This is your latest venture right here, this building we’re in. How is the new restaurant doing so far?
It’s going very well. Volume levels have been high and it’s been very well received. That has given us time to get our operation working the way we want it to. We have a great group of nice, skilled people. Now we need to make them nice, skilled Deschutes people. And that just takes time. We have people who come in here regularly. We don’t yet have a group of regulars. There’s a difference.
That takes more than a few months.
It takes time. We built a beautiful building but it hasn’t acquired its own personality yet.
It looks like you’re getting the lunch crowd.
Business has been very good. Last week when it was so hot, people didn’t’ go out as much as normal. But a little bit of rain has been terrific.
It’s a down time with the economy. Is that a concern?
We always want to pay attention to macro trends to be aware of them, but it does not change the approach of the business. We still have to make everyone who walks in that door happy. We want to make everyone who has a Deschutes beer anywhere happy with that decision. We can only control what we can control.
You came out of the restaurant industry?
I started out as a dishwasher when I was 16. I worked my way through college waiting tables.
Was it a family business?
No, it wasn’t a family business. It’s just what I did. I spent the first 10 or 15 years in the restaurant business getting out. It was always something I was doing now but not for much longer. I was good at it, I really liked the people in the business, and I finally decided one day to stop making myself miserable and find a way to be really good at it. I don’t know if I ever got that good at it, but I was able to survive long enough to get to a position where I can make a living at it.
Was it a leap from the restaurant industry to brewing?
Huge. I always considered myself to be a really good restaurant manager. I am completely unqualified for everything else I do. I’ve had to learn about making beer and distribution and the laws and all that kind of stuff, and it’s been a heck of a ride. Overall, it’s been very positive, but we’ve learned as much from our failures as we have from our successes.
Why brewing? And why bottling?
Serendipity plays a role in everything. I grew up in a family that was part of the California wine renaissance in the late 60s and early 70s. My father and I had talked about what was happening in the brewing industry in the mid-80s, and between his background in the wine business and what I had learned about the brewing business, we decided it would make sense to get into brewing. I sold my share in the restaurant I was involved in Salt Lake and moved back to California with my parents to help a friend opening a brewpub in Sacramento, so I would learn about the brewing side of the business. Meanwhile I was doing research about a place to locate in California, which was where I grew up. Both my parents were born and raised in Oregon, and they came through Bend on their way to a college reunion in Corvallis, and couldn’t stop talking about what a nice place Bend was. We came up and looked at Bend, and for all the wrong answers we were getting everywhere in California, we were getting right answers in Bend.
It was very quick. We came up in September (1987) for a few days and talked to everybody we could think of, and then I brought my wife, who was still in Salt Lake, to Bend in October. We moved to Bend for Thanksgiving and the pub opened in June (1988). We didn’t know at the time what would happen to the industry or to the area. Certainly when we first opened we were not successful. Bend was a very different place back then. We were not successful but one of the things we were doing is making some very good beer. John Harris was our brewer at the time and his reputation was excellent.
We got a call from a distributor friend, Jim Kennedy at Admiralty Beverage, saying some tavern owners from Portland had been through the pub in Bend and were interested in pouring our beer. Could we send up a few kegs? We had the beer and we certainly could use the cash flow. We cobbled together some beat-up dented Golden Gate kegs and sent them to Portland on a load of recycled cardboard, and that’s how we grew. The next order was two palettes, and then four and then eight. For the first six or eight years we never had to sell any beer. People just came and bought it. We had the brewing operation at the pub and we got a little building that we used as a warehouse, and you haven’t lived until you’ve driven a forklift down a sloped parking lot with a full load of kegs in the middle of winter, with chains on. We continued to grow that way until I started to get letters from the city about operating an industrial process in the downtown area in a commercial business district and loading semi-trucks on downtown city streets, and we knew we had to do something else. That’s when we found a piece of property across the river and figured out how to arrange the financing so we could buy there and build. Part of our model there was to start bottling because we had another debt to pay, and we needed to put together as much volume as we could.
We learned as we went and we made more than our share of mistakes. But we were always making good beer, and the industry was growing rapidly. We kept adding onto the building. We never really had a master plan. Now we’re kind of paying the price for that, because if we had it all to do over again we might have configured the building differently. But it is what it is. We’re still having a great time and we’re still making really good beer.
I saw that you are now into Texas. Are you distributed throughout the West now?
Pretty much. It’s our 13th state. Utah is still the hole in the donut, but we’re trying to get beer there as well. Their laws and our laws don’t mesh real well; we just want to make sure that appropriate care is taken towards the beer. We’re certain that when the consumer gets the beer they’ll like it. I lived in Utah for 12 years before I moved to Bend, and we have a lot of friends there. I’d love to be able to sell beer there.
What are the areas where you’re doing best?
The Northwest is our core. Nearly 50% of our sales are in Oregon.
Are you the largest seller in Oregon?
According to the numbers we’ve seen. But now with the Widmer merger and the Craft Alliance, I think they’ve taken back the number one spot.
Are you a skier by any chance?
There was a time when skiing was close to the most important thing in my life. It’s the reason I went to Utah. I don’t ski much any more I’ve got two herniated disks that I’m trying to rehab. I think I skied two days last year. We’ll see how I do this year. This getting older stuff is hell.
I had an assumption that you enjoyed the outdoors because the Deschutes brands are so attached to that Central Oregon landscape.
We are attached to Central Oregon, that’s for sure. If we had it all to do over again, would we name one of our beers Mirror Pond Pale Ale and Black Butte Porter? I don’t know. They were brands to be marketed in a local brewpub. Naming them after local geographic landmark was fine. Does somebody from new Mexico know anything about Bachelor? That’s a single guy. They probably don’t know the peak and the ski area. We’ve been a little bit hamstrung because those brands don’t necessarily resonate outside of the area, but it is who we are and where we are from. We’re proud of that.
Has it been fairly steady growth over the years?
Yes. We’ve never lost ground. We’ve grown every single year. Sometimes we grow slow, sometimes we grow fast.
How about these past few years?
They have been okay. As more of our growth comes outside of the Northwest we have been challenged with our message. We are working on that. We are interested in being authentic to who we are and figuring out how to tell our story in a meaningful way. That’s not as easy as it sounds.
Right now we don’t have a ton of excess capacity, so we don’t need to see the big double-digit gains that we saw once upon a time. We’re perfectly comfortable with keeping up with the market growth.
This restaurant is a huge endeavor.
Yeah, but it’s where I came from. And it’s our first one in 20 years. We had a lot of fun building this place. And it’s still a lot of fun. This is going to be that place that people want to hang out in, like our pub in Bend. We’re not there yet. Those things take time.
How many employees are you up to now?
The last time I asked that question the answer was 290.
When you have a successful business it grows over time. But there are certain consumers, many of whom appreciate craft beer, who don’t like big companies.
You noticed that, too. Really. (Rolls eyes).
There are people out there for whom success is bad. If you are successful you have sold out. All we can do is be who we are. And at the end of the day, a product speaks for itself. Our product isn’t nearly as good as we want it to be. It is better today than it was yesterday. And it will be better tomorrow than it is today.
Some people have opinions about us based on incorrect assumptions about who we are as a company. I can’t control that. All I can ask of our company is to be the best we can be. We have had a major impact on the community of Central Oregon with the community orientation of our company. I mean millions and millions of dollars.
One of the interesting developments in the industry has been Widmer’s merger. Now Widmer is a public company with a minority stake held by Anheuser Busch, now InBev. What do you think of the model of partnering with a large national company in the name of distribution? Have you been approached? Would you consider it? To get to 50 states is a powerful thing.
Well, it’s really interesting, because from my perspective the primary motivation behind those alliances with Anheuser Busch was for Widmer and Red Hook to get access to a distribution system that had been closed to them. Now that distribution system is opening up. It’s been a much publicized, at least inside the industry, jailbreak. Anheuser Busch distributors are moving away from that agreement with Anheuser Busch. We’ve been approached by a dozen or more large formerly exclusive Anheuser Busch distributors that want to carry our beer. The idea that we would have to pay Anheuser Busch a substantial over-ride for the sales that run through their system, that by the way they have the ownership over, when we don’t have to — the motivation to strike that kind of a deal is non-existent.
We’ve always stayed closer to home. But we do want to continue to grow. We have a lot of people on the East Coast who love our beer. We would like to get it to them. We think that we will, but we don’t know how. Does it make sense in this era of $4 a gallon gasoline to make beer in Bend and ship it to New York? Probably not. Does it make more sense to make it on the East Coast? Yeah. If we can make it the Deschutes way. If we can make it to our standards. That kind of an alliance could be with a big brewery, it could be with a small brewery. Who knows? There have been a lot of interesting conversations about different forms of cooperation between all sorts of different breweries, to solve this very real problem of capacity. Could that yield some interesting new hybrid company? Absolutely. It’s what we’re already seeing in the alliance between New Belgium (based in Fort Collins, Colorado) and Elysian in Seattle, and between Pyramid (based in Seattle) and Magic Hat Brewing (based in Burlington, Vermont). A lot of things are starting to happen and I find them intriguing. But the key is we have to make beer our way. We’re a little eccentric in how me make beer, so we don’t believe we can just move into somebody else’s brewery and make our beer and have it taste like Black Butte Porter or Mirror Pond Pale Ale. We’ve only just begun the conversations. There are new business models being developed all the time. And will there be one that no one has thought of yet? Will we be a part of it? Who knows? Maybe we can satisfy the big issues for us so that we can make our beer our way. Creative, intelligent people will find ways to solve problems creatively and intelligently.
The Magic Hat takeover of Pyramid is interesting because Pyramid went public and was recently de-listed. There’s a risk in going public, and it’s a hard thing to do.
Of all those breweries that went public in the 90s there’s only one that trades at or above its initial offering price.
Sam Adams. There’s only one. And there were six or eight of them or more that went public. A lot of investors lost a lot of money in that process. Also the environment for public companies has changed through Sarbanes-Oxley. I sit on a public company board in Bend (Clear Choice Health Plans) and I can tell you that it is a very challenging and expensive environment to do business in.
One of the things we learned when all of those companies went public in the 1990s is, beer is not software. Some people thought it was, that you could get these massive increases. But the beer market has not expanded or contracted more than a percent or so per year in aggregate for as long as anyone can remember. We’re not creating a new paradigm here.
So we just try to continue to build the company, grow it, add value, take care of our community and the people we work with. Sometimes we’ll grow fast and sometimes we’ll grow slow, but we expect to always grow.
The market became saturated to a certain extent.
It did? In what way?
It seemed in the late 1990s there were lots of new companies that didn’t last.
That was what the media said. I have always taken issue with that analysis and I will tell you why. The industry grew every year during that “contraction.” Every year. It never went backwards. That doesn’t sound like a shakeout to me. Some companies that never should have gone into business went out of business. Most of them were restaurants, were brewpubs. The restaurant business is the riskiest of all small businesses. Restaurants go out of business every day, and nobody talks about the shakeout in the restaurant business. There are companies that succeed and companies that fail. I don’t find anything untoward about that. That’s our system. At that time, we didn’t have 3% of the market. The consumer base has grown.
People ask me: ‘There are 90 breweries in Oregon. How many breweries can Oregon handle?’ I turn it around. There are 350 wineries in Oregon. How many wineries can Oregon handle? There are 2,000 wineries in California. Have you ever heard anybody talk about saturation in the California wine industry? Saturation? Are you kidding me? [Craft brewing is] 4% of the market; 1,400 companies nationally share 4% of the market. And it’s growing, and it will continue to grow. Saturation? We haven’t even scratched the surface
Craft beer has reached 4% nationally. What is it in Oregon and what makes Oregon different?
It’s about 15% in Oregon. About 11%% of that is actually brewed in Oregon. Oregon has a more adventurous consumer, a more sophisticated consumer. These are the crazy people who want to live where it rains all the time. Oregon consumes beer on premise in draft. People don’t grab a six-pack and go to the beach. They go to the pub because it’s raining out.
Also, some very talented, entrepreneurial brewers started in Oregon, whether it’s the Widmer brothers, the Ponzis at Bridgeport, the McMenamin brothers or whoever, so had some great brewers who didn’t screw up. And then you had Jim and Bobbie Kennedy, who started Admiralty Beverage (distribution), who are as responsible for the growth of craft brewing in Oregon as any brewer. They were out there evangelizing about these beers and did a lot to grow the industry and engage and educate the consumer and the retailer.
I saw a sign over there on the wall that says, Here’s to bringing brewing back to the Brewery Blocks.
The people from Gerding Edlen gave that to us. It’s pretty cool. Now the Pearl has us, Bridgeport, and Rogue. Rogue doesn’t have a brewery here but they certainly represent the industry and they have their little distillery. Then there’s Henry’s Tavern and the variety of beer they sell there. These are all culturally relevant things for Portland and this neighborhood.
Probably when you add them up there are as many jobs as when Henry’s was operating full tilt here.
I think more. Absolutely: You multiply it by the number of restaurants based around craft beer and you get huge numbers.
So you’re at 4% now. How big can craft beer get?
How high is up? All we want to do is get to 5%. And then we’ll talk about 6. I think there’s lots of room. There’s only 96% left.