Do You Have a Clue What Happens Now?

When I saw the news, I was so excited I texted my dad the link right away. He’s a hardliner. Once a brewery gets bought out by The Big Guys, he doesn’t buy their beer again no matter how good it is. He made exceptions for Northern Brewer since their stores are so convenient. Nevertheless, I thought he would be relieved to hear that Northern Brewer was no longer part of the Evil Empire.

He wasn’t.

He pointed out that, first and foremost, AB is actually in the beer business so they have an interest in, well, beer. A holding company is probably going to be interested in doing whatever it takes to sell the company for a profit. And second, AB has immense buying power they could leverage to maximize profitability and undercut their competitors. Anecdotally, they have lowered the price of malt fairly substantially since they were acquired.

Then it was recently revealed that the new owners are considering closing the brick-and-mortar Northern Brewer stores according to someone who is described as being “very trusted.” This made me wonder what the future holds for Northern Brewer. On the news that the Fridley Brew and Grow is closing at month’s end, it seems prudent to take this rumor seriously.

The stakes are high. According to American Homebrewers Association research, the homebrewing industry created 11,672 jobs and is a $1.225 billion dollar industry in the United States as of 2015. (Pause for a second to recall that a billion with a “B” is a thousand million.) In addition, homebrewing is the foundation of craft beer. Homebrewers created a demand for beers that weren’t Hamms. Homebrewers became savvy consumers, and got our friends into taprooms. Heck, homebrewers were the ones who decided to chase the dream and become the professional brewers making up many of the 7000+ breweries in the US today. The homebrewing book Radical Brewing essentially defined the last ten years of the craft beer scene.

After poking around online and running some numbers, I have no idea if the Northern Brewer brick-and-mortar stores are operating on borrowed time. In the end, here’s an exercise in sophistry as to why Blackstreet will, and will not, close their retail stores.

Why Blackstreet Will Close the Minneapolis and Saint Paul Northern Brewer stores

  • It’s their business model. According to an SEC document, Blackstreet’s business consists of buying businesses that are “mismanaged, unprofitable, orphaned by a parent conglomerate, or have limited earnings potential in a declining market.” Blackstreet then draws any presumably anemic profits from these businesses and reinvests them in new acquisitions. Businesses failing to meet Blackstreet’s expectations may be “defaulted, subjecting them to possible forfeiture of their interests.” Blackstreet’s acquisition of Bay Area Italian restaurant chain Pasta Pomodoro in 2014 illustrates this. Pasta Pomodoro was reportedly on the verge of bankruptcy at the time it was bought out. Blackstreet replaced existing management with corporate officers they appointed, according to court documents filed in California. Reviews after the acquisition noted a significant decrease in quality. Perhaps as a result, the number of franchises fell from 30 to 15 before they abruptly closed the day after Christmas two years later, notifying their employees via text message that morning.
  • Blackstreet CEO Murry Gunty takes a hands-on approach. In theory, a holding company takes ownership of a company’s assets and liabilities and establishes a viceroy of sorts (in this case, Blackstreet executive vice president Kevin Kuby) who is loyal to the holding company and commits to the holding company’s goals. However after Blackstreet Capital bought mid-Atlantic chain Jerry’s Subs and Pizza, Gunty planned to increase the menu beyond their signature cheesesteaks and pizza to add family value meals. Looking at their menu, they now offer chicken nuggets, “Wingz”, salads, and party trays.
  • Everything looks like a nail. The new interim Northern Brewer CEO Kevin Kuby is all about turning business around. He included the word “turnaround” in every position he’s held since 1996 according to his LinkedIn profile. The Wall Street Journal says that he is a Certified Turnaround Professional, although I wasn’t able to confirm this in the Turnaround Management Association directory. Given this is the person Blackstreet chose, two things are obvious. First, it’s clear they believe Northern Brewer was trending in the wrong direction. And second, Kuby isn’t a tech bro seeking to disrupt the homebrewing business model. Furthermore, Kuby said something that seems telling in the press release announcing Blackstreet’s acquisition of Northern Brewer. Specifically his full quote is, “We can move exceptionally fast to understand the situation and pride ourselves in completing complicated carveouts. We are focused on helping the underlying business grow over the long-term.” (emphasis added) A carveout is when a parent company sells some or all (usually at least 80% to be tax free) of its interests in order to spin-off a less profitable segment of its holdings. Is it possible Kuby’s turnaround strategy isn’t dependent on closing the Northern Brewer retail stores, but separating them into independent retail outfits?
  • Retail is the past, online sales are the future. News stories documenting the demise of retail, even at the current economic high-water mark, are legion. Online sales are probably economically more efficient since tech-driven warehouse jobs don’t pay more than retail jobs, and the labor supply can be expanded and contracted as a function of demand – assuming possible liabilities aren’t taken into account.
  • There’s no corner to turn. In 2010, the American Homebrewers Association presented a graph that appeared to show a correlation between Google searches for “how to brew” and white, male (20+) unemployment (maybe I’ll unpack that in a future post). It makes for a nice story; people lose their jobs and homebrewing acts as a salve to the real trauma of losing one’s financial stability and personal identity. Given that the economy is good right now, it might follow that homebrewing is approaching a nadir. If economists are seeing leading indicators of the next recession, maybe the homebrewing industry just needs to hold on a bit longer before things pick up again. There’s just one problem: it’s not true. It is true that there appears to be a correlation between unemployment rate and Google searches for “home to brew”. However, data show this is related to searches for “hombrew Wii” instead of beer. First, there is no correlation whatsoever if other homebrewing terms are used (e.g. how to brew, how to make beer, how to brew beer, or hombrewing). Second, the graph below shows that searches for “homebrew Wii” peak at the same time as “how to homebrew” and has a similar slope afterward. And third, the related searches in Google Trends for “how to homebrew” are all related to Wii and not beer. Bottom line? Saying there’s a real correlation here is inconclusive at best.
  • Blackstreet is a money company in Maryland and not a beer company in Minnesota. As far as I’ve been able to tell, this is Blackstreet’s first foray into the alcohol industry, so catering to the needs of homebrewers or considering second-order effects on the craft beer scene probably doesn’t rank too highly on their list of priorities. For that matter, I’ve looked at the Facebook pages of Blackstreet employees and there’s nary a beer to be found. Blackstreet is a Maryland-based company. If the retail homebrew stores close in the Twin Cities, it wouldn’t affect Blackstreet staff or their friends.

Why Blackstreet Won’t Close the Minneapolis and Saint Paul Northern Brewer stores

  • The Twin Cities is notably short on homebrew stores already. I obtained the estimated 2018 populations of the top 100 metropolitan statistical areas from the US Census Bureau (Minneapolis-Saint Paul-Bloomington is #16), and made a rough estimate of how many homebrew stores there are in each of these metro areas from Google Maps. As it stands today, there are 907,298 people per homebrew store in the Twin Cities. This is significantly higher than other notable beer cities like LA (886,099), Chicago (593,670), San Diego (557,227), Denver (418,916), Richmond (326,543), or Portland (225,346). With Brew and Grow exiting stage left, this disparity will only increase.
Homebrew shops per capita of US metropolitan statistical areas
  • This isn’t their first rodeo. Blackstreet has owned companies for years and it’s hard to find examples that have downsized. Indeed, depleting its portfolio companies of their own profits is probably self-defeating. Most acquisitions appear to remain in their holdings, presumably generating modest if stable income for the parent company, or are sold-off at a sizable profit. For example, Blackstreet sold its stake in 82 Papa John’s pizza shops in Colorado in Minnesota in 2017.
  • Rumors of retail’s death have been greatly exaggerated. Over the past two years, there are numerous data points indicating that the retail apocalypse hasn’t materialized. While it’s true that retail jobs and stores are down, retail sales are actually up. The National Retail Federation notes that retail sales have been increasing at 4% annually, nearly all online retailers have a retail presence, and online sales account for only 10% of total consumer sales. Companies are adapting. Some are using robotics, presumably to cut labor costs for example. Others are finding synergies between retail and online sales. For example, people go to clothing stores to try things on and then order the products online. A similar thing probably happens with homebrewing. I might go to a store to try out a floor corker, and then buy it online from the store that has the best price and free shipping.
  • Online retail is hot, flat, and crowded. If a homebrewer wants to order something online, they have options. Given that many online homebrew shops offer free and/or flat rate shipping, it doesn’t make a difference whether they order it from Northern Brewer, Morebeer, or Steve’s Brew Shop. While Google Trends and Alexa data appear to show that Northern Brewer is searched more than any of its competitors, there appears to be a downward trend for all of these outfits and Northern Brewer’s advantage appears to be narrowing. Being able to buy products locally, bring them home that day, try them out, and get up-sold by sales staff is an advantage no online retail outfit can match. Never mind that many homebrewing items are poorly suited to being shipped. I wouldn’t want yeast and hops sent through the mail in the summer, and these items might freeze in a Minnesota winter. And would I really risk a brand new $260 Blichmann brew kettle getting stolen by porch pirates?
Northern Brewer is Googled more than any of its peers from 2014 - 2019, but the gap is closing
  • There’s no quick money to be made. Selling off the retail locations would only be a quick way to make some bank if the sale included the property. According to property tax records, the Minneapolis and Saint Paul locations are valued at $1,640,900 as of 2019. Selling the property might be especially tempting since the Saint Paul property value is 33% greater than just four years ago. However, according to Ramsey and Hennepin County information, both properties appear to be owned by an LLC owned by Northern Brewer’s founder.

Calculus and Optimism

If the calculation some people made in not shopping at Northern Brewer before was that money spent there would add to AB’s ability to sneakily acquire beloved craft beer brands and affiliated companies, it might be even worse now. Shopping local is beneficial because money spent locally has a multiplier effect within the community. Since Northern Brewer is now owned by a holding company, any profits may get reinvested in buying hockey arenas near Chicago. Or a tech consulting firm in Kansas City. That’s less money getting reinvested in beer. As much as I support those who say we should shop so hard at Northern Brewer that the new owners will see the value in their brick-and-mortar retail outfits, I’m skeptical of the ability of a ragtag group of homebrewers in need of a shower meaningfully increasing sales and maintaining that level enough over the long-term to make a business difference.

One of the fundamental principles of economics is that demand determines supply. Blackstreet may well shut down these stores (or not), but there appears to be a demonstrated demand for the goods and services Northern Brewer provides at the retail level locally. Closing these stores would just open the market for some other entrepreneur to fill the void.

As I said at the top, I don’t know anything. If someone else knows something, I’d believe that person. Northern Brewer has always had a special place in my heart. Back when I was getting into homebrewing, visiting Northern Brewer’s store in Saint Paul was a highlight of my visits to the Twin Cities. I loved daydreaming about all the possible beers I could make using the malts in their grain room. Time goes ever onward, and that exuberance and complacency in what I took for granted seems far away, as if in a pleasant dream from which I am only now disquietly awakening.

Northern Brewer storefront at dusk

Northern Brewer and Blackstreet were both contacted for comment.

Conflict of interest statement: I asked Northern Brewer about the possibility of temporary employment in January 2019 but did not receive a response.