Photo by Stephanie Colgan Strategic investments, rebranding efforts and a 4 million state-of-the-art

brewhouse have morphed Cold Spring Brewing into a diversified beverage

-industry powerhouse.

“We were an old brewery known to make kind of crappy beer,” recalls Doug DeGeest, vice president and general manager of Cold Spring Brewing Company. “We were at a low point in the industry and knew we had a lot of work to do to change consumers’ perception.” He’s referring to the 1990s, when Cold Spring’s name conjured images of low-brow lagers relegated to the back corner of liquor stores.

That stigma has kept Cold Spring off the radar amid the well-publicized craft beer boom. But strategic investments, rebranding efforts, and a $14 million state-of-the-art brewhouse have morphed the company into a diversified beverage-industry powerhouse—one that produces and packages millions of cases of nonalcoholic beverages and craft beer each year for clients from all over the country.

During its storied history, Cold Spring has been forced to reinvent itself more than once in order to stay afloat. Its latest incarnation has more to do with pride, reputation, and long-term sustainability than with any short-term business impetus—but a new focus on higher-margin craft beer is quickly adding to the company’s bottom line.

Now it’s eyeing more growth, betting its new proprietary brand will take center stage in an increasingly crowded craft beer market.

The bottom of the barrel

Cold Spring Brewery was founded in 1874 near the cold spring from which it and the surrounding central Minnesota town derive their names. It navigated Prohibition by marketing alcohol-free malt tonic beverages, and by the mid-20th century, its beer and mineral water were national staples.

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By the mid-1990s—after a group called Beverage International bought out the company’s longtime family owners and made an unsuccessful push to go public—the company was on the brink of extinction. It made last-ditch efforts with gimmicks like Elvira’s Night Brew, branded with TV horror-show hostess Elvira, Mistress of the Dark.

Funds ran dry, paychecks bounced, and all employees were laid off. But a handful of dedicated employees rounded up an investor group, including a local banker, to keep the company afloat, in part by emphasizing the iconic Gluek’s beer brand. In 2000, John Lenore, owner of a California distributorship, acquired the business and shifted focus to nonalcoholic beverages.

DeGeest says Lenore invested “millions and millions” in cutting-edge equipment for the company’s 170,000-square-foot production facility, where Cold Spring “batches” non- alcoholic beverages—mixing water with sugar, caffeine, and other ingredients—and bottles, cans, and packages them for distribution. Today, the facility runs three packaging lines that move roughly 25 million cases each year of both beer and “nonalc” products such as energy drinks and juices.

Upgrades enhanced efficiency and capabilities. For example, the facility added several new “fillers,” which cost around $1 million each. It takes hours to convert a filler for a new use (say, from 12-ounce cans to 16-ounce), but Cold Spring switches them out without missing a beat—a major advantage, considering a single machine fills between 400 and 1,000 containers per minute.

When DeGeest joined the company more than two decades ago, “it was putting out about 40,000 cases of product a month. Now we can do that in less than 12 hours.”

Lenore leveraged connections with companies like Monster Beverage Corporation, the $2 billion California-based energy-drink behemoth and a key Cold Spring client today. And in 2006, the company acquired Monarch Custom Beverages, which develops and produces private-label beverages for convenience store chains, such as Snake Eyes energy drinks for Holiday Stationstores, further diversifying its operations.

From the west coast to here

Meanwhile, Cold Spring was contract-brewing—making and packaging clients’ beer for a fee.

Such services are attractive to brewers that can’t foot the bill for their own equipment, seek to increase production beyond their own facilities, or want to reduce freight costs by expanding geographically.

Such services are also rare in the region. In 2008, when Nico Freccia, cofounder of San Francisco brewpub 21st Amendment, began scouting for a partner that could accommodate rapid growth, “there was literally not another option between California and Minnesota.” Inking a deal with Cold Spring, he says, “allowed us to grow on both coasts simultaneously.”

Some of the beer brands brewed at Cold Spring 21st Amendment (California)

Big Wood Brewery (White Bear Lake)

Finnegans (Minneapolis)

Lift Bridge Brewing Company (Stillwater)

Tallgrass Brewing Company (Kansas)

Third Street Brewhouse (Cold Spring)

Cold Spring also lured local clients, including Stillwater-based Lift Bridge Brewing Company. But as the craft beer industry took off, Cold Spring began struggling to attract high-caliber customers because of its antiquated brewing equipment, which had been virtually untouched despite investments in nonalc production equipment and packaging operations. Case in point: Its brew kettle was from the ’40s, and several components were homemade.

“The breweries we attracted had a lot of concerns about our facility,” says DeGeest. The reputation of Cold Spring’s own low-price beers Gluek and Northern only exacerbated the problem. To compensate, the company ramped up production of flavored malt beverages such as hard lemonades—essentially flavorless, clear beer to which flavors are added.

“We could’ve brought the beer gods into that facility and they would’ve failed to make great beer,” says DeGeest. “I certainly was not satisfied with our mediocre beer,” he adds, referring to the company’s proprietary brands. “To walk around with your peers and know that we were the laughingstock of the industry, that was an impetus” for change.

DeGeest consulted with system manufacturers and other brewers, developed a plan for a new $14 million brewhouse, and pitched it to Lenore, who replied: “What the hell are we waiting for?”

Shifting focus to craft beer was fueled largely by a desire to remake Cold Spring’s image, rather than because of an immediate business need, says DeGeest. “It wasn’t that we had to—it’s because we wanted to. How can you be a world-class nonalc producer and not a world-class beer producer? I thought, ‘If we can’t be among the best at it, why do it at all?’ ”

But the move was also meant to ensure long-term stability, as Cold Spring recognized that consumers’ tastes were moving away from lighter, cheaper beer.

The ‘Dream Team’

Cold Spring’s plan called for demolishing an administrative building near its production facility to make room for the brewhouse. Neighbors who had already complained about odors from a wastewater treatment facility on Cold Spring’s property, which is nestled in the heart of the town, initially opposed the expansion, fearing it would intensify the problem. With the help of the city, the brewer convinced doubters that the project would not compound the issue and that work was underway to resolve the problem.

Amid those discussions, the company never explicitly threatened to move, but Cold Spring City Administrator Paul Hetland says the concern was top of mind: The company employs 240 in a town of roughly 4,000, it “didn’t ask for a penny in tax subsidies,” and is the city’s largest taxpayer. (Of the roughly $534,000 that the company paid in 2012 property taxes, $91,000 went to the city of Cold Spring, exceeding the combined contributions from the city’s second- and third-largest taxpayers, Gold’n Plump Poultry and granite company Coldspring.)

Approvals procured, the company embarked on a year-long construction project, erecting an 80,000-square-foot brewhouse equipped with 17 miles of stainless steel and a computerized system that makes the brewing process 90 percent automated.

A fancy facility, however, would not brew quality beer on its own, nor would it erase Cold Spring’s image problem. So the company branded its new operation the Third Street Brewhouse, named after a street that runs through its property but was long ago abandoned by the city. For new designs—from logos to tap handles—it enlisted Gaslight Creative from nearby St. Cloud.

The company also halted production of the 150-year-old pilsner brand Gluek. “The minute we announced it, there were 20 TV stations asking, ‘How the hell could you discontinue such an iconic brand?’ ” recalls DeGeest. “I responded: The beer’s mediocre, we don’t sell much, and when we do, we at best break even.”

Meanwhile, Cold Spring assembled what DeGeest dubbed the “dream team,” starting with the hire of Summit alum Horace Cunningham as director of brewing. Then came Bob McKenzie, formerly of Minneapolis’ Rock Bottom Brewery, Adam Theis, a Cold Spring native who worked at Minneapolis Town Hall Brewery, Chris Laumb of McCann’s brewpub in St. Cloud, and Steven Gittens of Banks Breweries in Barbados, among others. They teamed with Mike Kneip, who for four decades had manned the company’s brewery equipment.

“It was clear that Cold Spring was making major upgrades in all areas, including personnel,” says Lift Bridge CEO Dan Schwarz.

In June 2012, the company debuted three beers under the Third Street brand—Lost Trout brown ale, Rise to the Top cream ale, and Bitter Neighbor black India pale ale (IPA)—and has since added Three Way pale ale to its perennial roster. It also introduced seasonal varieties like Sugar Shack maple stout, which uses maple syrup harvested by monks at St. John’s Abbey arboretum.

Third Street partnered with St. Cloud-based distributor Bernick’s and by this spring had shipped 80,000 cases and expanded to 350 bars. Cold Spring is charting “slow and methodical growth” for the brand and is on track to ship 120,000 cases this year, says DeGeest. It aims to hit the half-million mark within three years. In the several years leading up to 2010, when the company was still focused on value-priced beer, it was producing between 150,000 and 200,000 cases a year.

Craft beer demands more expensive ingredients but has dramatically higher margins. For example, Gluek’s retailed for $8.99 per 24-pack; Third Street brands may go for $8.99 a six-pack.

The Third Street brand “has been transformative for them, in terms of the craft beer scene,” says Dan Justesen, president of the Minnesota Craft Brewer’s Guild. “They made a clear decision that they wanted to take another route: They want to make great beer, and they want to make a lot of it.”

The new brewhouse has bolstered the local economy; Cold Spring’s sole hotel added eight rooms and a conference center, anticipating an influx in traffic for brewery tours and visitors to Third Street’s taproom, where customers can imbibe while ogling the shiny new brewery through tall windows.

“They have been a great steward for the city over the years,” says Cold Spring Mayor Doug Schmitz, “and the addition of their new brewery compounds that.”

A major Minnesota asset

Craft brewing is a fast-growing industry in Minnesota, where new brewers are rapidly surfacing around the state and established companies such as Summit and Brooklyn Center-based Surly Brewing Company are ramping up production in an ongoing effort to meet increased demand.

While Cold Spring plans growth for the Third Street brand, more than three-quarters of the company’s beer output is still done on contract for other labels, and its contributions to the craft beer scene remain mostly behind the scenes.

Cold Spring’s contract services are “a big benefit” to the state’s growing beer industry, says Lift Bridge’s Schwarz, whose company was drawn to Cold Spring for both its production capacity and packaging capabilities.

Besides giving Minnesota brewers a chance to produce a new beer for sale or grow existing operations, Cold Spring has introduced national brands to the state. “We launched in the Twin Cities because we’re brewing right there,” says 21st Amendment’s Freccia.

Previous investments in packaging, many of which were driven by nonalc client requests, translate directly to brewing customers, who seek increasingly complex packaging. And Cold Spring’s canning lines have proven “extremely valuable” as more craft brewers shift to aluminum cans, says DeGeest.

Many clients participate in brewing sessions. “We can be as hands-on as we like,” says Schwarz, and “the proximity is really important to us.” 21st Amendment’s brewers, meanwhile, travel from California to help brew, bringing ingredients ranging from watermelon to figs.

Beer packaging must denote where beverages are made, and Cold Spring now brands many of its contract products with the Third Street name. “It’s their beer, and it’s our job to make it how they want it to taste,” says DeGeest. “But our name is on that package too, and we’re very conscious of that. Four years ago, we probably wouldn’t have cared, but now we’ve got a reputation to maintain.”

Going full-tilt

Cold Spring’s latest challenge is determining the most lucrative way to allocate production among its nonalc division, contract brewing, and Third Street proprietary brands, says DeGeest.

It produces a small amount of beer under the Cold Spring brand exclusively for export to China, but domestically, it recently discontinued its last remaining value-priced beer, Northern, after a failed attempt to reposition it as a premium brand.

Nonalc beverages still comprise the vast majority of Cold Spring’s output—21.5 million cases (1.6 million barrels) in 2012, versus 1 million cases (75,000 barrels) of beer—but output was lower than average due to the phase-out of value-priced beers and flavored malt beverages. The company expects to boost beer production this year and reach its 140,000-barrel capacity next year.

Cold Spring would be a $500 million business if all of its products were proprietary, says DeGeest, but its actual sales are undoubtedly a fraction of that, given that most of its production is done on contract. The company declined to disclose annual revenue or profit data, but its increased focus on higher-margin craft beer contracts has helped boost annual profits by 10 percent since 2010, says DeGeest, and an emphasis on proprietary beer, which has even higher margins, is expected to fuel 10 percent growth next year.

How the new Third Street Brewhouse transformed Cold Spring’s capabilities The old brewery had an annual capacity of 100,000 barrels; the new one, 140,000.

The old kegging system filled 15 kegs an hour; the new one, 60.

The old system accommodated 8 daily brews; the new one, 12.

Ten new 450-barrel fermenters can each hold the equivalent of 6,200 cases of beer.

The new brewhouse can have 140,000 cases of beer in process at once.

The old system was mostly manual; the new system is largely computer-operated, making the brewing process 90 percent automated and ensuring consistency.

The old equipment was made primarily of cheaper metals and contained little stainless steel, which may have accounted for a metallic flavor in earlier products; the new brewhouse contains 17 miles of stainless steel, which doesn’t impart flavor.

The new facility contains an automated cleaning system, simplifying sanitization.

Contract brewing, however, can reap significant fees: Cold Spring’s production for 21st Amendment, for example, has jumped tenfold over several years, hitting 43,000 barrels in 2012 and approaching 65,000 this year, according to Freccia. In 2009, 21st Amendment paid Cold Spring $388,000 for its services; last year, it forked over nearly $3 million.

Because profit margins are built into Cold Spring’s client fees, contract brewing also can carry less risk, says DeGeest. Marketing and sales are clients’ responsibilities rather than Cold Spring’s, although an extended and symbiotic relationship is contingent on those clients’ ongoing success.

Still, producing and selling proprietary brands is “much more lucrative,” DeGeest says. And as demand grows for the Third Street brand, the company may cut back on some contract products to ramp up production of proprietary brands.

Years of ongoing investments have built a uniquely diversified beverage company. “If you wanted to start up a facility like we have now,” says DeGeest, “you better have close to $100 million.”

Cold Spring’s next logical expansion would be adding another fermenter, which could boost brewing capacity by 80,000 to 100,000 barrels. While that would allow it to brew more beer, the company has maxed out its packaging capabilities: It’s running six days a week, and increasing beer output based on its current schedule would require reducing production of nonalc beverages. Due in part to those constraints, the company routinely rejects inquiries from both the nonalc and beer industries.

To boost output, the company could switch to a seven-day work-week, but that’s something DeGeest is wary of: Cold Spring made the move in 2007 amid soaring energy-drink demand but scaled back and laid off workers during the recession.

The craft beer segment, meanwhile, keeps growing. National sales rose 17 percent to $10.2 billion in 2012, outpacing 2011’s 14 percent growth, according to the Brewers Association, a Colorado-based trade group.

Ready for the future

But as breweries spread like wildfire, how much can the market support?

Justesen of the Craft Brewers Guild posits that Minnesota has significant room for growth, as craft beer accounts for only 8 percent of the local beer market; it constitutes closer to a third in cities like San Diego. Some breweries may fail due to poor products or lack of business acumen, he says—but not due to oversaturation.

DeGeest disagrees in no uncertain terms: “Absolutely there’s going to be some saturation point. Liquor stores aren’t getting any bigger. Breweries that do great beer and are innovative are the ones that will survive.”

Whether the Third Street brand could weather such a shakeout is unclear, but DeGeest says his company’s diversified operations hedge against the ebbs and flows of any single market, and it’s equipped to make quality beverages to match consumers’ changing tastes.

“The word ‘mediocre,’ ” he says, “is no longer in our vocabulary.”

This article is reprinted in partnership with Twin Cities Business.