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Brewing National Success

Kona Brewing Company's Secret to Mainland Expansion

Suds Sell: Kona Brewing Co. President and CEO Mattson Davis is expecting a 60 percent jump in sales this year, due to rapid expansion. Photo by Macario

It’s a long way from Hawaii to Florida, but that’s no deterrent to Mattson Davis.
The CEO of Kona Brewing Co. (KBC) is already selling his suds in four cities in the Sunshine State and will take distribution there statewide by the spring of 2008. To further fuel East Coast expansion, KBC is in the process of nailing down an agreement with craft brewer Red Hook to produce batches of Longboard Lager and other signature KBC libations at Red Hook’s New Hampshire brewery.

The East Coast push is the latest and most radical step by Davis, a brash, pull-no-punches CEO who, in an already crowded mainstream market, is speedily building an Island-born company into a healthy national brand.

Under Davis’ watch, KBC has grown its total production of beer sixfold, from roughly 5,900 barrels in 1999 to an estimated 65,000 barrels in 2007. In a cutthroat industry, KBC has posted impressive sales numbers with a compound annual growth rate of 25 percent.

And that growth is accelerating.
KBC grew sales by 30 percent in 2006, including an eye-popping 80 percent jump in sales numbers on the Mainland during that period. In fact, more than two-thirds of KBC’s total 2006 sales were outside Hawaii. In 2007, revenue growth should hit nearly 60 percent as the expansion accelerates.
KBC brews are on shelves in 17 states and Japan and can be found in some of the biggest Mainland retail chains, including Safeway, Costco, Trader Joes and, as of the fall of 2007, Von’s and its 200-plus California stores.

With annual revenues in the $20 million range and operating margins in the high teens – well over the 10 percent average for small breweries – Kona Brewing has remained solidly profitable with relatively low capital costs throughout its rapid growth.

So how has Davis performed the rare feat of taking a Hawaii brand national in a hyper-competitive market? How did he take a company with no real comparative advantage and achieve such expansion without abandoning its Island roots or moving his headquarters out of Hawaii?
Here’s a look at Davis’ playbook for growth.

NAIL THE LOCAL MARKET:

KBC started small, with less than 5,000 barrels brewed in 1996, its first full year of operations selling kegs and bottles in Hawaii. Founded by Kettle Chips magnate Cameron Healy and his son Spoon Khalsa, Kona Brewing from the start set out to sew up its Hawaii base. The founders wanted to bring Oregon-style craft brewing to Hawaii and create extremely high-quality products that could stand up to any in the world and would not rely merely on a local label to drive sales. A key early move was the addition to the team in 1999 of brewmaster Rich Tucciarone, who has since won more than two-dozen awards at beer competitions in the U.S. and abroad.

The result? According to Davis, KBC sells roughly 10 percent of all tap beer in the state of Hawaii and 1.5 percent of all packaged beer, an impressive number for a craft brewery in a market that never quite caught the microbrew fever in the same way as Mainland cities. And its brewpubs in Kailua-Kona and Hawaii Kai have become hubs of aloha with lively Hawaiian music nights that pull in big local crowds. “The more you do it right in Hawaii, the more you’ll be able to transport it to the Mainland,” says Davis.

NO BIG IRON:

photo courtesy of Kona Brewing Company

When it came time for Kona to seriously expand on the Mainland, Davis didn’t really have a choice but to contract with a large, Mainland brewery. But on its current growth curve, Kona could easily justify its own brewery or bottling factory on the Mainland within the next few years. No way, says Davis. “I never want to fall in love with big iron. It costs a lot to buy and maintain. I just want to make beer,” says Davis. On the Mainland his “No Big Iron” policy even applies to kegs, which KBC only leases.

PARTNER SMART:

In 2001, KBC began a long-term contract brewing arrangement with Widmer Brothers, an Oregon regional craft brewer that had a large brewery and rented out space to lower-volume labels like Kona. That also included a stock-swap with Widmer, which gave KBC roughly 2 percent of Widmer shares in exchange for 20 percent of KBC shares. Widmer had long had a reputation for high-quality facilities and attention to detail. It had the added benefit of being partially owned by brewing giant Anheuser-Busch.

While beer snobs might scowl at Widmer’s relationship with the Death Star of the beer biz, Davis saw distribution opportunity. Anheuser-Busch has the most technologically sophisticated distributor system in the country, with computer terminals in thousands of independently owned distributors and its own network of wholly owned distribution branches. In 2004, Kona entered the Anheuser-Busch distribution system and joined the Craft Brew Alliance, a marketing and sales group forged by Anheuser-Busch to capitalize on the fast-growing craft brew market. “The month of transition, normally a horrendous month of sales, we were up 40 percent in Hawaii,” says Davis.

GROW SMART:

When renovations to the Honolulu International Airport are completed sometime in the next five years, one of the watering holes will be a Kona Brewing pub. KBC won’t operate the pub. Rather, HMS Marriott will hold the license and manage the establishment, with KBC getting a licensing fee and supplying beer for the taps. “We don’t want to be in the restaurant business. I don’t want to have to manage employees all over the country,” says Davis.
That’s a reflection of his overall business strategy. Most of KBC’s growth has come through pure sales. The company does not have a full-time employee at the Oregon brewing operation. It doesn’t have warehouses or personnel to staff them on the Mainland. With roughly 150 employees, and two local restaurant operations, KBC maintains a remarkably lean profile considering its expanding footprint. “We don’t want to manage people. We want to sell beer and sense of place. We’ll let other people do the HR work,” says Davis.

MAINTAIN QUALITY:

Running a far-flung beer empire without growing head count makes quality control even more imperative. That’s doubly true for a product selling into a market with hundreds of premium competitors. Tucciarone takes regular trips to the Widmer brewery to check batches, which are also airmailed back to KBC in Kailua-Kona on a weekly basis. Unlike many smaller beer companies, KBC keeps all of its products refrigerated throughout the supply chain.ÊThat means from the brewery to the customer’s basket, products remain chilled, reducing chances of spoilage and resulting negative customer experiences.
True, the growth has meant that some larger customers don’t keep the product chilled–large supermarkets and Costco, for example. But KBC is also vigilant about rotating out unsold product within 100 days. Ironically, Davis says this quality control is possible in large part due to his partnership with Anheuser-Busch, which bends over backward to support members of the Craft Brewers alliance, including KBC, Widmer, Red Hook and Goose Island.
Not surprisingly, Davis has chosen a Red Hook brewery in Portsmouth, N.H., as his contract partner to support the Florida expansion and supply growing East Coast markets such as New Jersey and New York City. Says Davis, “We don’t own the breweries but we control everything else. We ship the hops right to the vats, we check the samples, and we closely monitor quality in all our markets. We have to because there are so many really good beers on the market.”

 

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