April 22, 2019 Supporting Manhattan-area entrepreneurs, businesses, events

Hop flop: A Pint Half Full?

In April of 2014, Manhattan visitors and locals couldn’t grab a beer overlooking Poyntz on a summer evening or attend a Science on Tap event to learn about innovative work spearheaded by community members because Tallgrass Taphouse was not yet a fixture of Manhattan’s downtown. Instead, people knew the Tallgrass brand as one of the first craft beer options available in Aggieville. Craft beer was already quite popular outside of Kansas, with nanobreweries, microbreweries, brewpubs and production-scale breweries in major cities and small towns throughout the West Coast, Colorado, Texas and Michigan; but Tallgrass was a Manhattan, Kansas brand—and Manhattan, Kansas was damn proud of Owner and Founder Jeff Gill and his growing team.

Tallgrass beer ran the gamut of styles with a lightly hopped Tallgrass Ale, a hopped-up, Nintendo-themed 8-bit Pale Ale, and Buffalo Sweat, a robust oatmeal cream stout. On the second Saturday of each month, a couple hundred Manhattanites would travel to the brewery on Quail Lane for a tour and to support their local craft beer scene. The year before, in 2013, the brewery had produced a record 11,775 barrels of beer—over 365,000 gallons—in their 14,000 square foot Quail Lane facility, and they were tapped out. Having already moved 30 percent of its production to Cold Spring, Minnesota, Tallgrass began looking for a bigger home, and a former Verizon call center in Manhattan’s Corporate Technology Park provided Jeff Gill an opportunity to grow.

That opportunity led Gill to call Trent Armbrust, and Armbrust, the economic development director at the Manhattan Chamber of Commerce, was excited to talk about an economic incentive package to support Tallgrass Brewery’s $3.2 million investment in renovations, equipment, and property improvement. As a part of the Manhattan Area Chamber of Commerce’s contract with the city of Manhattan to provide economic development services, Armbrust explained the incentives available for expanding businesses to Gill and supported him through the application process, which included Gill’s disclosure of capital investment, projected wages and revenue, employee benefits, and an assessment of Tallgrass Brewery’s community fit. Once negotiated, Gill submitted his application to Jason Hilgers, Manhattan’s deputy city manager, who analyzed the package using a statistical model that predicts the return on investment to the economic development fund.

By April 2014, Gill had filed his application with the city, the former call center had been rezoned “light industrial” and a third-party group, Springsted Inc., had performed a general risk assessment. When Gill, Armbrust and Hilgers presented the package to the city on the evening of April 1st, 2014, they spoke of a company with a strong history of growth, a natural community fit, and a clear path to success. Whereas many craft beer brands focused on their local market first and slowly grew to compete regionally, in 2009, Tallgrass had partnered with Anheuser-Busch Inbev, a multinational drink and brewing company, for distribution and had switched to 16-ounce cans in 2010. The increased reach gave Tallgrass a 72 percent average annual revenue growth from 2010 to 2014.

With the support of Armbrust and Hilgers, Gill had an exciting offer for his city commissioners: in exchange for $350,000 in forgivable loans and $180,000 in grants from the 2012 Economic Development Fund, Tallgrass Brewing Company would purchase and improve the vacant Verizon Wireless Building in Manhattan’s Corporate Technology Park, add 39 local jobs in 10 years, and generate $563,512 in sales and property taxes over 10 years, netting the city fund a $133,512 return on investment.

Unsurprisingly, the commission voted to approve Tallgrass Brewery’s economic development application. Gill, a former geologist, had started his brewery in Manhattan, and built enthusiastic community support for his brand. His business model overcame the primary obstacle to scale—the number of beer-drinking Kansans—by distributing his cans far and wide. While Springsted, Inc. didn’t conduct any industry-specific analysis, the trend was clear: craft beer was booming and Tallgrass was growing. Four years later, we know that a booming craft beer market was the exact reason that Tallgrass Brewery failed.

Why Did Tallgrass Fail?

Tallgrass Brewery’s growth model—the model that would pay for its new facilities—depended on the penetration of markets outside of Kansas. While large markets, such as Chicago and Kansas City, were sizable, they also had established craft brewing scenes and high competition, making it difficult to gain market share. On the other hand, with a national distribution system and a transportation friendly canned beer, smaller markets far from Kansas, could increase revenue for the brand.

Marquette, Michigan, a town of 20,000 where there’s a Tallgrass Brewery tap at the Iron Bay Restaurant and Drinkery, is emblematic of a craft-beer loving small market. In 2014, the town had a small nanobrewery that brewed 3-, 5-, and 15-barrel batches at a time, a 5-year-old microbrewery that had recently started bottling, and one of Michigan’s first brewpubs. At the time, a Tallgrass beer could compete as a craft beer option to the well-known beers from national breweries, such as Pabst Brewing Company or Anheuser-Busch, and the handful of local favorites. Today, the tap rail has filled out with many more local options, pushing Tallgrass to the wayside. In Marquette, the nanobrewery in Marquette has added a production canning operation and the microbrewery’s bottling operation has grown significantly. If craft beer drinkers tire of an in-town brewery, most of the surrounding towns have breweries to choose from, while regional powers, such as Bell’s Brewery, provide enough variety for most craft beer drinkers.

The explosion of craft breweries at the local level is a national trend. When Gill first started brewing in 2007, he was only competing against 1,200 other breweries across the United States. Today, there are more than 6,600. The challenge facing Tallgrass was more complex than simple competition between craft breweries. According to the Brewers Association, the 2017 American beer market was a $111.4 billion market. The primary producers and sellers were large domestics, such as Anheuser-Busch, which produced nearly 70 percent of America’s beer by volume. Imports, such as Heineken, constituted slightly more than 17.5 percent; and craft beer sales grew 5 percent by volume to make up a record 12.7 percent of the United States beer market by volume.

The reason why this growth did not spell success for Tallgrass, and regional breweries like it, is twofold. According to Bart Watson, chief economist for the Brewers Association: growth is negatively accelerating in the craft beer market, and the areas of the beer market that have grown are distinct from those that were growing in 2014. Today, microbreweries, those producing less than 15,000 barrels a year, and brewpubs are driving most of the growth in the craft beer market. While brewpubs had a great 2017—up 15 percent, representing 16 percent of the growth in craft beer—it’s the microbreweries and successful regionals that speak to Tallgrass Brewery’s challenges. Microbreweries, like the two in Marquette, Michigan, where there’s a Tallgrass tap at the Iron Bay, constitute nearly 60 percent of craft beer growth. The regional breweries that have grown, albeit slightly, tend to be the smaller breweries producing less than 30,000 barrels. Tallgrass Brewery’s new facility was built to brew 100,000 barrels, compared to the 11,775 barrel production capacity of its old brewery.

Reflecting on the challenges that Tallgrass faced, Armbrust explained,“There was a fundamental market shift, and Jeff was in early and Tallgrass was growing. His distribution strategy was very solid, and he built a network of distributors in many states. The competition—and no one could have predicted the explosion of craft breweries—made that very difficult.” Given that Gill decided to add production capacities—and to increase Tallgrass Brewery’s debt-to-equity ratio with nearly $6 million in private capital investments and $250,000 in forgivable loans—based on market growth, some have questioned whether the city’s agent, Springsted Inc., could have appropriately advised the city commission on risk surrounding the performance-based grant and forgivable loan. Armbrust, responding to that criticism, said, “[Springsted Inc.]’s role is not to predict the market, nor is it to predict future management decisions.”

What is the “Eco-Devo” Fund?

The city funds economic development packages, such as the one that Tallgrass Brewery received, through a county-wide, half-cent “Roads and Jobs” sales tax (RICOED), which originally ran from 2002 to 2012 (RICOED “Old”). Voters extended this initiative in 2012, and it will sunset in 2022 (RICOED “New”). In 2016, this half-cent sales tax had, on average, generated approximately $3 million per year. Under RICOED, revenues support county roads and bridges and city economic development activities. Thirty-five percent of that city revenue helps offset property taxes going toward city debt, such as streets and projects, while the remaining 65 percent is allocated to traditional economic development and infrastructure, such as the North Manhattan Avenue improvements. While there is no formal structure to the 65 percent allocated to economic development, the breakdown has been referred to as one-third property tax, one-third infrastructure, and one-third economic development for ease of discussion. This final “third”—often close to $1 million per year—is distributed as business incentives, such as forgivable loans and performance-based grants.

Armbrust is quick to point out to those who characterize the fund as a corporate handout that “company incentives are a very small portion of the pie for this half cent, 10 year sales tax” and that “it is ultimately up to the discretion of the commission to make an award of economic development dollars.” Armbrust said that his role, as the economic development director, “is to facilitate the [application] process, and if [an applicant] meets the city’s model, then we will support the application.”

The political power to award these funds, monies transferred from taxpayers to private companies by a commission vote, is, according to Jeff Koenig, the owner of financial and business consulting firm Open 4 Business, the root of the “error in economic development that has spread across the country.” However, Koenig cautions against specific criticism of Manhattan’s economic development fund without an understanding of the larger picture: “Really no government should have this kind of mechanism, but it would be unfair to say that Manhattan shouldn’t when its neighbors offer it.” Armbrust agreed: “In an ideal world, no community would need to offer economic incentives, but when other communities are offering dollars, you have to compete with dollars.”

The funding mechanism that supported Tallgrass, RICOED “New”, is the third iteration of Manhattan’s economic incentive program. Voters approved the first fund, the Manhattan Economic Development Opportunity Fund (MEDOFAB), in 1994, and it was funded by a four-year, one-half-cent retail sales tax beginning in 1995 that ultimately generated more than $11 million. The City Commission invested MEDOFAB funds in 21 companies based on the recommendations of an advisory board and six primary focus areas:

1) Retention and Expansion of Existing Enterprises

2) Research and Kansas State University

3) The Mid-America Commercialization Corporation

4) Venture Capital

5) Recruitment and Relocation

6) Retirement

At the time, the city also established a set of primary goals for the fund:

Create quality jobs with corresponding wages, benefits, and working conditions.

Diversify the property tax base in Manhattan.

Decrease reliance on federal, state, and local government for jobs.

Maintain, stabilize and build on the existing strengths of the community.

Invest public funds in ways that create self-sustaining economic development activities.

Use public funds to leverage private investment in economic development.

MEDOFAB funded successful Manhattan businesses, such as Farrar Corporation, Continental Mills, GTM Sportswear (now Hanesbrands) and Manko Windows, but in 2016, the most recent reporting year, 92 percent of companies funded through MEDOFAB were defunct. In 2016, of the remaining businesses, Continental Mills eliminated two full-time employees (FTEs), Farrar eliminated seven, and GTM eliminated 127. Annual reporting doesn’t tell the full story, however, as Continental Mills had successfully created 13 FTEs from 2014 to 2016, one over projection, Farrar had created 22 FTEs, 30 below projection, and GTM had created 488, 153 under projection. Manko Windows, which completed its reporting in 2015, had created 206 FTEs since 2006, 98 over projection.

At its sunset, MEDOFAB investments were associated with the creation of hundreds of full-time positions with benefits, a diversified tax base that would grow after tax abatements expired, and the investment of over $26 million in private capital. However, MEDOFAB’s 92 percent failure rate and the measurable returns on an $11 million investment led to revisioning the goals and objectives of economic development and increased scrutiny to ensure that funding supported sustainable economic development.

Goal 1: Determine the likely requirements to support the growth coming from NBAF from 2016 to 2026.

Goal 2: Support KSU and Chamber of Commerce efforts to attract NBAF-related companies to Manhattan.

Goal 3: Develop requirements for KSU/North Manhattan Corridor for 2016 to 2020.

Goal 4: Support the efforts of local businesses, Chamber of Commerce, MATC, and USD 383 to build and sustain a local workforce with appropriate skills needed for growth of existing businesses and attraction of new business.

Goal 5: Share monthly reports highlighting any expenditures as well as credits and provide quarterly forecast information.

In describing the city’s evolution in economic development, Armbrust said, “Under MEDOFAB, we were investing in companies. Today, RICOED invests in jobs.” This new focus had positive results. In 2016, only 8 percent of the companies funded using the RICOED “Old” funds were defunct, a clear improvement on the 92 percent failure rate under MEDOFAB. Moreover, key companies in which RICOED “Old” invested, such as CivicPlus, Flint Hills Beverage, Manhattan Area Technical College (MATC) and Meadowlark Hills, had exceeded projections for job creation, capital investment, and wage structures, as of 2016.

Armbrust, an unabashed advocate for the businesses he represents, reflected on the businesses which have received support:

“If you look at some of the great things that have happened in Manhattan, it’s because private businesses have grown in Manhattan. CivicPlus, Manko Windows, GTM, Florence Manufacturing have had an enormous impact on our community—those are the influential businesses that have been successful—and there was hope that Tallgrass would be one of those and it ended up not being, but that’s the environment that we’re in.”

“We have had company failures before. We will have company failures in the future. The community of Manhattan, when these are awarded, takes on a certain amount of financial risk. It’s a risk tolerance choice by the commission. We have lowered that risk based on the evaluation and we’re not investing in companies the way we originally were with MEDOFAB.”

Envisioning Economic Development for Manhattan’s Future

For Jeff Koenig, the idea of equal access is fundamental to understanding the role of government and why business incentivization falls outside its scope: “What’s government for? It’s supposed to tax the population and, more or less, provide services across the population. A park, a street, a fire station, the public at large has access to those services whether they use them or not. An eco-devo fund, not so much.” To Armbrust, the role of government in incentivizing business is more subjective: “Economic development means different things depending on the size and type of community you’re in. We invest our time on primary employers, or net importers of dollars, and they are companies that sell their goods or services outside of Manhattan because they are bringing money into Manhattan. A community either grows or shrinks based on their primary employers and that’s where we’ve spent our economic development dollars.”

Following the failure of Tallgrass Brewery, one of the four companies that have received incentives from RICOED “New”, Armbrust said that “there will be more people looking at how we perform with the fund” and “that [the City Commission] will rightly ask more questions.” As incentives are approved by the Manhattan City Commission, the direction of economic development going forward is, ultimately, political and therefore rests with the public. As the public may not have the business acumen to understand financial risk or read the city’s Economic Development Report, the onus for imagining future economic development in the city and for communicating its role in creating jobs, lifting wages, and expanding operations rests with community leaders. To that community, Armbrust said, “We’ve had many successes that are staples of this community. This isn’t just on commissioners—this is on all of us to say that we want company growth, we want those jobs for people’s kids in the future.”

As jobs have been identified as the central metric of success for the city’s economic development program, it’s surprising that the relationship between a government’s cash incentives and tax abatements and its ability to attract new business and add jobs to existing businesses remain unproven in the larger economic sense. Timothy Bartik, of the W.E. Upjohn Institute for Employment Research, reported in a 2017 report that analyzed data from 45 industries in 33 states from 1990 to 2015 that “incentives do not have a large correlation with a state’s current or past unemployment or income levels or with future economic growth.”

As this dataset represented more than 90 percent of the country’s GDP during that time, the data calls into question how significantly government incentives will affect future job creation in Manhattan when compared to market trends and access to facilities and workforce. Rather than rejecting economic development, Bartik argues for alternatives to cash, such as “incentives that are services, such as customized job training,” explaining that “such services may be more cost-effective than cash in encouraging local job growth.”

Looking to the future, Armbrust asked, “How are we as a community, besides economic development funds, helping build the next great group of companies in this community? And, realizing that entrepreneurial endeavors have a high failure rate and being comfortable with that, how do we help foster that next generation of great businesses?” For some, the answer to that question lies in local workforce development, for others, infrastructure improvements and access to facilities that can house animal science and biotechnology companies. For Koenig, it’s about vision: “Until we have an answer to the bigger question—what Region Reimagined is all about—we, as a town, are just flailing.” From there, he suggests developing a local seed capital fund like the Mid-America Angels, an angel investors group based in Kansas City, with a group in Manhattan.

Reflecting on the needs of CivicPlus over time and the effect that economic development policies have had on that company’s growth, CivicPlus CEO Brian Rempe said that not only are development needs broader than access to capital, the need for capital does not always align with economic development opportunities. Rempe said, “Access to capital is probably a bigger limiting factor to [CivicPlus’s] growth today than it was when we received [economic development] incentives, because we have embarked on a growth path that includes inorganic growth through making acquisitions, which is expensive.” When CivicPlus received an incentive package, however, the needs were more specific than general capital: “We were struggling to fill positions because we weren’t very well known in the community and weren’t able to tell our story as broadly as we would have liked. We were also outgrowing the four separate multi-tenant buildings that housed our teams.”

The specific hurdles that CivicPlus faced, brand awareness and office facilities, were ultimately solved with money received through economic development money, but some, like Koenig, are left wondering if solutions to marketing services and facilities couldn’t be more accessible to the general business community. Regardless, Rempe indicated that their incentive package was “very influential,” explaining, “The incentives didn’t necessarily influence our decision to expand because we were going to do that regardless; however, the incentives made it much more attractive to redirect our attention from evaluating other alternative cities to how we could best grow in Manhattan.” That decision was larger than a single incentive package. Rempe said,“Manhattan is a great community to grow a business. There is a great, well-educated, hard-working workforce, and the community is very supportive of business needs.”

City Commissioner Jerred McKee, who also works for incentive recipient CivicPlus, looks forward to engaging the economic development conversation: “Largely, I think that the city of Manhattan uses dollars out of the economic development fund in the right way. I do believe we need to think bigger at times. No doubt capital is important for any growing business, but there are many other resources that entrepreneurs in our community could be lacking, and I want to make sure the city is always willing to start a dialogue on where it can do better.”

Going forward, the conversation around Tallgrass Brewery will also continue as the city analyzes the impact of its closure on the RICOED fund and future city commissions will surely consider it when they review incentive applications. Given the political nature of the fund, some will oppose it on ideological grounds, and similarly, some will support it outright, but most will look to local business leaders for information on what support businesses need to expand their operations, what obstacles can be removed for entrepreneurs, and what developments could attract what Trent Armbrust calls “the next generation of great businesses.”

As the Manhattan business community reflects on the loss of Tallgrass Brewery and considers how economic development can support Manhattan’s growing economy, the answer might lie in Tallgrass Brewery’s lasting legacy: the Tallgrass Taphouse and the vibrant downtown it overlooks. Established with seed capital from local investors as a separate business entity from Tallgrass Brewery, Armbrust says that the Taphouse is “one of the many ancillary benefits of Tallgrass” and Koenig points to its role in establishing Manhattan as a “foodie town with a beer scene and a brew supply store.” As Manhattan aims to attract businesses with a highly competitive workforce, perhaps the challenges are worth considering from the Taphouse rooftop on a Third Thursday while watching families listen to musicians and laugh with magicians, as they stroll and shop below.

Josh Brewer is the agency marketing director at 502, a Manhattan-based strategic marketing agency.

Illustration by: Darcie Riordan

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