Magic Hat's New Tricks

Anyone who has ever cracked open an apricot-tinged Magic Hat #9 will tell you that Magic Hat takes a unique approach to beer. The company has never followed the conventions of the industry, and has experimented with flavors most brewers wouldn’t approach. (Think lemongrass. Or – ick – garlic.) Couple that with quirky promotions that range from traveling circuses to Mardi Gras parades in eight-inch Vermont snow storms, and the brand has earned a reputation like none other – but what else would you expect from a brewery that spawned from the same city as Ben and Jerry’s Ice Cream and the alternative rock band, Phish?

Despite the brand’s free-wheeling Burlington vibe, Magic Hat founder Alan Newman knows a bit about business. In the late 80s, he bought a catalogue company called Renew America that sold Earth-friendly household products. Today, that company – now called Seventh Generation – ranks as one of Vermont’s largest employers, and stocks the cleaning aisles at natural foods retailers like Whole Foods, but Newman’s tenure with the company ended in 1992 when his partner forced him out. Undeterred by his ouster, he started Magic Hat. The brand’s distribution territory initially clung close to the coast of Lake Champlain, but, today Magic Hat ranks as the twelfth-largest U.S. craft brewer, and sells #9, Circus Boy, Lucky Kat, Single Chair Ale and a selection of seasonals as far south as Georgia and as far west as Chicago – admirable progress for a man that says he got into a business he “didn’t understand.”

“I really don’t have a crystal ball and I really don’t know what’s going to ?happen,” Newman said, “so I keep following my nose.”

Newman plays humble, and calls himself “stupid,” but he earned the label of “serial entrepreneur” from the Wall Street Journal, so he must be following one lucky nose.

Lucky or not, that nose recently led him all the way to Pyramid Breweries on the West Coast. Newman and his partners at Magic Hat ponied up $25.7 million to purchase Pyramid in a move that represents a new stage for the quirky Vermont beer company. But, for those of you reading on the West Coast, don’t expect to pick up a six-pack of Berkeley-brewed Magic Hat any time soon.

“That last thing in the world we would ?try to do would be to consolidate the brands,” Newman said.

While there’s probably some ideology to Newman’s aversion to consolidation, there’s a practical aspect as well. According to Magic Hat Brewer Matt Cohen, the beer he brews can only be fermented in one place: the high-school-gym-sized fermenting room at the South Burlington Artifactory.

PINCH POINT

The company uses an open fermentation process, which allows continuous reuse of the same yeast. Other breweries have to discard their yeast after three or four generations. Keeping the yeast creates a consistent note in the beer, and Cohen said the room itself “creates a unique flavor that’s found across all of our beers.”

Crammed tight with catwalks and open-topped vats, the room smells faintly of fruit. Bubbles gurgle out of fresh worts – the solution that, with the help of microorganisms, becomes beer. Waves of carbon dioxide tumble out of the tops of the vats, and yeast forms a crust on beer nearing the next stage of production. Those conditions, Cohen said, hold a key to Magic Hat’s personality.

But that unique flavor comes with a price. Cohen can only brew with one strain of yeast at a time – otherwise they’ll cross-pollinate – and the conditions surrounding the room faintly resemble those of a Haz-Mat lab. Okay, so nobody wears sterile plastic suits to check the beer, but anyone entering the room washes their shoes first, and air rolls out when they open the door. The clean shoes and pressurized room – the result of pumped-in filtered air – keep wild yeast out.

All of those little issues add up to a bigger one: the room can’t grow. Cohen calls it the company’s “pinch point.” As Magic Hat gains popularity amid a craft beer market that grew 12 percent in 2007, the brewery approaches the limits of its capacity. Magic Hat already moved its headquarters once, but Cohen said the company has striven to deliver consistent product as it has ?become more popular.

And it has definitely become more popular. According to the Brewers Association, Magic Hat’s sales hit 102,506 barrels in 2007 – up from 38,400 in 2003 – after four continuous years of 23-40 percent annual growth rates.

ORGANIC AND GARLIC

But growth brings pain. The brewery had to discontinue several flavors – including Humble Patience, Magic Hat’s one-time flagship product – because their sales didn’t warrant continued production. Additionally, not everything they try succeeds.

Cohen said Magic Hat once brewed a garlic-infused beer that served best as a penalty for losing a bet, and their Orlio organic line has suffered from fits and starts since its March 2007 roll-out. Initially launched with blanket distribution, it didn’t quite catch on everywhere. Magic Hat spokeswoman Krissy Leonard said that initial broad launch allowed the company to find out where the product worked, and calibrate their support accordingly. Since then, she said the line is “doing everything that we’d expect it to.”

Then there are the physical limitations of that one precious room. To get around them, the company installed new equipment and expanded its facility. They added a centrifuge to cleanse the beer more quickly, built two grain-silo-like towers to free up fermentation space, and recently completed a new bottle filling line.

That last one represents a big jump. The old bottling line – still in operation – can clean, fill, cap, label and pack 100 bottles per minute. The Magic Hat crew ran the machine 24 hours per day, six days a week just to meet demand. In September, they started the new bottling line. This one can process 400 beers per minute, but has yet to be pushed to that limit.

“If we didn’t do the Pyramid deal…. Magic Hat would be fine for the next three to five years,” Newman said.

CRYSTAL BALLS

But what of the Pyramid deal? Newman called it part of the company’s “longer-term strategic vision” – something that sounds suspiciously like it might involve a crystal ball, though, perhaps a hazy one. Newman said he doesn’t have a plan for what the world will look like in five to ten years, but, the way he sees it, the beer industry is currently in a state of consolidation. For evidence of that, look no further than the ?big American brands of Coors and Budweiser, now divisions of MillerCoors and InBev, respectively. Newman doesn’t like it, he ?said, but he doesn’t make the rules. He just plays the game.

“When we began, the hottest category in alcoholic beverage was something called wine coolers,” he said. “Then that disappeared and next came ciders… then ciders kind of lost their way and that new amorphous malt beverage started coming in… and now you have a huge influx of what I’ll call super premiums.”

His solution to the ever-changing market is to accept that the environment will change, and employ people that stay plugged-in and passionate about beer. In the current environment, merging makes sense. And despite suddenly owning a second beer company, Newman said he and the Magic Hat team “really believe in small independent craft breweries.”

He’s not kidding. Cohen, standing in Magic Hat’s quality control room (one of the few quiet places in the Artifactory), said he doesn’t view other craft brewers as competitors. Their experience has told them that craft beer drinkers don’t declare their allegiance to a single brand. Instead, they gravitate toward a handful of brands and dabble in others. If a Magic Hat drinker picks up a six-pack of Switchback or Sierra Nevada, the theory is that the company hasn’t lost a customer, because they’ll be back.

So why consolidate?

Because, Newman said, uniting the otherwise-solo breweries under Independent Brewers United Inc., will allow the companies to be “big behind the scenes.” The two breweries will be able to share costs and knowledge on the back end while maintaining their own personalities.

The deal puts a scattering of West Coast infrastructure under Magic Hat’s control, but also, as Brewers Association Director Paul Gatza put it, “puts Magic Hat a little bit in the restaurant business.” Pyramid operates two production breweries with attached restaurants and three stand-alone brew pubs.

“I see it as more evolutionary than anything else,” Newman said. “I don’t see it as being that huge of a leap, but that could be because I’m stupid.”

Newman said if he had time, he’d probably find the transition at Magic Hat “scary.” But he doesn’t have time. So, he’s excited.

“I may be in for the shock of my life,” he said. “But we’re still in the beer business.”