Owing at least $20 million to 370 businesses and banks, and an unknown amount to another 382 individuals and companies, the collapse of two prominent Canadian brewing equipment manufacturers has caused a tailspin for breweries across North America.
[Editor’s note: all figures are in U.S. dollars.]
The financial failure of DME Brewing Solutions (DME) and Newlands Systems (NSI) has put millions of dollars of equipment into a homeless state, potentially waiting to be sold to a new company owner or put up for auction. In the meantime, deposits by Canadian and American brewers are essentially lost as creditors claw for whatever may remain or could be added to DME and NSI's accounts. The Royal Bank of Canada, which initiated the process to put the companies into receivership and recoup loans, revealed in an affidavit that it's owed about $13.5 million plus accruing interest and costs. At least 13 others are owed $100,000 or more, going as high as $364,000.
“It’s kind of like ‘thoughts and prayers,’ and there’s not much I can do with it right now,” says Jason Fisher, owner of Indie Alehouse, a Toronto-based brewpub. His business lost about $600,000 of deposit payments due to DME’s closure. “Unless somebody wins the lottery, I don’t know how they can help. I can’t take that goodwill and do much with it right now.”
Fisher considers himself one of the lucky ones. After "sitting with an Excel sheet 24/7 finding ways to make this work," he believes he can keep his brewery and restaurant in business. It may impact his ability to hire new staff or source certain ingredients or equipment, and he guesses he'll carry debt from a bank loan for three extra years compared to previous estimates, but it's not as bad as it could be.
"We're all facing something very difficult, but at the same time, you have to figure it out," he says.
He's heard of fellow Canadian brewers who may lose their business before they even open. One company's owners mortgaged homes and property, he says. Two others had fully-paid equipment waiting to be shipped or in storage, and neither knows if it'll ever happen. Canadian journalist Ben Johnson wrote in his initial coverage that "multiple brewery owners who have hundreds of thousands and in some cases over a million dollars invested in future brewing equipment from DME that they are now unlikely to ever see and who are now facing the very real prospect of bankruptcy."
Speaking with Brewbound, Texas’ Big Bend Brewing vice president Mahala Guevara said that she believes reverberations will cause “a wave of breweries going out of business or financially restructuring significantly.”
In conversations with industry pros, the same question kept coming up: what the hell happened? And, perhaps most importantly, what does it mean in the broader scope of industry headwinds?
Founded by Peter Toombs in 1991, DME was closing in on about 700 projects in 67 countries by the time it was acquired by private equity firm Clearspring Capital Partners in 2015 for an unspecified amount. The purchase came after the private equity company had secured $260 million for a third round of investments, which reportedly range from $20-$50 million each. NSI was brought into the fold to combine with DME a year later, also for an unknown sum.
From the perspective of outsiders, the decades of service from both companies, as well as what was assumed to be significant capital investment, made DME and NSI even stronger. That was obviously not the case.
“This suggests to me that something profoundly shitty has been going on behind the scenes at DME for some time now and surely there will be more to this story in the days that follow,” Johnson speculated in his coverage.
In its affidavit to the Supreme Court of Prince Edward Island, the Royal Bank of Canada wrote that DME had "significant liquidity constraints with a large portion of its accounts payable 90 days overdue, and limited supplies to complete purchase orders, and with most major suppliers providing supply on a C.O.D. basis, if at all." The complaint also said that Clearspring "has expressed an unwillingness to support their investment any longer on terms acceptable" and that, based on projections by the bank, DME would have needed an immediate influx of at least $3.74 million to continue operations.
Because DME and NSI were bundled together two years ago, as goes one, so goes the other. They reportedly operated as combined—but at times separate—businesses. At the end of November, DME/NSI had built more than 1,600 brewery systems and employed about 250 employees. Both construction and paychecks have at least temporarily halted.
Attempts to reach Toombs were unsuccessful, and he’s remained out of the media in the time since receivership of the companies was announced. In interviews with GBH, some brewing industry professionals wondered aloud—the same way Johnson did—what could have happened to have put DME and NSI in the hole for so much money.
Kevin Murphy, president and CEO of the Murphy Hospitality Group, which owns P.E.I. Brewing and Gahan House breweries, speculated to Charlottetown’s The Guardian that DME’s sale to Clearspring, followed by its purchase of NSI, caused the company to get “caught up in some of the stuff that can happen when you expand and lose sight of the bottom line.” What he meant wasn’t made clear, precisely, but he added that a slowing North American craft beer market may have contributed. With more breweries going out of business in the U.S. and Canada, used equipment is more readily available.
Eric Portelance, a co-founder of Toronto's Halo Brewery and currently working on a new brewery project, says there may be some credence from worries over a slowing market, noting that there were rumors that sales numbers “tanked” for DME in 2017 due to slowing volume growth and increased manufacturing competition from China, which has been making a hard push into the U.S. for a few years. There may have also been instances where DME and NSI were competing against each other for bids, despite being under one umbrella.
“They were just trying to sell equipment at cost,” says Portelance, noting the topic had come up in conversation among Canadian brewers.
There was at least one known warning sign leading up to the closure: DME was asking for a high percentage of deposits from buyers that may have been mismanaged along the way. Joel Iverson, co-founder of Atlanta’s Monday Night Brewing, said he paid 50% of the total cost up front for a pair of 120-barrel tanks, which drove off the lot to Georgia 30 minutes before the company announced its receivership. Chris Conway, co-owner and general manager of Newfoundland’s Landwash Brewery, put 25% down and another 25% at six weeks for a 15-barrel, three-vessel system, along with additional tanks that were delivered in September. Jason Fisher, the owner of Indie Alehouse, said that after spending about $600,000 over three payments, DME hadn’t even started building his equipment, which was a condition of his contract.
One assumption from industry pros, based on the need for deposits, but not completing work, is that cash coming in was being used for older projects. Essentially, it’s a claim that DME/NSI was forever trying to play catch-up, shifting money around to appear more solvent than things actually were.
Which all leads to a bigger issue from the fallout: if one of the most successful equipment manufacturers can’t make it, who can you trust?
“There’s always some uncertainty, especially if you’ve never done this before,” Portelance says. “Buying from NSI is the opposite of that. The reason you’re paying $1 million or more for a brewhouse is because they have a reputation and a name built in Canada for over 20 years. It was a high-end manufacturer as there is in North America.”
The same was essentially said about Portland, Oregon's Metalcraft Fabrication, which abruptly closed last year. At the time, the company had 17 unfinished projects for which it had received about $700,000 in down payments. Brewers didn’t expect to see that money, or equipment, either. Metalcraft founder Charlie Frye told GBH last spring his company was done in by a combination of “increased debt load as a result of our expansion” and “lessened cash flow due to fewer orders, and fewer profitable orders,” all exacerbated by “internal issues” related to bookkeeping—issues he was unable to elaborate on.
It’s a familiar refrain for Portelance, who’s set a budget of up to $500,000 for a new brewhouse so “it has some bells and whistles, but nothing too crazy.” In today’s startup costs, it’s a modest sum, but that doesn’t make him feel any more comfortable.
“It’s crazy to think about how I’ve been talking to accountants and lawyers and insurance companies asking, ‘How do you protect yourself?’” he says. “Is there insurance I can buy to ensure a deposit in case a supplier doesn’t hold up their end of a deal? Or is there a legal thing to write into contracts to protect us?”
Chris Conway, of Landwash, says that trust was a big reason he chose to do business with DME. He could have saved money by purchasing equipment from Asia, but the value of DME was “trust and support.” That’s no longer there, nor is customer service for his recently-delivered system.
“Now I get to worry about no support for a fairly high-tech brewhouse with a touch-screen display and all these bells and whistles that, without the manufacturer, will require a lot more effort and understanding to maintain or repair,” he tells GBH. “I remember not wanting the touch screen because I thought it made it more complicated to debug any electrical stuff, but since it was DME and not some fly-by-night operation who sends out emails in various font colors and text with promises of magical Asian equipment, I figured we’d be safe.”
For those in the industry, the fallout was so stark that the shock of DME/NSI closing caused competitor Portland Kettle Works to send an email to 6,000 subscribers to ensure former and future clients that investments would be safe.
“We have and will continue to include multiple vendor and credit references in our quotes," the email read. "These are important because they clearly demonstrate PKW's excellent record of timely payments to the vendors that supply raw materials used in fabricating your brewery."
It’s a move that’s thematically connected to communications started this past summer. Since August, Ken Massheimer, CEO for the manufacturing company, has included a signed memorandum with every purchase quote to state the business is financially stable. It’s updated quarterly to promise the most up-to-date financial information.
“I wouldn’t expect them to call us up and ask how we’re doing unless they can see something like that,” Massheimer says.
So while companies like Portland Kettle Works and a variety of its competition work to maintain the trust of clients, the unexpected closure of otherwise reputable businesses, most recently epitomized by DME and NSI, adds a complicated layer to the business of building brewing equipment.
According to the Brewers Association, 2018 is set to be the third straight year of single-digit volume growth for its member breweries (2016: 6%, 2017: 5%, 2018: 5%). This year is also bound to offer another national high for brewery closures, even though the raw total of production facility failures is a natural part of a maturing market. The first stat speaks to the fear of a slowing market that doesn’t need equipment to build up a never-ending demand for more. The second highlights the increasing potential for lower-cost used equipment to become available. There’s even a website now dedicated to flipping production spaces: craftbreweryforsale.com.
From a sales standpoint, the worry of a crowded beer space due to increased competition is now met by the reality of another market force, as companies responsible for enabling expansion are finding struggles of their own. In the case of Jason Fisher, the owner of Indie Alehouse, he’s found some solace with the potential to buy used equipment from peers in Wisconsin.
That hasn’t made him any happier about losing $600,000 or the impact the closure of DME/NSI has had on other brewery owners. At least some clarification will come on Jan. 7, the deadline for bids from potential buyers to take over the companies.
“This will put more pressure on all of us to do more due diligence and find ways to protect ourselves,” he says. “But at the end of the day, you have to have faith in your business partners.”
At some point in the future, Fisher says he wants to approach the Brewers Association about creating something akin to a rainy day fund, where a slight increase in annual dues could be used to help member breweries in need when sudden financial disasters strike. He knows this would only impact American counterparts, but sees the action as an important step to initiate change that will help the industry as a whole, regardless of geographical borders.
“I’m sure there have been less reputable people on trade floors selling equipment, and I’m not looking for anybody to blame or help us,” he says. “But what can our industry do to protect us? If this kind of thing happened 10 years ago, we wouldn’t be where we are today.”
—Bryan Roth