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DAVID HEIST displays a bottle of his Old Yeltsin at HopTown, a small brewery in Pleasanton. Heist does it all at the brewery. "I touch every bottle on the shelf," he said.
PLEASANTON

DAVID HEIST stepped out of his back office into the brewing area in his tiny warehouse-brewery and he looked at the electric forklift parked in the middle of the room.

"Damn, it's leaking again," he said.

He kneeled down and peered at a small pool of greenish hydraulic liquid puddled beneath the machine. "Oh, man." He quickly wiped up the puddle, then moved the forklift outside. Soon, only the smell of degreaser remained of the incident.

If only putting his brewery back on track was as easy as cleaning it up.

In two months, Heist said he's going to close HopTown Brewing Co. in Pleasanton, where he has been making beer for nearly a decade. Rising costs and cutthroat competition have melted away his profit margin and disrupted his personal financial situation as well.

"I have a good product and a good customer base," he said, "but no success."

This is the dark side of the craft beer boom. Small volume brewers like Heist are struggling to sell their handmade, individualistic beers in an indifferent market that's still dominated by a handful of giant companies and entangled by a web of anti-competitive state and federal laws.

Since Fritz Maytag resuscitated San Francisco's historic Anchor Brewing and Jack McAuliffe, a Sonoma fireman, founded New Albion Brewing Co. in 1976, the craft brewery movement has grown slowly and painfully to command almost 4 percent of America's gigantic beer market in 2006.

The road is littered with the corpses of defunct craft breweries. McAuliffe threw in the towel in 1982, exhausted from trying to keep pace. But others have signed on, inspired by the knowledge that with no more than plain water, malted barley and hops, it's possible to produce something pure and wonderful, historic and

BEERIBusiness 2ancient, without chemicals or flavor-lightening additives like rice or corn, benchmark ingredients of the major brewers.

Paul Gatza, director of the Boulder, Colo.-based Brewers Association, the craft beer trade group, said that as of Jan. 18, there were 1,418 breweries in the United States, including 450 craft brewers and 929 brew pubs. Size disparities are vast, The Brewers Association reports production in 2005 ranged from Boston Brewing (makers of Sam Adams) at 1.36 million barrels, and Sierra Nevada, based in Chico, at 612,640 barrels to the 725 barrels produced by David Heist at HopTown in Pleasanton. Heist's production is low, but far from the lowest in California, where small-volume breweries are plentiful. (A barrel of beer is 31 gallons, enough to fill about 331 12-ounce bottles.)

By comparison, Anheuser-Busch, America's largest brewer and the maker of Budweiser, produced more than 101 million barrels in 2005, the last year for which statistics were available. No. 2 SABMiller, maker of the Miller brand and others, produced 38.4 million barrels, and Molson Coors finished third with 22.7 million barrels.

Sobering facts

Another sobering fact for the David Heists of the world: Molson Coors, according to industry sources, was expected to have sold more than 400,000 barrels of a craft-style wheat beer, Blue Moon Belgian White Ale, in 2006. That would put Blue Moon alone as the No. 3 craft brewer, behind only Sam Adams and Sierra Nevada.

Other big guys are catching on. Anheuser-Busch has spun out a slew of imitation craft beers with fanciful names like "Green Valley Brewing" that conceal the big guy behind them. However, Anheuser-Busch has had more luck being out front. It's Celebration Christmas ales sold out in a few days in the Bay Area last month, a local Anheuser-Busch distributor said.

While beer giants pump out profits with saturation advertising and a lock on distribution systems, the entire craft beer segment sold just 6.2 million barrels in 2005 and an estimated 6.8 million in 2006.

However, Gatza, of the Brewers Association, said that although numbers are still small, they are growing, with national sales up 9 percent in 2005 and up at least 11 percent in 2006.

"Craft beer growth is accelerating, and there are more breweries opening than closing," Gatza said. "The American consumer's tastes are changing toward more flavorful beers, and that's what's driving us."

A.C. Neilsen and other surveys show craft beer sales in supermarkets alone across the country were up 14.4 percent in 2006, he adds.

In the Bay Area, where the craft beer revolution was born, most breweries and brew pubs remain tiny, but there are a few with their eyes on the big time.

Seattle-based Pyramid Breweries Inc., which produces most of its beer at its Berkeley plant, is the seventh-largest craft brewer, while San Jose-based Gordon Biersch, grew 16 percent in 2005. Production at Lagunitas Brewing in Petaluma rose 37 percent.

Bear Republic Brewery in Healdsburg has just opened a new plant in Cloverdale and hopes to double sales soon. At Russian River Brewing Co. in Santa Rosa, proprietor Vinnie Cilurzo is eyeing a major expansion.

The largest craft brewer in the East Bay is Drake's Brewing Co. in San Leandro. Pete Rogers, who manages Drake's for the Rogers Family Co., counts his business in barrels per month. The company produced 3,500 barrels in 2005, and a bit more in 2006. "If we could do 150 to 175 barrels a week, oh boy," he said. That would double production.

"The craft beer business is tough," Rogers said. "We've never turned a profit in our history. Most little breweries are struggling."

Drake's beers from brewer-wizard Rodger Davis have won a ton of awards. Buoyed by that, Drake's signed on with a distributor three years ago. Sales plunged.

"We were forgotten," Rogers said. "A big brewer comes in to a distributor and says, 'Don't carry Drake's.'"

"We took back our distribution," he added. "To do it right, we've got to have three to five sales guys. We have two."

Adding to small brewers' obstacles, the nominally independent distribution sector has undergone a massive consolidation. Most surviving distributors serve mainly the beer giants. But small local brewers get limited truck space, even at independent distributors.

"Ninety percent of our sales come from 10 breweries," said Keith Tabayoyon, sales director of Richmond-based Bay Area Distributing Co. To stay on the roster, he added, "the others have to be really nice with us."

Indeed, many low-volume brewers, like David Heist at HopTown, can't afford to use distributors and end up self-distributing, an expensive way to supply accounts.

Mike Laffen, an owner and general manager of Half Moon Bay Brewing Co. in Princeton-by-the-Sea on the San Mateo coast, lacks distribution. He self-distributes because it's difficult to get distributors to give him a look.

"It's absolutely a problem," Laffen said. "We put a guy on a truck and he delivers a couple days a week, but it's a tough way to grow a business."

His hand-craft brewery makes 1,200 barrels a year, and to drive to, say, Monterey to make a delivery "doesn't make sense" because the price of beer goes up.

Laffen said that if he had the ability to distribute more effectively, he would invest to boost capacity and produce more barrels. As it is, Laffen works at the brewery, draws a salary and the company breaks even because it also generates sales from the restaurant.

Just staying on the shelf

The biggest hurdle for small brewers is to stay on store shelves. Mainline retail chains, which sell about 40 percent of all beer nationwide, are engaged in a brutal price war. Trying to outdo one another, chain buyers demand special deals from suppliers, nicknamed "packages" in the industry. They can include wholesale discounts and reimbursements for store discounts, both of which eat deep into suppliers' profits. High volumes can offset that, but small producers make next to nothing on such sales.

Dan del Grande of Bison Brewing in Berkeley calls his Bison beer bottles on supermarket shelves "three-dimensional billboards" because they bring nothing but advertising value to his business. He has to sell them to the stores at such a low rate that he doesn't make much of a profit.

Del Grande says he needs to ramp up production to at least 8,000 barrels a year to begin to make a profit. "Below that, it's just a labor of love," he said.

Del Grande struggles. Once part of the adjacent restaurant, his Berkeley brewery on Parker Street at Telegraph Avenue is now barely the size of a small living room. A single mash tun, a brew kettle and two fermenting tanks are crammed beneath its 20-foot ceiling. He produced 900 barrels in 2005.

Bison rents space at two other breweries, but profits are so slim that del Grande can't hire full-time help, let alone a marketing professional. He still brews the beer, makes sales runs and does deliveries alone.

"If I don't market, I can't sell more; but if I don't sell more, I can't afford to hire a sales guy," he said. "It's a Catch-22."

Supermarket chains have little to say about deals they may cut. But Pleasanton-based Safeway Inc., for instance, says it encourages small-volume brewers.

We do encourage local breweries to contact us," said Jennifer Webber, Safeway's public affairs officer for Northern California. "We want to offer what our customers want to buy, and that's the bottom line. How things are selected in price isn't something that we discuss."

The Federal Alcohol Administration Act, which is supposed to govern the industry, doesn't do much for breweries, craft brewers say.

Federal alcohol regulations were set up after Prohibition, mainly to defend small corner stores from manufacturers, who were growing a lot of muscle. As retailers grew even bigger and the brewing industry began to fragment, small players found themselves out of their league, said Matthew Botting, staff counsel for the California Department of Alcoholic Beverage Control. The system, he added, is "flipped on its head."

Drake's Pete Rogers says state and federal laws often frustrate craft brewers. "It would be easier for all of us if it was a free market, no rules at all," he said. "A state law that just passed now says I finally can buy an eight-ounce glass of beer for a customer. Before that I couldn't even go into a store and let a customer try our beer. I still can't even give a bar a T-shirt or a glass with 'Drake's' on it.

"But you know, a big brewer goes in and gives out samples. If they're fined $10,000 at some point, so what? It's supposed to be a level playing field, but it isn't," he said.

Despite the obstacles, most small-volume brewers say they're in the business for the long haul.

In Concord, J.J. Phair, owner of E.J. Phair Brewing Co., frankly admits running a brewery's no walk in the park. "I live in a cottage on my parents' property. I put everything I make back into the business, trying to grow it," said Phair, a former NFL kicker.

Since launching a tiny brewery in a Concord warehouse in 1999, he has opened an ale house-restaurant on Todos Santos Square in Concord and is about to move his brewery to a large site at 190 E. Third St. in Pittsburg. There will also be a restaurant and tasting room there. The brew plant will be twice as big, and, he said, there will be a cannery, producing his well-regarded, prize-winning E.J. Phair beers in cans.

He's following the lead of 21st Amendment Brewery & Restaurant in San Francisco, a pioneer craft beer canner. "Just because beer's in a can doesn't mean it isn't good beer," said 21st Amendment's Shaun O'Sullivan. "We're taking back the can from the big brewers."

Phair agrees. Anything that will give him an edge and maintain quality, he favors.

"The beer business is very competitive. It's tough. And we're such a small percentage of the beer market. My focus is making the greatest beer I can. I don't want to be a 500,000-barrel, national brewer. Our goal is to create great beer with a local flavor," he says.

Tipping point

Bison's del Grande believes what keeps many small brewers in business is that the market is close to a tipping point. In a few years, he said, enough consumers could switch to craft beers to fundamentally change the system.

Until then, "we need to educate consumers," he said. "Instead of just downing calories, they should understand their beer. People are willing to pay $20 for a bottle of mediocre wine. For half that, you get beers you will remember for the rest of your life."

Del Grande is organizing a cooperative. Splitting the overhead with two other brewers, he plans to move to a new facility, perhaps in Sacramento, this year. Together they could surpass the 8,000-barrel volume threshold and afford services such as marketing.

Meanwhile, back at HopTown, Heist isn't exactly throwing in the towel. Realizing that a few hundred barrels per year will never make him the profit to buy the hardware he needs to grow his business, the brewer has decided to start anew. He has teamed up with a small group of investors and hopes to start a larger facility within a year, probably around Livermore.

Business Writer Tim Simmers contributed to this report. Staff Writer William Brand writes a column on beer each Wednesday in MediaNews food sections. Contact him at bbrand@angnewspapers.com. Contact Marton Dunai at mdunai@cctimes.com.