Mendocino Brewing Company, Inc.

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Mendocino Brewing Company, Inc.

13351 Highway 101 South
Hopland, California 95449
U.S.A.
Telephone: (707) 744-1015
Toll Free: (800) 733-3871
Fax: (707) 744-1910
Web site: http://www.mendobrew.com

Public Company
Incorporated: 1983
Employees: 94
Sales: $26.10 million (2002)
Stock Exchanges: Over the Counter
Ticker Symbol: MENB
NAIC: 312120 Breweries; 311213 Malt Manufacturing; 722110 Full-Service Restaurants

Mendocino Brewing Company, Inc. owns three breweries, two in northern California and one in New York, that produce more than a dozen different craft-style beers. MBC operates domestically and internationally, marketing its brands in 36 states and in more than a dozen European countries. The company also is responsible for the U.S. production and sale of Kingfisher Premium Lager, the top-selling brand in India. MBC's brands include Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, and Eye of the Hawk Select Ale. The company is controlled and led by Vijay Mallya, who also heads United Breweries Group, an India-based conglomerate with diverse business interests.

Origins

The formation of MBC in March 1983 marked the entry of one of the first competitors in the modern craft brewing industry, a business whose popularity exploded during the 1990s. When the company's brewpub opened in August 1983, it represented the first new brewpub in California and the second such business to open since the repeal of Prohibition. The company's pioneering start, occurring before any substantial numbers of consumers had developed the taste for or the knowledge of handcrafted, traditional-style ales, made its early success that much more remarkable. MBC, however, was founded and operated with far more zeal than capital, a common characteristic of the craft brewers that would follow in MBC's wake. Craft brewers, particularly during the latter part of the 1990s, were committed to expansion but lacked the financial resources to support the expansion necessary for survival. Despite its financial weakness, MBC enjoyed rousing success during its formative years. The problems occurred later, when the popularity of craft brewing reached unprecedented proportions.

At first, MBC restricted its activities to the confines of Hopland. A signal moment in the company's development occurred in December 1983, when it bottled its first beer at a production facility with a capacity of 400 barrels per year. Red Tail Ale, an amber ale, became the company's flagship brand, contributing substantially to the company's financial health for years to come. MBC quickly exhausted its first supply of bottled Red Tail Ale, enjoying a debut whose success was credited not only to the flavor of the beer but also to the company's innovative packaging. Instead of traditional 12-ounce bottles, Red Tail Ale was packaged in 1.5 liter magnums. The use of over-sized bottles, which would continue for roughly the next 15 years, became a hallmark of MBC, giving the company a distinguishing trait that added to its mystique.

Red Tail Ale, available on tap at the company's brewpub and in 1.5 liter bottles, found a receptive audience in northern California. Hopland became a stopping point for beer enthusiasts, home to the only craft brewing company in existence for thousands of miles. The demand for Red Tail Ale mushroomed, enabling MBC to post record sales for every month in 1984. The increase in demand prompted the company to expand in the spring of 1984, when its production capacity was increased by 67 percent. Despite the expansion, MBC continued to struggle with meeting demand. In 1985, when sales for the year increased by 27 percent, MBC frequently ran out of its signature 1.5 liter bottles of Red Tail Ale, whose popularity further increased after the company introduced another seductive packaging concept. In 1985, the company unveiled carriers designed to hold six 1.5 liter bottles, or 42 pounds of beer.

Growth in the 1980s

As MBC entered the latter half of the 1980s, it found itself leading what industry observers dubbed the American Craft Brewing Renaissance. MBC almost continually expanded between 1985 and 1987, scrambling to match demand with supply. Other brands were developed to complement the company's flagship brand, including Blue Heron Pale Ale, a golden ale, and Black Hawk Stout, a rich-bodied stout. The availability of the company's brands was widening as well, particularly after 1987, when MBC established a wholesale operation. By 1988, the company had developed a network of 300 outlets that greatly expanded distribution. No longer forced to make a pilgrimage to Hopland, fans of MBC's beers found Red Tail Ale, Blue Heron Pale Ale, and Black Hawk Stout in most major restaurants in the San Francisco Bay area, as well as in Napa, Sonoma, and Mendocino counties. Additionally, the company's brands were being distributed to 14 states, giving the company a broad geographic base upon which to rely.

By the end of the 1980s, MBC's management decided the company needed to abandon one of its signature traits. The scope of MBC's distribution network no longer could efficiently accommodate the 1.5 liter bottles that had developed a cult-like following. Accordingly, the company began packaging its brands in conventional 12-ounce bottles. Artists were commissioned to create labels for the company, resulting in a design that centered on illustrations of raptors, a motif that gave MBC a defined identity as it entered the 1990s.

For many craft brewers, the 1990s offered challenges that stemmed from the industry's own success. The idea of making specialty beers had become widely popular to many entrepreneurs, giving MBC a horde of new competition. When it was formed, MBC had existed virtually alone in the industry, but the number of craft brewers later proliferated. By 1997, there were nearly 800 brewpubs in operation throughout the country and more than 1,200 microbreweries. For many of these brewers, access to capital presented the most pressing challenge, as local companies tried to transition to regional concerns and regional companies attempted to make the leap to national contenders. MBC found itself facing its own financial problems during the decade, as its need to expand outstripped its access to new capital and precipitated profound change at the Hopland-based company.

Although MBC suffered from the ills of over-expansion, there were justifiable reasons for the desire to increase production capacity. Financial shortcomings aside, the company was a success. Despite the legions of new, handcrafted beers appearing in the marketplace, MBC's beers stood out among the rest, earning several prestigious awards during the 1990s. In 1990, the company received a gold medal at the Great American Beer Festival, earning the award for its Eye of the Hawk Summer Ale. In competition with domestic and European beers, Red Tail Ale was selected as one of the Top Ten Beers by the magazine Wine Enthusiast. The company's flagship brand also drew praise from Men's Health magazine, which selected Red Tail Ale as one of the best beers in the United States. In 1997, the Underground Wine Journal selected Blue Heron Pale Ale as the recipient of its gold medal. At the World Beer Championship in 1997, MBC won four out of five awards for its entries, with Red Tail Ale capturing the festival's gold medal. MBC's critical acclaim went even beyond its beers: In 1996, the company won a Bay Area ADDY Award for the design of it Blue Heron Pale Ale label and carrier package design. The numerous awards did not bring financial comfort, however. MBC entered the late 1990s forced to confront its weakness, a weakness that was evident to one outside observer in particular.

Midway through the 1990s, MBC sought to cure its financial woes on its own. In 1995, the company completed its initial public offering of stock in a $3.6 million debut as a publicly traded concern. Although the proceeds from the stock offering helped alleviate some of the company's financial pressures, additional capital was soon needed, as the drive to increase capacity continued. In 1996, the company sold 17,000 cases of Red Tail Ale and its complementary brands, generating $3.6 million in sales. MBC's management wanted more, believing that the time was appropriate to expand in an unprecedented fashion. The Hopland brewery, which had undergone a series of additions to increase its production capacity, could no longer sustain the company's demands on its own. A second brewery, located in nearby Ukiah, was constructed, becoming operational in May 1997. The opening of the Ukiah brewery occurred in the same month many of MBC's financial concerns disappeared. Early in May, the company announced it had received a substantial infusion of capital. The source of the funds was an Indian tycoon named Vijay Mallya.

Vijay Mallya Takes Control in 1997

According to numerous press reports, Vijay Mallya was the epitome of a playboy. He owned 26 homes, 260 antique racing cars, a Boeing 727, a Gulfstream jet, and several yachts. He was also in charge of a company, United Brewers Group (UB Group), that included more than 60 companies whose activities were grouped in six main business categories: alcoholic beverages, engineering and technology, agriculture, life sciences, media, and leisure. Mallya inherited the company from his father, Vittal Mallya, who started UB Group by acquiring a controlling interest in India's Kingfisher Beer in 1947. Although Vijay Mallya was renowned for his ostentatious leisure activities, he also embraced the role of businessman with commitment, declaring in an October 26, 2003 interview with the San Francisco Chronicle, "I work seven days a week." Evidence of his business abilities was apparent in the growth of UB Group under his stewardship, presenting a record of achievement sufficient to quiet accusations that his wealth was unearned. When Mallya took control of UB Group after his father's death in 1983, the company was generating roughly $100 million in revenue annually. Mallya was in his late twenties at the time he assumed control over a conglomerate with diverse business interests underpinned by Kingfisher, the fourth-leading brand in India's brewing industry. Mallya streamlined the UB Group, divesting interests in processed food, petrochemicals, batteries, pharmaceuticals, and paints, among other businesses. By the time his attention turned to MBC, UB Group represented a $1.4 billion empire. Kingfisher ranked as India's top selling brand, controlling more than 25 percent of the market.

Company Perspectives:

At Mendocino Brewing Company, we have a certain passion about our beers and are proud that over the years, discerning beer drinkers have shared our passion for quality and class. Although our beers have won many awards, the award we cherish most—is consumer loyalty to our products.

Mallya's interest in MBC stemmed from his ambitions as a businessman. "I want to achieve market leadership in this country," he said in reference to the United States in his October 26, 2003 interview with the San Francisco Chronicle. When he announced in May 1997 that he had invested $3.5 million in MBC, the investment was part of his plan to create a national microbrewing position by grouping craft brewing concerns under a single corporate umbrella, which would enable him to achieve economies of scale that individual brewing concerns could not attain on their own. One month before pledging his financial commitment to MBC, an announcement that coincided with his $1.75 million acquisition of Arcata, California-based Humboldt Brewing Co., Mallya invested $5.5 million for a 40 percent stake in Portland, Oregon-based Nor'Wester Brewing Co. Together, the small breweries became part of a new U.S. company named United Craft Brewers, a company that was expected to represent a federation of craft brewing companies.

For MBC, the intervention of Mallya proved to be its salvation. Although the company could not be adjudged as close to severe financial difficulties, the influence of Mallya over the company was nonetheless dramatic. Michael Laybourn, one of MBC's founders, credited Mallya with helping to save the company, as reported in the October 26, 2003 issue of the San Francisco Chronicle. Aside from Mallya's initial investment, MBC gained control over Kingfisher's U.S. operations, giving the company's annual sales volume a substantial boost. MBC also began operating internationally through a subsidiary named United Breweries International Limited, which distributed beers in more than a dozen European countries. A third production facility, located in Saratoga Springs, New York, joined the company's fold, easing its access to markets in the eastern United States.

After his investment in MBC, Mallya became chairman and chief executive officer of the company. He restructured the company and appointed seasoned executives to oversee MBC's finances, marketing, and advertising. In July 1998, the company completed the acquisition of Carmel Brewing Company. Based in Monterey, California, Carmel Brewing produced 11 ales and lagers, including Carmel Amber Ale and Carmel Hefeweizen.

With Mallya at the helm, MBC matured into a national brewer. Within six years of his leadership, the company's revenue volume swelled from $3.6 million to roughly $25 million. By the time of the company's 20th anniversary in 2003, MBC's brands were available in 36 states and the District of Columbia. As the company planned for the future, it possessed the resources to continue its expansion. MBC had an annual production capacity of 60,000 barrels at its Ukiah plant. The facility was designed with future expansion in mind, giving MBC the ability to increase production to 200,000 barrels annually once new equipment was installed. With Mallya's ambitions to become a market leader in the United States and his vast financial resources at MBC's disposal, the company was expected to figure prominently in the future of the craft brewing industry.