Tony Magee on Lagunitas' Chicago Brewery

FILED APRIL 10, 2012

Dear Client:

Last night, Tony Magee took to Twitter to break some big news: Petaluma-based Lagunitas will be building a 250-barrel brewhouse in Chicago, Tony's hometown. In his own words circa 10 p.m. CST last night: ""Back in February, I thought about all the truck loads of brew leaving eastward. Thought about all the freight. Added it up. It was enough to cover the financing for a whole new brewery. ... so I jumped a plane n flew back to Chicago ... found a perfect space on a movie soundstage complex so I rented it. Called ROLEC and they'll have a 250bbl brewhouse ready next July ... 1st mash-in will b Q4 2013. ... Google it- 18th&Rockwell, Chicago.Fresher beer w/ less diesel in it."

As one Twitter-goer pointed out, the 250-barrel brewhouse is bigger than most Chicago-area breweries combined, including Goose Island. Construction is expected to be completed by July 2013 and cost $15 million - $18 million, with an eventual 600,000-barrel capacity to exactly mirror the Petaluma facility. By the time Lagunitas Chicago is ready to mash in in late 2013, they plan to move about 140,000 barrels of production there. "All the left coast and western states beer will still be brewed in Petaluma and life at the Petaluma brewery will be pretty calm, for a change, for a while...!" Tony said in a release.

Indeed, his 6,380 follower folk were the first to hear the news last night. But the news leaves lots of questions. We got the post 140-character scoop:

CBD: The tweet mentioned you added up the freight costs for shipping beer eastward and it was enough to finance the whole new brewery. Can you share that math with us? [Ed's note: Tony estimates fuel savings will eventually pay for the $15 million-plus brewery. "I realized that there was about 4 ounces of diesel in every 22oz bottle of our beer when enjoyed in Chicago, even more if you're in NYC," he said in a release.]

Tony: "It's really an exchange of a cost of freight for cost of finance. ... It's a logical incremental step: Think of it this way. We're just finished up a big capacity expansion, which makes it seem odd. But the fact is ... adding a new brewhouse is not the same as [straight capacity]. A 300-barrel kettle- what does that mean? Does that mean it's an 800,000-barrel brewery? No. Because that's just your ultimate [capacity to grow]. So I'll still have to add fermentation capacity here if I didn't do this thing in Chicago - instead of adding it here in 12 months, so I'm installing it in Chicago. It's about that simple."

So what will the ultimate Lagunitas output be in 2013?

"We expect by the end of next year - and predictions about the future are always scary - but we're around 300,00 barrels here. We're working hard to make that happen. We'll essentially split that capacity [between the Petaluma and Chicago brewery]; this plant will have some excess capacity for a while. Chicago will have the capacity it'll need. Between the two it'll still be 300,00 - 400,000 barrels of actual production capacity. Brewing that much. That's the hope.

"But the thing is, unlike what happened in the '90s when so many got in trouble when capacity exceeded demand - we can afford to carry this capacity right now. It doesn't add to our business risk to do this. Because this is an incremental capacity addition. We're subbing assets for freight. So instead of spending money on expenses, we're spending it on assets."

So what's the upper ceiling of future production? Is there one?

"It's what the world will allow you to do. I'm not shy about growing. There's this idea that when a brewery gets big it loses its soul. Maybe big just hasn't been done cool yet. You can be anything. But I don't see any upper limit, we're going to follow it where it goes. Americans are digging better beer and that's not going to stop. We're just going to follow the volume where it goes, and so far it's been a great trip. You learn things you never would have learned. You get exposed to very cool stuff."

How have you all been able to move so quickly on this, securing the new huge space in a couple of months?

"We really are a small brewery, you know? Everyone is very much in touch with each other every day. It's easy to be agile when you're like that. And ... we [didn't really put together an RFP]; I haven't done that with Chicago. We didn't go to the public trough to see what incentives there might be. ... We have our own incentives: It's good business."

Can I ask what the financing method will be? Traditional debt and reinvested profits?

"It'll be a combination of the two. Lagunitas is working closely with Sterling Bank of Spokane Washington for project financing."

Will the new facility have a tasting room? Will it produce any different brews than the brewery in Petaluma?

"It's possible. You have so many moving parts right now. Somebody asked me this a.m., will we be doing growlers - why not? There will be things that happen in Petaluma that won't happen in Chicago and visa versa; personalities will develop. But ... we're going to bring ourselves to Chicago. A little bit of Norcal at 18th and Rockwell. But the ironic thing is, since I'm originally from Chicago, it's already a little bit of Chicago in Petaluma. Cross-pollenization."

So tell me how the logistics of this works. This brewery will ship how far, and how far will the Petaluma brewery beer go? What's like the optimal route for each?

"Well ultimately I envision Chicago brewery servicing from Denver back to the Eastern Seaboard, but it's hard to say right now. The Petaluma brewery will continue to supply all of the Western states; it's a nice balance of things. About half of our business is East of the Rockies. And half is on the West Coast.

"The funny thing is: If you think of A-B - they're professional brewers too -- they're 100 million barrels in the U.S., and have a brewery down street from me that's only 3 million barrels. They're already doing this. It's the logical progression of things."

Will this accelerate the time you will enter new markets this year? Assume you're talking with lots of distributors at this point.

"We're waiting for the new brewhouse to come online and replenish inventories. That's the only thing we're waiting on for right now - when Chicago happens, this brewery will get calmer."

Ultimately, when the two brewhouses are all built out, they should offer a million-plus barrelage. Asked how long these two will tide them over, Tony answered something like this: The world is divided into the known, unknown, and unknowable. But what we do know is that the difference between the cost of a 150-barrel kettle and a 250-barrel kettle brewhouse is minimal. "It's more efficient," he says.


AMERICAN CRAFT BREWERIES EXPORTED OVER 110,000 BARRELS ESTIMATED AT $23.4 MILLION in 2011, according to the BA. That's the ninth consecutive year of growth, this time a dramatic increase of 86% by volume and 97% by dollars over 2010 exports.

Per the BA's recently-completed industry survey: Canada remained the industry's largest export market, with shipments increasing 127% by volume (up to 27,976 barrels) in 2011, largely as a result of increased demand in British Columbia, Alberta, and Ontario. Additionally, the United Kingdom and Sweden remained the next two largest markets. Exports to both countries totaled approximately 13,065 barrels. Regionally, Western Europe is the largest destination for American craft beer exports. Shipments to the region increased by 52% in 2011 and now surpass 51,613 barrels. Total American craft beer exports are up by approximately 500% since the BA Export Development Program was initiated in 2004.

HOW LOCAL IS LOCAL? Here's a particularly timely stat: According to an American Express MarketBriefing via Technomic, "most people think of 'locally produced' foods as having come from no more than 50 miles away." About 37% surveyed specified "local" should come from within 50 miles, and 26% said it should be within a 25-mile radius. Another 26% said 100 miles was the magic distance.

Until tomorrow, Jenn

"I begin to think, that a calm is not desirable in any situation in life. Man was made for action and for bustle too, I believe." - Abigail Adams

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