Schell's plans expansion as Minnesota craft brewers grow

With demand for craft beer rising, the August Schell Brewing Co. of New Ulm, Minn., has become the latest regional brewery to announce an expansion to increase its output.

Schell said Friday that it plans a $2 million addition to its brewery this year, and an even more expensive upgrade in 2014. The goal of the two expansion projects is a near doubling of the brewery's output, from 132,000 barrels last year to a projected 245,000 barrels in 2014.

Schell is the largest Minnesota brewing company, based a 2011 ranking by the Brewers Association, a national trade group.

In November, Summit Brewing, the second-largest beer maker in the state, announced a $6 million expansion to double production capacity at its St. Paul brewery to 240,000 barrels annually.

Small breweries that manufacture regionally distributed craft beers make up only about 7 percent of the U.S. beer market, but they're are growing far faster than the mainstream beer market, analysts said.

"Craft beers are growing fast because consumers gravitate there for the flavor and the appeal of local breweries," said Eric Shepard, executive editor of Beer Marketer's Insights, a publisher of trade newsletters in Suffern, N.Y.

Consumers drove up sales of craft beers by 13 percent last year, setting off a wave of expansion at small breweries, Shepard said. Meanwhile, the overall beer industry is languishing with only a 1.2 percent increase in the number of barrels sold last year, following three years of declines in the overall beer market.

"The beer market in general has been flat, although it's starting to rebound a little," said Ted Marti, president of August Schell Brewing. "But the star of the market is craft brands."

While total retail beer revenue for 2012 is still being counted, the overall U.S. beer industry had estimated retail sales of just over $100 billion, Shepard said. Because craft beers have higher prices than mainstream beers, they are expected to account for about 9 percent of total sales.

Except for a handful of nationally distributed beers, such as Sierra Nevada and Samuel Adams, most craft beer makers are small regional firms, Shepard said. Schell distributes only in a six-state area that includes Minnesota, its largest market, and Wisconsin, Iowa, Nebraska and the Dakotas.

Another factor helping craft beers is that the recession didn't hurt them much.

"Sales of craft beers held up better during the recession because craft beer drinkers tend to have more education and higher incomes, so they're less price-sensitive," Shepard said.

Marti thinks the regional brewers of craft beers have done a better job of catering to consumers who want something new.

"It's hard to breed new excitement into a standard beer," Marti said. "But the craft beer industry has responded with lots of new varieties" such as chocolate flavoring, blending beer with wine or grapes and a new generation of traditional German and ­Belgian sour beers.

Schell is the country's second-oldest family-owned brewery and remains on its original 1860 site. The company has a line of 17 brews including its signature Schell's Deer Brand, a lineup of six year-round beers and a line of seasonal Schell's beer. Schell's also brews Grain Belt Premium, Grain Belt Premium Light and Grain Belt Nordeast.

Schell will break ground May 1 for a 1,800-square-foot building between its current bottle house and cellar area.

"The market's full of great beers, and these expansions are necessary to keep up," said Kyle Marti, Schell's sales and marketing manager. "It's a great time to be a beer drinker and a great time to be a beer brewer."

Steve Alexander • 612-673-4553