Cheers to craft beer

A host of brewpubs have sprung up offering craft beer. Can these microbreweries slug it out in the market?

Photographs by RA Chandroo

Talk to Padmal Kolongahapitiya about the good things in life and his eyes light up immediately; the conversation gets positively heady when we discuss refreshing beers. Having worked in Japan and his native Sri Lanka in the past, Kolongahapitiya has been based in Bengaluru since November 2011 in his role as head brewmaster for The Biere Club, a well-known name in Bengaluru’s craft beer business. Produced in small quantities, craft beers are available at microbreweries across the world, with 15 having popped up in Bengaluru alone in the past four years.

“The Indian palate generally tends towards sweeter flavours. It is hard for a bitter beer to make a mark here, unlike Japan, where people prefer bitter brews,” he says. In the summer of 2012, this consumer insight was put to good use by Kolongahapitiya and his bosses. Coinciding with the mango season, The Biere Club ordered 60 kg of the Alphonso variant and created a mango variant of its signature brews, which people just lapped up. “We served nearly 1,500 litres during the season. It was a bit unexpected,” Kolongahapitiya adds.

But the craft beer action is not restricted to Bengaluru alone. Gurgaon, where the craft beer story really began, today boasts of about 12 microbreweries, with only two pubs having debuted in Mumbai; neighbour Pune has another six in operation. It is estimated that the domestic microbreweries industry is worth anywhere between ₹75 crore-100 crore today and is growing at upwards of 25%.

That may, however, pale in comparison with the ₹3,500-crore bottled beer market, which is growing at 15% and is dominated by brands such as Kingfisher, Haywards, Knock Out, Tuborg and Carlsberg. Those in the microbreweries business insist that quality is a key differentiator, and the well-travelled Indian, who now has a better understanding of what good beer is all about, agrees.

Craft beer seems to agree with the pub-going public across board, as microbreweries used a gamut of natural ingredients such as malt, hops and yeast, compared with the emlusifying agents used by bottled beer brands.

Fresh start

If the global crisis of 2008 resulted in Gregory Kroitzsh losing his Wall Street job, it also facilitated his move to India. The American citizen — who traces his roots to Germany — was employed with Citi’s private banking team at the time of the crash and realised that India was one of the few countries with a semblance of employment opportunities. Kroitzsh moved to Mumbai with his Indian wife in 2009 to join insurance company HDFC Ergo.

“Some part of me always wanted to become an entrepreneur. I have always been a beer lover and though I had a full-time job, I wanted to start something on my own,” he says. A year later, Kroitzsh finally acted on that impulse and thus was born Seven Island Craft Brewery, inspired by Mumbai’s rich maritime history. Given that the process involved a lot of back-and-forth with restaurant consultants, Kroitzsh’s finance background did come handy after all. “Making spreadsheets might have been fun in the past, but the ground reality is very different,” he chuckles.

This is especially true when you consider the fact that Mumbai’s municipal corporation classifies microbreweries as a polluting industry thanks to the small quantities of effluents produced during the brewing process, clubbing it with the likes of India’s infamous tanneries. Given that these restrictions apply primarily to Mumbai, it is far easier for entrepreneurs to open microbreweries in the rest of Maharashtra. It is also probably why India’s first microbrewery came up in Gurgaon, Haryana, a place known to have relatively relaxed liquor rules, as far back as December 2008. After a lot of back and forth, Kroitzsh was finally allowed to open his brewpub The Barking Deer at Lower Parel in Central Mumbai in February 2013.

“However, we still didn’t have a liquor licence and, for the first eight months, were serving Kingfisher beer on tap,” he explains. When craft beer finally figured on the menu in November the same year, Barking Deer became the city’s first microbrewery. By this time, Kroitzsh had put in ₹2 crore into the business, including the cost of construction and equipment, of which ₹40 lakh came from his personal savings.

“Money was being poured into the business and we needed the project to take off,” he says. Kroitzsh is forthright when asked why he was so kicked about this business opportunity. “I come from the state of Vermont, where there are 30 breweries for a population of barely half a million. If the US can have over 3,000 breweries, there is no reason why India can’t,” he quips. 

Keeping The Barking Deer company barely half a kilometre away is The White Owl, set up by 33-year-old Harvard graduate Javed Murad, who returned to India after working in the US for nearly 12 years. “We looked at various options and it was obvious that the biggest challenge was distribution. The mass route was unviable, though the opportunity in the beer market itself was too big to ignore,” says Murad, who spent his formative years in Mumbai, before heading westwards. India already had mass-market brands such as Kingfisher and Carlsberg and imported beer such as Corona and Stella Artois, with the latter being priced in the ₹240-320 range.

Then there were brands such as Shepherd Neame and Chimay from brewers in Britain and Belgium, priced in the relatively unaffordable ₹350-700 range. “There was an untapped opportunity for craft beer in the affordably priced category starting from ₹120,” points out Murad. Even in the $100-billion beer market in the US, craft beer accounts for as much as 8% sales by volume and 14% by value, he adds.

Of course, being in Mumbai did pose certain insurmountable challenges in terms of real estate costs for these young entrepreneurs. The White Owl, which opened its doors in October 2014, is housed inside the tony One Indiabulls property in central Mumbai.

“When it comes to issues such as licences and real estate, Mumbai can be pretty difficult to operate in,” admits Murad. He has invested nearly ₹3 crore in the business so far, part of which has come from friends and former colleagues in the US and part from angel investors such as adman Piyush Pandey and marketing consultant Shripad Nadkarni. “For now, craft beer is still a metro story. We are seeing some interesting consumer behaviour in Mumbai,” says Murad, pointing to two well-dressed men in suits close by, who have ordered some craft beer to go with their fish-and-chips lunch.

The emergence of craft beer in India is in line with global trends, especially those seen in larger markets such as the US and Europe. According to Pradeep Gidwani, former managing director of Foster’s India and Carlsberg India and founder of Pint Room, which serves international beer, the growth of craft beer in more developed markets has been at the expense of bottled beer.

“In fact, bottled beer has been registering a negative growth rate in the US, while craft beer has been the big story. That has prompted some serious buyout activity,” he explains.

In November this year, Anheuser-Busch InBev, the company that owns marquee brands such as Budweiser, Stella Artois and Corona, bought over Oregon-based 10 Barrel Brewing Co. This move was preceded by its acquisition of Blue Point Brewing in New York and Chicago’s Goose Island in 2011.

Racing towards break-even

Gaurav Sikka still remembers the relief he felt when he discussed his upcoming business with his partners. “They asked me to think of our company not as a brewery but as a restaurant. That was nothing short of golden advice,” he says. As an undergraduate student at the University of Michigan, Sikka was intrigued by the concept of beer served locally in the US. The university town was home to Arbor Brewing Company, a venture started by couple Matt and Rene Greff in 1995.

They gave Sikka the licensing rights for the Indian market and also picked up a minority stake in his venture, the Bengaluru-based Arbor Brewpub. None of that came easy, though; the Greffs decided to hand over the rights only after six visits over three years.

Sikka set up shop on Bengaluru’s Magrath Road in November 2012, serving food and beer on tap but no craft beer — that had to wait till February the following year. Sikka, whose previous employers include Virgin Comics and Percept Pictures, has invested ₹5 crore in the project to date, including ₹75 lakh from his own savings.

According to Sikka, the biggest cost outgo in the early stages of this business is the investment in the microbrewery. “We spent less than ₹1 crore setting it up, though in some cases this figure could be at least twice as much,” he says; fixed costs include licensing fees and the money spent setting up the place. Also, in the early days, the Bengaluru civic administration stipulated brewpubs to have an area of at least 12,000 sq ft.

Then, there are running costs such as rent, salaries, power, utilities and, of course, the cost of manufacturing the beer, which could be steep given that all the ingredients are imported.

Malt comes from Europe, while hops, the ingredient that is used as a flavouring agent, and yeast are largely sourced from the UK. Sikka says that though there is a possibility that these items could be manufactured in India at a future date, given the current volumes sold in this nascent business, there is no choice but to import the ingredients.

Other entrepreneurs concede that break-even on an operational basis can be achieved in the first month itself, while recovering the capex takes close to two years. Case in point: the brewpubs mentioned in this story all broke even operationally within the first three months of being in business, bringing in enough revenue to pay for running expenses such as power and salaries. Since rentals are high in a lot of metros, someone such as Kroitzsh ends up paying ₹7.5 lakh each month for a 4,000 sq ft property alone. Adding salaries, power and sundry expenses into this mix, he has a fixed outgo of nearly ₹30 lakh each month. Mumbai, however, is the exception, not the rule; rentals can often be twice as expensive as those in similar neighbourhoods in Bengaluru. When ticket sizes hover in the ₹1,000-1,500 range, a rental of ₹300 per sq ft in Mumbai, compared with about ₹125 per sq ft in Bengaluru, can make or break a brewpub outlet.

Sikka, who nets revenue of around ₹1 crore each month, says food brings in about 30% of this figure, while liquor brings in the rest. “If you don’t have great food, it is very difficult to crack this business. People will buy more beer if the food is good, which is how it works in the US as well,” he explains. Of the ₹70 lakh at Sikka’s pub that comes from liquor, beer accounts for 65%, while spirits accounts for the rest. “We work on two-and-a-half times margins,” says Sikka. In terms of pricing, Arbor charges upwards of ₹175 for 330 ml beer and ₹225 for the 500 ml version. In all, the brewery sells around 12,000 litre of craft beer each month, with three times more business during weekends. Almost all the breweries listed here sell about five variants of craft beer. 

Mukesh Tolani, director, Ph4 Food & Beverages, which owns the Toit brewpub in Bengaluru, makes it clear that this business is merely a game of volumes. Toit was the first to get off the block when it opened in December 2011 and has grown by 30% each year. “If your cost of manufacturing is ₹30, you can sell your beer at ₹100. That’s the kind of margin that is possible in this business,” he says. That might be a bit difficult when everything that goes into the beer is imported. “There is no question of sourcing anything locally since we would have to compromise on quality,” maintains Tolani. To save costs in the early days, Toit sourced second-hand equipment at a cheaper rate of ₹2 crore, compared with the ₹3.5-crore price tag for new equipment.   

In search of an audience

Though Bengaluru, with its beer-drinking culture, proved to be a comfortable environment for some brewpubs, other markets were not as easy to crack. “It is easier to sell the idea of microbreweries in Bengaluru, unlike Gurgaon, which is largely a whiskey market. Today, our biggest customers are either expats or Indians who have travelled and are familiar with craft beer,” says Sanjay Mathur, managing director, Seven Souls Hospitality, the company that runs 7 Degrees Brauhaus in Gurgaon. The route that Mathur has taken is offering authentic German fare — the beer and food at his brewpub are strictly in line with what is served in that country.

“We are the most expensive brewpub in Gurgaon, with a 500 ml beer serving costing ₹345. Our menu includes items such as sausages,” he says. Almost half the revenue at 7 Degrees, whose name is inspired by the ideal temperature to drink beer, comes from food, a far cry from the break-up at Bengaluru brewpubs.

“German food alone brings in 70% of our food revenue, while the rest comes from continental and Indian food,” explains Mathur. To bring in a feel of Germany, the brewpub also organises a local Oktoberfest, a well-known fair held each year in Munich. According to him, at least 70% of his customers are expats, including Koreans and Japanese, who “love pork and guzzle a lot of beer”. Mathur concedes that he is looking to enter the Mumbai market at some point. “Bengaluru is pretty crowded now but there is a big opportunity in Mumbai,” he says. 7 Degrees sells around 8,000 litre of beer each month across its four variants. “Globally, variants account for 10% of the beer business, while lager is the biggest chunk at around 70%. Beer variants is the fastest-growing segment, and that’s where we want to be,” adds Mathur.

He is not the only one chasing the expansion story, though. Ashwini Chaudhary, director, Soi 7, set up Striker in Gurgaon in March 2010 and followed it up with Soi 7 in October 2013. Being in Gurgaon has allowed him to access a potential audience of at least three lakh people, he says. “We are on course to opening our next microbrewery, Adda. Wheat beer is a big hit in Gurgaon since North Indians favour sweeter flavours,” he explains. The plan is to open outlets in Pune and Singapore as well. “We think there is a lot of potential in Gurgaon despite the relatively large number of breweries around,” adds Chaudhary.

In many ways, the IT and ITeS crowd in Gurgaon has been the biggest clientele for the likes of Mathur and Chaudhary. This audience can also be credited with the success of Ajay Nagarajan’s venture in Bengaluru. Nagarajan, who returned to India after spending 13 years in Dallas, is today the CEO of the very plush Windmills Craftworks, a 20,000 sq ft entity in Whitefield, Bengaluru’s IT hub. “We probably make more money on a Thursday than a Sunday. Food is a big draw and that brings in 47% of our revenue, with beer and spirits accounting for the rest,” says Nagarajan, who owns a minority stake in the venture.

The expat and IteS audience that Windmills generally hosts is what brother-sister duo Arvind Raju and Meenakshi targeted in Whitefield with The Biere Club. The 31-year-old Arvind laughs heartily about the brewpub’s success with the mango beer and admits that it was unexpected. “We will soon launch chilli lime and peppermint flavours as well,” chips in Meenakshi. A look around their other outlet, situated opposite United Breweries on Vittal Mallya Road, reveals impressive-looking furniture that is actually sourced from China, where it is at least 40% cheaper. According to Arvind, many people often take a five-hour road trip from Chennai to Bengaluru just to have a beer and late brunch at his outlet.

A head for business

Not everyone has the patience to run a restaurant business, though — this is something that Rahul Mehra, co-founder, Gateway Brewing Company, agrees with. It was very early in the day when Mehra and his partners Krishna Naik and Navin Mittal decided to manufacture craft beer at a microbrewery in Dombivli, a distant suburb outside Mumbai’s city limits. The 10,000 litre of beer produced each month — starting February this year — makes its way to 30 bars in Mumbai and five in Pune.

“The advantage is that we control distribution and do not have to worry about things like interiors or how our restaurant will look,” thinks Mehra. The beer is transported by road five times a day from the plant. Gateway sets up dispensers for its variants at the target outlets. “This involves an outgo of ₹2 lakh per dispenser. We also give them glasses and coasters with the Gateway brand name,” he says. Craft beer is sold to these outlets at ₹200 per litre, which in turn is served in 330 ml portions. “The bar can zero in on the price per serving but on the condition that the beer be sold at a premium of at least 15% to any other brand available on tap,” says Mehra. Even in Thane, a satellite city just outside Mumbai, a 330 ml serving sells at a not-so-cheap ₹275, while Kingfisher on tap sells at ₹200.

Though Mehra and his partners have zeroed in on a system that works, as things stand, craft beer is a story that is still playing out. To get it right in smaller centres will call for a sea change in the way beer is consumed and also how state laws make it easy for such microbreweries to set up shop. The other big challenge is distribution, where large brands hold a substantial advantage, and escalating real estate costs in metros. Quiz Mehra on the future prospects of this business in India, and he avers, “The way forward will be craft beer in a bottle.” Lofty though this idea may be, the truth is that craft beer sells like hot cakes in markets such as the US and Europe. Whether local players will see the same degree of churn and success, then, remains to be seen.