearthing a chest filled with magic wands buried in a pile of leaves just outside the forbidden forest. The kids filed in and up the stairs to the main activities table, where they all had the chance to decorate their own wands. This went surprisingly quickly so we opted to move everyone into an adjoining room for gifts. The end of gifts we had a golden snitch balloon drop which turned into a chaotic bout of fun!

The hit of the party happened next. We cleared off the wand decorating items and set up the potions class. This included each kid pairing up, and listening intently to our Professor Trelawney (Snape was away for the day). Ingredients included Troll Bogies (dish soap), Troll dandruff (baking soda) and a few other Troll items (vinegar and green water). The kids were talked through adding the necessary ingredients, with the finale being a big, bubbling mess that left the kids screaming and giggling! It was then cake time (after we cleared off the mess) and all enjoyed a HP themed cake of chocolate and vanilla!

Finally, the end was near. We thought it would be funny to have a pool party. After all it was late October in VT, some of the ski hills were already open, it was freezing out and even snowed that morning! The pool was steaming like a witch's cauldron! Most of the kids changed into their swim suits and dashed across the lawn and jumped into our pool, which we spent days heating up to a toasty 90 degrees! This was a great way to end our magical gathering and it was fun watching their little feet scurry across the freezing lawn and back into the warmth of the house!

1600/Allie+6th+Birthday+075.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"> This was one for the ages, and we all had a great time planning and executing this little bash! Now its time to start planning our son's party, due to happen in a few months!

Does our government have a reset button?

So the government is taking their ball and going home, who cares I think? After all its not like our elected officials have any real clue about what its like to be in the trenches. Well I was wrong. I stand to have a significant number of client's deals not happen, or at least sit idle until our mighty elected stop holding their collective breaths and right the ship. There are so many great memes out there that bring home the equivalent of what is up for grabs here. My favorite is the one that shows a family's income, compared to what they are spending, and their cumulative deficit as a result. If any of us lived the way the government has been conducting itself we'd be screwed, simple as that. So why do they get a pass? So anyway, I have a wonderful collection of deals in the works that are in need of a small business administration guaranty, but guess what? That program is considered non essential so all these hard working folks, trying to put together a business of their own (remember, the American dream), can only sit and wait for some resolution. Is that a big deal, you're damn right it is. Here is why, some are waiting to sign leases, some are waiting to order equipment, some are waiting to hire. Sure sounds like all those wonderful things that all these donkeys ran their campaigns on right? Stimulating the economy. Creating small businesses, you know the back bone of the economy. Well you're not going to believe this but that was all a bunch of lip service. So the next election remember this collection of Washingtonians, and get some new folks in there that are working in the interest of we the people. In fact let's really get nuts and keep campaign contributions to $50 a head, its damn hard to feel any obligation to folks if they only drop $50 in the pot. Oh yes, and let's also do away with lobbyists. I mean really, a job whose sole purpose is to try to influence policy? Shouldn't we as the folks voting these people into office be the people they ultimately report to and shouldn't we be the ones that dictate policy? It all seems to simple, yet it is also so hard. Let's start with having longer memories, I know I will come election day when I remember all these wonderful small businesses, sitting on the side lines, as our current group of elected fumble, bumble and fake smile their way through this mess. Shame on all of them, grow up. We deseve so much better.