[MKOB] Flying Dog

[Russ Clayton]

   A few months ago we were discussing the increase in price for hops 
and malt this year.  I subscribe to the Flying Dog newsletter, mainly 
because I like the beer.  But I found this kind of interesting and 
thought I'd share the letter from the breweries' President. 

Message From Flying Dog President Eric WarnerTo the People's Republic of 
Flying Dog

As some of you may have heard, Flying Dog Brewery announced on Tuesday 
that we are embarking on the next step in our illustrious, 17 year 
history of crafting remarkable beer by concentrating all of our brewing 
and production to the brewery in Frederick, MD, where 70% of Flying Dog 
Beer is already being brewed. This move will take place in January and 
we are working to ensure that our entire production team will be able to 
make this move over to Maryland. Accounting, sales, marketing and other 
administrative functions will remain largely unaffected by this change 
and our HQ will remain in Denver.

We decided to make this proactive move as it has become increasingly 
important to be extremely nimble in today's business environment. Only 
those who can quickly adapt in the hyper-Darwinian economy will survive 
and in today's craft brewing landscape. We are facing unprecedented cost 
pressures due in large part to the tremendous hop and malt cost 
increases. We have also lost some of the contract brewing business we 
had, thereby decreasing capacity utilization at both breweries (I 
actually found out AFTER the announcement that one of our largest 
contracts was going to switch their production to a lower cost producer, 
thereby diminishing our capacity utilization at the Denver Brewery even 
further). Concentrating our brewing operations to one facility will help 
us become more efficient while maintaining our exceptionally high 
brewing standards. This is a smart, proactive move for our growing 
company and will allow us to most efficiently use our resources. This 
idea was conceived in late summer, and once we understood the magnitude 
of the price increases we are facing it became apparent that this was a 
necessary step to remain strong. Like most other craft breweries our 
costs are going up at least 25%, and we are only going to be passing on 
a 15-20% price increase. We expect some relief on raw materials costs in 
2009. Obviously, a huge focus for the production teams in 2008 will be 
to discover and implement new ways to be more efficient, without 
sacrificing the quality of our award winning line up.

The Frederick facility is a state-of-the-art brewery that has already 
been producing great beer for Flying Dog and we look forward to ramping 
up production and growing our business even more than the +20% trends we 
are experiencing in 2007. The bottling line in Frederick has lower 
oxygen uptake at filling than the one in Denver, which translates to 
better flavor stability and longer shelf life. It also kicks out bottles 
at twice the pace of the line in Denver. The brewhouse in Maryland is 
also capable of brewing a wider range of recipes than the one in Denver. 
Finally, the brewery in MD plans on substantial capital expenditures and 
plant upgrades (close to a million bucks in 2008 alone) to continue to 
brew better beer in an efficient and environmentally friendly way. It 
was very important to me, the management team and the owners of the 
brewery to take care of the employees who might be impacted by this 
change. Everyone in production was offered an opportunity to make the 
move to the brewery in Maryland. I'm proud to say that almost half of 
the brewing and bottling line staff is interested and we will be taking 
a group trip out to MD in early January so they can see if Frederick is 
a place they would like to relocate to. For those that don't make the 
move, we will be offering a severance package and outplacement 
assistance. 14 employees in production are impacted by this change. When 
we broke the news Tuesday everyone handled it pretty well, and as a 
brewery we decided to go out in style and still have our holiday party 
this Friday. Although some could argue the timing was a little close to 
the holidays, we also considered that some employees might be more upset 
that if they were told after the holidays, having spent more money than 
otherwise having not known they were going to potentially be laid off. 
There is truly never a good time for such news.

We are a family here at Flying Dog and as such it's been a rollercoaster 
of emotions the last couple of days. Although no one, myself included, 
would have chosen to write the script quite this way, everyone 
understands this chapter, why it makes sense and why it's good for the 
future of the brewery. The good news for the People's Republic is that 
the Flying Dog beers will still be available wherever you are used to 
purchasing them.

Cheers,
Eric Warner

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~russ~
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