When I moved to New York City some sixteen years ago, every bar offered roughly the same menu of beers: Bud Light, Corona, Amstel Light, Corona, Heineken and Corona. But, much as in Oz, the craft beer market in the US has exploded over the last ten years. Now it is possible to walk into a bar and not recognize a single tap.
I love it. I love how easy it is to find good beer these days. I love visiting new cities and trying the different local microbrews. But the sheer number is overwhelming. The microbrewery count has gone from about 1,500 in 2008 to 4,200 in 2015. With relatively few barriers to entry, a new one opens every day. For a beer enthusiast like myself, the plethora of options is nirvana.
The analyst in me, though, debates whether they can all survive. Looking back, no matter how many new beers lined the shelves, there seemed to be room for everyone. With the global behemoths like Anheuser-Busch and Heineken slow to react, the small craft brewers reveled in an extended party free of big business concerns like competition, distribution and supply chain management. Everything came easy for them as they rode the wave of the cultural zeitgeist.
Lights fading for craft scene
But the party lights look a little dim these days. Despite the success enjoyed by the craft movement, big beer enjoys a number of competitive advantages. Due to their scale, the giants obviously have more marketing resources; they also command more muscle with distribution. In the beginning, the popularity and strong growth of the craft beer segment meant that any beer-selling establishment interested in earning some cachet was quick to offer whatever craft beer it could find. Craft drove customer traffic, so the bars and storefronts took distribution from wherever it came.
But mass produced beer still commands the majority of the market. Because of that, most establishments feel compelled to offer it. These beers are supplied by dedicated distributors who carry only brands that the giants either own or approve. And the giants are striking back.
First, they have used their scale and resources to buy up the biggest craft brewers. Having armed themselves with their own stable of “craft brews”, they have used their distribution might to stuff the channel with their beers. When you walk into a bar today, most of the time you will see craft beers on tap—but it’s the same five or six that just so happen to be owned by the global giants. Same goes for your local grocery store. Perhaps you’ve seen Lagunitas (US craft brewer acquired by Heineken) at your local bottle shop.
When small becomes big
It has recently been reported that the craft guys are starting to have problems with their supply chain as well. If you are into beer, then you are familiar with hops. Most of the IPAs produced in the States involve one (or several) of ten specific hop varietals. With the explosion in craft beer production, there is now a shortage specific varieties. Which beer companies do you think are going to pay the most to secure their hops?
Perhaps that is a temporary setback they can overcome with time. But these are big boy problems – problems most craft brewers are going to be extremely disadvantaged to face. It saddens me because I have thoroughly enjoyed the party. I expect there will be a reckoning period over the next few years that thins out the herd. That means fewer options and a decidedly less exciting beer scene. It also goes to show the importance of a sustainable competitive advantage and to not be too quick to count out an incumbent.
Valid point KR. Where I think the craft brewers might be able to eke out a sustained living is locally, as destinations. Travelling through the Pacific Northwest, these breweries have sprouted up everywhere and are as much competition for local restaurants as they are for ABInbev. They sell better food and of course better beer than the local Dennys, Applebees etc, and locals bring their growlers in to buy takeaway. I think there’s a sustainable model for many there. Selling to supermarkets, however, is going to get tougher. Achieving national scale from here very unlikely. But having a decent small business with an very local reservoir seems achievable for good operators.
Interesting article, thank you.
A reminder of the importance of inputs, hops for small brewers is a classic example. How often the cost of goods sold forecast is overlooked…
As a “beverage & leisure” analyst covering European stocks in the 1990’s, I wrote often about the then explosion of microbreweries in the US and UK. That star faded as large breweries gobbled up micro pub companies and brands, and the movement looked to have permanently peaked.
“Momentum began to pick up for the microbrewing phenomenon in the early- to mid-1990s with annual volume growth increasing from 35 percent in 1991, to a high of 58 percent in 1995.”
“Craft brewer volume growth slowed to between 1 and 5 percent annually between 1997 and 2003.”
Source: The Brewers Association, “History of Craft Brewing” 2013
Of course, as your article highlights and fortunately for beer drinkers, the sector re-gathered momentum and became a far more formidable force over the past 10 years.
Let us hope that if we are to see another hiatus in growth that it will be short lived, and that “micro” / “craft” beers will fire back once again.
I agree Gareth and I’ll add that the desire to ‘drink local’ is also a key ingredient to Pacific NW success and for other microbreweries elsewhere. However I also concur with Kevin that there are simply too many microbreweries selling their product in bottled format – the selection is mind boggling – and it suggests that there will need to be some consolidation for them to remain successful
I just came back from a trip through Montana and Wyoming. I was blown away by the number of craft breweries. Towns of 10,000 people had 4 breweries, and you couldnt even buy bud or coors in a number of bars. There’s also this appetite to drink local as Dan says above… we’re seeing more of that here too, go to a bar in the inner west of sydney and they’ll be serving young henrys or on the northern beaches and it’ll be four pines. This means that there’s still room for breweries to build a ‘local’ brand and dominate that market.
What I did notice was an amazing appetite of the big grocery stores to stock local beers, something that we haven’t seen here (Dan Murphys, First Choice, Liquorland etc have pitiful craft beer ranges). This shows me that craft beer is fully mainstream in the US, and it still has a long way to run in Australia.
Thinking locally, I’ve noticed the shine really comes off a brand when taken over by the big boys. Eg, Little Creatures used to be the craft beer of choice for many, but now that it is more readily available after takeover by one of the big boys it has left the taps of pubs and has lost that ‘premium’ appeal. I think the big breweries will continue to struggle to build their own Craft empires, and it is now becoming part of the point of difference of many pubs and bars to offer smaller breweries beers.
An interesting article. I wonder whether a comparison to small wineries would add any insight, especially given the better economics of brewing regularly mentioned by II/Forager analysts? In both cases you will have people doing it for love not money who will accept a lower return and customers prepared to pay extra to an extent. Will craft brewers go down the cellar door / club member model to get repeat purchase? How much beer consumption is at home vs on premise compared to wine?
A recent story in The Economist suggests there’s more disruption to come for the beer industry, in the form of yeasts engineered to produce particular flavours and aromas.
http://www.economist.com/news/science-and-technology/21706494-piece-genetic-archaeology-researchers-discover-origins-good
Perhaps this technology will also create the opportunity for winemakers to produce much more precisely wines that taste the way they want them to – taking ‘craft wines’ to a whole new level.
Interesting article, I presume it refers mainly to the USA market?
In Australia, I think there is only one independent craft brewer left on the ASX, which is Gage Roads (GRB). I recall reading another one is doing an IPO, not sure if it is finished yet.
GRB was recommended many years ago by somebody from the old Intelligent Investor, maybe Greg or Gareth, I forget exactly who, but I have followed it ever since. Unfortunately they just shafted their small shareholders via dilution through a massive capital raising, but they will end up with a stronger balance sheet and more possible channels to market. When you look through their results, the margins on craft beer are pretty good.
Anyway, I digress, I think I started out to make the point that the craft beer market in Australia seems to be going gang busters and if you want to buy exposure to it via the ASX your options are quite limited at the moment.
Perhaps an interesting, and more general FMCG question to ponder is –
Whilst social media etc makes it easier to establish a local brand, do supply chain and distribution requirements favorably tilt towards established global players (provided they are adaptive) and their established networks, where they can profitably buy local players to feed their existing global distribution networks, and hence relatively inexpensively take a local brand global.
The corollary is where some FMCG companies have paid a high price for a local brand in order to feed their existing product though an established local / regional distribution channel.
Craft beers are to mass-market beers what gourmet burgers are to Big Macs. There are obvious similarities, but from a marketing perspective (i.e. Price, Product, Promotion, and Placement) they are vastly different products.
It’s true that they compete for common ingredients like hops, but the true arbiter of what the beer landscape (beerscape?) will look in the future will be the customer.
It will indeed be a sad day if the competition is fermented out of the market (excuse the pun). What these guys need to do is to take a leaf out of Little Creatures book which is mirrored by most independent Vinyard operators. That leaf is to start their own family friendly restaurant/drinking establishment. If you have ever been to Little Creatures in Fremantle you will see what I mean. This is the perfect storm for keeping their brands going and making a s*#t load of money at the same time. Craft beer is always best to taste at the point of manufacture as it doesn’t travel as well as the big production styles. Even though it tastes good at the pub having a better flavour at source along with a meal and craft beer patronage only all helps to resoundingly keep the home fires burning and the word of mouth advertising alive. If anyone know someone in the craft brewing industry, pass the secret along.
..thanks to A-B Inbev maybe we are really near the top. Two interesting links:
http://draftmag.com/stone-brewing-layoffs/
“(…) More recently however, the larger independent craft segment has developed tremendous pressures. Specifically, the onset of greater pressures from Big Beer as a result of their acquisition strategies, and the further proliferation of small, hyper-local breweries has slowed growth.
http://mnbeeractivists.com/newsfeed/northern-brewer-midwest-supplies-acquired-ab-inbev
“(… homebrewing company Northern Brewer / Midwest Supplies seems to have been acquired by ZX Ventures, a global incubator and venture capital arm of AB InBev
Just out of curiousity, what does a 6 pack of craft beer cost in the US ?
I think we pay about $20 here for a 6 pack, and a pint in the pub in Canberra is about $10.
My local uni pub used to stock Zierholz, a Canberra craft brewer. But it has closed down, as I think it was too expensive for uni students.