Good things brewing

NEW ULM, MINN. - Ted Marti, the fifth generation of his family to head the 147-year-old August Schell Brewing Co., had no illusions about the prospects for success when he ransomed the Grain Belt brand out of bankruptcy five years ago.

"Once a brand falls out of favor, it's a monumental task to revive it," said Marti, 56. "I thought we could keep Grain Belt alive, but I really didn't expect any significant growth."

He was dead wrong -- which is good news for both the Grain Belt and Schell brands.

Since the beginning of 2003, the first full year after the acquisition, Schell and Grain Belt sales have been growing at precisely the same pace, an annual rate of better than 9 percent.

Combined sales have risen 28 percent since then: from $7.7 million in 2003 to $9.9 million last year, with revenue on track to grow another 11 percent this year, to $11 million.

By comparison, industrywide sales of American lager beers -- the dominant category that includes Grain Belt and most of the major brands -- have been growing at an annual rate of 2 percent or less.

Meanwhile, sales of Schell's specialty "craft beers" had been growing at an annual rate of less than 7 percent in the five years before the Grain Belt acquisition. And at times in the 1990s, Marti said, there'd been no growth at all, the result of the company's dependence on the unreliable business of contract brewing for other companies.

In short, all's well at Schell headquarters, a scenic campus built into the side of a hill high above the Cottonwood River amid a thick forest of oak, walnut and black spruce.

It wasn't always so tranquil, Marti said. At one point in the early 1990s, with 60 percent of Schell's revenue generated by contract brewing, it lost virtually all those sales when a key client chose a new vendor.

"I used to hate that business," Marti said. "You never knew from one year to the next what you'd have."

Finding an alternative to contract brewing wasn't the only reason Marti risked an undisclosed investment, reportedly approaching seven figures, to acquire a brand that had been in decline for several years. For one thing, he figured that if he could resuscitate Grain Belt, it would strengthen Schell's bargaining strength in the marketplace.

"The beer-distribution business was consolidating rapidly," leaving Schell as an ever-smaller part of a distributor's business, Marti said. "We needed something like this to give us more clout with distributors."

It worked: With the merger, Schell added about 25 new Grain Belt distributors and strengthened its position with 30 more that had been handling both brands, Marti said.

Marti also saw the acquisition as a diversification move that balanced Schell's focus on craft beers with Grain Belt's American lagers.

Craft beers are made with all-malted barley to provide a fuller, heavier flavor and somewhat more alcohol than the more popular lager brands, which use a mix of barley with corn or rice.

Success of this strategy, however, depended on Schell's ability to reverse the downward sales trend for Grain Belt, which had suffered through a series of ownership changes that led to reliability issues with distributors and product-quality problems with customers. All of which left little cash for sales and marketing.

Schell spent several months tweaking the Grain Belt formula to restore its quality. Then it expanded its sales staff from three to seven and added $1.5 million to its $1 million sales and marketing budget to "reintroduce" Grain Belt to the market.

"We provided the product consistency to win back old customers and promoted the brand's long Minnesota history to attract new customers," Marti said.

And it succeeded so well that Schell wound up investing $3 million to boost production capacity from 70,000 to 95,000 barrels a year.

It was but the latest in a long series of strategies that have assured the survival of a company that was up and running before the Civil War. Consider:

• When Budweiser, Miller and Coors were making serious inroads into Schell's sales of lager beer, the company shifted to the craft beers in the mid-1980s. And while "the Midwest is not the hottest craft beer market in the country, our craft sales have been growing consistently since then," Marti said, in large part because of "great brand loyalty" across southern Minnesota.

• During Prohibition (1920 to 1933), Schell's stayed afloat by brewing "near beer," selling candy and making a root beer that one fan described as "thick enough to seal-coat your driveway." The company still produces root beer and other soft drinks on a contract basis, a business that generates $1 million a year on top of the beer gross.

• And during the famous Sioux Uprising of 1862, when the city of New Ulm was under siege, the Schell brewery was spared.

Family lore credits the fact that August Schell's wife was given to giving food and drink to native passersby out of the back door of the family home, which now houses the company's corporate offices.

Dick Youngblood • 612-673-4439 • yblood@startribune.com