By Ezra Johnson-Greenough
For the Oregon Beer Growler
In March, Portland’s Metalcraft Fabrication shut down after facing a federal lien, causing the company’s bank funds to be emptied, according to industry insiders. Owner Charlie Frye acknowledged the bank had closed accounts, but did not address this specifically when asked for comment.
The closure came as somewhat of a shock since Metalcraft was one of the greater success stories in Oregon’s craft beer industry. Co-owner Charlie Frye came from well-established manufacturer JV Northwest to found an innovative brewery-centric fabricator. Metalcraft reportedly made more than 1,000 tanks for businesses in 30 states and three countries in the last 10 years, including equipment for some of our state’s best breweries like Breakside Brewery and pFriem Family Brewers.
Many are left wondering how a company that was once praised by beer makers and business journals alike can suddenly close and see some of its relationships with clients go sour.
Charlie Frye and his then-wife Jen Baque opened Metalcraft in 2007, starting off welding furniture and building facade components before picking up work fixing tanks and equipment for breweries. By 2015, the business expanded by moving into a huge new warehouse to become one of the few U.S. fabricators that could make larger equipment — tanks more than a couple hundred barrels and brewhouses beyond 30 barrels. And just last year, Metalcraft teamed with Pelican Brewing Company to develop a new dry-hopping method. The resulting “Hopinator” received a rave review from brewmaster Darron Welch, who said Metalcraft “perfected a design that was exactly what we wanted. Not every fabricator would have been that patient.”
However, it wasn’t long after that when Metalcraft began scrambling to keep the doors open long enough to finish millions of dollars’ worth of projects.
“A number of factors contributed to Metalcraft’s demise,” said Frye in my original article breaking the closure for newschoolbeer.com, “the greatest one being several unforeseen challenges associated with our expansion.”
Metalcraft entered the brewery fabrication business at just the right time — before the big boom that would become the industry’s largest period of growth, post-2010. Growth was quick and used equipment became scarce, which led to longer lead times and down payments. Industry sources familiar with the matter indicated these upfront down payments ranged from 15-40 percent.
“The company got themselves into a cash crunch,” said Thad Fisco of Portland Kettle Works, another local fabricator that has offered to help finish Metalcraft’s work for clients. “[Metalcraft] ignored some basic fundamentals to maintain cash to finish deals. You begin to burn those deposits to finish projects that were contracted previously.” There are no rules against operating this way.
According to Fisco, this is “unfortunately not an uncommon occurrence in the manufacturing industry.”
The practice of taking on new jobs and even discounting them in a mad dash to use that money to finish past work that may not have even gotten underway “unintentionally turns into a Ponzi scheme.” Fisco says this is a critical issue for the industry overall and one that he expects could cause a few more fabricators to go bankrupt.
You might be wondering if this has anything to do with the unsustainable growth of the craft beer industry. Yes, a little. As brewers get bigger, and some more desperate to compete, they may plop down huge sums of money upfront without checking a fabricator’s creditworthiness.
Meanwhile there is mounting competition from China where fabricators routinely offer a cheaper but lower-quality product. Some American companies have even stooped to selling Chinese equipment and marketing it as U.S. made, according to Fisco. However, the larger the tanks, the higher the shipping costs, and that can decrease margins and any competitive advantage.
According to comments Frye made to me in March, he laid off 35 employees, which would’ve been a significant cut to the 50-60 people he reported would be hired by 2015. He also hinted at some financial mismanagement, saying “a business owner should always be aware that their finances are in order and those trusted to manage them are qualified to do so.”
Frye declined to answer additional questions, stating “I'm not prepared to give any more interviews at this time.” For now, then, it’s impossible to know the full story of what happened to Metalcraft. But its failure is bad for both the brewery fabrication business as well as brewers and should serve as a wakeup call to each.
When fabricators go bust, some brewers who have sunk large sums of money into equipment will have invested too much to recover. That may include some of Metalcraft’s clients. Bill Baburek of Infusion Brewing Company in Benson, Neb. is one of those affected by the closure. “They took $45,000 dollars in deposit money from us in late December,” Baburek said, “for a $60,000 tank order, and now we get nothing for it!”
“If another company the size of Metalcraft or bigger goes down, it’s going to be a big deal,” warned Fisco. “It starts to tear the fabric of the system that is in place ... people that are looking to buy right now should take a moment to check the credit of the people they are looking at doing business with. Find out what’s going on with the business before jumping in with both feet.”
By Ezra Johnson-Greenough
For the Oregon Beer Growler
It’s the end of an era. Full Sail Brewing’s employees and founders voted in March to sell to Oregon Craft Brewers Co., which is a local investment group formed by Encore Consumer Capital, a San Francisco-based private equity firm. “The votes were returned confidentially to our ESOP attorney. It passed nearly unanimously,” said Full Sail founder and CEO Irene Firmat.
While this news is sure to not make as big a splash as the recent sales of 10 Barrel Brewing and Elysian Brewing Company, it is in many ways more important. Full Sail has been one of the industry’s pioneers and produced more beer (115,000 barrels) in 2014 than 10 Barrel (40,000 barrels) and Elysian (50,000 barrels) combined, making it the 25th largest craft brewer in the country.
Both 10 Barrel and Elysian are also examples of quick growth in a very short period of time, which may have been one of the reasons 10 Barrel was in a difficult financial position and willing to sell. Full Sail has experienced its ups and downs, but has largely avoided pitfalls and continued on a steady stream of growth by going its own direction. Ignoring trends like barrel aging, fresh hops, double IPAs and sour beers (for the most part, though the brewery certainly has dabbled); Full Sail instead focused its energy on recreating the craft lager and session beers, a move that was way ahead of its time. Full Sail’s location in Hood River is also undoubtedly responsible for the explosion in the number of breweries in the town and the entire Columbia River Gorge. Former Full Sail brewers have opened favorites like Double Mountain, Logsdon Farmhouse Ales, pFriem Family Brewers and Everybody’s Brewing.
Full Sail’s growth has not always been smooth. In 1999 the company transitioned into an ESOP (Employee Stock Ownership Plan) rather than be put up for sale. That model has worked well, with other breweries -- most notably New Belgium -- following in Full Sail’s footsteps. Then in 2012, Full Sail lost its Henry Weinhard’s beer contract, which it had held for 10 years with SABMiller. That investment allowed Full Sail to reinvest in its brewery, keep debt low and sustain growth. Full Sail was making so much Weinhard’s beer that the Weinhard’s brand alone was ranked as the seventh largest in Oregon. At that time I worried for the future of Full Sail, but the company re-upped its No. 1 in-house brand, Session.
The Session beer brand by Full Sail may have been the smartest and most successful product launch of any Oregon brewery since the start of the craft beer revolution. Short, stubby, highly-recognizable bottles of cheap (but still craft) tasty, light lager were a huge seller. And the brand has sustained with spin-offs Session Black, Session Fest and recently Session IPA. When growth started to go flat, Full Sail launched the beer into new markets and took Session beer to bar taps for the first time in a move the company said would never happen.
The pessimist might suspect the recent huge expansion of the Session brand was in anticipation of putting the brewery up for sale, driving up production numbers and the value of the company. Though Full Sail Chairman Irene Firmat says that the brewery was approached unsolicited last September, that doesn’t mean the brewery was not preparing for a buyer. Anheuser-Busch paid an estimated $400 per barrel times the annual 60,000 barrel production of Blue Point Brewing when it purchased that company in February of 2014. Given those figures, Full Sail’s estimated value would be $46 million.
As I mentioned before, a pessimist might also suspect that the Full Sail employee vote on approval of the sale was a formality and the sale was a foregone conclusion. Leaving the decision to the employees who own an estimated 58 percent of the company makes for a terrific PR move. Though that is a solid majority, founders Jamie Emmerson and Irene Firmat own 42 percent and would only need a small percentage of employees to agree to the sale. But according to Firmat, “The employee vote was not a sure deal. Jamie and I don’t have a majority position, so even though we felt that this was a very good offer for all our shareholders, it was not a sure thing until the votes were counted. We did an early reveal because once notices went out to 78 employees, we thought confidentiality would be difficult to maintain and it would be better to have the facts out to minimize speculation.”
Still, it would seem the deal was done since Firmat and Emmerson could reverse any “no” decision by the employees as they are the two sole trustees of the ESOP. Not that the deal is a bad thing for the employees who, based on their time at the company, will likely earn four to five figures in the buyout as well as keep their jobs. The other good news is that Full Sail would still be counted among the “craft” brewers as defined by the Brewers Association by selling to an equity firm rather than a macro brewer like Anheuser-Busch.
The bad news is that brewery sales to private equity firms might have a worse track record than those sold to SABMiller and Anheuser-Busch. While the previously mentioned companies’ business is at least making and selling beer, both are only concerned with making money. However, an equity firm will quickly sell off companies to make a buck and has no interest in continuing the products. That seems to be the case here. The formation of a new company called Oregon Craft Brewers Co. distracts from the fact that the real owners are Encore Consumer Capital, a group that holds no other breweries or beverage companies. Oregon Craft Brewers Co. is a brand new formation that also has no history in the industry. While Full Sail posits that its buyer’s lack of experience guarantees the current employees jobs (which may be true), it also underscores a potential turn toward primarily profit-driven endeavors. That could mean cutting costs and raising profit margins on products and perhaps launching into more states or countries.
After raising the value further, Full Sail could be sold off again, following the path of Portland Brewing/MacTarnahan’s, which has been bought and sold a few times and is now owned by a Costa Rican conglomerate. Encore Consumer Capital has an established track record of buying and selling companies a few years later. It has been alternately reported that Emmerson and Firmat would either plan their immediate exit or stay with the company. Firmat clarified this: “We have committed to stay a year to insure that this transition goes smoothly. After that we will see.” After seeing Full Sail through the transition, I think we can expect little substantial change immediately, but I worry what will happen in a few years after they continue to develop the Session brand. Will we see a day in the future where a craft brewery on the East Coast is contract brewing Full Sail beer as it becomes a version of the formerly-prestigious Henry Weinhard’s?
Firmat admits, “It is what they do, but they have a track record of holding on to companies for a longer period of time and, in the meantime, they invest to grow it. Our distributor alignments make a purchase by a big brewer very difficult and more expensive and they are very aware of that.”
Let’s hope she is right. At the very least, Firmat and Emmerson have followed through with their commitment to employee owners, giving them a nice bonus to their 401Ks while making a happy exit for themselves. That is much better than what Anheuser-Busch is offering to the casualties of its acquisitions.
This article originally appeared in The New School.
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