S.F.’s Magnolia Brewing Co. files for Chapter 11 bankruptcy

A view of the Smokestack BBQ restaurant which adjoins the Magnolia Brewery operations Monday November 3, 2014. The Magnolia Brewery in the Dogpatch neighborhood of San Francisco, Calif. is an example of a successful local manufacturing operation. less A view of the Smokestack BBQ restaurant which adjoins the Magnolia Brewery operations Monday November 3, 2014. The Magnolia Brewery in the Dogpatch neighborhood of San Francisco, Calif. is an example of a ... more Photo: Brant Ward, The Chronicle Buy photo Photo: Brant Ward, The Chronicle Image 1 of / 4 Caption Close S.F.’s Magnolia Brewing Co. files for Chapter 11 bankruptcy 1 / 4 Back to Gallery

In the midst of a craft brewing boom sweeping America, San Francisco’s pioneering brewery Magnolia Brewing Co. has filed for Chapter 11 bankruptcy.

Magnolia owner Dave McLean voluntarily filed for bankruptcy protection on Nov. 30, according to court documents. McLean opened Magnolia Gastropub and Brewery in 1997; he opened nearby sister bar the Alembic nine years later. In 2014, Magnolia underwent its biggest expansion yet, opening Smokestack, a brewery and barbecue restaurant in the Dogpatch neighborhood, and quintupling beer production. The expansion took years to come to fruition, and McLean estimated that it cost more than $3 million. All three businesses are expected to remain open through the bankruptcy, McLean said.

Despite solid bar business and strong sales and growth in beer distribution, the bars have more debt than the company can manage with its current flow of cash, McLean said.

“We’re profitable from our operations, but have a lot of debt that we need to restructure,” said McLean.

According to court documents, Magnolia has estimated assets between $1 million and $10 million. Estimated liabilities fall in the same range. Among the 181 companies and creditors that Magnolia owes money are Bi-Rite Market, Blue Bottle Coffee, Hog Island Oyster Co., Marin Sun Farms, and Off the Grid.

“This kind of thing is making us analyze our operations,” said McLean. “We’re planning on moving through this business as usual. Everything that we’ve always strived for — quality of product, guest experience — that won’t change.”

The news, first reported in the Business Times, may come as a shock to many that follow the beer world. California’s craft brewing industry is booming: Last week, the California Craft Brewers Association announced that the state’s craft brewery count had reached a milestone of 600, representing an 18 percent increase in the number of breweries over last year. The craft brewing industry in the state now generates $6.5 billion, according to the Governor’s Office of Business and Economic Development.

With that surge comes tougher competition. “We are seeing the beginning of a new era in craft beer in which it will be getting much more competitive,” Tom McCormick, the California Craft Brewers Association president, said. “It’s just getting more and more difficult to keep ahead of the growth and finance the expansion that we’re seeing.”

Photo: Brant Ward, The Chronicle Looking down from the grain mill area of the brewery at the huge...

It’s only natural — and healthy, McCormick pointed out — that such rapid growth in an industry should experience some contraction. Two young craft breweries in Sonoma County, Warped Brewing Co. and Bloodline Brewing Co., announced closures in recent months. “There’s no doubt in my mind that we will start to see the number of openings decrease and the number of closings increase,” said McCormick.

A more crowded marketplace, and the increasing presence of the mega beer companies like Heineken, Constellation and Anheuser-Busch in the craft beer segment, means that many craft breweries are forced to re-evaluate their business models. For many, the pressing question is: How to finance growth?

“People are having to make huge leaps forward to stay on top of that growth, and doing that requires a big investment,” noted McCormick. This may have been the problem for Magnolia — a dramatic expansion plan that simply cost more than it could return in the short term.

Sarah Fritsche and Esther Mobley are San Francisco Chronicle staff writers. E-mails: sfritsche@sfchronicle.com, emobley@sfchronicle.com