[00:00:00] Jessen Fonte: How do you grow while scaling down? Tomme Arthur from The Lost Abbey will tell us how next on the Brewbound podcast. Hello and welcome to the Brewbound podcast. My name is Justin Kendall, and I'm the editor of Brewbound and I'm joined by Jessen Fonte, the managing editor of Brewbound. What is up, Jess?
[00:00:28] Lost Abbey: Not much. Hi from the official Brewbound World Headquarters studio. How are you?
[00:00:35] Jessen Fonte: Very fancy. I can't top that. I'm here in the unofficial Brewbound recording studio in Grimes, Iowa. It's very luxurious. Secret bunker. Secret bunker, yes.
[00:00:50] Lost Abbey: secret bunker. You're in a bunker. I'm in a middle school hallway. But our third co host here is Zoe Licata is in the lovely decorated. I don't want to call it a Harry Styles shrine because there is some David Bowie present. It's pretty close. Home studio looks great, Zoe.
[00:01:09] Tomme Arthur: Thank you. Reporting live from this getting slightly concerning growing wall of memorabilia.
[00:01:17] Jessen Fonte: Which we've contributed to. So apologies and no apologies, I guess, because it was your birthday.
[00:01:24] Tomme Arthur: Yes, I appreciate it.
[00:01:26] Jessen Fonte: Well, let's get into this week. And first, we've got to plug our Brew Talks conversation series that's coming to Nashville Underground during the Craft Brewers Conference on Sunday, May 7th, 2 to 5 p.m. Central Time. We've got a couple of talks. Zoe and I'll be there. Zoe, what do we got going on?
[00:01:45] Tomme Arthur: Yeah, so our first talk, we're talking all about the two kind of conflicting trends of high ABV and low and no alcohol offering. So we have some friends from Dogfish Heads, from Athletic Brewing, from Greater Good right over here in Massachusetts. So that is going to be a fun conversation. And then you've kind of spearheaded our second panel here talking about out-of-state taprooms.
[00:02:12] Jessen Fonte: Yeah, we're going to talk strategies for expanding into other states with taprooms. So you're digging deep in a new state, trying to build a local following there. And there are various strategies that folks at Monday Night Brewing, High Wire Brewing, and Weathered Souls have all undergone that we're going to discuss there. And then we're also going to have a conversation with the National Black Brewers Association, which will be starting up. So lots going on there. Tickets are available now at Brewbound.com. So head over there, pick those up and we'll see you in Nashville. And The Lost plug for this week, Tomme Arthur from The Lost Abbey is here on the podcast. He's going to discuss how that brand is growing down, what they're going to do next, where they're going and what are the opportunities he sees by downscaling the business. Stay tuned for that, but. We've got news to hit and let's start with Diageo is closing its production facility in Maryland. Jess, we hopped on this story yesterday. What do we got going on here in Relay or, you know, on the Diageo campus?
[00:03:23] Lost Abbey: So the Diageo campus in Relay, Maryland is closest to Baltimore, but not in the city proper. It's a big Diageo facility that I guess they've had for a while that makes all kinds of stuff, former home of Calvert Distilling. And this is going to result in The Lost of unfortunately about 97 jobs, close to a hundred. Looks like the work's going to wind down in June. The facility can do a lot. It can do about 11 million cases, which translates to 800,000 barrels for our purposes. So we'll see. I mean, they opened the Guinness Open Gate Brewery there in 2018 as a stateside home base for Guinness, which, you know, is an iconic Irish brand. And there's a taproom, pub, restaurant, brewery, experience visitor center, all of that stays. So that will remain open. It's just this production facility that was making plenty of other things. But one of those things was Baltimore Blonde, something that Guinness had started making for its new hometown. And it sounds like the crew at the Baltimore Business Journal ascertained that that would be going away. So we'll see what happens, but not to worry if you were a fan of hanging out at the Guinness Maryland Brewery, that will still be around.
[00:04:42] Jessen Fonte: Yeah, I dug up that 11 million case number this morning. It was in an old press or a couple of old stories that are out there. So that's my understanding is that they can do up to 800,000 barrels of production or around there. But to me, that's more excess capacity that's on the market in the US that is likely going to be very attractive to someone. And I wonder if that someone would be a Japanese brewer who is looking for stateside production. We've heard all about several looking for that. And we just saw New Belgium, which is owned by a Curin subsidiary, Lion Little World Beverages. We saw what they did, what was it, a week ago when they picked up the Daleville, Virginia production facility. So maybe they're out of the market now. Maybe they've got all they can handle there once that deal closes. But I would think that this would be very attractive to somebody, maybe an Asahi, I don't know.
[00:05:46] Lost Abbey: Yeah, plenty of other Japanese brewers that were mentioned in that Reuters story back in December that are looking for capacity. So I don't know if any of them listened to this podcast, but hi guys, if you do, facility in Maryland, you might want to take a look at.
[00:06:01] Jessen Fonte: Yeah, I'm sure that they're probably already on it. Let's get to the other story that involves layoffs from The Lost week. And Zoe, this is one that you picked up on and that's e-commerce platform Drizzly is cutting around 100 jobs as well. Take us through what's going on there.
[00:06:18] Tomme Arthur: Yeah, so we started seeing some tidbits of this last week on Twitter and on LinkedIn of several people in various departments at Josely saying they had been let go. And so we eventually found out that it was a hundred, about a hundred jobs across the company. The first statement that we got from Drizzly that it was in order to, quote, secure Drizzly's future and lay the foundation for the long-term success of both brands and our combined businesses. As some people may know, Drizzly was acquired by Uber a few years ago. In a second statement, they tried to clarify that this was part of that restructuring they had to do because of that Uber acquisition. But Drizzly's been making quite a few moves lately of having a kind of new brand direction and focusing on a lot of different things beyond just their e-commerce delivery of alcohol. They have a editorial service now, they run a advertising consulting agency now. So this, I don't know if it's entirely surprising, especially tech jobs in general have been seeing a lot of layoffs recently. It seemed like a lot of these people were remote workers too. So we'll see what that has to do with it. But interesting events for people. And Drizzly, a little iffy on communication about it.
[00:07:43] Jessen Fonte: The thing that surprised me coming out of this was that folks didn't make as big of a deal about these tech layoffs as they have some others in the past. And I don't know if it's fatigue or what, but it felt like there wasn't a lot of follow-up coverage to this one.
[00:08:00] Tomme Arthur: I will give a little bit of credit to Drizzly that there was not a single post that I saw from an affected worker that was negative about their time at Drizzly. And I don't know if there are other factors going on there, but yeah, it seems like we're kind of just used to these happening now. So there's not as much, there's not as many alarm bells going off.
[00:08:19] Lost Abbey: And this is also a lot smaller than a lot of the other tech layoffs that have been making news. Like Meta has laid off like more than 10,000 people. So compared to that, this is tiny.
[00:08:29] Jessen Fonte: On the subject of those posts, though, some of those workers' posts ended up disappearing.
[00:08:35] Tomme Arthur: That is also true. After some of our initial reporting, some of The Lost which had categorized this as like a tidal wave of layoffs and had got given a little bit more details were deleted after our coverage went up. So a little suspect there, but we can't really draw any concrete reasoning behind why those happened.
[00:08:56] Jessen Fonte: I think we can all probably figure that out, you know, without saying it out loud. The other story that sort of hit pretty big, I would say, is Politico reported that the Federal Trade Commission is investigating one of the largest alcoholic beverage wholesalers in the U.S., or the largest, Southern Glazer.
[00:09:17] Lost Abbey: Yeah. And shout out to my husband for DMing me the Politico tweet about this story, which allowed us to hop on this really quickly. But Southern Glazer has been in the bedrock news a lot lately for a bunch of different things. But they're the country's largest wine and spirits wholesaler. They're in almost every state. They are really, really big. And this all kind of stems from to really the easiest way to tell the story is to go back to last June. June of 2022, a group of California retailers filed a lawsuit against them, claiming that they were not offered the same prices as large retailers like Albertsons. So these small, mostly seem like mom and pop liquor stores, claimed that Southern Glazer was selling, for example, one of the products called out here was 750 milliliter bottles of Johnny Walker Black. And Albertsons was selling them for $19.99. And these retailers bought the same product from Southern Glazer for $22.25. Now, there's a discrepancy there. And there's a few things that can come into play here, like quantity discounts. I am not exactly sure if that's legal in California. It varies state by state. But basically, these guys saw this and thought, hmm, we're not getting the same deal. as Albertsons, which is a huge grocery chain. So they filed a lawsuit back in June. There's a trial set for this coming December of 2023. But a couple months after that happened at the end of October, we got news out of a Bay Area publication that there was a raid on Southern Glazer's office in the area. And there was very, very little information that came out about that at that time. But regulators from the TTB, you know, like the Department of Treasury's Alcohol and Tobacco Tax and Trade Bureau, and also the IRS raided the office in Union City, California. And now Politico reported last week with a lot of anonymous sourcing, people agreeing to speak about the subject on condition that they're not named. I know there's occasionally there's some miscommunication out there about what anonymous sources mean. So on behalf of my journalism soapbox right now, anonymous sources are not anonymous to the reporter. The person writing that story usually knows who these guys are.
[00:11:37] Tomme Arthur: We have to verify that they actually know what they're talking about. So we need to know who they are.
[00:11:41] Lost Abbey: Exactly. I know my husband teaches high school history and sometimes when he gets to Watergate and he'll talk about stuff like that and the kids get very confused because they just think like the reporters are making this up. In the interest of media literacy, these sources are not completely anonymous. Usually they are known, but their names are kept out of the story to allow them to speak freely and not, you know, face any kind of retaliation at their jobs. So in this case, you know, Politico reported that there's potential violation of the Robinson-Patman Act which is a law that bars companies or suppliers from offering better pricing to large retailers at the expense of small retailers. That's what's being alleged here in the case of these five small California liquor stores versus Albertsons.
[00:12:33] Jessen Fonte: And Coke and Pepsi are, they are also under investigation reportedly for violations of the Robinson Patent Act as well.
[00:12:43] Lost Abbey: Yeah, so it's not just confined to Bev-alc, spilling into the non-alc world as well. And the timing of all of this is just interesting because we're now what? Two years out from the official release of the competition report?
[00:12:59] Jessen Fonte: Yeah.
[00:12:59] Lost Abbey: Two years? Maybe one year?
[00:13:01] Jessen Fonte: I think so. I mean, it was a talk last year at CBC.
[00:13:06] Lost Abbey: Yeah. Yeah. You know what? I think the initial executive order came out in the summer of 21, and then that big 64-page report came out in February of 22. So that's really shown that the federal government across many agencies is taking a much closer look at what's going on in a bunch of industries across the country, but in particular at the beverage alcohol industry. So I don't know that this was something anybody had on their radar as being like something, a big, big priority that we would see action on first, because there's been a lot of talk about other things that happen in BevAlc like category management and tie-in sales. And interesting that this is something that's popping up here.
[00:13:45] Jessen Fonte: I think this is just the beginning. For sure. Our friends at Beer Business Daily did a report earlier this week basically saying that the conditions are rife for increased enforcement. And I think we're seeing that. And this is just the tip of the iceberg.
[00:14:04] Lost Abbey: Yeah, that was a really nice piece from the crew over there basically saying like, hey, like get your act together or else kind of.
[00:14:15] Jessen Fonte: And we've had warning flares go up on other things this year that, you know, we have a lot of folks who are saying producers are flying too close to the sun, basically, with some of these innovation products, these crossover products. And you can see in state legislatures what they're doing as far as label approval for some of these, denying them, I think. Utah was one example recently that they said, no, we're not going to approve these labels. You can still sell them, but you know, they cannot be similar or something like that.
[00:14:46] Lost Abbey: Yeah. And I'm sure we covered the Virginia situation last week on the pod, but in Virginia, if you're making, you know, a Bev-Alc product that borrows a brand name from a well-known non-Alc product, they cannot be near each other at retail.
[00:14:59] Jessen Fonte: Yeah.
[00:15:00] Lost Abbey: Yeah. We'll see more. I mean, a little background on Southern Glazer, just for those who don't know, you know, 42 distribution centers that carry 7,000 brands and make 6.4 million deliveries to retailers annually. Huge, huge operation in just about every state except a small handful also in Canada.
[00:15:17] Tomme Arthur: So do we now have to put Ryan on staff because he helped us find this story? Does he get a stipend now? I don't think so.
[00:15:27] Lost Abbey: No, no. This was done out of the goodness of his heart. And might I say his timing was very peculiar because it was like end of the day, I was getting ready to pack it in and go to a birthday party that night actually. And he's a very handsome man and I love him very much, but those extra 30 minutes of work were a little stressful. But we got the story out. Yep. Yes. Well done.
[00:15:54] Jessen Fonte: One more thing for the new section of this show, let's talk a little bit about innovation and Bump Williams put out a report recently that producers really need to start innovating more efficiently. And the other half of that is consumers are confused by a lot of this variety out that's out there. And I think the third thing was spring resets are taking hold a lot slower than people anticipated.
[00:16:20] Tomme Arthur: Yeah, so we got the monthly industry update from Bob Williams at Bob Williams Consulting. And he pointed out that, you know, The Lost 52 weeks through the end of February here, new brands accounted for 12.6% of total beer brands in Nielsen IQTracks channels, but only 1.2% of total beer sales. And so he was pointing out there's a discrepancy with the amount of new innovation out there and how much they're actually taking from the available beer dollar sales. He also looked at specific brands that are putting out these innovations and said, like Anheuser-Busch, unsurprisingly, because they're the biggest guys out there, but they're putting out The Lost new innovations in that period. The payback isn't the same ratio-wise. They are not even in the top 10 So Anheuser-Busch, number one for new brands into the market in the period, but number 10 in actual efficiency of those new brands. And that's calculated just by the number of them by the amount of share of the dollar sales they have. just putting your stuff out there isn't actually going to result in dollar sales back to you. And he pointed to some other brands that have scaled down a bit on it, like Constellation or Mark Anthony brands, which aren't doing as many of those new brands, but are focusing in on the innovations that they do have. And it's turning into a better return at the end of the day. So he's saying, you know, we really need to start focusing on what is the purpose of your innovation? Is it going to actually bring in new dollar sales or is it just going to result in your same consumer going and just picking a different brand within your portfolio? And because of the strategy that many people have had recently of just pushing everything they can out there, it's resulted in consumers getting really confused on just all the stuff that is available on the shelf. And it's trickled down to retailers too, where they don't even know What they should be putting on shelves for consumers yet, because they don't know where trends are going. And so we've had a slower rollout of spring resets. He said it's The Lost he's ever seen in his 43 years in the industry. which is alarming, and he described it as innovation just being in this holding pattern right now, seeing how price increases and RTDs and cannabis beverages and the economy in general, how those are actually impacting sales. Retailers don't really know right now, and so they're unsure of how they're going to lay out their shelf space for the summer selling season. The things that Williams knew were probably going to be the winners at the end of the day were anything that is quality, flavor forward, anything that probably is Modelo or Corona, because Constellation's just been doing pretty well lately. New Belgium's food arranger is going to keep its space. Nickel-O-Ultra, Like Blue Habit Space, Spirit Space RTDs, which we've seen are continuing to climb. Boston Beer's Twisted Tea, which just continues its acceleration as well. Mike's Hard Lemonade and White Claw Hard Seltzer from Marc Anthony Brands. Anything single-serve, especially those 19.2-ounce in the convenience channel, higher ABV offerings, and those non-alcoholic, better lifestyle things, which is what we're going to be talking about at BrewTalks. Those two continuing to make their way in shelf space.
[00:19:47] Lost Abbey: Look at you, what a pro.
[00:19:49] Tomme Arthur: Thank you.
[00:19:50] Lost Abbey: Calling out Brutax.
[00:19:52] Tomme Arthur: Yeah. So I think this is going to be a weird reset because it's been slowing so far, but even with retailers not even really knowing what they want, that's a bit of concern. And if you don't have something that you can show them clearly it's going to have a substantial increase in incremental dollar sales, then they're going to be even more hesitant to put that on the shelf.
[00:20:16] Lost Abbey: The team at Nielsen IQ actually put out a little report about innovation in advance of National Beer Day, which is this coming Friday. So a happy National Beer Day to you both, I guess.
[00:20:27] Jessen Fonte: I'm going to enjoy all those press releases that come in now.
[00:20:32] Lost Abbey: I mean, better that than April Fool's Day, but we'll get into that.
[00:20:35] Jessen Fonte: Yeah.
[00:20:35] Lost Abbey: And in the 52 weeks that ended February 25th, so, you know, that whole year, new innovation products in the beer category brought in $566 million, which sounds like a lot, half a billion, but that is 24.8% lower than The Lost full year period. So we'll have a report on this sometime this week, but I really want to dig into what was new in 21 versus what is new in 22. And I have a feeling we're going to see quite a few different things. But, you know, innovation accounted for 1.4%. That's what the Nielsen report has. I know, Joey, you said a different number for bump, but I'm sure we're looking at slightly different time periods.
[00:21:21] Tomme Arthur: Yeah, it's very similar. It was a 1.2%. Yeah.
[00:21:24] Lost Abbey: So the number of innovation items was 662, which is down 22% from the year before. I mean, it's interesting, but all those brands that you just named, like anything, Modelo, Corona, Twisted Tea, White Claw, these are brands that consumers have known for a long time now, and they have not done. I hate to name names, but they haven't done what say Truly has done, where it's just like new line extension, new line extension over and over again. Lemonade, tea, punch, margarita, you know, like Modelo is Modelo is Modelo and Twisted Tea is Twisted Tea is Twisted Tea. And that's not to say that there's not some offshoots in those brand families. There certainly are, but there's not nearly the amount of dilution that we've seen happen across other brands. You know, there's so many products out there and consumers don't have room in their brains to keep all of them straight.
[00:22:16] Jessen Fonte: And they've kept the main thing the main thing.
[00:22:19] Tomme Arthur: Yeah.
[00:22:20] Jessen Fonte: I think that's the key there is the main thing is still the main thing is the main thing, you know, like we may add on to it, but we're still going to sell you a ton of Modelo. You know, that's going to be the number one focus. Mick Ultra is the number one focus. Who's to say what Mark Anthony would have done with White Claw if they would have had the capacity to over, you know, extend White Claw, but they didn't. So they're in a better position because they didn't.
[00:22:48] Tomme Arthur: And it seems like the brands that are doing those smaller extensions that aren't doing as much, every extension that's coming out is something that's supposed to add and bring in a new consumer, whether it's like a lower calorie version or something that's going to not just keep speaking to the same person that whole time. You're going to bring in more people to the brand.
[00:23:08] Jessen Fonte: Yeah, it's incrementality. It's new occasions, new consumers, a new audience, or at least hopefully most of the new people who come in are new.
[00:23:18] Lost Abbey: or you know, new occasions for your same people. Right, right.
[00:23:21] Jessen Fonte: Well, let's get to one happy note. And then maybe we'll play another round or tabbing out. Word on the street about Russian River's Pliny the Younger release is it's going well, as you could probably imagine. There are long lines at both breweries each day, Vinny Cirluzzo told us, and it's always very humbling, he said, for him and Natalie to see. So congrats to them on another awesome Pliny the Younger release, and we'll look forward to getting that economic development data that they always put out. So we can see, you know, what the tourism dollars look like. And, you know, folks can go back and listen to your interview. Both of you interviewing Natalie Chialuzzo about what it's like out there.
[00:24:05] Lost Abbey: Yeah. I mean, their social posts showed people came in from all over the world, which is cool. It's nice to see that beer travel still exists.
[00:24:13] Jessen Fonte: Yeah. All right. Let's play a quick game of another round or tabbing out. And this is one trend that we're a couple of weeks behind on, but A lot of kids are out there making fun of their crappier loving dads on TikTok. This is a trend that we've seen to much delight and very good use of the Home Depot theme. Are you buying another round on this or are you tabbing out?
[00:24:39] Lost Abbey: I will take another round of this all day. I think it's hilarious. I kind of love it. So I don't mean to, I know we're having fun. I don't want to make it sad, but I lost my dad before I started my beer career. But like, you could tell he was, he was like about to become a full fledged beer geek. And he was real into Blue Moon. I'd taken my brothers up to Boston to see the Red Sox. They went to a Sam Adams tour. He bought all of the perfect pint glasses. He came home and started homebrewing. I don't know, like a gentle ribbing of your dad is never not funny to me, because it's cute and it's in good spirits. And the Home Depot theme, just icing on the cake here. So if I were slightly wittier and on TikTok, I would be 5,000% one of these kids.
[00:25:28] Tomme Arthur: Yeah, I'm 100% in for another round. And I know it's like, makes it a little sad for craft because you're saying, oh, this, the young kids are making fun of craft culture, but they're not making fun of it. Overall, they're making fun of like, the people who are like dedicated to putting like their untapped reviews in and stuff like they are doing it in a very kind way. Yeah, they're making fun of their dads. Yes. And dads are kind of cool now. Like it's a thing to like be into dad stuff. So in a way, it's also saying that that's cool.
[00:26:03] Jessen Fonte: I had not heard that dads are cool. Yeah, that's good to hear. I think this is great, too, because it's the revenge of the taproom kids, as our headline on our insider newsletter over the weekend said a few weeks back. These kids have been dragged to craft breweries across the country, probably for a portion of their lives and good on them for, you know, getting back at their dads and seeing these trends like, oh, yep. Buying a flight. Oh, yep. Got to check in each one.
[00:26:33] Lost Abbey: Gotta take a picture of this bourbon barrel. Wow. Yeah.
[00:26:37] Jessen Fonte: All right.
[00:26:38] Lost Abbey: I think it's cute.
[00:26:39] Jessen Fonte: Yeah. Our last one for the week, April fool's day, we were off. We didn't get to enjoy all the PR that comes in. The funny PR, you know, the, the ones from like yingling about their Philly cheesesteak. What was it? Golden ale with beer cheese. Stop it. That could probably be a thing from a brewery that makes a thing called bongo fizz, but I digress. Are you buying another round on having the day off on April Fool's or are you tabbing out?
[00:27:12] Lost Abbey: I would love for us to be off on every April Fool's. Yeah. I think it should be a holiday for journalists so that we can hide from the scourge of joke press releases.
[00:27:24] Tomme Arthur: Yeah, absolutely. It made my day much more enjoyable. I got to see from afar, like Twitter, like Night Shift, like basically spammed by feed with a whole bunch of different fake releases. There was like a chicken pot pie and something else.
[00:27:39] Lost Abbey: That was gross. It was so gross. Yeah. Like the image of it. Too much. I got got by one, other half got me. They posted like a picture of a letter from like the National Broccoli Coalition saying they were suing them for some like trademark infringement for for their beers. And I was like, oh, that's interesting. And what I do like either at night or on the weekends when we're not actively working and I see something like that, I'll take a screenshot so that I remember to talk to you guys about it, which I did. And then the more I thought about it, I was like, I don't know. Cause it was like on Friday and I was with my family for the weekend. And I was like, oh, this is interesting. And like both my brothers were like, what's tomorrow? And I was like, shit, you're right.
[00:28:21] Tomme Arthur: That's what I noticed was a lot of people were doing them a bit early this year, which was like a little more deceiving. Um, I got like reverse got almost like I was convinced something wasn't real and it was, uh, was happy. Dad's collaboration with Snoop Dogg on a new death row records, grape flavored, happy dad, hard seltzer. I was very convinced. There's no way this is real, but it is real. And they've continued to post about it and Snoop is in photos with it. So it's a real thing.
[00:28:56] Lost Abbey: Yeah. I just, I know we, we soapbox on this every year, but I get it. Like you want to have fun for your client. You want to come up with something kind of crazy and zany and look at us. We're so silly. I get it. But like, don't involve us, you know, like we have our newswire that we, is very labor intensive for us. And it's something that we do as a service to the industry. It's free to post press releases on Brewbound.com, but it does take a lot of work on our end. So. Just don't ask us to do that because you're asking us to, and maybe I'm being a little too snooty and high minded here, but like you're asking us to trade some of our credibility to get something jokey out there. That's not true. Yeah. Like, you know, it's not true. Like I've heard from people all the time, like just for this one day, isn't it fun? No, no, leave us alone. Leave us out of it. Put it on your socials. You're not putting it on our news publication.
[00:29:50] Tomme Arthur: Yeah. Also, if you send me a April Fool's note that is embargoed and putting air quotes out there, and I didn't agree to your embargo, you're risking me spilling your April Fool's Day joke because I don't want to see it. Jail for a thousand years. Yeah.
[00:30:06] Jessen Fonte: Yeah. But let's get to this week's featured interview with Tomme Arthur. The Lost Abbey has gone through several business operations changes in order to scale down over The Lost couple of years. And joining us today to discuss is Tomme Arthur. What's up, Tommy?
[00:30:25] The Lost: Well, not my blood alcohol level because it's an early morning, but I appreciate the ask.
[00:30:30] Jessen Fonte: It should be up given that it's raining in San Diego again. Yeah.
[00:30:35] The Lost: We had the San Diego Beer News Awards last night. So a lot of people, I think, liken the sleeping in this morning.
[00:30:41] Jessen Fonte: Yeah, well, I'm glad that you joined us and we're here to discuss the scaling down. This has been something that you've been doing over The Lost year or so. What does scaling down mean to you?
[00:30:54] The Lost: Well, I think everybody looks at a business and says that, you know, the goal of a business is always to grow and to scale up. And I think that scale always connotes movement and trajectory upward. But if you look at where we kind of have been in our past, in our 17 year history, we got to 15,000 barrels. We're much smaller than that today. I don't know that we have an intention to ever be a much bigger brewery than 15,000 barrels. So I don't see us ever truly scaling up again to that kind of level. So for us, the process of scaling down meant a real focus on getting to the right size.
[00:31:28] Jessen Fonte: And you'll be exiting your San Marcos production facility, I believe in May, which will be taken over by PizzaPort as you look to find another place to brew either on contract or as part of an alternating proprietorship. Where are you in that process?
[00:31:46] The Lost: Yeah, so we've been in this building for 17 years. Stone was here for the first 10 years. So this building has been a world-class brewery for 27 years now. It's built out to do about 25,000 barrels of total production. We recently sold the bottling line that was in this building that was very large and high speed. So it becomes a really good facility for PizzaPort to absorb into their universe, looking to make a lot more draft beer and production of 19.2 cans for their universe. For us, it's about getting back to being somewhere between 2,000 to 5,000 barrel a year brewery. We believe that we're going to be in an all prop situation, not a pure contract situation. We may or may not have one brand that does go to a contract situation, but I'm not really feeling that today. So we've identified a location here in North County, San Diego, but as I haven't yet signed a lease on it, I'm not yet sort of at liberty to kind of say where that is, but I will tell the people listening that by the time this gets out, hopefully next week that will be done and we will be able to announce kind of where we stand with the kind of future and movement of everything.
[00:32:53] Lost Abbey: So Tommy, I feel like alternating proprietorship isn't a business model that doesn't get talked about as much as other options. What's attractive about that to you?
[00:33:02] The Lost: For us, it gives us a chance to work on a smaller system. It gives us the opportunity to not have to pay for the assets, or at least go out and install all the assets. Right now, it's kind of like renting a home versus buying a home. And it gives us a chance to kick the tires on the neighborhood, determine if we want to be there for the longer term, just understand the economics of where we're going to be. And an alt prop, I think, is something that a lot of breweries are going to look at, because as we start to all engage a sense of, owning stainless steel is very expensive and can be a very time consuming installation and constant infrastructure upgrades, things like that, that sharing some of those burdens with another producer is a very feasible way to look at this.
[00:33:48] Tomme Arthur: So you said you are hoping to get between 2,000 to 5,000 barrels annual production?
[00:33:52] The Lost: Yep.
[00:33:53] Tomme Arthur: Why is that the comfort zone for you guys? Why is that perfect for Lost Abbey?
[00:33:58] The Lost: I think right now we sell about 1,000 barrels a year through our four tasting rooms. So for us, starting at a base of 1K makes a tremendous amount of sense. If we then approach the market somewhere between 1,000 to 2,000 barrels of distributed beer, we can see some of the sweet spots with regard to drivers and salespeople. and infrastructure to deliver to our tasting rooms and to our own self-distribution in San Diego and Southern California-based then we pick up a few distributor partners that we're going to maintain in Arizona, Colorado, and Northern California. And that number of somewhere between 2,000 to 3,000 plus barrels of beer leaving the building in that environment pencils out pretty well.
[00:34:40] Jessen Fonte: There's been a lot of talk about the reasons for you doing this and a lot of speculation as to why you did this. Can you sort of take us through that decision tree that led you to this moment?
[00:34:53] The Lost: Yeah, I think it's important to note, you know, as I said, we've been in business about 17 years now. Our original partnership when we started out was a group of three investors, myself, the owners of Pizza Port and another partner who was since bought out and replaced by a gentleman whose name is Carl. And Carl's been our partner for quite a while now. But we've never had an investor pool of people that we have worked with or otherwise. So everything for Port Brewing, Lost Abbey has been self-funded for 17 years. And for us, those conversations were quite large. Sometimes the bottling line was well over a million dollars. Every piece of stainless steel in the building, centrifuge and everything that we've bought over the years, we've taken all the profits and pushed them back into equipment, equipment, equipment. Because once you own things, that's a a really strong way to be able to kind of look at growth and things and say we control our growth. But when we started in this process, we determined that one of the things that we didn't have was access to additional capital and potentially other people who might want to assist us in growing the brands in different ways. So what attracts us to where we're at today is an opportunity to sort of reset. And the reset for us is kind of like almost, you know, having a renewal of what we wanted to do back in the day, but with a better sense of how the industry is going to behave. I think a lot of people where, when we started, you know, we were at the, you know, sort of the really nascent stage of the real heavy growth years. And then all of a sudden, you know, we've gone through those growth periods and now we're seeing some serious years of decline coming.
[00:36:31] Jessen Fonte: You talk about those growth periods and there was some talk of breweries that went too far aflung, Allagash being one of those cases of the story is always out there as an example of Allagash shotgunned its beer out into so many different markets and then it retrenched and now it's found its groove. How similar are your cases there? You know, is this a case of your beer went to too many far-flung locations or, you know, did that factor in at all?
[00:37:01] The Lost: I mean, if you were to go back in time and look, you know, 12 to 14 years ago when we started, you know, getting new markets. So, you know, we opened our doors and year one, we took care of getting California distribution figured out, then we went to Arizona. And then we slowly kind of looked at some of the bigger hub and spoke kind of opportunities. So, you know, your Denver, Colorado, your Seattle, Washington's or Chicago, Illinois, you know, Philadelphia, New Jersey, we were in Atlanta for a while. All of them were kind of built around a mentality that if we had a shipping zone or area, then we could go out from that hub to the spokes. But that just never really materialized, mostly because in those markets, lots of new breweries came online and there was never really an opportunity, I think, for breweries to truly sort of affect that. I think a lot of breweries had the same mentality, you know, get deep or get out there and never got more than an inch deep.
[00:37:52] Lost Abbey: I want to go back to AltProp for a little bit. You think this is going to become a much bigger factor in the industry moving forward. What should brewers who are considering it look out for? What are some of the things that you got to be aware of if you want to go this way?
[00:38:05] The Lost: Well, I'm new to the game, so hopefully I'm not going to speak out of turn. I think it's really finding good partner. I think there's going to be a lot of opportunity where everybody's either going to have excess capacity or be looking at it from different lenses. One of the lenses that we looked at at The Lost Prop was that we would like to be very much in control of our own production and by finding a brew house that we can sort of manipulate on our own terms, that's a really great way. I know there's a tremendous amount of people doing contract work these days and they have great labs and facilities and things, but for us The Lost Prop was a much smaller thing. Again, at a two to three to four thousand barrel a year brewery size, we really aren't necessarily wanting to be away from our own control and we don't need someone to make 100 barrels of beer for us. So an all prop situation where we know how to run the brew house, we know how to sell our beer, how to keg it, can it, do all those things, makes a lot more sense.
[00:39:01] Lost Abbey: Yeah, that makes a ton of sense. And what's the biggest opportunity you see ahead for The Lost Abbey right now?
[00:39:06] The Lost: I think we've been struggling with innovation for a long time because the scale and the size of the equipment didn't make sense. We bought the original Stone Brewery here in 2005, and when we did, it was a 30-barrel brew house with big tanks. Every time we had an opportunity to buy more stainless along the way, we bought double, triple, not even double, we bought triple. to triple to six batch tanks. And so there isn't really a lot of small batch brewing in this building. And one of the mistakes we made was never really investing in a true, you know, five barrel pilot system. And that's cost us an ability to, you know, put beer into our tasting rooms and really kind of shop the consumer, you know, sort of taste panel and see how things go. But it's a lot of beers that we've had to kind of put on the back burner because there's just too much production tied to that. So we're really excited about getting smaller in that regard.
[00:39:56] Tomme Arthur: For breweries who just in general might have to consider going into some sort of downscaling, what advice do you have to them before going into this or things that they should be aware of?
[00:40:08] The Lost: I think there's two main concerns. One is that there's a lot of personnel that has got to be sort of looked at and how much bandwidth we have for creating, you know, less people in our space and how all those jobs are going to be done. But, you know, we know for a fact that two of the largest costs for being in business are occupancy. and labor and how you deal with those two things is really important. Those framed a lot of our decisions. Our building is currently 40,000 square feet. We're in California, The Lost to occupy is tremendous. Our labor percentage here is very high. We're on a Now we're on over $16 per hour minimum wage, which then rolls uphill from hospitality all the way to what a production worker makes as kind of a minimum base for them. And then everybody's sort of salaries up from there. So we're seeing a situation as we're looking to kind of grow down where everybody has to take on a little bit more. for now in order to kind of get the, in order to get the percentages back in spec, but hopefully by not carrying too many, too many extra square feet and too many extra bodies, that'll be, it'll be self-evident.
[00:41:15] Jessen Fonte: I think one of the key things here too is outside of San Marcos, you're going to maintain the other existing tap rooms that you have.
[00:41:24] The Lost: Yeah, and that's been part of our thing is, you know, when we built this business, you know, Port Brewing and Lost Abbey kind of collectively 1A, 1B, we assumed we would be a highly distributed brand. And again, we got to, you know, brands, we got to 15,000 barrels, 90% of the beer we were selling was leaving on trucks going to distributors. That has slowly but surely changed in The Lost few years. In 2015 we opened our first satellite tasting room in Encinitas, Cardiff-by-the-Sea. In 2019, pre-pandemic in November, we opened our second satellite tasting room, Sanctuary, which is here in San Marcos as well. And then in early I guess in late 2021, we opened the church down in East Village. And so that has really flipped the script. And The Lost Abbey is now a very forward-facing hospitality component with more employees in hospitality than in production. So for us, it's pretty obvious that our path forward is to keep maintaining the connection to the consumers in the tasting room environment, use that as our innovation hubs and look at maybe one or two more opportunities if they're the right places to do that. Again, keeping the footprint small, but reaching more people.
[00:42:38] Tomme Arthur: When you have, like you said, people are having to take on more roles, you have a smaller team now, what has been their response and what have you found is The Lost effective way as a leader in that position to communicate to people what's going on and your plans going forward?
[00:42:54] The Lost: Yeah, it's a great question. I think the hardest part of growing down has been the stripping down of the staffing and really the hard line cuts that sometimes there's just really crazy dates that get put in front of us. And those dates are, you know, we have to be at this by that for these reasons. And then there's also a strategic component because, you know, it's a lot like when you take an old car and you strip all the layers of paint off it, and then you find what needs to be repaired or kind of where the damages are. And then you want to get back to having a really nice paint job. For us, it's about like the team moving forward you know what are the cross capacities of the people that are with us and so who is coming along to the new facility, what can they do and I think right now we're about a team of five or six total. And almost everybody in that top part of that group is gonna have some level of production capacity, some level of production experience. Even though you might be in charge of warehousing and other things, you are going to be on this team because we have to step in and do all these things. So a lot of people being cross-trained and a lot of people who bring a multi-skill set to the equation.
[00:43:59] Jessen Fonte: I'm sure that you're not alone in being in this position and looking at these options. So when you look at the broader scene, what did the next five years look like for San Diego craft and for the rest of the country?
[00:44:15] The Lost: You know, I've had a lot of conversations, obviously, because of the way that we've approached this and the transparency, you know, where we're at and who we've been and what we're trying to be. I think a lot of breweries are struggling with this because there's just not a lot of places to win right now. And I think if everybody knew where the wins were coming from, then, you know, you might open the right sale and sail away. There's been so much pressure on, again, Southern California-based specifically, on occupancy costs, on labor costs, on raw material things, and everybody's absorbed them. And in many ways, it's a lot like a price fight. If you can absorb and absorb and absorb and then find the next solution, you can get out of it. But there's only so many things you can take before you just kind of crumple. And I feel like there's a lot of people right now that have absorbed it and they think they know what's going on. And I don't know that we haven't figured out, but ultimately it's been a lot of body blows for The Lost three years and not enough wins for everybody.
[00:45:14] Lost Abbey: Tommy, you guys have been at this a long time. You opened The Lost Abbey in 2006, so that's like 17 years.
[00:45:21] The Lost: 17 years, that's right.
[00:45:23] Lost Abbey: One, congrats. Two, that's wild. Three, can you think of other periods in crafts history that have felt similar to this? Because you just said three years of body blows and the number of breweries has really exploded in what, say like The Lost five, six years. So there's a lot of people who haven't been through this before. Has this ever happened to this industry?
[00:45:44] The Lost: Not to my knowledge, yeah. So, not only have we been in business for 17 years, I've got another nine years on top of that, having been in the industry. So, I'm well past 25 years of having been in this and having seen cycles and things, but I've never seen anything cycle in this way. We in Southern California-based Diego specifically, we leapt out to a very large amount of breweries. There's 150 breweries in town. So for us, The Lost five to six years haven't really looked a whole lot differently because there's been that many breweries for quite a while. That being said, they have been cycling. One will open, this one will close, and then somebody else will take over the space. It's pretty obvious, I think, to just about everybody that there are regions in this country that are super saturated. While the industry might even feel saturated, there are regions that are super saturated, and we probably are one of them. And in that space, you're talking about 100, 150 breweries in San Diego, plus multiple people with satellite tasting rooms. There's at least 200 craft-centric sort of spaces and places, and that's before you get to any of the bars, bottle shops, restaurants that live and breathe in that space as well. There's a lot of players in craft in San Diego.
[00:46:58] Lost Abbey: The past few years, you've been super creative and launched brands like Tiny Bubbles and Charisma Hearty. How important are innovation projects like that for brewers today? And what's the future look like for those two?
[00:47:09] The Lost: Yeah, those were sort of born from a sales function that we were asked to create some things. And again, I mentioned that we'd really have on some level struggled with innovation, mostly Because the production side of it, I think we've really nailed the qualities of those things. The Tiny Bubbles brand, the beers that we produced were fantastic. Struggled a lot with off-premise packaging for those and didn't see the lift that we thought we would see. The Charisma RT line was built as a better for you, a gluten-free option for our tasting rooms, first and foremost. We've really never gone to market with them, but I do still see a future where they're going to exist inside and outside of our tasting rooms. But right now, we need to get back to, you know, we've got a lot of work in front of us to create some new beers for the tasting rooms with this transition. And as part of that, the Charisma line will not be going away, but we're going to collapse it down to one or two items just for the tasting rooms for the time being.
[00:48:11] Lost Abbey: They're both delicious products, so excited to hear Charisma is still among us.
[00:48:16] The Lost: Yeah, it's something that I do very firmly believe in, and not that we're running at it as a fifth space option kind of thing. It's just we see the people coming to our tasting rooms asking for that as an alternative, and we need to be mindful of that. So it needs to exist.
[00:48:32] Lost Abbey: One thing we've been hearing a good amount out in the world is that a lot of brewers that have traditionally made these really nice, funky barrel-aged sours are starting to pivot away from that. And you've made some phenomenal beers that fall under that category. What are you guys thinking about that part of the portfolio?
[00:48:53] The Lost: Great question and yeah you're not wrong I know I know plenty of my friends who are, you know, selling off sellers and dropping down their wood capacities we, we moved into the space that we're in five years ago we built out a wood seller, and that would seller is going to be going. Fairly by the wayside. One of the biggest issues for us in terms of moving into a new space was ensuring that we at least had some separation so we could continue. Everyone knows The Lost Abbey makes great sour beers and that needs to be part of our future at a time when people are kind of getting away from it. We're not doubling down on it, but we're not getting away from it. It's been a big part of the conversation in terms of the economics, which is what is the right amount of this. And it's not the same economic driver that it used to be, but we believe in a small batch environment, we can produce those beers. Maybe we don't need 700 cases of them anymore. Maybe we need 150, but that requires a lot less open, a lot less infrastructure. So we are certainly not deviating from The Lost Abbey having a really world-class sourdough burger.
[00:49:55] Lost Abbey: Well, that makes me and I'm sure Zoe both very happy.
[00:50:00] Jessen Fonte: I know you're, you're in the thick of things right now, but it seems like you have a pretty good plan that you've laid out for what at least the immediate future of The Lost Abbey looks like. But can you peer down the road into the crystal ball five years from now and see where you're at?
[00:50:19] The Lost: It's a little more difficult. A lot of it, I think, is going to come back to, you know, we're in the process of seeking new investors. And so ultimately it's going to sort of align with, you know, what is the next two years look like in terms of all props, sub leases, things like that. And then, you know, do we shop, you know, and look for a new forever home? Do we go to a much bigger, you know, stainless steel asset base and back to three, five, 10 million bucks worth of infrastructure kind of things. You know, what we really believe right now is going to be The Lost advantageous thing is to have have a reserve of money in sort of in the bank and sort of a safety fund. And that safety fund can be used for both expansion projects when the time comes, there's going to be a lot of distress. assets and things on the market that may make sense in order to move on them, having a reserve fund will be huge. And then just potentially using that reserve fund to be strategic and say, OK, maybe The Lost of money is going to come back down and therefore we want to go get a loan SBA or something to build a different forever home. But I'm looking at a scenario where right now we're focused on today, Today for tomorrow and today for tomorrow means that, you know, we want to be mindful of getting out of what we're, you know, what we're up against, which is a May 31 deadline. And then mindful of the future, because when we're bringing in new investment, we have to sort of promise people a certain amount of return and explaining to everyone that we're going to be part of the future. You know, we're a 17 year old company, but the goal is to be a 30 year old company.
[00:51:51] Jessen Fonte: I think that's probably a good place to end it, but is there anything you want to add before we let you go? No, I think that, you know, I think the universe has changed.
[00:52:00] The Lost: You know, I don't think anybody's seen anything like this, you know, and no matter if you're, you know, if you're six years into this business where, you know, I've got friends that are, you know, opened a brewery six years ago. I've got brewery partners in Tucson that opened a brewery at Moda Sonora three years ago. And, you know, I've got friends that have been running breweries for 30 years. I mean, like just everybody's kind of scratching their head in the same way, but ultimately it's, you know, I've been, I've been told it's math. And that at some point, math is math and that you need to make the math work. And how do you make the math work? Well, you get out your pencil and eraser and you keep revising until the math works. I see a lot of people doing that.
[00:52:35] Lost Abbey: I'm fairly traumatized by math, so I can only imagine how everybody else is feeling.
[00:52:40] The Lost: As an English major, it's not my primary want in life, but I can still add two plus two and get five.
[00:52:46] Jessen Fonte: And this is a strategy, a move that, you know, you don't hear a lot of people vocalize.
[00:52:53] The Lost: Yeah, you asked earlier about growing down and I think that's the one thing is like, I don't think we're embarrassed by the fact that we might make less beer next year. I don't think that we get out of bed and think, oh my God, my competitors and my peers are going to wonder if we're okay. I think there's a fallacy of argument that putting 100 barrels per year, year over year on your growth is the best way to show that you're doing okay. The best way to show you're doing okay is to run a solid business, figure out where your bottom line comes from. And we're starting to hear a lot of breweries mention their bottom line more than their top line. And it makes a lot of sense to play the math game right now.
[00:53:32] Jessen Fonte: Well, Tommy, thanks for hopping on the podcast with us and sharing. Love you guys. See you soon. And that's our show for this week. Thanks to Jess and Zoe for all they do. Thanks to Tomme Arthur for joining us. Thanks to our one man audio team, Joe, and thanks to all of you for listening. We'll be back next week.
