In August 2018, brewers from across the nation traveled to Yakima, Washington, to attend the 14th annual YCH Hops and Brew School. Thanks to a scholarship from The Pink Boots Society, I was also able to attend. Among the brewers who journeyed to Washington was Garrett Marrero, who founded Maui Brewing Company with his wife, Melanie Oxley, in 2005. Marrero was there to deliver the keynote address.
Maui Brewing is currently the largest craft brewing company in Hawaii and has a reputation for being innovative and fiercely local, notably in the ingredients it uses and the nonprofits it chooses to support. In 2007, it was among the first craft breweries to buy a canning line despite the unpopularity of cans at the time (Marrero saw cans as a way to get beer to the masses in an environmentally friendly way), and Maui Brewing expects to be grid-independent by the end of 2019.
As a new brewer with dreams of one day opening her own brewery, I was eager to hear what Marrero had to say about the current state of the craft beer industry.
In his talk, Marrero discussed how craft beer sales by volume are decreasing and offered possible solutions for surviving the changing craft beer market. He offered his own brewery’s practices as an example: After crunching numbers on tax credits and return on investment, Maui Brewing decided to purchase a 1.2-mega-watt solar array as well as a CO2 recovery system to pursue grid independence. Not only would this allow them to cut high energy costs, but it also allows the brewery to plan for future energy bills versus attempting to predict a variable cost.
As of the writing of this article, there are 8,000 craft breweries operating in the United States—more than any time since the end of Prohibition. Yet craft beer’s annual volume growth is falling rather than growing, slowing to just four percent in 2018. There are many reasons for this: consumers leaving the beer segment for wine and spirits or giving up alcohol altogether, pressures from big beer, and slipping standards for quality control. With this in mind, Marrero offered a few keys to survival: Breweries must innovate, diversify, and “run lean.”
To learn more about what this might look like and hear more of his take on the craft beer scene, I followed up with Garrett Marrero in March. Below is an excerpt of our conversation. The interview has been edited for length and clarity.
Morgan Banning: You highlighted slowing sales volume growth during your speech at YCH. What concerns you most about the slowing sales growth of craft beer?
Garrett Marrero: I personally don’t think that the market is totally oversaturated. I think what I mean is that there are so many new brewers that have a lot of money that are being attracted to the industry that we are seeing a decrease in the quality of beers. So, overall, as much as there are so many more choices, not all of them are great. I think quality needs to be number one when it comes to craft beer. At the same time, you are seeing more SKUs added at a much faster rate than shelf spaces growing or tap handles growing. It’s not like restaurants are adding more tap handles to keep up with the rate of craft breweries opening up. So it is by nature leading to either a hyper-rotation situation, which is nearly impossible to build a business on and beyond that leading to selecting beers based on all the wrong reasons. One thing we say is, “just because it’s local doesn’t mean it’s good.” That’s true. We are local and we are very proud to be, but we also take the effort and make the investment to make the best possible quality beer we can. It’s a double-edged sword when we have the growth that we as an industry have and the money attracting into it.
Is it your contention that growth has impacted quality?
I think that growth has definitely impacted quality. I personally know brewers, unfortunately, who have sacrificed quality to get volume or to grow faster. It’s like, “Hey, just get the beer out there.” That’s a dangerous situation for all craft brewers, because we already are facing a lower number of beer drinkers. The beer drinking public is shrinking where the younger generation are going straight to super-premium spirits and wine. If a potential craft beer drinker gets turned off by a low-quality craft beer, it hurts the entire market. So, the rapid sales growth and, more specifically, the number of breweries has definitely led to a decrease in overall quality by some of the breweries.
“If you let the dollar drive you, then you make decisions 100 percent [based] on dollars.”
Garrett Marrero, Maui Brewing Company
If you let the dollar drive you, then you make decisions 100 percent [based] on dollars. If that was the case, we should all be putting corn and rice into our beer, because it’s cheaper to make beer that way (if we put quotes around “beer”). Is that what you want to make though? If we were 100 percent guided by the dollar, then we would be in a situation where we would start saying, “Extract is so much cheaper than us toasting our own coconut.” So we’re going to directly make a decision that looks great on paper but decreases the quality of the beer.
So, if craft breweries should not sacrifice on quality to save money, how can breweries cut costs?
From a cost-cutting standpoint, I would be looking at sustainability initiatives. [Which involves] investment up front, but there are a lot of tax incentives and global financing behind it, too. I would also be thinking about really dialing in recipes. You have to make some equipment investments to be able to make some of the cost-cutting measures that we have. At the same time, we have long-term paybacks. I think a lot of times people look at how they can invest in more volume when volume isn’t necessarily what they really need or what they really should be chasing. That’s something that I see a lot of younger brewers doing as well.
Specifically, what equipment would you suggest for cost-cutting measures?
A centrifuge. I think a real density meter, as opposed to just using a hydrometer, would be a huge savings. I remember when we went from a hydrometer to a density meter; I forget exactly what it was, but it was somewhere on the order of 3 or 4 percent more malt that we were using than we needed to be. We were saying our beer was about 5.2% ABV, but we didn’t have any way to actually check that. Once we actually checked it, we were like, “Holy shit, the beer is actually 5.8 (ABV); we’re using too much malt to make the beer we thought we were making.” In the mainland, you wouldn’t have to make investments in that equipment, because you have testing capabilities probably next door to every brewery, but any sort of efficiency measure [will help].
Don’t waste water. [Do] everything you can do if there is any bit of waste. Doing an audit every quarter, every six months, every year of how much water you used to make how much beer. Where can we save that? Is your draft system dialed in? Because you could be sending gallons and gallons down the drain. The most basic of things is what they need to be looking at to be able to make efficiency upgrades.
You have mentioned previously that you faced pricing pressure at the onset of Maui Brewing due to the nature of Hawaii’s economy. How did you deal with that? What lessons could be applied to those who are feeling pricing pressure due to the saturation of today’s market?
Every market is different. I think pricing pressure has only increased over the years. We have been fortunate to start out where we were able to see rapid growth organically, and we did not have to push the beer into the market. There was always the consumer pull into the market. That has shifted, especially as Big Beer has gotten into the market. The faux-craft or the crafty brands have, I’d say, less-than-ethical marketing practices as well as the “free beer, buy one get one free” discounts. All the things that real craft brewers generally cannot do. You’ve got these craft-looking brands on the shelf at $7.99 for a 6-pack or $12.99 for 12-packs. That is putting the pressure where we can’t sell our beer for much higher than that, because people will still naturally pick by cost in a lot of ways. When you see two mango beers on the shelf and one is from a local craft brewery and the other is from a craft-looking brewery, the consumer is going to be like, “Well, this one is $3 cheaper. I will take this one, because I’m supporting craft.” To me, that illustrates a couple things:
One, the real craft breweries should be adopting and putting the independent seal on all of their packaging so that consumers are at least afforded the information to make an educated decision, but also to distinguish that brewery away from faux craft beer. It does take away a sale from that local brewery where people think they’re supporting the craft industry but instead are supporting Budweiser.
Two, the reason I say [pricing pressure] has increased is because grain has not gotten cheaper. Shipping has not gotten cheaper. Fuel has not gotten cheaper. Labor certainly has not gotten cheaper. But beer prices have stayed the same, if not gotten lower. That is where the margins are thinning and it’s going to lead to some breweries not being able to make it.
I would add though, specifically as advice to the younger brewers starting out: don’t dig a huge pit for yourself to dig out of. If you start off with $10 million dollars in debt, unless you have some crazy good financing or a ridiculous pedigree that people are like, “Hey, I wanna buy that guy’s beer,” you’re going to have a real hard go of it. Cracking that nut every month is going to make it difficult, especially with how capital intensive it is to grow in this industry. If you are already tight on your numbers, you are just not going to be able to afford to grow.
You mentioned funding your brewery primarily with cash flow. Can you talk a bit about the reasoning behind your decision to fund operations on cash flow rather than credit?
Banks thought we were crazy. They don’t think that anymore. Well, they think I’m a little crazy, but they understand my crazy at least now. But yeah, we were broke and we had just enough money to start the business. You know, I think it was a little bit of luck, a lot of hard work, and definitely a lot of passion. My wife and I slept on the floor of a shitty condo for forever, because we couldn’t even afford a mattress.
These days it’s a very different world. We funded out of cash. Every time we’d have enough money to buy a tank, we’d buy another tank. We’d keep putting that money right back into the business. I think our first equipment lease was four or five years in. We paid that off in two years. It was a short-term lease, but that established some credit with the local banks.
It wasn’t until 2010 (exactly five years in) that [the banks] actually started lending money to us. At that point, starting in 2012, the numbers got too big to do just out of cash, because we were buying five acres, building a 40,000-square-foot building and 50-barrel brewhouse—all that kind of stuff. That’s when it started being real debt that we added to the company. I remember in 2011 thinking: “We can either grow and borrow some money to do that, or we can stay where we are and pay off all our debt.” We could have written a check for it, because the debt was so little. It is a very different world today. [But] our numbers supported those debt obligations, and we were comfortable making those debt payments even […] if the market was to change.
We are, fortunately, still growing. We are up over 15 percent over last year. At the same time, we have a very rapid debt repayment plan [that’s] similar to how we used to rathole money to buy a tank. Now, every bit of extra money goes to pay down debt so that we can de-lever the company. I would not be wanting to borrow a bunch of money today if it was a new brewery.
You propose that breweries “stay lean.” Can you give examples of what it looks like when breweries spend carelessly?
Running lean is literally when everybody else is going home, you’re starting your second shift. You don’t take vacations. You don’t have nice things. You’re not going to the gym. You’re working shifts behind the bar at the tasting room as well as brewing the beer and packaging it, selling it, delivering it. You name it. Whatever it takes. That’s your job as a startup. My wife and I did every single job for many, many years.
Some of the breweries I walk in, frankly, are brand new, haven’t even brewed a batch of beer yet, and they have like epoxy floors, centrifuges, and all this shit that took us 10 years to get. I’m just like, “How are you funding this?” I don’t purport to know how every brewery is funded. I would say I am more than a bit surprised when I see how much some of these startup breweries are spending. Not knowing where the money is coming from, I really hope it’s not debt.
At the same time, I do feel for the shareholders if something were to happen. To that point, as much as we’ve taken on a lot of debt, we still own the vast majority of our company. I have seen friends who owned 100 percent [of their business] 10 years ago, and now may have single [or] low double-digit stock left in their company for themselves. That was a situation I was never okay with. So, we grew slower, because it was at the pace that our money would allow us to grow. We also didn’t have to give up that company either.
How crucial is diversification outside of craft beer for the industry?
You have to move with the market, [with] the distilling [and] the ready-to-drink cocktails. We’re working on a hard water. If a brewer is unwilling to change in the market—if you’re standing still, you’re falling behind. I think that innovation is part of that. It doesn’t have to be that you’re making new categories of products, but you certainly have to be innovating in beer. I think some of them caught onto that too late or I think the writing is on the wall with some of them already. We’ve seen some closures.
For us, the distilling makes sense. When people are visiting Hawaii, they want a real Hawaii experience, so we should offer them an alternative to what they’re customarily drinking at home. Beyond that, it does help with growth. It helps with deepening our relationships with all of our vendors—our retailers especially. At the same time, taking a step back from all that fun-sounding financial, empirical data side, we also just want to make cool shit. So, when it comes to distilling I sat down with our director of brewery operations before he moved on a year ago and he’s like, “We’re getting really close to being able to […] commission the still. I need to know what our business plan is. Like, what budget am I working to? What are we doing?” I literally told him, “It’s really simple. Make cool shit. The rest of it will take care of itself.”
“If a brewer is unwilling to change in the market—if you’re standing still, you’re falling behind.”
Garrett Marrero, Maui Brewing Company
Naturally, in my mind, I have more of a plan than “make cool shit,” but I’m not relying on the distillery to pay the brewery’s bills. The brewery is doing just fine on its own. So the distillery is for us to have our artistic whims—our serendipity—satisfied, if you will, so that we can learn a new area, but then we can expand that into something that, yes, has goals and budgets and business plans to it. At the end of the day, if we start with a budget and start with too clear of a vision, then I think you ignore some of the cool shit that you can actually do. It’s a learn-along-the-way [process]. It would be different if that was our primary business, trust me.
In some ways diversifying is leading. Not everything we’ve done is a response to what everyone has done. We’ve been working on [the other projects] for years. We started the distilling conversation back in 2013, but it was illegal to do. So it took me a year to get the law changed and two more years to get the county of Maui to recognize those new laws. We were leaders back then. Even though our cans of, say, ready-to-drink cocktails are coming out later than others, it’s not because of any other forces than […] legislative. So, diversification is not a response to declining sales growth on our part because we’ve been growing every year. But we want to be prepared for what may come. At the end of the day, if something is being shipped here and I think it has legs, then I want to make it. There’s no reason not to.