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Primed to be the next Primo

Some folks are trying to be Hawaii’s new “King of Beers” through innovation.

Walk into most supermarkets in Hawaii and you will see a clear case of dueling beers. Next to each other in the center of the premium beer section most likely as not stand offerings from Kona Brewing Co. and Alii Brewing Co., two beer outfits that are vying to dominate the local suds scene. Both are chasing the ghost of the past, a fabled brand called Primo that for years ruled the Hawaii beer market and duked it out with major national brands with great success.

Despite the still-lingering rosy glow, Primo died a slow death after the brewery and bottling operations were shipped to the mainland in 1979 and local interest declined. Primo’s departure from its Pearl City brewery foreshadowed the general demise of medium sized regional breweries around the country. When Schlitz Brewing Co. (the final owner of the brand) stopped brewing Primo in May 1998, it was no surprise. The beer had been a loser for years, with case volume sliding to nearly one-tenth of its peak.

Say the word Primo and locals smile and remember giving cases to their garbage men for Christmas or slurping Primo at a backyard luau. But Primo, as it was, seems like an economic non-starter. The costs of restarting a large-scale local brewery would run into the millions with no return in sight for a number of years. Profit margins—already slim at less than 10 percent in the brewing business—would be slimmer. Of course, the big three would make every attempt to price the new beer out of the market, if it were to be positioned as an everyman’s beer like Primo once was.

So Primo’s days as Hawaii’s Budweiser seem to be over. "Primo was an industrial beer. I don’t see much of a chance of that here in Hawaii," explains Mattson Davis, the general manager of Kona Brewing. "It’s a different niche than the ones that Hawaii’s beer companies are in now." That said, Davis and his counterparts at Alii would be more than happy to snag a hefty double-digit share of the Hawaii beer market like Primo once did. Here’s how they are going about it.

KEEPING THE TAPS FLOWING

In 1996 local telecommunications entrepreneur Jack Brennan and a group of local investors bought Alii, which was struggling at the time. Brennan became president and sunk $750,000 into improvements including an upgraded bottling line, better filtration systems and additional capacity. The turnaround from red to black has been slow but Brennan says that he expects gross revenues growth of 50 percent this year. Even better, he expects his first operating profit.

Production has doubled from 150 barrels a month a few years ago to 300 barrels a month, and a refurbished bottling line is humming along. Furthermore, Alii is getting the royal treatment from retailers who feature it in advertising circulars. Alii is also on tap in more than 50 restaurants around the state—a big increase from 1996 when it was hard to find. In August of 1999, Alii made 3,000 cases of beer and several hundred kegs. "We see improvement with the locals showing a little bit more loyalty to the Alii products, particularly where we do have strong local colleges and an upwardly mobile base of people," says Brennan, who adds that he makes up for lack of marketing dollars with sponsorships of local events to improve his brand’s visibility.

Alii’s approach to brewing and bottling beer in Hawaii is not without hefty costs. Although he is committed to keeping his entire operation in Hawaii, Brennan must pay dearly for it. Propane, electricity and carbon dioxide all cost far more in Hawaii than they would on the mainland. For example, shipping a case of empty beer bottles to Hawaii costs 50 cents more than shipping full beer bottles. Shipping refrigerated hops and malts from the mainland costs 8 cents to 9 cents per pound. Brennan estimates these two added costs slice 15 percent off of his already thin margins which, if he is lucky, will foam up profits of 4 percent to 8 percent. Still, Brennan is dead set on staying put. "We are not planning on brewing on the mainland for the Hawaii market. It’s like selling someone a hotel in San Diego that has a Hawaiian motif," says Brennan.

To avoid many of those costs, Kona Brewing Co. elected several years ago to move the brewing and production of its brand-name bottled beers to the mainland, where they now contract with two microbreweries on the West Coast that have excess capacity. According to Kona general manager Mattson Davis, the differences in expenses aside from bottles and malt are also substantial. Electricity in Hawaii costs more than double what it costs on the mainland. "It doesn’t take too much head scratching to decide, do I spend a million dollars on a bottling line and still pay all these costs or do I go to a brewery on the mainland and do a partnership. There was no way we could afford to be a profitable company and put our bottling here." explains Davis.

So Kona has arrived at a compromise, producing keg beer for sale at bars around the state and stocking their own brewpub with a Kona brewing operation. Still, they sank $175,000 into their Kona brewpub to expand brewing capacity by 40 percent in order to handle the keg trade. To improve movement of products off the shelves, Kona retooled the packaging of its beers to make its different types of beers more clearly identifiable with the brewery.

It also dropped prices this spring to compete with cheaper hand-crafted beers like Sam Adams and Red Hook, which average nearly $6 a sixpack in Hawaii.

According to Davis, the past year has been stellar. "In the last 12 months sales have grown 43 percent in draft business and 13 percent in bottled business," he says. "In 1998, we sold 75,000 cases. "We are probably 10,000 to 15,000 case equivalents behind Sam Adams and they are the leading craft beer sales company in Hawaii."

WHO’S THE NEXT PRIMO?

Right now, of the two Hawaii brews, Kona sells significantly more beer but that gap may close in the future. But neither is coming close to the level of old Primo. There are a number of reasons for this. The state of Hawaii also handcuffs local breweries. "Multiple locations are not allowed. A brewery such as ours cannot have an offsite restaurant, and a brewpub cannot produce more than 10,000 barrels of beer," explains Brennan. On top of that, Hawaii’s beer tax levied on gallons of keg or bottled beers is significantly higher than beer taxes in most mainland states. The state’s 11 brewpubs and breweries are forming a lobbying group to get relief. However, these factors have already impacted the market and will likely continue to do so.

Unlike Primo, both Alii and Kona have positioned themselves as premium beers. This is by design but the extra two or three dollars or so that they cost is more than a little bit in Hawaii. "The local people are very price driven. In the grocery store it’s pretty challenging," says Davis. "At the bar, the price difference is 50 cents a glass between us and domestics instead of almost twice as much like you find in the supermarket. That’s much easier to sell."

Clearly, Alii and Kona have their work cut out for them. In Hawaii’s million barrel per year beer market, they collectively represent less than one percent of sales. Overall, the state’s beer market has been flat or shrinking slightly for the past few years. And, following the national trends, the imported beers have surged in Hawaii with double-digit growth. In step with both their means and the national trends, Davis and Brennan have modest goals of garnishing a few percentage points of the Hawaii market. Kona sells at hundreds of stores in California, as well, thanks to distribution agreements over there.

"In our wildest dreams, we would like to see ourselves at about 5 percent of the statewide market. That may not happen for 10 years. But you have to have faith," says Brennan.

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