Pyramid Breweries Inc.

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Pyramid Breweries Inc.

91 South Royal Brougham Way
Seattle, Washington 98134
U.S.A.
Telephone: (206) 682-8322
Fax: (206) 682-8420
Web site: http://www.pyramidbrew.com

Public Company
Incorporated: 1984 as Hart Brewing, Inc.
Employees: N/A
Sales: $28.81 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: PMID
NAIC: 31212 Breweries; 312111 Soft Drink Manufacturing

Pyramid Breweries, Inc. is a craft brewer of specialty beers and sodas. Its more than 20 English-style ales and German-style wheat beers are marketed under the Pyramid Ales and Thomas Kemper Brewing Company brands. In addition, the company produces a line of four specialty sodas under the Thomas Kemper Soda Company name. Pyramid brews its beers at two breweries in Seattle, Washington and Berkeley, California, both of which include attached alehouses with restaurants. The company also sells its beverages through a network of independent distributors in more than 30 states. The majority of sales, however, come from Washington, Oregon, and California.

Mid-1980s: A Tale of Two Breweries

Pyramid Breweries was formed by the union of two small craft breweries, or microbreweries, in the state of Washington. The first, Hart Brewing, Inc., was established in 1984 in the small western Washington logging town of Kalama by Beth Hartwell and her husband. Hart’s inaugural beer, Pyramid Pale Ale, was one of the first microbrews to be produced in America.

The second of the breweries was The Thomas Kemper Brewery, of Bainbridge Island, just across Puget Sound from Seattle. The Thomas Kemper Brewery was formed in 1985 by two friends—Andy Thomas and Will Kemper—who both had degrees in chemical engineering. Their operation was a small one, housed in the men’s basements. Despite its size, however, the brewery’s full-bodied, German-style lagers managed to attract a local following. Just a year after starting the brewing operation, Thomas and Kemper moved into a new facility, just outside the town of Poulsbo on the Washington coast.

In 1986, while The Thomas Kemper Brewery settled into its new home in Poulsbo, Hart Brewing introduced its second beer: Pyramid Wheaten Ale. The Wheaten Ale was the first year-round wheat beer produced in America since Prohibition. Three years later, in 1989, the Hartwells sold their growing brewery to five Seattle investors.

While 1989 brought a change in ownership for Hart, the year marked the beginning of an annual tradition for Thomas Kemper: that year, the brewery held its first Oktoberfest. The event, which was held at the brewing facility, was a promotional event designed to introduce the Thomas Kemper beers to area residents and visitors. Although the Oktoberfest celebration started out on a small scale, it rapidly gained in popularity, soon drawing thousands of visitors to the small town.

At one of these Oktoberfests, Thomas Kemper’s brewers introduced a new beverage that was to eventually evolve into its own product line. Wanting to offer non-drinkers and children their own special beverage, the brewery created a batch of hand-crafted root beer. The root beer was an enormous hit; by some accounts, the soda actually outsold the beer. A year later, encouraged by the root beer success, Thomas and Kemper formed the Thomas Kemper Soda Company to develop and market a line of premium beverages that were more flavorful than the average soda.

Mid-1990s: Joining Forces

In 1992, with Hart Brewing and Thomas Kemper both picking up steam, the two breweries merged. Under the terms of the deal, Hart acquired the Thomas Kemper Brewery, but not the Thomas Kemper Soda Company, which remained as a stand-alone business under Thomas’s and Kemper’s ownership. Hart then made a second significant step toward expansion, moving into a newly built, 11,000-square foot facility in Kalama and leaving behind its original home on the town’s Main Street.

As it happened, the Hart-Thomas Kemper merger came at an important time for the breweries; both were on the verge of introducing significant new products. In 1993, Thomas Kemper introduced a German-inspired raspberry wheat beer called Weizen Berry. Weizen Berry was an immediate success, soon becoming the most popular fruit beer in the Northwest. Also introduced in 1993, Hart’s new Hefeweizen, a full-flavored, unfiltered wheat beer, became an instant favorite with beer lovers in the region.

By the middle of the 1990s, the two breweries were thriving. Hart Brewing had become the fourth largest craft brewer in the United States. Thomas Kemper was likewise showing amazing growth, with 1995 year-end sales up 100 percent over 1994 sales. The Thomas Kemper brand was one of the top three brands in the state. Encouraged by skyrocketing sales and increasing consumer demand for microbrews, in March of 1995 Hart opened a second brewery in downtown Seattle. The Seattle facility, which was located near the city’s Kingdome football and baseball stadium, had a 250-seat adjoining alehouse.

1996-97: Expansion, Difficult Market Conditions

In late 1995, Hart went public, selling two million shares of its stock and netting $34.2 million. The company used proceeds from its initial public offering to expand its production capacity in both the Seattle and Kalama breweries. By the end of 1996, the Kalama facility’s annual capacity had been extended to 95,000 barrels from its original 10,000-barrel output. The Seattle brewery’s capacity was increased from 40,000 to 98,000 barrels. With the increased production ability in the Seattle brewery, Hart decided to close the original Thomas Kemper facility in Poulsbo and move its operations to Seattle.

Throughout the middle of the nineties, Hart’s sales had grown exponentially. By the beginning of 1996, the company’s annual revenues had climbed to $25.3 million, up from just $2.9 million three years earlier. Its three best selling brands were Pyramid Hefeweizen, Pyramid Apricot Ale, and the original Pyramid Pale Ale. Because the Pyramid line made up the bulk of the company’s sales and reputation, in 1996 Hart Brewing, Inc. changed its name to Pyramid Breweries, Inc. It continued, however, to market its Thomas Kemper products under the Thomas Kemper name.

At the end of 1996, although it had shown tremendous revenue growth, Pyramid was still very much a regional brewer; the majority of its improved sales had come from an increased market share in the states of Oregon and Washington. In early 1997, however, the company moved to broaden its geographic presence, opening a new brewery and alehouse in Berkeley, California, its first operation outside Washington. The new facility was in a renovated warehouse within walking distance of the University of California at Berkeley campus. It consisted of 122,000 square feet, a 260-seat alehouse/restaurant and an annual production capacity of 80,000 barrels. The large size of the facility offered much potential for expansion; Pyramid estimated that it could ultimately extend the brewery’s production capacity to 200,000 barrels, if warranted.

The Berkeley brewery was to be a first step in a long-term growth strategy. Pyramid planned to develop an entire network of similar breweries in various high-traffic regional markets across the country. The company also planned to achieve greater geographic penetration by aggressively expanding its distribution network. In 1996, it kicked off this initiative, adding 20 new states to its distribution territory. By the end of the year, the company’s products were available in a total of 31 states. Sales in Washington, Oregon, and California still accounted for more than 80 percent of total revenues, however.

Pyramid also diversified its product line in 1997, purchasing The Thomas Kemper Soda Company, which had been left out of the 1992 merger. The acquisition added two premium sodas—root beer and cream soda—to the Thomas Kemper brand. It also provided the small soda company with capital needed to grow. Within a year of having been acquired by Pyramid, Thomas Kemper Soda had introduced two new beverages: Orange Cream Soda and Black Cherry Soda.

Despite its efforts to expand, 1996 and 1997 were challenging years for Pyramid. The craft, or microbrew, market had grown extremely rapidly, with small, independent breweries springing into existence at a breathtaking pace. This proliferation of craft brewers, both in the Pacific Northwest and across the nation, led to greatly heightened competition for Pyramid in all of its markets. To make matters worse, the growing consumer interest in mircrobrews during the early 1990s had enticed virtually all of the major domestic brewers into the fray; such industry giants such as Anheuser-Busch, Miller Brewing, and others had introduced full-flavored, European-style beers to compete with the microbrews. Many had also formed alliances with or made investments in specific craft brewers. Competition from these national brewers was particularly damaging to Pyramid; with their much greater financial resources, influence, and distribution networks, they were able to drive down product prices and reduce distribution options for the smaller breweries.

Company Perspectives:

Each and every day we integrate handcrafted brewing methods of the past with natural, modern-day processes and ingredients to create what we think is the best beer money can buy. Our distribution base is continually growing and includes a loyal following in more than 30 states, making Pyramid one of the oldest and largest craft breweries in the country.

Pyramid’s finances began to show the effects of the adverse market conditions in 1996. Sales flattened, increasing only two percent over 1995, and net income plummeted. The company took steps to trim overhead and boost profits in 1997, closing down its Kalama, Washington brewery and redistributing production between its Seattle and Berkeley facilities. Sales for that year improved by 13.6 percent, but Pyramid still ended up with a $2.1 million net loss at year-end.

1998: Trying to Turn Around

The company spent part of 1998 rethinking and refocusing both its growth strategy and its marketing efforts. It suspended its earlier strategy of building a chain of breweries in various locations, deciding instead to focus efforts on its existing Northwest/West Coast markets. It also initiated a new marketing campaign, themed “Have a good beer,” and introduced new product packaging and promotional materials for both its Pyramid and Thomas Kemper lines.

However, 1998 financial results were no more promising than 1997. Sales decreased by 7.2 percent, and Pyramid again posted a net loss. In July, the investment firm of Sugar Mountain Capital, LLC purchased a 19.5 percent stake in the flagging company. As part of the acquisition, Sugar Mountain’s managing partner, Kurt Dammeier, joined Pyramid’s board of directors. The company also brought in two new top-level executives: Gary McGrath and Martin Kelly. McGrath, formerly employed by Miller Brewing Company, became Pyramid’s new vice-president of sales in November 1999. Kelly, a former executive of both Miller Brewing and Coca-Cola, became the company’s chief operating officer. Both men were beverage industry veterans of more than 15 years, and it was hoped that their expertise would be pivotal in the company’s turnaround.

At the end of 1999, Kelly was promoted to CEO and president, replacing the company’s president of more than seven years, George Hancock. At the same time, Dammeier—who had become the company’s largest shareholder—became chairman of the board of directors. Meanwhile, Pyramid continued to falter. Although 1999 sales showed a slight improvement, the company posted a net loss of $4.4 million for the year. Shortly after assuming his new position, Kelly announced a reorganization of executive management and called for a strategic review of operations. As part of the reorganization, two new top-level positions were created and filled by existing Pyramid employees: Director of Brewery Operations and Director of Corporate Operations. Both positions reported directly to Kelly.

Kelly also announced the company’s first quarterly cash dividend and authorized a stock buyback of up to $2 million in shares. “Paying a cash dividend, in addition to our a stock repurchase program, reflects our confidence in Pyramid’s future prospects,” he explained in a February 24, 2000 press release. “These actions also reflect our commitment to improve returns for Pyramid shareholders,” he added.

Looking Ahead

As Pyramid continued its efforts to reverse the downward trend of the late 1990s, it pinned part of its hopes on its alehouse operations. This segment of the company was perhaps the most promising, posting a 16 percent revenue gain in 1999. “We feel that our Alehouse Division has substantial opportunity to add value to the company, both by improving existing operations and achieving unit growth through acquisitions or new developments,” Kelly said in a February 2, 2000 press release. Another potential area of growth for Pyramid lay in its soda subsidiary. Wholesale soda shipments increased 11 percent in 1999, in marked contrast to beer shipments, which increased only two percent.

Principal Subsidiaries

The Thomas Kemper Brewing Company; The Thomas Kemper Soda Company.

Principal Competitors

Redhook Ale Brewery, Inc.; Boston Beer Company.

Key Dates:

1984:: Hart Brewing, Inc. is formed in Kalama, Washington.
1985:: Andy Thomas and Will Kemper form The Thomas Kemper Brewery.
1989:: Hart Brewing is acquired by Seattle investors.
1991:: Thomas and Kemper form The Thomas Kemper Soda Company.
1992:: Hart Brewing acquires The Thomas Kemper Brewery.
1995:: Hart opens a new brewery and alehouse in Seattle and makes initial public offering.
1996:: Hart changes its name to Pyramid Breweries, Inc.
1997:: Pyramid acquires The Thomas Kemper Soda Company; closes down original Thomas Kemper brewery; opens new brewery and alehouse in Berkeley, California.
1999:: Martin Kelly becomes Pyramid’s president and CEO.