 | From Nathan…………. |
The explosive growth of craft brewing over the past ten years has been a great American success story. The craft sector has reportedly enjoyed average growth of 7.9% over the last ten years with an even more impressive 10.1% over the last five. As demand grew, there were relatively few craft breweries in position to supply a larger consumer base. It presented the ideal business environment where good products were met with great success and demand has continued to skyrocket. Some of you may have had a front row seat to the National Homebrew Competition registration fiasco as demand from the explosion of craft brewing at home brought the server to its figurative knees. Tickets for the Great American Beer Festival sold out in 45 minutes in 2012 after remaining available for a full week the year before. Michigan beer fans were taken off guard when their 2013 Winter Beer Festival sold out in 13 hours after being available for a couple weeks the previous year. These tickets, along with many rare beers, have become hot items for secondary market sales (the polite way to say “scalping”).But digging a little deeper shows that recent years have seen tremendous growth on the supply side as a large number of new breweries have navigated the years of planning often required to open their doors and provide new options to the craft beer consumer. In my opinion, we have now turned the corner where supply is catching up with demand and the current rate of brewery growth is not sustainable. Supply is probably still behind demand, but it will even out fairly quickly at this rate. I’m a big believer in craft beer and there is no shortage of potential converts in the mainstream beer drinking community. But there will be new challenges for the market and perhaps our very definition of craft beer. Here are the reasons behind this opinion:
The math doesn’t work right now. The number of craft breweries reported by the Brewers Association rose from 1,949 at the end of 2011 to 2,336 at the end of 2012. While market growth has exceeded 10% in recent years, a 20% increase in the number of breweries still reduces the average slice of that pie available to each business. Now consider that 1,254 prospective breweries-in-planning are reportedly in some phase of opening. Some of these will probably never reach the market, but consider the implications that a potential 54% increase in operating businesses would have on any industry.
Craft beer is trendy. Trust me on this, my natural inclination is to sit here and try to invent a reason why this thing I write about can’t possibly be branded with the “T” word. I’ve always felt the craft beer scene had a bit of counterculture appeal working in its favor. But while it makes us feel good to continue mouthing “we are the 5%”, like this is still completely underground, the truth is undeniable here. Just note the growing number of beer festivals that cycle through our calendar being put on by organizations that have nothing to do with the brewing world. These often support wonderful causes, but it’s pretty clear this is occurring because beer festivals are the cash cow du jour. And while I can’t personally imagine abandoning the craft beer world once you become immersed in this segment, you always have to wonder about the staying power of any trend when the next big thing comes along.
The big brewers won’t sit idly by. While craft brewing has experienced tremendous growth, domestic macros have seen their market share decline. The big brewers have responded by introducing their own “faux craft” brands and buying out successful craft brands like Goose Island. Expect to see a lot more of this if the craft segment continues to grow at anywhere near the current level. And that’s not even mentioning the pressure they can exert on distribution networks and shelf space at chain retailers. Additional consolidation like the proposed AB InBev/Modelo merger will make these companies even more formidable.
The news is not all bad. Increased competition among craft breweries will likely lead to more choices and increased quality for those of us who enjoy drinking the product. Premium pricing for specialties like barrel-aged beers and sours may come down a bit as more breweries introduce their own offerings to the market. And a continued shift towards supporting local businesses could support widespread brewery success on a more modest level. But the days of constant headlines like “Brewery X reports rapid growth, plans massive expansion” might be a little harder to come by in the next phase of craft brewing expansion.
 | From Jake…………. |
Distribution is not meeting demand. While there's no denying the fact that distribution of craft beer in Indiana is improving, the fact of the matter is we don’t get a lot of the craft brands that we crave: Allagash, Dogfish Head, Lagunitas, Russian River, and many more. This hole in the market has, in part, encouraged the influx of craft breweries around the state. Distribution of Indiana brewed craft beers has been around for a while with Barley Island and Upland, but the opening of Sun King in 2009 set the stage for the increase of production style craft breweries in the state. This Sun King blueprint has since been used by many breweries in the state that are now flourishing, such as: Flat 12 in Indianapolis, Peoples in Lafayette, Triton in Fort Benjamin Harrison, Cutters in Bloomington, and the newest, Tin Man, in Evansville. These breweries are all offering craft brewed Indiana beer on draft at nearby pubs, and/or packing their beer for retail sale at your local liquor stores and even grocery stores.
Craft Beer is a Source of Pride. Both production breweries and brewpubs alike have become local hangouts that are packed most nights of the week. Almost all of these breweries like Black Acre, Flat 12, and Triton are brewing great beer and helping revitalize their neighborhoods. These breweries are now ingrained in their communities, and can’t brew fast enough to meet the resulting demand. This effect extends to smaller cities as well. For example, Columbus, despite being a relatively small city, currently supports three breweries, not including one in nearby Hope. However there are still plenty of communities that do not have a brewery and communities that could support more breweries. Take Peoples in Lafayette for example. When a former brewer from Lafayette Brewing Company started his own brewing company a mere 2 miles from LBC; some questioned whether Lafayette could support another brewing company. I was just getting into craft beer, living in West Lafayette, around the time Peoples opened up, and LBC’s creativity was stagnant in my opinion. Peoples has really hit their stride recently creating some very tasty brews, see Amazon Princess. This local competition has spurred LBC to develop new creative recipes making them a better brewery as well. LBC’s support in the community has not diminished; their brewpub location in downtown Lafayette offers a very different experience from the tap room experience offered by Peoples. Another longstanding brewery in Greenwood, Oaken Barrel, has some new competition opening soon in Planetary Brewing Company, who recently brewed their first batch.
The big brewers ARE sitting idly by. This is obvious if you examine the recent moves by AB InBev. The most recent introductions into their product line, Black Crown and Beck’s Sapphire, show a lack of understanding of the craft brewing industry. They view beer drinkers as demographics, and this is why they are failing. Craft beer drinkers are discerning palates that are not interested in a slightly more alcoholic amber lager with a stupid name, honestly which King ever wore a black crown. While the purchase of Goose Island and the distribution rights for Kona Brewing is cause for concern it is by no means an omen for the craft beer industry. Their proposed merger with modelo, which is being blocked by the US government currently, would give them more market share; however modelo is by not a craft brewery and therefore doesn’t help them reach the growing number of craft beer enthusiasts. Also the spectacular reaction from Lagunitas owner to the recent takeover interest from AB InBev should be applauded (see below). I certainly hope other brewery owners follow Lagunitas’ lead.
Have I mentioned the visit I got from the Budweiser guy who did the deal to buy Goose? We had dinner, a burger, I think. He was shopping.
— LagunitasT (@lagunitasT) January 31, 2013
He was a nice fella. Didn't exactly say what he wanted, but the three calls to meet seemed clear enuf. I told I'd rather die on payroll.
— LagunitasT (@lagunitasT) January 31, 2013
Selling ones brewery is selling all of ones best friend's careers, their hearts, the portion of their lives they spent working for you.I only see craft beer getting bigger and better. Some breweries may be forced to close and that is by no means a bad thing for the industry. As the community grows and changes it will reach people that you never thought would try craft beer, my Dad for example a lifelong light American lager drinker, MGD 64, who recently tried and enjoyed the Schwarzbier from Black Acre. This craft beer boom is going nowhere but up and I for one am excited, and you should be too!
— LagunitasT (@lagunitasT) January 31, 2013
 | From Greg…………. |
Even if craft beer is about not only flavor but also local, independent, and fresh then it is very clear that many consumers have embraced craft beer. So let's dissect the growth and determine if it can continue.
Beer is growing and craft beer is fueling growth. During 2012, total sales of beer in the U.S. increased over 2011 (U.S. Government, Department of Treasury) While one percent growth may not sound like much that represents approximately 744 million MORE pints drawn from breweries in a year. That would be nearly 4 more pints for every person over the age of 21; well, I did my share! The Brewers Association reported in mid-2012 that craft beer volume, by their definition, was up 12%.
There is tremendous market share opportunity for craft beers. The world of craft beer is still relatively small. There are a lot of numbers thrown around but comparing the BA estimate of barrels sold to the U.S. government statistics, craft beer would represent 7% of total beer sales (yes, I've seen 5 or 6%). That means 93% of beer consumed in the U.S. does not meet the Brewers Association of craft beer (Brewers Association statistics, U.S. Treasury statistics). If flavorful 'craft like' beer is thrown in the percent of these beers is clearly larger. For example, MolsonCoors, the fourth largest global brewer in revenue and the only one actually headquartered in the U.S. reported double-digit growth for its Blue Moon and Leinenkugel brands. Thus, even stealing share from 7% to 14% is a huge growth opportunity!
Low barriers to entry and low entry cost fuel the opportunity. The cost and legal requirements to set up a nano-brewery, a small brew tasting room served by food trucks, or even a small brewpub/restaurant are fairly low. Many new entrants are primarily self-funded and some have reverted to small micro-finance forms of public offerings. Homebrewers enlarge their equipment and turn pro-nano-brewers. And the Brewers Association shows far more craft brewery openings (250 in 2011) than closings (36 in 2011).
Local is the key word. The fact that one of Indiana's largest brewers (SunKing) grew at tremendous rates while serving only consumers in approximately a fifty mile radius shows that local has been popular. In addition, the fact that a few brewpubs with not particularly great beer have thrived primarily because they developed a very local following. In a few cases they were the only local pub and in one case I see people sitting at the bar drinking a Bud Light, but hey, the place stays open and they keep brewing beer -- and the beer they brew gets better and better! Fresh local is a big trend in food and in beverage right now. Will it last for a long time, who knows? But does it make sense that more people are enjoying their own neighborhood brewery for the first time since before prohibition, absolutely! Given the current populations there is still solid opportunity for more locations and increased market penetration. Look at the trend of the successful breweries opening multiple tap rooms. Restaurants are much more open to local taps than in the past. Yet consider that less than one-quarter of alcoholic beverages are sold in restaurants and brewpubs. This means there is ample opportunity for expansion into supermarkets and retailers. Why do restaurants, bars, and supermarkets like craft beer? The answer is higher sales prices and higher profit margins. Traditional yellow fizzy beer is sold at highly competitive prices, on sale, and in multi-packs. Craft beer sells well at higher prices, in six-packs and often does not require a reduced price! Fresh, local, profitable can drive growth!
Younger drinkers drive growth. One bar owner pointed out to me that the traditional beer drinker is older and blue collar. Look around at bars filled with craft beer drinkers and you find young and higher incomes! I hang out in a college town a lot, but I've also experienced an evening at Twenty Tap and Sinking Ship near Broad Ripple. If I compare Bloomington Beer bars Yogi's and The Tap, with Twenty Tap and Sinking Ship I am surrounded by a relatively young crowd appreciating variety and flavor. One of the owners suggested that Millennials feel entitled to 'better beer.' If you had suggested 20 years ago that you could run a successful bar by selling beer only, most bar owners would have called you crazy. Yet, now it is being done regularly. Higher margins, greater variety, smaller kegs (6ers and half-barrels), and younger crowds are the norm.
Will the market grow and will the large brewers change the mix? Two industry sources I checked predict higher volume sales for alcoholic beverages and for beer over the next 4-5 years. The four largest global brewers, AB-Inbev (Belgium), Heineken (Netherlands), SABMiller (Great Britain), and MillerCoors (Denver) are mostly globally focused. AB-Inbev, this nations largest seller of beer, has managed to stem the tide and increase volume and profit in the U.S. mostly by bringing in the flagship Euro-beers. But Asia and Europe both represent growth areas and and reading the annual reports of these firms it is clear that is where growth will be. And recent reports on the Wall Street Journal report that homebrewing is growing in China (WSJ, 3-1-13) and that craft beer sales are growing in Europe (WSJ, 8-12-12). No wonder they will leave alone some acquisition they made in the U.S. as long as it makes profit.
Surely some won't make it. Just as we've seen some craft brewers exit over the past ten years we know some won't survive in the next five years. If you don't make good beer you don't deserve to survive. And places that aren't well managed won't make it -- there are more failures in the restaurant business than almost any other business. Plus, people like to try new things so sometimes people just get tired of a place; yet that has not happened to most of the oldest brewpubs like Broad Ripple Brew Pub which is even just called 'the Brew Pub' by many. I would expect some consolidation. When a brewery founder decides to retire (for example, Fritz Maytag of Anchor) expect either an investment management group to take their brewery over or expect it to be gobbled up by a bigger brewer seeking more brands. And expect more brands from some of the major brewers. But hey, you won't want to read this but I actually like Batch 19 and Third Shift beers! Yes, we likely won't see an addition of another 1500 breweries as we had from 1990 to 2000. But there is plenty of room and fuel for growth of beer with flavor whether truly craft as defined by the Brewers Association or a combination of craft, local, and more artisanal beers!
So what do you think? Is there an end in sight to the current growth rate of craft brewing? Or are we still in the early stages of the better beer revolution?
7 comments:
Viva La Revolution! :) Good work guys!
Permit me to suggest that it might help to apply the growth of craft brewing to principles of the "buy local" movement and localism in general. Whether or not craft beer growth is sustainable depends quite a lot on the business model: Is it about shipping local beer a long way to satisfy geek demand, or bringing local beer drinkers through the tent flap?
Great article guys. I do think that the math IS still working though. Yes, the number of breweries grew 20%, but the output of those breweries was only a 13% increase in the number of bbls made (volume). This compares with a 15% increase in retail dollars spent on that beer. The fact that the retail dollar amount is rising faster than production indicates that supply is nowhere near demand at this time. I think that the locality movement will continue to fuel a higher percentage of actual brewery numbers, but many of these local places are producing less than 1000 bbls of beer a year for their local pub only.
The New Albanian, the growth of craft beer in Indiana certainly is an example of localism. Almost all breweries in the state keep their brews in the state, or in nearby areas. This goes back to my point in the "Craft Beer is a source of pride" section. To open a brewery today solely with the expectation that your beer is going to be sought out by beer geeks across the nation is naive, and to be fair I don't know of any brewery that has attempted this from their beginning. Shipping beer long distances is also not in the best interest for almost every style of beer, as hop character will diminish and oxidation will increase. The business model of attracting local patrons into a tap room or a brewpub is quite obviously the more logical approach.
I will add that the low prices of brewing equipment and ingredients, which has facilitated many small breweries opening, is certainly aided by globalization in both shipping and reduced labor costs. So while craft breweries should encourage the localism movement for their customers, many of the same breweries would not be open if it weren't for low cost boil kettles, fermenters, hops, and malted grain.
There's another factor driving the proliferation of craft beer among younger drinkers - those who are in their 20’s and perhaps even early 30’s never knew the days when beer meant only bland light lager!
From their earliest tastings and forays into sampling beer, these younger drinkers had distinct choices that included easy access to at least the macro-craft brewers like Sam Adams or Sierra Nevada. For a young person with a virgin palate, who hasn’t spent years being bombarded with Budweiser ads and tricked into thinking beer means light lager, the choice is obvious – one product has flavor and the other doesn’t. Not surprisingly, most choose flavor.
Prior to the last 10 years or so, for craft beer to attract a new consumer meant having to awaken and convert people into realizing there was more to beer than American light lager. That was a slow process, but now a new threshold has been crossed.
Cheers to the new era!
Craft beer sales growth will inevitably slow down on a percentage basis - the law of large numbers will see to that. And, as sales slow, prices will have to come down. Small, inefficient breweries will have to close because distribution and manufacturing realities will make them economically obsolete.
From one Jake to another, I have question two of your statements:
1) The "Low cost" of entry to brewing. How do you define "Low"? I've heard cost estimates of $150k for a nano and $1.5M for production. Not small change.
2) Your entire statement about a new brewery opening with the plan to go national. So, Chad Yakobson of Crooked Stave opened to just focus on Denver? Against the Grain in Louisville opened 1.5 years ago and already has beer in Arizona, across the midwest, and in Europe. It's good to have a local base, but, depending on your location, "Local" can only take a brewery so far.
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