How Dogfish Keeps Brewing Winners

The brewery's long-term success has come from its word-of-mouth reputation for great beer, careful attention to business efficiencies, and the growing popularity of craft beer in the United States

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Amy Sussman / Getty Images

Sam Calagione, founder of Dogfish Head Craft Brewery with one of his brews

Teetering on the brink of bankruptcy in the late 1990s, craft beer maker Sam Calagione would occasionally dodge the impatient creditors who called him on a daily basis by telling them that his computer had just caught on fire and he had to hang up the phone immediately. Although sales of his exotic brews — infused with everything from St. John’s wort to juniper berries — were growing steadily, Calagione’s Dogfish Head Craft Brewery in coastal Delaware was flat out of cash.

And no wonder: Calagione hadn’t worried much about expenses after he founded his company in 1995. An English major in college who counted Ayn Rand and Walt Whitman as two of his favorite writers, he believed that beer making wasn’t just a business; it was art. “I was a hopeless romantic,” says Calagione, now 41, who started his company with $110,000 in family loans, which he in turn used as collateral for bank loans. Whether that meant adding pricey saffron to his Midas Touch “golden elixir,” which is based on ingredients found in drinking vessels unearthed from King Midas’ 2700-year old grave in Turkey, or creating his deep, dark World Wide Stout, which is 18% alcohol by volume (about four times as much as a Bud Light), Calagione almost always indulged his wildest feats of imagination, no matter how much they cost him.

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Today, however, it’s all paid off; Dogfish is the sixteenth largest craft brewer, and is on track to bring in some $39 million in revenue, 30% more than it made in 2009. Dogfish has been operating in the black every year since 2000, says Calagione, who won’t disclose exact profit margins at his privately-owned firm. Defined as independently-owned breweries that produce less than 2 million barrels of barley-based beer a year, craft breweries now number about 1600 in the United States. While overall sales in the $100 billion U.S. beer industry are flat so far this year, craft beer sales are up nearly 13%, for a fifth year of consecutive growth, according to research firm Symphony IRI. “Beer is an affordable indulgence,” says industry analyst Dan Wandel of Symphony IRI.

In that crowded field, Dogfish’s quirky brews regularly stand out and win industry awards, so much so that Calagione has become one of the industry’s most popular evangelists. Mobbed by devotees at beer festivals, Calagione hosted a Discovery Channel TV series this fall called Brew Masters, about the world of craft. And he has partnered with Mario Batali to open a New York City brewpub in early 2011 above the new Eataly food emporium that will feature unfiltered, naturally carbonated, cask-conditioned beer that is still in the process of fermenting.

Named after a jut of land near Boothbay Harbor, Maine where Calagione has vacationed since childhood, the brewery initially survived its cash crunch with additional investments from Calagione’s family. While Calagione still indulges in the occasional extravagance (like a 10,000-gallon tank made of an ancient Paraguayan hardwood that he ages his Palo Santo Marron brown ale in), Dogfish’s decade of profitability is a testament to Calagione’s growing business acumen. The brewery’s long-term success has come from its word-of-mouth reputation for great beer, careful attention to business efficiencies, and the growing popularity of craft beer in the United States.

While starting small enabled Calagione to experiment with different ingredients with minimal risk, it quickly became a liability. “We started small because we couldn’t afford equipment,” says Calagione, who used to sleep on a mattress in the basement of his brewpub in Rehoboth Beach, Delaware, between brewing his original 10-gallon batches, when Dogfish first opened. “We could take a risk and the worst case scenario was ten gallons of crappy beer,” he adds.

As orders increased from distributors up and down the Eastern seaboard, who in turn often sold to mostly high-end grocers and bars, Calagione realized his business was ill-equipped to grow. So he got his father, uncle and father-in-law, who were already investors in the company, to put in more funds to help pay for a new bottling system. He hired a sales manager to build demand in more states, and he started reading the fine print on contracts he signed with vendors and negotiating better terms. In other words, he quickly learned that if he wanted to pursue his art, he had to focus on business first.

Still, despite Dogfish’s growing pains, Calagione never quit making weird beers. He concocted a green ale made with spirulina (a blue-green algae) for St. Patrick’s Day and a purple brew infused with black currents. His most successful experiment, however, occurred to him after watching a cooking show in which the chef continually added ingredients to her stew while it cooked. By applying that same approach to the addition of hops (which gives beer its bitterness), he created Dogfish Head’s current bestseller, 60-Minute IPA, an India pale ale that one reviewer on the popular site describes simply as “hoppy deliciousness.” And he continues to make limited editions such as this summer’s Bitches Brew, a blend of traditional Ethiopian honey beer with a dark, chocolaty stout. That concoction showcases Dogfish’s twin talents of art and commerce; the beer is a joint venture with Sony to commemorate the 40th anniversary of the eponymous Miles Davis album.

Perhaps the biggest challenge that Calagione, like all craft beer makers, faces today is the fickle palate of his core customer. “Craft beer drinkers tend to be promiscuous. They’ll have four different beer styles they like,” notes Brewers Association director Paul Gatza. Such lack of brand loyalty may actually force smaller brewers to constantly release new concoctions, lest their fickle audience lose interest. As any beer buyer can attest, these days even regular grocery store shelves are typically packed with a constantly-changing selection of tempting new craft labels and flavors.

Kevin Murtagh, a philosophy professor from Rockville Centre, New York, says he got turned on to craft beer a few years ago after tasting the Belgian beer Chimay. “I couldn’t believe beer could taste this good. That started me on a journey of going online and reading about different beers,” says Murtagh, 30. Dogfish is his favorite brand overall, he says, but he admits to other passions. His basement stash of 15 bottles includes specialty brews from Brooklyn Brewery, Goose Island, and “my new one I’m in love with,” which sells under the labels of Port Brewing and The Lost Abbey, from San Marcos, California. But while he’ll play the field when it comes to craft brews, one thing he won’t do is go back to bland mass-market beer. “For me, it’s gotten to the point where I can’t even enjoy that stuff,” he says.

As if competition from other small labels wasn’t enough, now the beer conglomerates are grabbing a piece of the craft beer market. The fastest growing craft-style beer is Blue Moon from MillerCoors. Launched in 1995, the Blue Moon label sold $40 million worth in supermarkets through the first half of 2010, according to Symphony IRI. Budweiser’s malty American Ale is courting the craft consumer as well. Still, while this might seem like trouble for small brands, Symphony IRI analyst Wandel says the big labels may actually help keep the craft segment growing by increasing its visibility. And despite the proliferation of labels, stores are giving more shelf space to craft brands because the profit margins are much higher than mass-market brands. Since the craft beer buyer expects to pay more, retailers can charge a premium for them. And Dogfish’s brews are among the priciest. A single, 12-oz. bottle of its Palo Santo Marron, for example, sells for around $5.

Today, Dogfish is just struggling to keep up with demand in the 31 states from California to Maine and as far south as Florida where it is now available. Massachusetts beer distributor Ken MacDonald remembers being skeptical about whether he could even sell the first shipment of Dogfish’s Raison D’etre, made with beet sugar and green raisins, which Calagione personally delivered nearly a decade ago. “People used to say, ‘Dogfish? That’s a silly name,'” he says. “Now I get calls for it every day. It’s our number one selling brand,” says MacDonald, who sells some $2 million worth of Dogfish every year. As for Calagione, he now has a much better problem to have when the phone rings: the only excuse he has to come up with is why he can’t brew more beer.