ISO: Velocity — Surly and Brooklyn Get Traded in Chicago Distribution Deal

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[This story has been updated with comments from Windy City representatives.]

Two big-name breweries are changing wholesaler hands in Chicago. The two distribution houses that sell Surly Brewing and Brooklyn Brewery products respectively have agreed to swap the rights to each with one another.

Beginning the first of January, Lakeshore Beverage—a Bud house that carries craft heavyweights like Anheuser-Busch InBev’s High-End portfolio, Bell’s, Boulevard, and Founders—will sell Surly’s growing portfolio of beers, lifting the brand from Windy City Distributing. Conversely, Windy City, which similarly sells other big craft names such as Lagunitas, Stone, Avery, Allagash, and Green Flash, as well as a sizable lineup of smaller brands, will be compensated with Brooklyn Brewery’s roster of offerings.

For Minneapolis-born Surly, the move represents a new avenue for velocity in its “second home” market, as Lakeshore calls it, as it utilizes its recently increased brewing capacity to grow, diversify, and make its portfolio more affordable. Reached by GBH, Surly says the company was further motivated by specifically growing its off-premise footprint (chain grocery, convenience stores, liquor stores), where it sees the future of craft having the most impact.

Windy City feels perfectly confident in the on-premise opportunity where it's historically had outsized success with craft brands. "I think it’s got a lot of potential," said a senior representative who wished to remain unnamed. "I think certain brands get lost in certain houses, and [Brooklyn] is a legacy brand that has a lot of history from a brewing standpoint as well as from a market standpoint. I think we have the ability to take it up to that next level and give it that attention it really needs and deserves. There's a great on-premise opportunity for their portfolio."

“If we look at our long term perspective [of] where growth is, it’s off-premise,” says Bill Dillon, national sales director at Surly. “Windy City has been a great partner for us in the past… But I don’t know if they’ve made the transition to [focusing on] off-premise.” Prior to his 2016 start at Surly, Dillon had been in the beverage industry for more than two decades, working for Anheuser-Busch, Constellation (Modelo), and Pepsi. He also ran a large distributor in Oklahoma.

Austin Sawyer, sales director for craft and import brands at Hand Family Companies, Lakeshore’s parent organization, further says Surly saw the evolution of other brands in the wholesaler’s book and wanted the same for itself.

“Surly saw what we did in the market with brands like Founders and Bell’s that transitioned to Lakeshore,” he says. “They were all propelled to the next level.”

To that end, Founders, which switched from Louis Glunz Beer, Inc. to Lakeshore in 2014, has grown sales in Chicagoland food and grocery stores by more than a whopping 220% over the last three years, according to market research firm IRI, which tracks the kind of off-premise accounts Surly is interested in. Those massive sales numbers also align with the minority acquisition of Founders by San Miguel in the same year closely followed by the introduction of the All Day IPA 15-packs. Bell’s, meanwhile, which tapped Lakeshore in April of 2016 after eight years elsewhere, has grown more modestly, but not insignificantly, bumping up just shy of 12% year-to-year (45% over that three-year period) in the same channel, per IRI. Dillon adds that Surly currently sells about 100,000 case equivalents in the Chicago area, but says the company does not have specific volume goals in mind going forward.

The changeover likewise represents a chance to reinvigorate growth on the other side, as IRI has Brooklyn down 53% with Lakeshore in the above-mentioned food and grocery channel over the last three years. But for Brooklyn, which is already well established but owns a light presence in Chicago, the move is also one of consolidating interests as Windy City carries 21st Amendment, one of two companies in which Brooklyn made a minority investment earlier this summer.

Following requests for comment from GBH, Windy City’s Bob Collins responded today via email, writing, “Thank you for your call and email. Unfortunately there is nothing to share at this moment. I will reach out when I can share info.” Brooklyn also declined to comment today, adding it would be willing to go on record next week.

Interestingly, though, the trade may be further undergirded by philosophical differences between both the brewers and wholesalers in question. Indeed, Surly says it has nothing bad to say about Windy City and that the two enjoyed an amicable relationship, but GBH has been told that pricing had become a point of contention between the two in the years since Surly returned to Chicago in 2013 after a three-year absence.

“The tensions have been high…There was some push to lower pricing and Windy didn’t really want to do that because they didn’t operate that way,” says one source close to the matter who spoke on condition of anonymity. “I think Windy City just didn’t see eye-to-eye there, and obviously there was talk with Lakeshore.”

"Pricing’s a very, very sensitive topic," said another senior representative from Windy City. "What I can tell you is they had a desire to lower pricing on one specific SKU, and we did that. It might not have been as far as they wanted to go."

Asked about this, Dillon did not address specific conflict, but rather just spoke to the broader relationship between brewers and wholesalers on this issue.

“When it comes to pricing, I think that every brewery out there has a price-to-consumer point in their mind,” Dillon says. “We give them guidelines, but ultimately, at the end of the day, it’s up to them on how they want to price their products.”

Now, though, under Lakeshore’s direction, Chicago drinkers can in fact look forward to finding Surly beers in the market at more palatable price points. “That was one complaint. People love their beers but $11.99 a 4-pack, sometimes it just didn’t fit the [drinker’s] budget,” Sawyer adds. “Obviously it takes a couple weeks, but people are going to see the lower pricing out there.” The lower pricing aligns with a push into larger off-premise accounts in Chicago, such as Costco, Jewel-Osco, and Target, both known for their highly competitive, sometimes otherworldly, prices on higher end craft beer brands that are intended to bring new audiences into the stores.

On the flip side, and in addition to the motivation to consolidate its distribution network with 21A, Brooklyn founder Steve Hindy has not been coy when it comes to speaking about hot-button issues facing the beer industry, and this includes giving credence to skepticism of ABI-affiliated wholesalers such as Lakeshore.

For instance, two years ago, Hindy worked with First We Feast to create the “State of Craft Beer” podcast. In one episode (which, full disclosure, GBH founder Michael Kiser co-hosted), taped in Chicago with a number of other brewers, Hindy posed a question about working with companies like Lakeshore. He asked: “Are you concerned about ABI forcing its distributors to focus on its wholly owned brands and marginalizing, you know, the rest of us?” Looking at Brooklyn’s numbers at Lakeshore, he perhaps had reason to be concerned. But at the same time, brands like Bell’s and Founders, both with a regional relevance similar to Surly’s, flourished. And during its time at Windy City, which owned Surly’s rights in the Chicagoland area, Surly’s sales grew rapidly in the rest of the state by comparison.

In a bit of a side deal, Surly also went to Schamberger Brothers Distributing, which serves Cook, DuPage, Kane, Kendall, and DeKalb counties. And in exchange for that deal, Windy City picks up Weihenstephaner.  

Aside from trading brands, Lakeshore would not disclose any financial compensation involved in the deal. Either way, it remains to be seen if Windy’s purported decision to hold prices was good or constraining for the Surly brand in the long term. But with Lakeshore eyeing lower prices as a main lever it can pull toward growth, the answer should be made clear soon enough. And if Brooklyn finds new relevance and consolidated sales power with its other partially-owned craft brands in Windy’s still-growing book of craft suppliers, the swap could prove to be a win-win for all involved.

—Dave Eisenberg