Hops and dreams
Gage Roads is toasting its success after a move into contract brewing not only turned around its fortunes but also ensured the survival of its innovative craft brewing tradition.
Gage Roads was the realisation of a dream long-held by Bill Hoedemaker, said to be one of Australia’s best brewmasters. Having learnt and perfected his trade at the Sail and Anchor Pub Brewery in Fremantle – winning numerous awards along the way – he now wished to pour his talent and ideas into his own traditional craft brewery. In 2002 he decided to make that dream a reality with the help of his entrepreneur brother John.
John Hoedemaker sold off his business of the time to become the brewery’s chief financial officer and together they set to work finding a location, securing funding and building the Gage Roads brewery. Three years later, in an ideal location on the edge of Fremantle, the brewery created its first beer: Pure Malt Lager.
Soon after that it developed a mid-strength PILS and an India Pale Ale (IPA) called Sleeping Giant, which Hoedemaker (John) says is particularly popular today. Gage Roads later introduced Wahoo, a German-style Kolsch that’s another favourite with customers and Atomic Pale Ale. “Our craft beers are high-quality, interesting beers, and in comparison with Australia’s mainstream products they’re really quite different,” says Hoedemaker.
“They’re much more flavoursome, they’re very traditionally brewed, we have a small-batch brewing process and we put a lot of care into selecting the materials we use,” he adds. They’re also designed to be easy to drink and served cold, to suit Australia’s outdoor lifestyle and hot climate.
A storm brewing
The four years following 2005 saw the regional craft brewer gain popularity and gradually increase production from around 20,000 cartons a year to 50,000, yet in the face of tough competition it wasn’t making enough money to exceed its high overheads. Gage Roads had to adapt to survive.
“By 2009 our sales were stagnating at around 50,000 cartons per year, whereas our original craft-brewing business model was designed around producing more than 1 million – meaning the equipment we had originally sourced was disproportionately large,” Hoedemaker reveals.
“The craft brewing model is all about producing low volumes of high-value beer, but we weren’t getting the high margins expected from this model because lower-priced imports from the UK, the US and Germany were forcing us to lower our prices to be competitive. That niche craft brewer’s margin was eroded.”
Recipe for success
Salvation was delivered in 2009 by Australia’s largest supermarket chain Woolworths – also the country’s largest liquor retailer controlling 39 per cent of the market. While Gage Roads needed someone to help grow its volumes, the retailer needed someone to produce its private label beverages so the two businesses formed a partnership. Gage Roads agreed to produce an initial 350,000 cartons per annum for Woolworths, who also bought 25 per cent of the company for $2 million. The money went towards the capital infrastructure needed for brewing high volumes of beer.
“The switch was one of necessity,” says Hoedemaker. “In financial year 2011 we became profitable from the operations of the business for the first time and now we’re producing around 1.2 million cartons of contract beer per year. The higher volume reduces the fixed costs on a per carton basis, including our craft beers, which enables us to maintain those products at very reasonable price points as well.”
The deal with Woolworths provided Gage Roads with a distribution platform for its craft beers, enabling it to stay true to its roots. “Before changing our business model we were selling around 50,000 cartons of craft beer per annum, but this year we’ve sold around 200,000 already,” Hoedemaker adds. “So we’ve had a very successful uplift in those products as well – made possible by the additional volumes of contract beer.”
In its contract-brewing capacity Gage Roads has worked with Woolworths to develop a range of beverages suited to target markets. Woolworths determined the positioning, flavour style and packaging design of these brands and owns them, while Gage Roads provides the manufacturing at a certain price per carton.
These private-label products have sold extremely well.
“The biggest and most successful product we make is a premium lager called Dry Dock,” Hoedemaker says.
“We also make a popular cider product called Castaway, which comes in apple, pear, and strawberry and lime varieties. We also make a low-carbohydrate beer called Bolt, as well as a light beer and an alcoholic ginger beer.”
Since partnering with Woolworths, Gage Roads has increased its production significantly and thus outgrown its previously under-used manufacturing facilities. Following the completion of a first expansion in 2011, the brewery is now midway through a second, $9.5 million expansion to boost its production capacity from 1.2 million to 2.9 million cartons of beer, cider and other beverages per annum by financial year 2015.
Bubbling with ambition
Building new facilities while continuing with production has been challenging but Hoedemaker affirms the new brew house is on track to produce its first beer at the end of September.
“In addition to increasing our capacity to almost three million cartons per year, we also expect the expansion to reduce our operating costs by 50 per cent on a per-carton basis,” adds Hoedemaker.
“We’re expecting profitability to grow by a similar amount and in the next few years, based on that increased volume and reduced cost structure, we’ll be able to deliver substantially increasing profits. We want to continue that pattern of profitability and to be able to show it to Australia’s capital markets to support the growth of our share price.”
The current expansion will make Gage Roads not only bigger and richer, but also greener. According to Hoedemaker, the new production facilities will make the brewer “much more efficient” in regards to energy and waste management.
“When we talk about a 50 per cent reduction in costs, we’re also talking about a 50 per cent reduction in our environmental impact; because we’ll be using around 50 per cent less energy and gas and producing around 50 per cent waste,” Hoedemaker says.
“To reduce the environmental impact of our packaging we’ve signed up to the Australian Packaging Covenant – a commitment by governments and industry to the sustainable design, use and recovery of packaging.”
While Gage Roads is eager to expand, Hoedemaker says the business’s relatively small size is a key advantage over significantly larger competitors such as SAB Miller and Lion Nathan. “Our business’s size allows us to be innovative and flexible,” he says.
“In comparison to larger brewers, we are able to produce and develop new products and get them to market much quicker. That’s where we’re ahead of the game.”
With business booming in both its high-volume contract brewing and low-volume craft brewing divisions, Gage Roads is enjoying the best of both worlds.