INTERVIEW : Mendocino Brewing Company’s Savior — An Interview with Vijay Mallya

Mendocino Brewing Company’s flamboyant billionaire owner Vijay Mallya is in the eye of a financial hurricane that has encumbered his ability to keep his historic Mendocino Brewing Company in Ukiah, Calif., funded. The company that started in 1983 as California’s first brewpub got into financial difficulties in the mid-nineties after an ambitious but underfunded expansion by the original founders and was “rescued” by Mr. Mallya with an investment and a bridge loan holding the brewery as collateral. Mr. Mallya took control of the brewery in 1997. What follows is an interview with Mr. Mallya recorded in November, 1999 and published in Celebrator Beer News, Feb/Mar, 2000.

Celebrator Beer News (CBN): You have stated that Michael Laybourn’s understanding that the Red Tail brand had value was his strength.

Vijay Mallya (VM): Yes, he founded the brand. He founded the company. He started the brand; he created it. But I think he created it relatively more professionally than many of his peers. He went about creating an identity, and it reflected in the label design, in the packaging design. All the other Mendocino brands that followed, followed basically the family of hawks. Now, that was strategic, as he has explained to me. As I said, I’ve examined many microbrewery acquisition opportunities in the U.S. for the last five years, and clearly Mendocino stood out. And Mendocino continues to stand out in performance as well today, because in a market that’s declining, we are growing as a company, and growing very significantly, at that. It isn’t as if we’re just sort of inching forward; we’re really on the fast track of growth. And I must give credit to the founders of Mendocino to have laid a good enough foundation for this growth to continue.

CBN: They had the advantage of being first. Like a lot of other small breweries, it was really a passion brewery, wasn’t it?

VM: It was a passion brewery, but a brewery that was constructed and conceived as a brewpub. It stayed that way for many years — for at least 12 of the 15 years that it’s been around. That’s why it succeeding in establishing itself as a brand in people’s minds, and that’s what allowed Laybourn to continue his business for 12 long years. He didn’t go out of business because he ran out of cash. It was only then that Laybourn made the same mistake as every other brewer, saying, “Fine. I have sales of X. The brand is very strong. It’s going to grow twice as fast, so let me build a big brewery.”

At the end of the day, I got Mendocino Brewing Company only because they overextended themselves financially building that brewery in Ukiah. If they had not done that and had continued to stay in Hopland in a small place, I might not have had the opportunity to buy Mendocino Brewing Company. It’s amazing how these guys have gone and built to capacity. Any one of them that you see — they have just gone and built for a huge capacity.

I hate making a capital investment unless I have to. Take this case: We are the world’s sixth-largest distilled spirits producer. Today I have 28 distilleries in India that manufacture our spirits. But of the 28, we probably own only 10. Eighteen are dedicated exclusively to all manufacturing units, where somebody else has made the capital investment. So, that’s a very simple business philosophy that I have. That is why, even today, when I look at acquisition opportunities in the microbrewing industry — I’m still looking — my criteria are basically: (1) they must have strong brands, and (2) I don’t want another brewery.

Now, I’ll be very candid with you; we signed a memorandum of understanding to buy Full Sail. I think Full Sail has an excellent brand equity and an excellent brand image that would be complementary to us. We walked away from the deal because we couldn’t figure out how to close the brewery, and they have a huge brewery in Hood River, Oregon.

CBN: Could Mendocino have absorbed the production of Full Sail?

VM: Easily. And it would have made tremendous economic sense.

CBN: They were at 70,000?

VM: Sixty.

CBN: Sixty thousand?

VM: Sixty and declining, as per the reports that I’m getting now.

CBN: Their capacity, however, was triple that, wasn’t it?

VM: That is the point I’m making. It’s all in the hope and anticipation of huge sales — coming from where, I don’t know. These guys built these huge breweries. Jerome Chicvara had been working with me from day one, when I started this whole exercise. Jerome and I must have looked at 20 or 30 microbrewery acquisition candidates. Either the brands were not strong enough and really had no brand equity — so we dumped them, or we dumped the idea — or the brands were good but we were to inherit the brewery as well. You know, I’ve got better things to do than make an acquisition and then have to do the dirty job of closing plants and so on and so forth.

So we’re very cautious about how we’re going to proceed, because we have got a very nice stable of brands. Take the case of Carmel. I bought Carmel Brewing because I thought Carmel had a very strong brand equity in one of the USA’s most popular destinations. There are very few people on the East Coast or West Coast or anywhere else who don’t know of Carmel, so there’s an immediate brand equity and an instant recognition there. And I got it without the brewery. That was a win-win. I bought the brand, and it’s now produced out of Ukiah. So I’m looking at these types of opportunities.

CBN: What do you think of what Jim Koch is doing these days? He’s another one who looks at brand value and does not invest in bricks and mortar, although he did buy a brewery in Cincinnati a few years ago. He’s gone down recently from about 1.3 million barrels of production to around 900,000 barrels of production.

VM: Those who don’t invest in bricks and mortar and who instead invest in brands are those who will succeed, in my view. If you take the market as a whole… I mean, the consumer out there has many options, and we should never forget that. You cannot ever take a consumer for granted. You always have to deliver good value and good quality, and you cannot take consumer loyalty for granted. You’ve got to command it. Here is where everybody made the mistake. They just sort of thought that the sales were going to triple and quadruple, and they built these huge plants to satisfy these pipe dreams about future sales that never happened. So you have, typically, a huge capacity that is terribly underutilized.

The Ukiah brewery of Mendocino Brewing Company is no exception. They built a huge brewery, which, if it had to be built at all, should have been built after three or four years, according to my view. It will take until 2002, in my view, for Mendocino Brewing Company’s sales to actually justify the size of that brewery in Ukiah. But, you see, it came five years too early, and that’s why the company got into financial difficulty, and that was my opportunity.

If you take the beer market in general, you have the long-established Big Boy brands, which you have to respect.

CBN: Bud, MillerCoors, et al.

VM: The consumer has the choice. They’re not inactive; they are, in fact, overactive. They advertise, they market, they promote, and they do things very professionally. So the consumer is motivated to drink a Bud or a Miller or a Coors. It’s stupid for anybody to think that the consumer will build a Great Wall of China — a barrier — between all that marketing enticement and just stay with microbreweries. It will not happen, and if anybody thinks it’s going to happen, they’re dreaming.

So you have the big beer brands on one side, with a lot of marketing and a lot of enticement for consumers. Then, of course, you have imports. You have so many huge international brands that deliver excellent quality and that also deliver excellent imagery. Once again, their entire marketing platform is also very enticing and very inviting. You can’t ignore them, because they have a very, very strong and growing presence.

Then, of course, you have the microbreweries. The microbreweries basically, in my view, cater to local communities that bond with local brands. I own the community newspapers here in Marin as well. We have five editions of these newspapers, for each town or each city in Marin County. And there is a loyal readership there. People are interested in community news: the stuff that won’t get reported in the San Francisco Chronicle. The stuff that will not get reported in USA Today. The stuff that will not necessarily come on TV

CBN: Or even appear in the Marin Independent Journal.

VM: Yes. What I’m trying to say is that we have Marin Scope, which covers, and is targeted to, Sausalito. We have the Mill Valley Herald, which is targeted to the residents of Mill Valley. We have the Ross Valley Reporter. We have the Twin Cities Times, which is targeted to Larkspur and Greenbrae. So there is a bond there.

It’s similar with micro beer as well. People bond with a local product that they relate to. That’s one. Second, microbrewing is an art in itself, which really cannot get replicated by the big industrial plants. We have 14 breweries in [United Breweries of India]. If you asked me to brew Red Tail there, I could not do it. This is really crafted, if you know what I mean. The profile of the product — bottle-conditioned ales and things like that — requires a totally separate manufacturing protocol compared to the mass-produced lager beers.

So I drink Red Tail. For instance, I go home to India. I go every month; I travel up and down. And I love drinking my Kingfisher Lager. When I’m in England and so on, I love drinking Carlsberg or Heineken. But when I come back here, I actually look forward to drinking Red Tail, because it’s a totally unique experience. We don’t get this type of stuff in Asia and in most parts of Europe and South Africa and places where I go.

So, I mean, to an extent, there is a consumer loyalty attached to the flavor profile, the product characteristics and the total experience. And it is this experience — this satisfying experience — that we are trying to build on at Mendocino Brewing Company. We want to tell the consumers who are loyal to us that our products are unique in their individual characters, that we deliver a very satisfying experience, and that we are absolutely, totally, committed to quality and totally committed to delivering value. We will not discount — I will not permit them to give post-offs indiscriminately. I will not drop the price. At the end of the day, there is a place everywhere in this world for premium products. And I believe that the premium products are those that will stay, that will survive, and all this $4.99 will become $3.99, and $3.99 may well become $2.99, and everybody will go out of business. We are not in that game.

CBN: What can we do to get beer consumers in America to appreciate premium-priced beers? That seems to be the most difficult category to move people up to. The wine people have no trouble paying, in some cases, very high prices for wine. And yet there’s a much narrower range of prices in beer. Do you think we’ll ever be successful in getting people to pay more for quality premium beer?

VM: You have to persevere. In any fast-moving consumer goods category, there are different levels: different levels of quality, different levels of offerings, different price points. You mentioned wines, but it’s true for spirits. Take vodkas, for instances. Take the tequilas, for instance. We are talking about people who are willing to pay $40 and $50 for a bottle of tequila. People who can pay $40 and $50 for a bottle of vodka. What is the difference between a $40 vodka and a $10 vodka? I am a distiller; I know what the difference is. The difference in the manufacturing process and the ultimate difference in quality do not justify a 300 percent increase in the price.

CBN: Of course not.

VM: That is marketing. So, with beer, I think that Red Tail and Eye of the Hawk are commanding that loyalty and growing despite the fact that we are extremely tough and we will not reduce our price. I mean, take the case of other products. I know of, let’s say, Full Sail. When I see the price of Full Sail — they have actually dropped their price from before. Obviously, we have to follow our competitors’ activities. Full Sail has dropped their price and yet is facing declining sales.

How do you explain that phenomenon? If ultimately it was all price-driven, then logically, the more you drop the price, the more the sales should increase. To have a falling price and falling sales together is pretty surprising. So that means that somebody is thinking out there. So it isn’t only dollars and cents.

CBN: When you first came to the American beer industry, you had a certain impression of what the American craft beer industry was then, and you now have had a lot of experience in the industry. How different were your impressions from the reality of that industry? Or were you not surprised at all?

VM: When we launched ourselves in New York, we basically launched our strategy. I basically said, “I see an opportunity here that is going to be a major consolidation plan. I see an opportunity here where a lot of people are going to go out of business and there are consolidation opportunities available.” But I had limited experience in dealing with microbrewery owners. I had already had various discussions. I told you about my experience with Jim Bernau [former owner or Microbreweries Across America in Portland, Seattle, Denver and New York state]. Fine guy, but business was just unviable and didn’t stack up to our measurement of financial requirements.

But we’ve had a lot more experience, we’ve looked at a lot more companies, and I’m just becoming more and more convinced that all the mom-and-pop shops are going to disappear. And some of the large companies, I dare say, are also going to disappear, according to my view, because the business fundamentals are just not right. If the sales figures that we get are to be believed, you see so many brands that are declining in sales. Ultimately, you can’t keep on going south forever.

CBN: Now, are you making a distinction between brewpubs, which make their own beer and sell it on-premise, and microbreweries, which—

VM: We make that distinction. I’m not talking about brewpubs, which brew and sell on-site. They have a totally different and unique concept, because people make the decision to patronize a brewpub not solely on the basis of the beer that it makes, but also on who they serve, the ambiance, the entertainment and everything else. So that’s not a market in which we can play. We are here to manufacture, market and sell brands. So we cannot be competing with the brewpubs.

CBN: So, when you talk about mom-and-pop microbreweries, you’re really talking about anybody under — what — 15,000 barrels or 10,000?

VM: Absolutely. [Small breweries] cannot be viable. It cannot be viable. I mean, the business fundamentals — there’s no rocket science here. There’s no proprietary information. Everybody knows that it’s a mathematical calculation. I think that we can very easily and clearly determine what is financially viable and what isn’t.

CBN: The Gordon Biersch company recently sold its 12 brewpubs to another brewpub operator and kept the production brewery in San Jose.

VM: Gordon Biersch has an excellent brand image. That’s the difference. They have consistently invested in building a brand. One did not necessarily think of Gordon Biersch as a brewpub; one thought of Gordon Biersch as a beer, like Red Tail. Like Eye of the Hawk. When people think of Red Tail or Eye of the Hawk, they don’t necessarily think of the Hopland brewpub of ours; they think of the brand. So, in my view, that’s what Gordon Biersch has successfully done. People recall Gordon Biersch as a product with brand equity. There is a distinction between the top-of-mind recall factor for a brewpub, which is a good eating joint with a good atmosphere, a place to meet people, “and, incidentally, I also drink beer there — beer that is made there.” That image is very different from “I want to buy this six-pack of Gordon Biersch beer to take home and drink.”

CBN: So it didn’t surprise you, then, that the owners of Gordon Biersch would spin off the brewpubs and keep the production brewery.

VM: I don’t know them, and I don’t know their background, so I can’t really talk about it. But what I can say is that they obviously are focusing.

CBN: Exactly; that’s what they said. They have plans to perhaps expand the production of Gordon Biersch microbrewery beers throughout the Southeast and perhaps do a second brewery somewhere in the Southeast.

VM: I am not fully familiar with all their plans, but if they’re going to focus on a brand, on building a brand, my recommendation to them would be to focus in on just that and not invest in drinking water because there’s too much drinking water out there that can be had either very cheaply, or contract manufacturing can be done easily.

CBN: You’re comfortable with your level of brick and mortar right now?

VM: I have no choice; I didn’t build it. I inherited one brewery on the East Coast and one on the West Coast. Now it’s my job to make the best of it. If somebody asked me whether I’m going to go out and build another one, no way.

CBN: You have plenty of capacity for expanding the Mendocino and the Carmel brands?

VM: I have enough capacity on both coasts to cater to my requirements for the next five to seven years without a problem. And there’s a unique advantage as well; having one on the East Coast and one on the West Coast is a major advantage, because freight does play quite an important role in the entire demand/supply chain economics. And now I’m focusing on how to leverage this advantage to the maximum extent that I can. Obviously, I need to create more and more demand for Mendocino brands on the East Coast and produce it out of the brewery up in Saratoga.

CBN: You have not yet started to do that?

VM: Oh, yes, we have. Like I said, it’s a long haul. It’s not something that’s going to deliver results tomorrow morning.

CBN: And when will the Kingfisher label start being expanded in the U.S.?

VM: With Kingfisher, we have started small. We targeted it purely for the ethnic market, and it’s doing very well. It’s gaining more and more recognition with a huge amount of international marketing behind the brand, so people in the United States are also sort of beginning to understand it. People are beginning to know about it. The recall factor as compared to a Budweiser or a Miller is probably minuscule, but nevertheless, there are enough people who are generally aware that something called Kingfisher exists. We are going to produce it here in the U.S. in due course. We’re in no hurry to do it; we need to install some more equipment in our breweries to handle Kingfisher. And then, of course, we want to be absolutely sure of the distribution. Mendocino Brewing Company is going to do it. And we’re going to be absolutely sure of proper marketing. It’s our flagship brand, and we want to do it right.

CBN: The import market is the growth market, and it seems like all of the beers in the import category are considered to be in the better-beer category. So that looks like a potentially larger growth market for you than even the Mendocino brand, perhaps?

VM: In the imported beer category, one has to compete against the Heinekens of this world.

CBN: And Corona?

VM: And Corona. And Foster’s. We are talking about huge international brands. It’s a lot more difficult to play in that ballpark than it is in the microbrewery industry. There, Red Tail is up against Anchor Steam, up against Sierra Nevada, up against Redhook. It’s much easier to deal with this set of players than to take on the Heinekens of this world.

CBN: You had also said that you have looked at many other properties. Do you have any intention of acquiring other properties?

VM: I thought I made my intentions very clear when I signed the memorandum to buy Full Sail. I still would have loved to have had the brand, but unfortunately, I couldn’t inherit the brewery. This seems to be the problem almost everywhere. Whenever we go to buy a brand that we believe has equity and a future, a brand that we believe would be complementary to our portfolio, a brand that we believe would succeed if we just added some professional marketing to it, they’ve got one or two breweries. That’s a big deterrent for me. I’m not prepared to clean up other people’s messes.

CBN: Where do you think this industry will be five years from now?

VM: As I told you, I think there will be five big players in the microbrewing industry, and that’s it.

CBN: Five. And given the level of production now, all five of them would be doing in excess of 500,000 each.

VM: I don’t know about that, but at the end of the day, five or six big microbrewers will survive, in my view. The rest of them will be the brewpubs. Everybody in between, according to my view, is going to go. They’ll get bought, or they’ll have to close down, or they’ll have to merge; they’ll have to do something. They cannot stay where they are.

CBN: Your experience, your worldview, the fact that you have looked into so many different industries — when you bring this to the beer industry, there are things that inherently work and things that are just passion and love with no real business sense, “at the end of the day,” as you say?

VM: Everything has to be viable. Any idea has to be viable. It must stand the test of viability. People have to face the reality that, ultimately, the engine that drives any business is finance. Without finance, you don’t go anywhere. And you don’t find people who are willing to pour money into a bottomless pit. So someday, there’s got to be a prospect of a return. That’s what financial viability, according to my view, is all about.

There are people who are willing to put in money and say, “I’m willing to wait 10 years to get returns.” There are people who are willing to say, “I’ve put in money; I want a return in two years.” The venture capitalists want to make money in six months. So there are different levels of investor play. Ultimately, I don’t know of one person in this world who says, “I’m going to keep on putting my money in, and I never know when I’m going to get anything back.” So that’s what financial viability, according to my view, is all about. You can have many dreams, you can have many ideas, you can have great vision. Ultimately, it has to stand the test of financial viability.

CBN: And you really think that this consolidation is imminent? You gave a five-year time frame.

VM: I repeat: I think a hell of a lot of microbreweries are going to disappear, because they have declining sales, which is very evident from the sales reports. They are obviously losing money. How long can this continue? If somebody has a fairy godfather out there who is just going to keep doling out the cash, then I don’t know. But if they don’t have a fairy godfather out there, how are they going to survive?

CBN: One of the keys, I guess, to the beer industry is that middle tier. We’ve got you producing here, and we’ve got consumers and retailers over here. But it’s that distribution part. Any comments on your experiences with the distribution of beer, what you foresee in the next couple of years?

VM: The solution is very clear. Either you self-distribute or, alternatively, you have to go to one of the big houses, which invariably have one of the three big brewery manufacturers as their anchor brand. It’s very simple there, too. It’s viability. You can’t have a big distributor without an anchor brand. So one has to go to one of these houses —a Coors house or a Miller house or a Budweiser distributor — and persuade them to take on brands as an add-on.

I think that the craft beer segment has a very legitimate place in the beer market, in the beer industry, and I think that it is perfectly legitimate for a distributor to take a whole range of brands to complement their own portfolios. While they may certainly distribute the big anchor brands, I think there is very definitely room for craft beer brands as well.

CBN: California is a self-distribution state. There are a few of them. But as you grow across the country, it’s going to become more and more important to get good distribution with a big house. Both Anheuser-Busch and Miller have had all of their distributors sign agreements to give them the 100 percent share of mind that they are looking for, to actually discourage their taking on smaller breweries that take away from their brands.

VM: I don’t subscribe to this. I don’t agree with it. We have the Monopolies and Restrictive Trade Practices Act. If I were the biggest beer manufacturer in India, with about a 40 percent market share, and if I told all my distributors, as openly as you suggest, that they should not touch any other brands, I would be hauled up by the government. I don’t think it makes any major difference to the Big Boys in the beer business if their distributors handle craft beer brands as well. We are not going to make a dent in Budweiser’s market share or Miller’s market share. I think, on the contrary, that they should have no objection to their distributors handling complementary beverage brands, because I don’t believe that we necessarily are in a position to take market share from these big brands in sufficient measure for them to bother about.

CBN: Although, the circumstances, I guess, are that they do feel that somehow these microbreweries are either threatening to disrupt their distribution cycles or whatever. You are almost as big in India as Anheuser-Busch is in America, and yet…

VM: Yes, but in America, my view is that the big brands have had relatively flat sales; their growth is minimal. Probably that is why they’re concerned. They probably feel that the growth that is taking place in the craft beer business should legitimately go to them, whereas they are relatively flat and craft beer sales are climbing. But then, here’s what I have to say. Percentages really can be quite misleading. Our growth, for instance, of 30 or 40 percent on a base of 40,000 barrels sounds very spectacular; I grew by 40 percent. But in absolute barrelage, compared to Budweiser or Miller, it’s minuscule. So maybe that’s what is causing them concern. But whatever it is, I don’t think that they should be driving out craft beer manufacturers from their distributing portfolios.

CBN: The distributors like the microbrewers because of the gross margins that they make on the beer, as opposed to selling the Big Guy beer.

VM: Plus, as I said, I think it’s complementary to their portfolio. They have a full range of offerings.

CBN: In terms of distribution, where does Mendocino go when you’re looking at a new area?

VM: We have good distributors who are performing for us. Where we don’t have distributors or where we have difficulty getting distributors, we are seriously evaluating whether we will self-distribute. Once again, the economics have to stack up.

CBN: If you have enough brands…

VM: If the economics don’t stack up, then we stay out of that market. I’m very clear in my mind that the economics have to stack up. If I don’t find a distributor, I’ll do it myself. There may well be a situation sometime where distributors will emerge for craft beer only — distributors who will deal with multiple craft beer brands only. That range of brands and portfolio of brands may well become financially viable.