ADVERTISEMENT

Ryan Petz and his three partners, from left, Jim Diley, Peter Grande and Brian Huffman started the Fulton Brewery in a garage in south Minneapolis. Now, they're in the final stages of renovating a space near Target Field.

Richard Sennott, Star Tribune

Schafer: Profits aren't what draws people to brewing

  • Article by: LEE SCHAFER
  • Star Tribune
  • October 5, 2013 - 9:31 PM

Anybody touring Fulton Brewing Co. the other morning would have noticed the big guy working up a sweat on the top of the brew kettle.

He turned out to be the president, Ryan Petz. And it was just another Thursday at the brewery.

“You wouldn’t believe how many times people come up to us and say, ‘You guys are living the dream,’ ” Petz said later. And while he and his partner Jim Diley mostly agree it’s great fun running a brewery, Petz said, “I certainly don’t find it easy.”

Of course it isn’t. Brewing is a capital-intensive, highly regulated business dependent upon third-party distribution and fickle consumer tastes.

People tempted to call the recent expansion of craft brewing a boom need to understand that booms happen when early entrants in a market get outsized returns on capital, and more capital then floods into the niche. That’s what is happening in craft brewing — except, of course, for the outsized returns part.

“It is not now and never has been a traditional path to wealth creation,” said Tom Acitelli, author of “The Audacity of Hops,” a well-regarded book on the craft brewing segment. “It is easier to start up, easier probably than it ever has been. To stay in business is a whole another matter, and we are going to find that out in the next few years.”

Fulton is one of a handful of popular and growing upstart brewers in the region. And the granddad of the locals, Summit Brewing Co., has expanded this year, too. Summit got going in 1986, and will by year-end have $40 million invested at its brewery in St. Paul. Asked about returns on that capital investment, founder Mark Stutrud said, “From what gets published in the media and how this industry is presented and polished, it seems much more lucrative than it really is. The amount of capital it takes to put a plant together well is phenomenal. It’s certainly a long-term proposition.”

Acitelli said there has already been one big wave of craft brewing washouts — entrepreneurs who took a look at Boston Beer Co. and Pete’s Brewing Co. 15 or 20 years ago and thought beermaking looked easy. “A lot of people jumped into it and they were not interested in the craft,” he said. “They just wanted to make a quick buck,” and the early 2000s recession did many of them in.

Among the eventual casualties was James Page Brewing Co. of Minneapolis. The cover letter to James Page’s equity offering of 1999 was brimming with optimism, particularly in its “frequently asked questions” section.

“Can the membership units appreciate? The answer is yes,” the letter began. “What other return is there for investors? The answer is dividends.”

The final answer turned out to be liquidation in 2005. I managed to track down one of the former directors of James Page, and he declined to discuss the business at length but did make this observation: “It’s a fine hobby, but I wouldn’t want to invest in a brewery.”

Fulton’s history fits right in with the kind of hardscrabble stories told by Acitelli. It even started in a south Minneapolis garage.

Jim Diley had been given a Mr. Beer kit as a gift, and while it’s hard to make good beer with one, he did catch the brewing bug. As Petz put it, “Jim was the one who sort of roped us all into home brewing and so maybe it was all his idea.”

Their first brewery was capable of making 10-gallon batches and was built for $175. When Diley’s garage got crowded, the brewery was moved to co-founder Pete Grande’s two-car garage.

Fulton became a business in 2009, in part because it was the depth of the recession and Petz was having trouble even getting an internship. Diley, Petz, Grande and co-founder Brian Hoffman had no money and school loans to pay back.

In 2010, Fulton sold 20 percent of the company to 14 investors, a classic friends-and-family round, although the founders will not disclose terms or valuation. The proceeds, along with loans, allowed them to build the current 6,000-square-foot brewery and later a taproom, just a short walk from Target Field.

In 2012 the brewery produced about 3,200 barrels, and it may exceed 9,000 barrels this year. Fulton also bottles its products through a contract with a brewery in Wisconsin. Clearly capacity constrained, the partners announced in September that they were adding a 51,000-square-foot building in northeast Minneapolis.

The expansion doesn’t mean that Fulton is flush with cash. The partners said the company has been cash-flow positive — enough for Diley and Hoffman, the last of the four founders, to quit their day jobs and join full-time in the summer of 2012. The new brewery is a $3 million capital project to be financed in part with a Small Business Administration-guaranteed loan, cash flow from operations and funding from Trillion BTU, an energy efficiency improvements financing program administered by the St. Paul Port Authority.

Fulton is far from the only craft brewer looking to expand. Out in the western suburbs of Minneapolis, Excelsior Brewing Co. plans to start in November on an 8,500 square-foot expansion to what’s now just a 3,000-square-foot operation. John Klick, one of three founders, said Excelsior will brew about 1,500 barrels in this, its first full year, and it’s selling every pint it can brew. Klick is planning to book at least one dollar in operating income this year, since that sounds so much better than break even.

Like other brewers, Klick gets plenty of inquiries from folks itching to start a brewery, and he said he offers aspirants realistic advice. Pull at least $1 million in capital together, he will say, and get an experienced brewmaster on the team.

But Klick also said brewing is not just fun, it also can be profitable. As he put it, “You can’t tell me the Fulton boys won’t make some money if they ever sell that brand.”

 

lee.schafer@startribune.com • 612-673-4302

© 2014 Star Tribune