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ATLANTA, 1997 -- Paul Shipman, president of Redhook Ale Brewery, Seattle, recently toured the Southeast to promote Redhook beers. On the occasion of Redhook's 15th anniversary, this reporter met with Shipman to discuss the state of craft brewing in the United States at Taco Mac in Sandy Springs, GA.

Redhook, one of the country's top craft breweries, joined forces with Anheuser-Busch Companies in 1994 to form an alliance enabling Redhook to take full advantage of A-B's enormous network of distributors while giving A-B an equity share in the national craft brewery. Redhook, which has breweries in Woodinville and Fremont, WA, and Portsmouth, NH, recently added a state-of-the-art keg racking facility in Woodinville that can fill 60 kegs an hour. The facility includes an adjacent 1,000-seat amphitheater that will feature live music.

Southern Draft Brew News: Have you been to Atlanta before?

Paul Shipman: Yes, I visited a wholesalership in early 1997, and I was here in 1996 and once in 1995. I can see that there have been further developments in this market, but I like what I see as far as Redhook goes. I think there's been some positive response and increased awareness of our beers.

Southern Draft Brew News: How do you view the overall beer industry in today's market and where do you see it going?

Paul Shipman: There was a period of incredible growth. You can trace it all the way back to the beginning of the 1980s. But by September 1996, it had reached the saturation point. Since September 1996, which is when I think we hit the wall, all of the excitement, enthusiasm, new construction, production, and so forth has created an overhang of product and capacity, which we are working our way through. In a capitalist system like ours, this is a painful process. The craft brewing arena is going to see fewer players. It's not going to roll back to where it was in 1979; it will never go that far back. But there will be a significant retrenchment. I see a parallel between this time and Prohibition. Luckily, we will be able to continue drinking during this difficult period, but there are going to be Prohibitionlike forces. I think there's going to be an increase in tax on the alcoholic beverage producers. I think the responsibility of the brewers in terms of healthcare will come into question. That will be a national debate. We're going to see an attrition of breweries just like after Prohibition. There's going to be parallels. I also think it is very interesting that for the first time ever the United States has more breweries than Germany, and I think that will continue to be the case for at least the next 100 years. We feel very confident that Redhook is here to stay, but we regret that many brewers will go through an extremely painful period. It's not going to be easy for anyone in this environment. There is a place for national specialty brewers like ourselves. There is a place for strong local brewers. There is a place for brewpubs, but not in the numbers that have come in. I think there's going to be some more brewery alliance arrangements out there in the future.

Southern Draft Brew News: What is the role of breweries in the marketplace?

Paul Shipman: The role of the small local brewer is to identify those beer needs that are very localized in the market, cultivate relationships with retailers, cultivate consumers of interest, help to build awareness of the entire category which benefits all of us. The role of national brewers like Redhook is to further develop the market, offer brands that people are familiar with in their travels, offer, perhaps, tastes that are localized in our region but can work on a national basis, and, really, we're all supposed to provide competition for one another. That's what improves the quality of our beers. And then there's definitely a role for brewpubs as well.

Southern Draft Brew News: When you talk about the roles of national brands, where do the megabrewers like A-B, Miller and Coors fit in?

Paul Shipman: They will definitely be around, but they will prosper and compete primarily in the national-brand-style arena. They have to compete in every segment of the beer business, which includes imports, and you will see more alliances between national brewers and foreign brewers. At the recent brewers conference in Munich, the biggest theme that I heard was the internationalization of the beer business. Internationalization is going to be hugely important to the big brewers of the world in the future. The craft brewers' segment is best approached by craft brewers.

Southern Draft Brew News: Where do you see the distribution issue going from here?

Paul Shipman: The consolidation of distributors in the brewing industry means there will be larger distributors. And I think that opens up opportunities for small specialty distributors, because there will be beer brands searching for a home. We've seen entrepreneurs build up specialty distributorships in the Northwest, and I'm sure you've seen them here. If done well, they have an easy exit strategy should they choose to exercise it -- by selling to a larger distributor. They've got franchise protection on their brands, and so there's no choking-off of access to the market. You just have to search for all your alternatives. I see contract brewers often ending up in the Miller wholesalerships across the country, and Miller has an increasing initiative with its wholesalers for more Miller time, and the contract brewers have an initiative to have more of their time, and so it's rough on everyone.

Southern Draft Brew News: Do you think the big breweries intend to bury the micro brands through their wholesalers?

Paul Shipman: If that's the case, it has not happened to Redhook.

Southern Draft Brew News: What was your original vision of the future for Redhook?

Paul Shipman: I always wanted Redhook to have national exposure, and I felt that we should be careful about how we went about that. So Redhook is very conservatively financed. We have some debt, but it is very supportable debt compared to our total capitalization. We always believed that Redhook would first be a local treasure for the people of Seattle, but if we did that well it would be the basis upon which to build a larger brewing company and ultimately serve whatever size the market would evolve into. We also have the alliance with A-B, which for some people is a matter of controversy, but for us it is a matter of great confidence and comfort, because we know the standards under which our beer is warehoused and distributed. We have built our reputation around extraordinary quality. We've been cautious about adding new styles of beers. We missed out on certain trends, such as the fruit beers, which the market did not validate, but it was tempting.

Southern Draft Brew News: Have you ever brewed any fruit beers, even for your "blue line" of experimental beers brought to market?

Paul Shipman: No. The only flavorings we ever tried were coriander and, of course, the coffee in the stout. The stout is a unique style, but unfortunately it is not available in much of the Southeast because of the alcohol content.

Southern Draft Brew News: Now that Alabama has legalized beer up to 6 percent alcohol by volume, will Redhook soon be distributed in that state?

Paul Shipman: We're excited about Alabama, and I'm going to Alabama this trip. We're going to Birmingham, Huntsville, Opelika, Mobile and get to know the distributors on this trip.

Southern Draft Brew News: What can readers do to help reform beer bottle size laws in Southern states like Florida, and is there anything that you can do or do you have any influence on A-B to help change these laws?

Paul Shipman: I'm not a spokesman for A-B, but having said that, I think A-B has always been open to sitting down and hearing out the opinion of craft brewers, explaining their position and looking for participation in the political process. I think that sometimes there is reluctance on the part of brewers, wholesalers and retailers. Enthusiasts and retailers should state their case. In the alcohol level laws, I don't think strong beer is a public health issue. I believe beer is positive for society, otherwise I wouldn't be in the business. Consumers should have the maximum range of choices. I can't tell you how many of these types of laws I've seen disappear over the years, and I expect that to happen down here.

Southern Draft Brew News: Does Redhook have any type of legal department that does any kind of work to change laws to make their beers more available?

Paul Shipman: We tend to respond to requests to testify, but we don't have our own lobbying department.

Southern Draft Brew News: Would you support a grassroots effort in Florida to change the bottle size law?

Paul Shipman: I would promise to go in and arm wrestle the CFO of Redhook to get some money. On occasion I win. I am for consumer choice, and I think that you would see us operate in that way. I don't have any problem with bringing in competitors' beers, because it educates consumers.

Southern Draft Brew News: A-B is reportedly behind the creation of the bottle size law in Florida and the primary obstruction to getting it overturned.

Paul Shipman: I have always felt that A-B operates in a pro-consumer choice and good listening environment, and because of their size they tend to be identified with stories like that.

Southern Draft Brew News: So many craft brew enthusiasts look upon A-B as the evil empire. How much reverberation do you get about your relationship with them, and do you have any qualms about your relationship with them?

Paul Shipman: No, A-B has done so much to build the beer business in this country, and I think that most small craft brewers don't understand how much opportunity A-B has created. Take, for example, the excise tax differential, if A-B had been against small craft breweries, wouldn't they have used their efforts to hurt that one? That excise tax exemption is the bedrock of government assistance for small craft breweries. I happen to be personally disappointed that it applies to contract brewers, because I think it was intended to protect capital-intensive breweries.

Southern Draft Brew News: Do you think that contract brewers, such as Pete's, are more insulated from the effects of the slowed growth in the craft beer market since they simply rent space from breweries and, thus, evade the capital investment that a bona fide microbrewery incurs?

Paul Shipman: Pete's has a special situation. When you have $27 million in the bank, you can take your time making a decision about the future. For most contract brewers, though, I have always said that the fate of the contract brewers is the fate of their principal suppliers, which in Pete's case is the Stroh Brewery. The question is whether Stroh's will always be there for contract brewers like Pete's. The race is really between breweries like Redhook and Stroh's. Let me assure you that Pete's, with their $27 million, isn't going to disappear tomorrow. They can probably wait it out. But their ultimate fate depends upon Stroh's.

Southern Draft Brew News: Were you surprised at the reaction of your peers when you delivered your controversial speech at the 1997 Craft Brewers Conference, which called for the demise of the old-time, middle-size breweries?

Paul Shipman: I didn't really call for their demise. I just said that the forces in the evolution of our industry favor bigness and smallness, and the guys in the middle are in an awkward and untenable situation. Many people who love brewing and its history lament the passing of middle-size breweries, but this is a natural process, and I think we should recognize the benefits. I suspect that people wanted to hear that we were going through a rough patch and that the wonderful days we had in the early '90s would resume, but anybody who looks at it carefully can see that it's going to be an extended period of consolidation and roughness. I wasn't trying to offend anyone. I just told it like I saw it. I also saw a lot of hopeful signs. I still feel that a very strong position exists for small, local brewers and that they have been forced back into their local markets in many parts of the country, which is a good thing, because they should have been concentrating on their local markets for a longer period of time.

Southern Draft Brew News: In my research, I was struck by the accuracy of many of your predictions in years past.

Paul Shipman: Yes, very early on, when there were fewer than 100 microbreweries, I predicted that there would be hundreds and hundreds of them. I was considered to be visionary, but each step of the way I've tried to look into the future. The very idea of building Redhook was an expression of an incredible belief in the future of the industry.

Southern Draft Brew News: How did your partner, Gordon Bowker, convince you to begin a brewery?

Paul Shipman: It didn't take much convincing. It took less than a day to make that decision. I've always felt that specialty and craft brewers compete with the imports, and that basically craft brewers in the U.S. offer a superior alternative to import beer. That hasn't slowed down the growth of imports, but I continue to believe that craft brewers of the U.S. will ultimately replace most imports. The growth of the import business tells me how big the craft brewing industry is going to become. At the time that I made the decision to build the first Redhook brewery, the import beer business in the U.S. was about 1 percent of the beer market and growing at about 15 percent per year and had been for 10 years.

Southern Draft Brew News: Does Redhook get a percentage of A-B's equity share in all of the micro deals A-B enters into, and if so, how much?

Paul Shipman: No, not exactly. In the Widmer transaction, which is now completed, A-B has a direct investment in Widmer, but Redhook did not participate in the Widmer transaction. At various points in the negotiations, it was contemplated to be a Redhook-only investment, a joint investment or an A-B-only investment. It turned out to be an A-B-only investment, and we wish both parties well. That was the end of our exclusive relationship with A-B.

Southern Draft Brew News: What is Redhook's equity share arrangement in A-B's alliance with Atlanta Brewing Co.?

Paul Shipman: That is a work in progress -- Atlanta Brewing Co. is distributed by Atlanta Beverage, and that is a relationship that has been worked out. Now the investment component is expected to follow. Redhook does, indeed, stand to get an equity share of Atlanta Brewing Co. at the time that A-B may exercise its equity option with Atlanta Brewing Co. We would like to see that deal finalized so that we can describe it all in detail, but until it comes to a close, I think it's enough said that we're very happy that Atlanta Beverage has the distribution rights to Atlanta Brewing Co. brands.

Southern Draft Brew News: What percentage of the equity share would Redhook get in Atlanta Brewing Co.?

Paul Shipman: It would be a minority percentage.

Southern Draft Brew News: Have the production demands at Redhook's Portsmouth, N.H. brewery been less than anticipated?

Paul Shipman: No question about it, and if Redhook had been financed with debt, I might not be here today to do this interview.

Southern Draft Brew News: Do you still hope to have more regional breweries across the country?

Paul Shipman: Absolutely, but it's going to take longer. We're going to develop the business with a style that I think is working. There are other competitive approaches to the business, such as contract brewing. One of their issues is whether their suppliers are here to stay. I don't think so.

Southern Draft Brew News: In the past, you've said that contract brewers confuse consumers by posing as real breweries, but isn't Redhook confusing consumers when posing as a boutique brand but being sold in some markets at rock bottom prices like $3.99 a six-pack?

Paul Shipman: Where did you see it for $3.99?

Southern Draft Brew News: Chicago.

Paul Shipman: Chicago is a vortex of brewing competition -- a very intense market. When we're talking about pricing, let's not use Chicago as the baseline. Chicago is unique. But I think you'll see a decrease in the depth, frequency and duration of promotions. I think the promos only slightly increase the number of consumers in our category, although they are a real benefit if you happen to be a regular consumer of our beers.

Southern Draft Brew News: Do you still have difficulty finding shelf space for Redhook now that you're distributed by the A-B network?

Paul Shipman: Oh, it's brutal! That real estate is the toughest in town.

Southern Draft Brew News: What is your position on slotting fees?

Paul Shipman: I am totally opposed to slotting fees, because that would be the end of the opportunity for small brewers, and I'm not sure Redhook, with its relationships, could make it through to the other side. That comes up periodically, because retailers are becoming stronger and they are in favor of it. But that's where we draw the line, because it's bad for the industry. It's kind of like doing direct. I am opposed to that, and I really believe in the three-tier system.

Southern Draft Brew News: Why are you opposed to self-distributing?

Paul Shipman: I don't have a problem with small breweries distributing to their down-the-street business, although many wholesalers do. We did that. I don't think shipping directly into retailer XYZ's warehouse in another state is a formula for success. The distributors support a low- or no-margin business on premises in exchange for building the brands off premises, which is the profitable part of the business. In direct distribution the part that suffers is the off-premises business, which means the end of the brands. So the three-tier system is borne out in economics. You must develop your brand, and that is the labor- and effort-intensive part of the business.

Southern Draft Brew News: A lot of rumors have been flying about a courtship between A-B and Old Dominion. Would you be able to comment on that?

Paul Shipman: I have a good relationship with Jerry Bailey of Old Dominion. In this business everybody is talking with everybody trying to figure out where it's all going. I don't have anything specific to say about that, and I don't think Jerry would either.

Southern Draft Brew News: What is behind the famous competitive relationship between you and Bert Grant, founder of Yakima Brewing & Malting Co.?

Paul Shipman: I think that we have a competing claim on who was the first brewer of craft beers in the state of Washington. Also, Bert was the first person, when we were clearly making the original Redhook Ale with a wild yeast strain, to come straight out and say it, and that angered us. And Bert was right. We had a yeast problem. The original Redhook Ale was a Belgian-style beer. We would have stopped making it early on, except Michael Jackson came along and was so enchanted with our "Belgian-style ale," that we were stuck with it. Redhook was instrumental in making the Pacific Northwest a hotbed of [commercial] craft brewers, because when most homebrewers saw Redhook prospering on Redhook's original ale, most of them in Seattle said, "I make better beer than that, so why should I keep working for Boeing? I should start my own microbrewery."

Southern Draft Brew News: What would you say to someone attending the Craft Brewers Conference in Atlanta next April with aspirations of becoming a microbrewery or brewpub operator?

Paul Shipman: I would say there are still opportunities, but they would have to have a very clear and complete business plan. They're going to be up against a more difficult capital-raising situation. It's going to be closer to the one that Redhook had when it got started. The better opportunities for people who have a desire to become associated with the specialty brewing industry are by either combining breweries, taking over ones that are having difficulty or even considering micro distribution opportunities. But it's getting tougher. If someone has a million dollars in their pocket who wants to do a brewery, I would tell them that rather than starting from scratch, look at any opportunity presented by an existing brewery going through a profound change adaptation to the marketplace. They'd probably get better leverage on their investment.