Beverage production makes its mark on retail

As the alcohol-beverage production industry becomes a larger economic contributor to the state, its commercial real estate footprint increases exponentially. And as this industry evolves to embrace a robust front-of-house as well as production, the retail component becomes more important.

“I think it’s kind of an evolution of the bar business,” said Nate Heckel, vice president with Cushman & Wakefield in Fort Collins. Over the past five years, conversations have shifted from opening a bar to opening a brewery, he said. “I joke that there are not really bars anymore, they’re all breweries.”

Historically, alcohol-production companies were located in manufacturing and industrial space, but this is changing as many are finding themselves outgrowing their space due to high customer demand. When moving to new locations, companies are putting a larger emphasis on front-of-house retail as a way to grow business.

For example, when The Infinite Monkey Theorem opened in 2008, it had a footprint of about 8,000 square feet that consisted of a courtyard and two buildings – one for production and the other for offices, said Ben Parson, winemaker and CEO. In 2012, the winery moved to a 30,000-sf footprint, with a 10,000-sf winery, a 2,500-sf taproom and 2,500 sf of office space.

The new site had to have enough room for production and space for more retail-oriented opportunities. “It really just had to be a certain size and in a certain neighborhood,” Parson said.

Consumer Demand

The beverage production industry, both alcohol and non-alcohol beverages, was identified as a major employment and economic contributor by the Metro Denver Economic Development Corp., which tracks industry clusters for a nine-county region that includes Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, Jefferson, Larimer and Weld counties.

About 180 beverage companies operate in the nine-county region, including breweries, distilleries and wineries as well as coffee, tea, dairy, water, ice and soft drink manufacturers. The region ranks third out of the 50 largest metro areas in beverage production employment concentration, and ranks fourth for direct employment with about 8,640 employees, according to the EDC report.

When examining alcohol-beverage production specifically, the market is seeing modest square-footage growth. There are expectations that the number of breweries, distilleries and wineries will continue to grow in Colorado, and this trend will continue to drive employment in 2016, said Lisa Strunk, a senior economist with Development Research Partners, who prepared the EDC report.

The front-of-the-house retail operates as the introduction into whatever the company is manufacturing. Not only does it introduce the beverages to new customers, but also it allows the company to communicate its brand and show off its production space.

Today the state has over 300 breweries, over 50 active distilleries and more than 140 wineries. The nine-county EDC region is home to 25 craft distilleries and more than 50 wineries alone.

Why Retail Space?

As these beverage markets become more crowded, producers who rely only on distribution are finding it harder to get placement, said P.T. Wood, an alchemist with Wood’s High Mountain Distillery. When Wood’s High Mountain Distillery received its distilled spirits plant license in November 2012, it was the 23rd company in the state to do so. Today, there are almost 90 licensed DSPs, he said.

“There’s a limited amount of shelf space out in the world, so the tasting room or farm-distillery destination type model gives you the ability to make a pretty good living in this business, even without a ton of outside distribution sales,” said Wood.

At Wood’s distillery in Salida, the 4,000-sf building dedicates about 20 percent of the square footage to a tasting room, which sells bottles and cocktails made out of the distillery’s gin, whiskey and liqueurs, and features garage doors that open onto First Street and windows looking into the production area.

However small, that tasting room brings in close to 60 percent of the distillery’s revenue, he said. “Before we went with a distributor, we really didn’t have any sales or marketing, and we were in 100 to 125 retail outlets across the state. Virtually all of that was driven from our tasting room.”

The same can be said for many of Colorado’s small wineries. “A 2013 CSU Economic Impact Study showed that on average, [wineries] sell more than 60 percent of their product direct to consumers through the sales room or at events,” said Doug Caskey, executive director with Colorado Wine Industry Development Board. “A large winery would sell a greater share of its product at wholesale, but a smaller winery without much distribution will sell an even larger percentage of its product out of its sales room.

” Some wineries find success in retail locations when grouped together in order to do joint marketing and collaborative events, he said.

Several Colorado breweries are taking their expansions one step further and creating “destination breweries.” These locations pair the brewery experience with tourist attractions, Strunk said. New Belgium Brewery is credited as one of the first to adopt this model, followed quickly by Breckenridge Brewery, Avery Brewing Co. and Great Divide Brewing Co.

“Generally, destination breweries offer a number of tourist attractions, including the brewpub, restaurants, special tours, gift shops, private event spaces and beer gardens,” she said.

Avery Brewing opened a destination facility in Gunbarrel in February 2015. The 23-year-old company found itself bursting at the seams at its Boulder location about four years ago and set out to build a new facility, said Ray Decker, Avery Brewing’s general manager.

The 5-acre plot features a 67,000-sf brewing/production facility. Inside the facility, in addition to the production area, is a 5,000-sf restaurant that is spread across two floors, the ground floor features the taproom and the upstairs space features a traditional restaurant setting, Decker said. There is a patio that seats about 60 people as well.

Alex Avery’s vision was for the brewery to be 100 percent transparent, Decker said. He achieved this by building a catwalk that spans the production floor, allowing guests to walk out at any time during the day and watch what they’re making.

The opportunity for transparency in a retail setting, in one form or another – Avery’s catwalk, windows facing into the production area, specialty tours, etc. – helps build brand and identity in a crowded market.

Leasing Suggestions

If a retail landlord is interested in acquiring a brewery, distillery or winery as a tenant, there are several things to keep in mind. First, be prepared for the tenant to have contingencies that they must have in order to commit.

Similar to procuring a liquor license, these tenants must have a lease signed before they can submit to the local and regional authorities, as well as submit to more far-reaching authorizes – label approval, for example. All these approvals could take six to nine months before the deal is ready to go, Heckel said. And most of these leases will have a clause that says, “If these approvals don’t happen in X amount of time, then the deal is off.”

“The advice to the landlord is if you have that building that would work, then you need to be prepared for a time of uncertainty for that deal to actually be approved by the different authorities,” Heckel said.

There also are important considerations for the lease.

“You have to be aware of the nature of the tenants that you’re taking on,” said Justin Pless with Pless Law Firm LLC. “You see a lot of these places in retail, and that’s all well and good, but there are different concerns because of the production component. It’s sort of a hybrid thing.”

When attempting to marry the industrial and retail, it is important to remain mindful of the other retail tenants in the center. The lease must address certain production side effects that could disturb the other retail tenants, such as unwanted noise and odors, he said.

Parking is another important consideration. Not only are the parking demands less consistent than traditional retail, but also partnerships with food trucks create more parking challenges. Food trucks in a retail center present a bigger possibility of problems than a food truck-brewery partnership at a stand-alone or industrial facility, Pless said.

A few other important considerations for converting traditional retail into alcohol-production spaces include building modifications, such as higher clear heights, and increased capacities for water, power and utilities. Zoning also can be an issue, depending on the municipality.

However tricky the details appear, the trend of alcohol producers moving into retail space will continue. One of the driving factors for this is the shift in consumer demands to favor locally sourced and craft-style products that focus on quality ingredients, said Strunk.

“I think that it’s wonderful to see this kind of adoption of the local brewer in the community,” said Heckel. “It’s something that is a little bit unique to Colorado and is something that we should be excited to be a part of and embrace this change.”

Read about notable brewery real estate expansions and openings in the May 2016 Retail Properties Quarterly.