While other craft brewers struggle, Lagunitas looks to future with new products

Craft breweries across the country are adjusting to whiplash going from the rapid growth of a decade ago to a dramatic slowdown of sales in recent years.

The fallout has been quick and brutal, especially among some of the most well-known brands, as craft beer sales have decreased 7.5% over the past year at retail establishments tracked by the market research firm IRI. The examples are notable, including Stone Brewing Co. of Escondido, which was snapped up last month by Japanese brewer Sapporo as the company owed $464 million to private investors, and Modern Times Beer of San Diego in receivership and looking for a buyer to rescue it.

Lagunitas Brewing Co. in Petaluma, however, is looking to the future.

The company, which has been fully owned by Amsterdam-based Heineken International since 2017, is bullish on its new hard tea product with a $4 million marketing campaign behind it. Later this year, the brewery will launch Island Beats, a less bitter and citrusy ale that has a milder 5% alcohol content. And later this month, Lagunitas will finish construction of its innovation brewery that will allow its team to test out small batch, experimental beers for its fans.

At the company’s helm is CEO Dennis Peek, a Netherlands native who climbed up the ranks of Heineken in North America over the past decade and took over leadership at Lagunitas in February 2020 just before the pandemic struck. Peek has a delicate balancing act as he brings all the knowledge and capabilities of the second largest brewer in the world to grow the Lagunitas brand domestically and internationally to now being sold in 48 countries. At the same time, he needs to maintain the company’s DNA profile of a stoner-friendly culture known for its potent IPAs ― as its Maximus double IPA beer comes in at a strong 9% alcohol content.

Peek said he believes the craft beer segment has blended so much into the IPA style that there is little distinction in the marketplace to most consumers.

The IPA category makes up about 5% of all beer sold in the U.S., but could double in the future, he said.

“We as a leader of IPA can accelerate that,” Peek said of future growth. “We are going to continue to innovate in the IPA segment to bring in new consumers into IPA. We really see that not just in the United States, but worldwide with that trend happening.”

Dennis Peek has served as chief executive officer at Lagunitas Brewing Co. since February 2020.
Dennis Peek has served as chief executive officer at Lagunitas Brewing Co. since February 2020.

To be sure, Lagunitas has encountered its share of fiscal challenges as the company’s sales in the craft category are down 12.4% over the past year, according to IRI.

The brewery had 730 employees when Heineken first invested in 2015 with a valuation of the brewery at the time at about $1 billion, people familiar to the deal told The Press Democrat. The head count is now around 500, Peek said. Heineken also noted in its 2021 annual report that it took an impairment loss ― a permanent decline in the value of an asset ― of $240 million mainly related to its Lagunitas investment and a slower than expected recovery from COVID-19.

But the difference was that Tony Magee, who founded Lagunitas in 1993, saw an exit ramp and acted years before most in the craft beer industry with the Heineken investment.

Kevin McGee, CEO of Anderson Valley Brewing Co. in Boonville, said in an email that Magee “did a great job of doing what he needed to do when he had the opportunity to do it and then when to exit. That’s a rare talent.”

Lagunitas had ramped up with a Chicago brewery that opened in 2014 and had major plans for one in Azusa, but growth then slowed.

“He (Tony) was running pretty hard with some aggressive financing to ride the growth wave that was happening at the time and I’m not sure if he had much of a margin for error back then. It could have been a very different story for sure and I doubt it’s something that could be replicated by another brewery today,” McGee added.

The Heineken investment has allowed Lagunitas to play the long game at a time of retrenchment among many craft brewers or those who have jumped on a trendy craze like hard seltzers, a category where growth has flattened. Lagunitas has deepened its roots in the IPA category with various styles, such as a hazy IPA version and lower-alcohol version with less calories called Daytime IPA.

Peek said the goal for Lagunitas is “to make sure that we continue the innovation funnel where we really think in the long term.”

Those efforts have continued with an alcohol-free hop tonic water, which later was used in a cannabis drink, called HiFi Sessions, produced by CannaCraft in Santa Rosa and sold in licensed dispensaries. Earlier, this year, Lagunitas introduced a revamped HiFi lineup with more fruit flavors. It also has a nonalcoholic beer, IPNA, that is flavored with Mosaic and Citra hops.

But its Disorderly Tea effort has been its biggest gambit yet under Heineken as the tea is brewed at the Petaluma facility with a leaf similar to yerba mate and flavors of berry and yuzu lemon. A new peach version came out this summer. That is in contrast to other brewery efforts mostly using generic commodity tea bought and then spiked with alcohol.

The tea effort strikes the right balance between a flavorful drink and a product that is not super boozy and filling, Peek said.

“The consumer and the retailers start to understand this is a tea that is full-bodied and flavorful and naturally brewed and at the same time has all the advantages of what consumers are looking for ― easy to drink, low calories and low carbohydrates,” he said.

The launch also showed that brewing input is still highly regarded at Lagunitas under Heineken control. The hard tea effort was driven by the brewing team, which is led by Jeremy Marshall, the head brewer whose tenure at Lagunitas goes back almost 20 years and was hired by Magee. The brewers were looking for some new inspiration that wouldn’t be a last-minute effort to join the seltzer craze that could alienate longtime fans, but something much more artisanal in nature, Marshall said.

“The brewers pushed on this. We knocked on marketing’s door and sales and tried to shove it in their faces. That’s pretty hard to do when the taproom is closed (because of COVID),” Marshall said. “It’s not a mainstream product.”

The potential for growth in the category is significant as IRI found the hard lemonade/hard tea segment has increased 10.4% over the past year with sales now at $1.2 billion. Peek said the sales of Disorderly Tea are especially “flying” at taprooms and bars.

The brewery is hoping for similar success with Island Beats, which is now available in its taproom. Marshall said the beer is still a hop-driven ale but doesn’t overwhelm the palette with soft notes of papaya, mango and passion fruit and contains a very low bitterness. “It’s trying to be the gateway IPA for the people who maybe had an IPA at some point and said, ‘Oh, that is too hoppy and I don’t like hops,’” he said. “Let’s bring them back into the category.”

The innovation brewery will give Marshall’s team more time to explore and brew different styles. It also will help with productivity because they now conduct their test batches on the huge brewing systems that mostly produce its high-volume beers.

“We have a long list of things (to brew),” he said, noting that one future pilot beer will be infused with mushrooms from a local Sonoma County farm.

Ultimately, the expansion of the IPA style will not be a massive hop-loaded beers like its Waldo’s Special Ale triple IPA that comes in at an 11.7% alcohol content, Marshall said.

But it will be from more subtler efforts that could attract even a fan of the very mild Blue Moon beer like his late grandfather.

“We want to bring them in with modest amounts of everything, including flavor,” he said.

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