The end of 2018 is looking to be a rough one for Deschutes Brewery, which announced further delays in plans for a proposed East Coast brewing facility, followed by news it would lay off 7% of staff across sales, marketing, and operations. According to previous reports by the Bend Bulletin, the company had just recently had about 550 employees. Brewbound reported the cuts would reduce overall staffing to 520.
“This decision was extremely difficult to make, but necessary for the brewery given current craft beer market conditions and trends,” Deschutes president and CEO Michael LaLonde said in a statement. “At this time, we will continue to watch trends for the right time to build a facility in Roanoke. We don’t foresee breaking ground in 2019 as originally planned, but we will meet our commitments to let the city of Roanoke know our updated plans.”
Both of these new decisions shouldn’t come as a surprise. This spring, Deschutes decided to delay its buildout of a Roanoke, Virginia brewery that was set to have a capacity of almost 200,000 barrels a year. In this instance and others, LaLonde has been consistent in his explanation: market trends just aren’t kind enough. In 2017, the business had its first-ever sales decline. After hitting a peak of about 374,000 BBLs in 2016, Deschutes dropped 9% in volume to around 339,000 last year.
According to Brewbound, Deschutes is on pace for about 315,000 BBLs in 2018, which would represent another 7% year-to-year decline and a 16% fall from its highest volume days.
It might be easy for beer enthusiasts to survey the industry’s landscape and understand why Deschutes is trying to be thoughtful and deliberate about expansion. Green Flash’s failure just a few hundred miles away in Virginia Beach is only one example of how peers have tempered expectation in a slowing market. But given the financial incentives from the City of Roanoke, the situation doesn’t look any better.
Already in 2018, Roanoke officials and Deschutes canceled an agreement that would have literally given the brewery land for free and $4.7 million in various incentives. According to Roanoke.com, beer would have needed to be made and sold via the production space by June 1, 2021 to receive tax benefits based on investment and job creation, both of which seemed to be locked in at the time. The brewery was to cost $95 million, $40 million more than the investment required by the incentive agreement, and 70 full-time employees would be needed, about half of what the company had planned to hire.
Essentially, the the city and state were putting up free money, but instead of forcing the issue, Deschutes decided in June to outright buy the land it intended to use, spending $3.2 million for 49 acres as a sign of good faith. In April, LaLonde said that owning the land would allow the business to adjust timeline and investment as needed because Deschutes "needed that flexibility."
The brewery can reapply for incentives, but must share a new proposal by the end of March 2019, then another set of design plans and drawings by Aug. 31, 2020. Construction would need to start by June 30, 2021, two years later than initially planned. If all of these things don’t happen, Roanoke can buy the 49 acres back for the full price Deschutes paid for it, minimizing what could otherwise be a sunk cost.
But the question remains if any of that is even realistic for the brewery.
From a raw numbers standpoint, Deschutes is facing a similar problem many of the largest members of the Brewers Association’s “small and independent” contingent are facing w/r/t slowing growth. Of the 15 largest BA-defined "craft brewers" in 2017, four (Dogfish Head, Stone Brewing, Firestone Walker, Bell's) had double-digit percent increase in total volume over the previous year. Two (SweetWater and New Glarus) had somewhat significant growth at 6%, and Brooklyn Brewery increased 4%. The remaining eight were all flat or declining.
Deschutes IRI-tracked sales aren't helping, either. Those numbers from off-premise grocery, convenience, and other stores showed a 10% decline in volume and 5.6% decrease in dollar sales from 2016-2017. As one-time flagships Black Butte Porter and Mirror Pond Pale Ale have steadily declined in sales, Fresh Squeezed IPA has become the unplanned flagship leading the way. But in an era of IPA-focused craft beer sales, having one just isn’t enough, and as IRI volume flattens across most of Deschutes’ brands, the prospect of turning objectively declining interest into passionate customers on the other side of the country seems daunting at best.
This is why next year, the brewery will reportedly focus more on the Pacific Northwest, California, and Arizona, with LaLonde telling Brewbound Deschutes will be replacing recently laid-off workers with new ones to act as sales reps in those areas.
And perhaps that’s the most telling result of all. As crunch time approaches for an Oregon-grown business to make a decision on its East Coast existence, that business is plainly stating that near-future attention won’t be in the Mid-Atlantic. Rather, like so many craft breweries, Deschutes is retrenching into its home and nearby markets, hoping more localized enthusiasm and familiarity will ward off threats found farther away.