Surly and other craft breweries target regional, not national expansion

Omar Ansari draws crowds to his Surly beers, the brewery and retail promotional events around the state.

But when David and Emily Josephson showed up at Liquor Boy in St. Louis Park to meet Ansari and try some of Surly's latest brews, they admitted they don't drink them as often as they once did.

"To this day Surly is one of my favorites," David said. "But I drink less of it now because I want to try other things." Emily added, "If you stick to one, you miss out on the other stuff."

Ansari jump-started the Minnesota craft beer industry in the mid-2000s with IPAs as full-throated as a heavy metal band. His lobbying changed state law in 2011 so breweries could serve their own beer. And the brewery Surly opened in 2014 became a destination for beer and food lovers, even tourists.

But the craft beer craze has plateaued, and trailblazing Ansari is trying to carve a new path in a mature business. "It's much harder to sell beer than it used to be," he said.

Though Surly is not the biggest brewer in Minnesota, its rocket-like growth, innovative marketing and Ansari's high profile put it at the center of an industry that exploded in the state over the last decade.

Now reaching the business equivalent of middle age, Surly is contending with fickle consumer tastes and loyalty and a bevy of new competitors. Its tactics have changed and ambitions have narrowed, but Ansari still aims to lead.

Surly doesn't release revenue figures, but Ansari said its sales growth was 4% in 2018, well below the 20% to 30% rate it experienced for years. He and new sales director Bob Repp talk about smart, targeted growth in the Midwest rather than expanding Surly nation across the, well, nation. More than 80% of Surly's sales are in Minnesota, Wisconsin and Illinois.

"I don't think we'll ever be a huge presence in California, New York or Florida," Ansari said. "So it's more about focusing on where we sell most of our beer."

The rise of craft beers has produced a Surly in almost every state. Oregon has Deschutes, Delaware has Dogfish Head and Wisconsin has New Glarus. All have grown large at home and created businesses — restaurants, hotels, event operators — that reinforce their beer brands. They're also contending with difficult choices as sales plateaued.

Craft beer production was up 4% last year nationally but down slightly in Minnesota, according to Bart Watson at the Brewers Association. St. Paul-based Summit led the state's brewers with production of 122,000 31-gallon barrels. New Ulm-based Schell's was next at 119,000 and Surly was third at 98,000. All made the list of the country's Top 50 microbreweries.

When Surly delivered its first beers in 2006, there were about four craft breweries in Minnesota and 700 in the United States. Minnesota now has more than 175 and the country more than 7,500.

All those breweries are constantly innovating and creating an immense number of choices for consumers. As a result, market researcher Mintel says there's enormous churn among beer drinkers. Only 46% were loyal to one brand in 2018, its surveys found.

Drinkers are also experimenting more with cocktails, wine and fusions. "There's a lot more pressure today to come up with a new shiny object," said Ben Smith, head brewer at Surly. "The rule book has been thrown away. You have to be innovative and unique but still drinkable. "

Minnesota law prohibits brewery halls from selling wine or spirits, so Smith and the brewing team came up with Rosé last year, a beer with a kiss of strawberry and black currant for people who don't normally drink beer. The pink beer has been a top-three seller in Surly's taproom every since.

It was a risk and a clear departure for Surly. Instead of the usual black packaging emblazoned with skulls and flames, Rosé is sold in a "white package that looks like a glass of wine was spilled on a canvas," said Bill Manley, Surly's vice president of marketing. "It's an alternative to aggressive beers."

It's also the latest example of how fast growth brought another change. In the early days of craft beer, Surly felt confident in telling consumers what they should be drinking.

"Ten years ago I would've said 'No way, we're not going to do fruited stuff,' " Ansari said. "My aperture has opened up over the years. In the beginning, I couldn't even imagine doing a lager."

Some drinkers would say Surly pushed the flavor edge too far with a dessert stout called Tiramisu Funeral Bar and Mango Axe Man, a mango version of its Axe Man IPA. But the company hasn't tipped into the extremes seen at the Minnesota State Fair, where brewers have offered doughnut-flavored beer.

"They're aggressive without crossing the line into ridiculous," said Brian Ingram, chief development officer at Williston Holding Co.

The company has had growing pains, most significantly when head brewer Todd Haug, namesake behind Surly's popular Todd the Axe Man, left abruptly in 2016. Soon after, Ansari began putting together a formal management team to cope with an employee count that jumped from 30 in 2014 to 375 today.

Six people now report to him instead of 20, including a chief hospitality and operations officer, VP of marketing, VP of brewing operations, VP of sales and the chief financial officer. Regular meetings with distributors have been added, a strategy team is in place, and beer tasting has become more collaborative.

The structure is working so well that for the first time since Surly started, Ansari plans to take the summer off to travel with his family. "Until now, that never would have been possible," he said.

Surly has had to cut its losses at times. Ansari decided to close Brewer's Table in 2017, the award-winning high-end restaurant on the second floor of its 50,000-square-foot brewery.

"Sometimes I'd look around and we'd have an hour and a half wait in the beer hall on a Thursday, and I'd go upstairs and we'd have 10 people," he said. "The customer was kind of telling us what to do."

He and other executives decided to turn the space into a pizza restaurant, in part because it solved the problem of food taking too long in the kitchen. What could have been a yawn turned into another hit.

Food critics showered praise on the New Haven-style pizza. And its latest viral moment happened during the NCAA Final Four in early April when Barstool Sports blogger Dave Portnoy gave Surly pizza a rating equal to his other local fave, Black Sheep Pizza.

Ansari was 35 when he started Surly with $500,000 in space that was available in the Brooklyn Center warehouse of an abrasives business his parents owned. The suburb changed its zoning laws for the brewery to operate. Summit was virtually the only craft brewer in the region and Haug had spent time working there.

"Craft beer was just starting to gain traction with consumers then," said Mike Bamonti, former senior vice president at Summit. "Their palates were starting to adjust to flavorful beers with more hops characteristics. Mark Stutrud [founder of Summit] worked his butt off to win consumers over."

Taking Summit's lead, Surly introduced in-your-face flavor profiles packaged and marketed with impudence. Furious, a hoppy amber, became its signature brew.

Before passage of the "Surly bill" in 2011, Minnesota breweries weren't allowed to serve beer on site because of the three-tiered system that kept alcohol manufacturers, distributors and retailers separate. The Minnesota Licensed Beverage Association lobbied against it, but the company prevailed, Ansari said, because of Surly nation, fans who contacted their legislators. The law paved the way for Surly's $34 million brewery in Prospect Park near the University of Minnesota.

"Every up-and-coming brewer today wishes that lightning would strike them as it did Omar and Todd," said Dan Justesen, co-founder of three-year-old Utepils Brewing in Minneapolis. "Brewers respect them a great deal for their success."

Ansari reaches out to dozens of local breweries to participate in Darkness Day, an event each fall to celebrate dark beer. Last year, 60 breweries brought their beers to the Surly event, which was moved from Brooklyn Center to Somerset, Wis., for more space and to circumvent yet another law — one that prevents Wisconsin brewers from selling in Minnesota.

"Part of the reason we moved it to Wisconsin is to get beer we don't normally get in our market," Ansari said.

Earlier this month, Dogfish Head, the Delaware giant, was sold to Boston Beer Co., producer of Samuel Adams, in a $300 million deal that's another sign of how craft beer makers are contending with slowing growth. Ansari said that he's had a few inquiries from prospective buyers but that Surly is not for sale.

Next month, Surly will expand to St. Louis, the home of Anheuser-Busch, maker of Budweiser and the nation's largest brewer. It's a market where the craft beer industry is still frothy.

In July, the company is joining Brew Pipeline, a program that allows craft breweries and distributors limited-time releases in new markets. Surly will test its mettle in markets such as Nevada, California and New York. And Ansari said he's considering opening another brewery in another state.

"Whatever we take on, we push the envelope as far as we can," he said. "We're a restless place when we tackle what's in front of us."