Good Beer Hunting

Vow of Modesty — Amidst Sales Pressures, The Lost Abbey Downsizes to Preserve a Longer Future

THE GIST

One of the U.S.’s most revered and awarded breweries—San Marcos, California’s The Lost Abbey—announced Nov. 1 it envisions a future not of sales growth, but of right-sizing. The company, which in 2015 hit its peak production just shy of 15,000 BBLs, hopes to sell its 30-barrel brewing system and find a tenant for half the space in its brewery as it adjusts to annual output around 8,000 BBLs. The move was first reported by San Diego Beer News

The Lost Abbey’s co-founder and managing partner Tomme Arthur says the scale-down is an acknowledgment of vastly different market conditions than those of the brewery’s sales heyday seven years ago. In California’s most recent 52-week sales period for chain grocery, convenience, and other retail stores, market research company IRI shows beer volume declines of -5.2%, with even steeper drops for craft at -10% compared to the year prior.

This decrease compounds challenges from rising costs of labor, inputs, and real estate, presenting The Lost Abbey a choice to cut costs or find itself out of cash. 

“In the past, most breweries would wake up and say, ‘I need to sell more beer.’ We’ve had numerous conversations internally that generating sales—while it would show a top line [growth] number—it might not be enough to cover the bottom line costs of all those inputs,” Arthur says. “Therefore, we’re not chasing the top line, but improving the bottom line.”

Arthur says capping production around 8,000 BBLs will set the brewery up for better stability in the long term. The Lost Abbey anticipates it will maintain current production and distribution of all its sibling brands: Port Brewing (specializing in West Coast-style IPAs), The Hop Concept (also an IPA-focused brand), Tiny Bubbles (fruit-flavored, tart wheat ales), and Kharisma Hard Tea. Arthur says he hopes that reducing costs, particularly on rent and property taxes, will mean the brewery can maintain its staff of roughly 35 employees.

“You can’t get small enough quick enough if you’re trying to protect the flank,” he says. 

WHY IT MATTERS

The Lost Abbey isn’t alone in the market headwinds it’s facing, but its choice to cut capacity rather than pursue growth underscores how expensive—and elusive—growth can be in specialty craft beer. To scale up production to maximize efficiencies in its current brewhouse and space, Arthur says the brewery would need to spend money that would likely not be recouped by increased distribution.

Port Brewing/The Lost Abbey’s combined production fell -41% from 2016-2020, according to data reported to the Brewers Association. (The brewery says it produced roughly 8,800 BBLs in 2021.) Arthur attributes this in part to a changing consumer alcohol preferences as well as distributor consolidation that led to “appreciable declines in sales” in once-key markets such as Washington, Arizona, and Chicago. Competition—from greater numbers of local breweries to legalized cannabis—also made sales more difficult in those geographies.

“If you look at the beer business today, it’s gotten really difficult to sell highly specialized beers, and in the 16 years we’ve been open, we've always been known as a highly specialized producer,” Arthur says. “How do you float the mainstream?”

The company has attempted to do that with spinoff brands, including a hard tea that Arthur pitched to potential investors as “soccer mom certified.” Tiny Bubbles, too—featuring a mascot named Brutus T. Bubbles—was launched as more approachable and “lighter” than The Lost Abbey’s corked-and-caged sour beers. Today, Arthur says those brands are at best minor contributors to the company’s sales and are sold primarily through the brewery’s four taprooms.

In the three markets he cited—Arizona, Washington, and Chicago—The Lost Abbey over time saw its distributors sold to other wholesalers, which Arthur says led to decreased attention for his brewery. Consolidation has led to larger portfolios for distributors, and as U.S. beer sales have slowed, many are winnowing the number of breweries and brands they carry. This is particularly true for specialty brands that wholesalers need to import—at rising freight costs—from out of state. 

“Distributors aren’t selling nearly as much beer, and they’re terrified to bring in a seasonal or niche beer from someone like The Lost Abbey, so it’s become almost impossible to get those,” says Michael Roper, owner of Chicago’s The Hopleaf, a beer bar and restaurant with a history of serving Belgian and Belgian-style beers from around the world. Arthur says The Lost Abbey hasn’t had “meaningful” distribution to Chicago in five years due to distributor consolidation.

Roper has asked distributors whether they can add, say, four specialty kegs from a farther flung brewery on a Chicago-bound pallet with that brewery’s flagships; he says most are not amenable. While an independent, craft-focused distributor is small enough in scale to make this transaction worth the effort, larger distributors are structured to move volume. 

“Distributors are interested in selling whatever is the hot flagship beer, and it means that we don't see all the cool beers from Allagash or all the cool beers from Sierra Nevada,” Roper says. 

Distributors have reason to be cautious: Beer has for years been losing its grip on the title of “America’s favorite alcohol” in favor of spirits. (Even Anheuser-Busch InBev executives admit beer will need to keep “reinventing itself” to stay relevant.)

  • Belgian-inspired, bottled beers like those from The Lost Abbey are some of the most esoteric within this declining sliver, and have seen a dip in consumer interest since before the pandemic.

  • Today, Port Brewing (45%) and The Hop Concept (35%) make up the majority of sales for Arthur, with The Lost Abbey comprising 20%.

  • With nearly every brewery in the country brewing its own IPA, Lost Abbey spin-off brands  would need significant sales support to make them viable far from their home base. 

This reality creates a bind for a brewery of Lost Abbey’s size if they hoped to expand sales: Even in territories where independent restaurants or bottle shops want specialty beers, distributors may not see those relatively minor sales as worth their effort. Hiring brewery sales representatives in those out-of-state markets is expensive for Arthur, and ultimately, the level of sales may not justify that cost. Today, Arthur says 85% of the company’s sales come from California, though it distributes beer to five other states. 

If The Lost Abbey is not able to sell its brewhouse in favor of a smaller system, Arthur says it would explore potentially offering contract brewing or alternating proprietorship arrangements, both of which allow another company’s brands to be brewed on its equipment. But again, he emphasizes that those partnerships would need to bring enough revenue to continue to cover the cost of maintaining and cleaning the existing equipment.

Even if it means his bar will never tap a keg of Red Poppy Barrel-Aged Ale with Cherries and Poppy Seeds again, Roper approves of The Lost Abbey’s streamlined approach to the future. He believes it will set the brewery up for a longer, albeit more modest, future. 

“There’s really no such thing as perpetual growth and in this market it’s not sustainable,” he says. “The alternative for a lot of people is they end up having to sell their brewery or close their brewery.”

Words by Kate Bernot