By Alen Etzler
Pushing open a pair of black double doors, Keith Marcoux steps from the tasting room at Olde Mother Brewing into the room where the magic happens.
When there’s space.
“This is our nightmare,” Marcoux jokes as he steps into an old dingy kitchen that’s more like a closet than a place to brew beer. Three small brewing tanks line the left wall, which is about all that will fit in the space.
On the other side of the old kitchen of what was formerly Lohr’s Family Restaurant, Marcoux walks through a curtain into an actual closet, where the brewery keeps three fermenting tanks, and what little storage is left. Marcoux, a short but reasonably thin man in an Olde Mother hooded sweatshirt, nearly has to shimmy between the tanks and the wall to get to the storage.
“It’s really been a challenge just to get anything done here because of how tight it is,” Marcoux says.
But, even with tight quarters, decisions for breweries to expand have been met with some skepticism. As growth of new breweries has slowed in the industry, skeptics of craft booze have questioned if a bubble is ready to burst.
Marcoux and Olde Mother co-owner Nick Wilson moved into the 1,800-square-foot space almost three years ago. They’ve done what they could with the space, but its functionality has been more than maxed out for the past year. More than a year ago, the duo signed a contract with another company to brew their beer off-site because they couldn’t brew enough of a supply to meet the demand.
Less than two miles north, a vacant building on North Market Street sits in anticipation of this summer, when Marcoux and Wilson plan to open in a new, expanded location in it.
The brewery’s current location can nearly fit in the new location’s tasting room alone. In the back room of the more-than-10,000-square-foot space downtown, Olde Mother will have a private event space and room for 10 to 12 100-gallon brewing tanks — though Marcoux and Wilson will open the new space using about a third of that. Still, once they open, they’ll be able to effectively triple their production capacity.
Breweries continue to pop up in Frederick, but few have even considered a move to expand. Flying Dog, the state’s largest craft brewery, postponed plans for a $50 million expansion late last year, broadly citing state legislation as the reason. The company did not return a request for comment for this story.
And while the expansion is seen as necessary by Marcoux and Wilson, they realize what the boon in craft breweries in Frederick has done to the industry — made it exponentially tougher to succeed.
“If we would have opened today, I don’t think doing this in two to three years would be in the cards,” Marcoux says of the expansion. “The bar has been raised that much because so many people are making good beer in Frederick.”
Reaching this level of saturation has left many people to consider if, at worst, there’s a bubble brewing beneath the foam, or at best, if the ceiling of operating in a crowded industry might be lower than some had previously thought.
THE NEW GUYS ON A CROWDED BLOCK
On a deck on vacation in Minnesota nearly two years ago, Mike Clements decided to make his basement bar a real brewery.
Clements, who had been brewing beer at his home for 12 years, built a business plan and proceeded to try and land a location to open Idiom Brewing Company in Urbana. Zoning regulations from the county made landing that location nearly impossible, Clements explained recently.
So he and his wife, Rachel, turned their attention toward opening in Mount Airy. They ran into the same challenges there, he said.
That’s when the couple found the Union Knitting Mills building at 340 E. Patrick St. along Carroll Creek in the city of Frederick. Clements had considered Frederick as a possible location, but they saw the number of breweries in the area, and were cautious of saturating the area.
Lease negotiations lasted nearly a year, and the brewery still hasn’t opened, though they expect to open this summer, Clements said. Lease negotiations in the brewing industry can often be a challenge.
“You really can’t brew anything until you have a lease,” Clements said. “But it’s hard to convince someone to give you a lease if you can’t pay them rent for a couple months, because it takes that long to brew something so you can make money.”
Since that conversation on the deck in Minnesota, Clements has seen several breweries open in Frederick, causing further concern of a saturated market. And, while the length of time it has taken to get Idiom off the ground certainly isn’t ideal, it’s too late for Clements to turn back. By the time the brewery opens, he estimates that the family will have invested about $400,000 before it even serves a beer.
“You definitely look at the landscape and wonder if this is still a worthwhile venture,” Clements said. “But we’ve already invested so much into this, for us it doesn’t make sense to back off now. Most brewers don’t feel like there’s a bubble coming. I don’t think there’s much of one either, but it’s definitely on your mind.”
Instead of focusing on surviving in a challenging market, Clements’ goal is to offer something no local breweries have offered thus far: He invested in a small canning operation and has plans to use that to make small cans for special release beers — a common practice from breweries like RAR, which pull in visitors from around the state.
In 2017, the craft beer industry expanded to more than 6,300 craft breweries nationwide, a 15 percent increase from the previous year, according to the Brewer’s Association, which is a trade organization for small and independent brewers. The industry has added more than 4,000 craft breweries since 2012.
There were also more closures in 2017 than there have been in any year over the last five, signaling some slowdown in the industry. The industry saw 165 craft breweries close last year, up more than 40 percent from the 116 craft breweries that closed in 2016, according to the Brewer’s Association.
Earlier this month, Green Flash Brewing, a San Diego-based company that attempted a nationwide expansion, was foreclosed on by its largest shareholder, Comerica Bank, because of the company’s poor business health. Green Flash made its name in 2005 after releasing its West Coast IPA, but it has since become the poster child for too much, too quick, opening a brewery in Virginia Beach that it struggled to make progress paying off.
While Green Flash will continue to operate as a brewery, it has been sold to new ownership and will occupy a smaller footprint.
“After a general slowdown in the craft beer industry, coupled with intense competition and a slowdown of our business, we could not service the debt that we took on to build the Virginia Beach brewery — and in early 2018, the Company defaulted on its loans with Comerica Bank,” Green Flash CEO Mike Hinkley wrote to company shareholders in a publicly released email.
Green Flash’s failures could also be seen as one of the challenges of expanding into new regional markets or a national market, Frederick-based Attaboy Beer co-owner Carly Ogden said.
“Once you try to jump across the country, you’re fighting with local breweries, regional breweries, large scale craft, and conglomerate owned ‘craft,'” Ogden said. “Shelf space at liquor stores is very competitive — we will continue to be very cautious about distributing our beer.”
While the number of breweries has increased, the amount of shelf space in stores has not. That has caused brewers to largely avoid trying to get into liquor stores, and sometimes even restaurants and bars.
“That’s the absolute best way to go,” said White Rabbit Gastropub co-owner Kenneth MacFawn. “A lot of these breweries can sell their beer on site for seven bucks a beer and make $850 on a keg. Or they could sell it to us for $150.”
Idiom, for instance, intends to focus almost solely on distributing on-site to start, with slow growth toward an eventual regional distribution plan in mind. That creates a ceiling for how large a brewery can become, but that’s a good thing, Clements said.
“Breweries are meant for families,” he noted. “I want to enjoy what I do and provide for my family. I’m not trying to be this regional or national brewery.
“A lot of the trouble these big players have is when they get away from what made them,” he continued, “which is the local community. You have to cater to your local audience.”
TOO MUCH, TOO SOON?
Despite the high-profile bankruptcy of Green Flash, local brewers don’t need to look past Frederick County to see the risks that expanding too quickly can bring.
In 1997, Frederick Brewing Company became the poster child of the 1990s craft beer bubble when it opened a large-scale facility that allowed it to produce 80,000 barrels of beer a year. The only problem was the company had never sold more than 11,000 barrels in a year.
The company bet on potential, not demand for the product. The next year, it bought up competitors like Wild Goose Brewery Inc. and Brimstone Brewing Company. The business was eventually placed into receivership and bought by Flying Dog for $1.6 million — at least $3 million less than the company paid for the building alone.
Similar to Green Flash, Frederick Brewing Company operated as a large regional craft beer company. Ogden sees these breweries as the ones most susceptible to a potential bubble that could be looming, adding that mega-breweries like Anheuser-Busch are under the most market pressure.
The numbers support that claim.
In 2017, beer sales by volume were down 1 percent, however the craft beer portion of the market was up 5 percent, according to the Brewers Association.
Craft beer’s sales growth by volume still makes up just 13 percent of the market share, and 23 percent of the market by retail value.
Marcoux sees that as obvious opportunity.
Recently, Olde Mother attended an event at the fairgrounds where they met hundreds of people who had no idea who they were, Marcoux said.
“We realized there are still a lot of people in Frederick that haven’t tried craft beer,” Marcoux said. “They don’t realize there’s an entire world of beer they haven’t experienced yet.”
The challenge becomes if Olde Mother can lure those people into their tasting room. The duo contends that all it takes is easing new customers into the environment. Start them off with beers similar to the ones they’re used to drinking — most commonly a lager.
While a craft beer can take some getting used to for someone who has only ever opted for Bud Light, the more craft beer someone drinks, the more refined his or her palette becomes. Once that happens, they become open to trying more styles, Marcoux said.
“Once they come into a local brewery, they usually see that what they get in here is way better than any of that s— they would get from (a big beer corporation),” Marcoux said.
Craft beer prices could be a turnoff to some of those customers who haven’t visited a local brewery, Marcoux admitted. It’s not unheard of for a six-pack of craft beer to cost more than a 12- or even 18-pack of just about any domestic light beer on a liquor store shelf.
But, if any city is willing to pay increased prices for locally produced products, Frederick is a good one to bet on, Wilson said.
The median household income in Frederick County is above $83,000, according to 2016 census data, which is about $24,000 above the national median. Even though Frederick has a higher-than-average cost of living, there are still plenty of families that can afford the higher prices — if they’re willing to pay.
But until it can lure in some of those new customers, Olde Mother relies on its regular customers, and the tourists who don’t mind paying what essentially amounts to similar prices one would pay visiting most downtown Frederick bars.
“We’ve been really lucky to build a great base of regulars who enjoy coming in here and honestly don’t mind paying a little bit more for better beer,” Wilson said.
WHAT MAKES A BUBBLE?
Economic bubbles have been occurring for centuries. One of the first reported bubbles was in the tulip bulb market in the 1630s in the Netherlands. The tulip was introduced in the Netherlands from Turkey and seen as a status symbol by the Dutch. As people quickly rushed to buy them, the price rose significantly.
It got to the point where buyers would mortgage their homes to buy tulips. But in 1637, the bubble burst and speculators lost everything.
If a bubble does exist in craft beer, the indicators haven’t become obvious to economists, yet. Price point is usually a primary indicator of a bubble, said Emil Berendt, assistant professor of economics at Mount St. Mary’s University. While Berendt hasn’t studied the beer industry, he understands the general concepts of an economic bubble and they usually have a few things in common.
“Prices normally rise when there are things such as an increase in the costs of providing the asset or a disruption in supply,” Berendt said. “But, in a bubble, prices rise significantly above what economists would call the item’s ‘intrinsic value.'”
Another sign of a potential bubble is that people get caught up in excessive optimism that the bubble will continue. Or, in other words, people keep buying with the hope of reselling at a profit and they don’t consider that the good times will eventually end, Berendt said.
The third sign of a bubble is that buyers take on much more debt than usual to buy the items, he added. Typically, a good is put up as collateral, so once the market drops, the borrowers not only have difficulty repaying the loan, but they lose the collateral as well. This is the most likely place a bubble could occur within the industry, with brewers putting up collateral to start or expand a business, but then struggling once it opens.
If the industry were to take a hit, the effect on Frederick’s economy would be sizable. Outside of the brewers themselves, Frederick has a growing contingency of bars and restaurants primarily offering craft beer.
White Rabbit, which opened in July 2017, has built its brand betting on craft beer. The gastropub offers 40 rotating taps daily that are based on various styles of beer. While the beers change, they always keep four pale ales and eight IPAs in the rotation.
“It’s the backbone of our business,” MacFawn, the gastropub’s co-owner, said of craft beer.
White Rabbit, which is at 18 Market Space, opened its restaurant in a location in which it had previously been challenging for businesses to be successful.
Before White Rabbit, Skuare Burger occupied the space and closed within a year. Before that, Mistero opened and closed in the same building. The space hasn’t seen a business have long-term success since La Paz operated in it for two decades, before selling the building to move onto Market Street.
Co-owner Chris Hubbard knew it was imperative to offer something that few other spots could, so they went all in on an expansive craft beer program, which provides beer from all over the world, and allows visitors to purchase crowlers — 32 oz. cans — along with the typical pint glass or 5 oz. tasting glass.
Just across town, Oscar’s Alehouse opened recently on East Street, between Midnight Run Brewing and Rockwell Brewery. The alehouse, which has its first restaurant in Eldersburg, keeps 36 beers on tap, the vast majority of which are from small and independent breweries.
A crash in the industry would likely hit restaurants hard as well, but Hubbard has no concerns that a bubble could be in the future. For instance, the restaurant is scheduled to host an event that spotlights Frederick beers only, though Hubbard and MacFawn are having trouble getting kegs from the local breweries.
“It’s just illogical (to think there’s a bubble),” Hubbard said. “They’re doing so well, they’re not even sure if they can get us a keg. I think there is more competition so people will have to keep making good beer. But I don’t see people moving away from drinking craft beer any time soon.”
Bubble or not, it’s likely the mega-breweries like Anheuser-Busch still pose the biggest threat to the craft industry.
Anheuser-Busch has been on a spending spree in recent years, buying up 10 formerly independently owned craft beer companies in an effort to continue dominating market share and shelf space.
“They use their large scale distribution networks and their deep pockets to aggressively take over markets, pay off politicians to sponsor legislation to change laws to be anti-small craft beer, just like what is happening in Maryland,” Ogden said of the big beer corporations. “For small breweries like us, the biggest worry is that (Anheuser-Busch) is going to work with legislators to create laws that restrict small breweries and taprooms.”
CAN THE LOCAL SCENE CONTINUE TO THRIVE?
Frederick has been one of the largest beneficiaries of the craft beer explosion of the last decade. As recently as 2010, only three breweries existed in Frederick — Flying Dog, Brewers Alley and Barley and Hops. Since then, the county has added more than a dozen breweries and farm breweries — with at least two more, Housecat Brewing Company and Idiom, set to open soon.
While Flying Dog operates as the largest brewery in the state, most of the breweries operate at a much smaller scale.
That creates an obvious market ceiling for these small breweries. They all might be able to co-exist, but in competing for the same customers, they can only bring in so many customers.
Locally, most brewery owners have deflected expressing any desire to expand, or get to the size of big-brother Flying Dog. To some, that may seem like a lot of competition, but Ogden sees an opportunity for all of them to co-exist.
“We don’t think the beer business is untouchable, but we do see an overall trend toward small, locally produced goods — whether it be craft beer or spirits, produce, or baked goods,” she said. “Consumers are pushing away from big chains and mass-produced goods, and shopping local.”
Ogden, who grew up in Portland, Oregon, likened the current craft beer scene to her hometown. As of 2016, Portland had the most breweries of any city in the U.S. and the sixth most per capita, which has made it a destination for tourism and culinary exploration, Ogden said.
In the basement at White Rabbit, Hubbard and MacFawn have more than 100 kegs stacked on top of one another, nearly hitting the ceilings. They had a friend build special shelves to hold kegs in the freezer so they could fit all 40 kegs in the room. Even with about $50,000 in inventory in their basement, a keg doesn’t stick around too long — the restaurant goes through more than 40 kegs per week, MacFawn said.
Hubbard and MacFawn have also grown their clientele to be about 40 percent return customers, indicating a dedicated base of regular patrons. That also means more than half of their customers are visiting for the first time.
“We’re don’t really have emotional conversations about our business plan or what we’re doing,” MacFawn said. “We have data to back these decisions. And the data says what we’re doing is working.”
While Marcoux doesn’t think an economic bubble exists in the craft beer industry, he and Wilson understand that more breweries means everyone has to up their game.
“I think if we’re going to see anything, it’s that the breweries that continue to make good beer and know how to brand themselves are going to be fine,” Marcoux said.
That’s another reason the boys from Olde Mother feel now is the perfect time for their expansion.
In their current facility, they have been limited not just in amount, but in the styles of beer that they can brew. Because they barely have enough space to walk, they haven’t been able to experiment with styles like barrel-aged stouts as often as they’d like.
“This new facility is going to open so many doors for us to do some really cool things and make some amazing beer,” Wilson said.
But, with hundreds of thousands of dollars wrapped up in this move across town, there will be very limited excitement from Wilson and Marcoux until they open. While the move, they feel, is a necessary one, they know what people are saying about the industry. And they know the risk involved.
“I’m cautious about anyone who is overly optimistic about this industry,” Wilson said. “We feel good, but we understand the risk. There’s real stakes in this game. There’s a lot of money involved.
“And,” he concluded, “we have to do this right.”
Follow Allen Etzler on Twitter: @AllenWEtzler