A CASE FOR MICROBREWS

RICHARD TURCSIK

WEST SACRAMENTO, Calif. -- Specialty beers from microbreweries are putting a healthy head on beer category sales at Raley's here. Earlier this year, the chain built up its assortment of microbrews -- beers produced in small quantities by small breweries and often distributed locally -- and the investment has paid off handsomely.

"Our sales of the microbrews have probably increased around 200% over the last year," said Bob Jennings, buyer and merchandising manager for the beverage department at Raley's. "I've never seen a more [rapidly] growing category than this in recent years."

Raley's improved its microbrew program because the brews carry a higher dollar ring than their mainstream counterparts, bring in better profit margins and also attract the young, upscale customer, Jennings said.

The microbews are still a small portion of Raley's total beer segment, accounting for less than 5% of total beer sales. Beer as a whole comprises 35% of total liquor department sales. But still, they carry a lot of weight in terms of marketing to beer drinkers, many of whom are looking for new tastes.

"We find stocking microbrews helps to build the cachet of the entire liquor department," he explained in an interview with SN.

"It is a whole new category. These beer drinkers are really interested in trying the different labels out there. It is really new to them, too. Even people at the stores are excited about it," Jennings said.

Microbrews are now carried in each of the 64 Raley's supermarkets, as well as 17 upscale stores that the company operates under the Bel Air banner. Raley's has discovered that the best way to move microbrewed beer is to sell it ice cold. "Sales probably increase fivefold when they are refrigerated. We refrigerate the microbrews if we have room," he said. Some of the microbrews actually need to be refrigerated to maintain their quality and shelf life, he added.

Raley's devotes about 28 feet of shelving to cold beer, usually located in the middle of the store in an aisle shared with cold soda and adjacent to frozen foods. The chain devotes about 10 linear feet of that to cold microbrews.

Most of the microbrews are sold by the six-pack. They are merchandised on the top shelf, over the mainstream brands, because the configuration on lower shelves is better suited for the larger packs and cases for the Coors, Millers and Buds of the world.

Another 8-foot section containing 32 linear feet of warm microbrew beer is merchandised at the end of the liquor department, Jennings said.

The footage apparently is invested wisely. Jennings said the microbrew program is a very lucrative proposition for the chain.

"They offer good profits. On the microbrews, we realize margins of around 26% vs. Budweiser and the others, which are around 20%," he explained.

What's more, they draw "preferred customers" to the department and the store, Jennings said.

"We find they attract the younger crowd -- the upscale yuppies. After all, the price is almost 40% more than a national premium beer. Probably the average price point on a six-pack is $5.99, or $1 a bottle, compared to Budweiser, which is $3.99."

Jennings began carrying the microbrews after receiving re-quests from several customers. He'd also read about the subcategory's growth in trade journals.

His selection now amounts to about 20 domestic microbrew labels. Raley's stocks many local favorites, such as Wild Boar, Buzzard Breath, Rhino Chasers, Red Hook Ale, Pete's Wicked Ale and Devil Mountain, along with more widely distributed brands such as Sierra Nevada Pale Ale and Samuel Adams from the Boston area.

The best microbrew sellers are Samuel Adams, Sierra Nevada Pale Ale and Pete's Wicked Ale, he said.

The selection process for building a microbrew section is apparently as much an art as a science.

"We often decide which microbrews to carry based on if they have gotten any reviews at any of the beer competitions. Some have even been suggested to us by our customers. Sometimes it may even be location, because we are in the [Sacramento] Valley here. We may be looking for Humboldt Brewing or Aetna, or something in the surrounding area," Jennings said.

The chain sources the microbrews either through local wholesalers or direct through a brewery's sales broker.

"We don't go to Oregon or Washington ourselves and source them; they usually come to us. We would consider carrying beers from different markets if someone made a presentation [to us] and the beer was easily sourced. But it would have to be pretty much carried by a local wholesaler, because it wouldn't be worth it to have

it to have it shipped in."

The microbrews can present problems in distribution that aren't seen with national brands.

Since the brewers are localized, many often deal with a single distributor or wholesaler. Raley's, on the other hand, uses several distributors in its operating area of California and Nevada, which means that the wholesalers involved have to coordinate their pricing and distribution.

And although the category's sales have been strong, they don't always come easily; getting customers to try a product for the first time with a moniker like Buzzard Breath can be a challenge.

For one thing, beer tastings are out of the question, because Raley's does not have a license for on-premises consumption.

Occasional advertising does help to stimulate trial, Jennings said. The chain advertises microbrews at least two or three times a year. By comparison, at least two regular beers are advertised weekly.

"We usually mix in the microbrews and the imports together in an ad, because it is really hard to attract the customers you need with an ad for just microbrews," he added. "In other words, you need to throw in some Coronas and Heinekens. I usually label that beer ad 'International Beer Ad.' That way I can include both imports and microbrews."

The beers also are included in theme ads, such as an Oktoberfest event. Another example is a beer and sausage ad that was scheduled to run Aug. 13.

Besides advertising, trial is encouraged by the placement of microbrews just above the most popular national brands.

"I've noticed in the stores that people have been buying a national and a microbrew. Say if they're buying a Miller 12-pack, they'll also pick up a Wild Boar six-pack. They are willing to experiment with different beers. We especially see this with the younger crowd," Jennings said.

In a further effort to develop the section, Raley's recently began stocking an exclusive label beer produced by G. Heileman Brewing Co. Its distribution is limited to Raley's and one other retailer in the Valley. The beer is called Blitz Weinhard and it is packaged in 12-packs in regular and light varieties.

"We've just taken Blitz Weinhard on within the last month or so and it is doing fairly well," Jennings said.

He said sales for the segment may be strengthened further by outside forces as well. Beer houses and microbrew restaurants are starting to spring up in Sacramento, further generating trial of microbrews. One such establishment, River City Brewing Co., recently opened up in downtown Sacramento and already has become a popular watering hole.

While sales of microbrews have been skyrocketing, import sales have been languishing, he noted. "For some time, import sales had been flat, but they recently posted a decline of around 5%, and may be from where the microbrew growth is coming," he said.

"If we were to increase the space allotted to specialty microbrews, any deletions would be looked at from the import category. We wouldn't be getting rid of facings of Budweiser," he said.

"I haven't really pinpointed where the business is coming from, but I think it is coming somewhat from the premium-priced beers. I don't think there are new drinkers, or that people are drinking more."

Raley's also has avoided stocking seasonal beers, which recently have come into vogue.

"We haven't gotten into seasonal beers because that product is difficult to merchandise. One will be on the shelf, and when it is finished there will be a gap until the next one comes in, and that facing will be missed. Most of the time it is a different UPC number. It is difficult to manage on the shelf, but we are looking into bringing them in at some point down the line," he said.

Raley's first fit the microbrews in through some good old-fashioned category management.

"Initially we looked at some of the slower domestic beers and some of the slower selling imports. But we really didn't look at the big three -- Bud, Miller, Coors."

Category management is important at Raley's, but Jennings added that it is not the only factor he looks at when he thinks microbrews.

"I do category management every day. I look at scan data, warehouse shipments, all kinds of things. I'm constantly monitoring the category. If it doesn't move, it doesn't pay for it being on the shelf. But microbrewed beers that don't have that many turns would probably not do well with category management," Jennings said.

He added that his chain hasn't gotten into it to the extent that Safeway did in its northern California division, where it axed hundreds of stockkeeping units of slow-moving wines.

While the future looks good for the microbrew retailing business, Jennings said he also believes the field may be getting too crowded.

However, Jennings also said he's not clearing microbrews off of his shelves either, because "they are all pretty much selling. Everyone we have brought in seems to have some activity to it."