The Craft Beer Illusion
As a small brewery owner I’m freaking out a little. From what I read craft beer is on an incredible growth track and making people rich. The message I hear is that craft beer is exploding, macro beer is suffering, and there is no end in sight because there is plenty of market space available to craft breweries everywhere.
Except it doesn’t add up. My brewery produces about 1,000 barrels a year. The largest craft breweries produce a few million. The top 50 craft breweries produce tens of thousands. The other 4,947 brewers are making waaaaaaay less than that. In fact, the vast majority of small craft breweries are like mine or smaller.
Which is all fine and good except that most people lump craft breweries together and think we are all ‘small’. That, and the market is changing rapidly. Prior to 2016 there was a lot of room for the big craft breweries to sling their beer all over the country while the little guys serve their neighborhoods. But what has happened over the past year is that everyone tried to grow.
Now, my experience with business growth, prior to owning a brewery, was informed by Dr. Seuss’s ‘The Lorax’. The Onceler destroyed the ecosystem by ‘biggering, and biggering, and biggering!’. I’ve never understood why businesses must grow to stay alive, but it seems like some basic tenet of economics. My brewery grew for a few years and has stabilized — not from lack of trying, but market forces seem to push me to about 1,000 barrels a year. Biggering may be necessary, but I suppose it depends on your goals.
Anyway, growth exaggerates the huge differential in ‘small’ craft breweries. When a brewery making 1M barrels a year grows by 1% it adds 10,000 barrels although if my brewery grew that same amount it would only result in an additional 10 barrels. There are big craft breweries, there are little craft breweries, and there aren’t many breweries in the middle.
Over the past year at least ten large (top 50) craft breweries have built additional production facilities across the United States and mostly on the east coast. This makes wonderful sense because now those breweries won’t have to ship their beer as far and save money. But the flip side to this coin is that each of those breweries also dramatically increased their production.
So, if ten of the top 50 breweries drastically increased production in 2016 we are now seeing a huge influx of all this new beer on the market. Just for fun, I’m going to estimate that each of these breweries increased their production by 50% (conservative, many nearly doubled in size) and that, on average, each brewery produced about 200,000 barrels annually before expansion (again, very conservative range is about 50,000 to 1M). Even that conservative estimate calculates an additional 1M barrels hitting the market right now.
Of course, many factors will affect how much new beer is hitting the shelves but the fact remains that there is going to be a lot more beer flowing through existing markets for the foreseeable future. Total American beer production is about 200M barrels of which craft is around 12% or 24M barrels. My estimates suggest at least a 4% increase to that production and probably much higher. Bottom line, there’s a lot more craft beer being produced.
Which begs the question of whether the market can bear this new production. The total amount of beer consumed in the US has not changed much over time. So if we assume that 200M barrel number to be fairly static, the increased production has to cut in to somebody.
The trend has been, it seems, that excess craft beer production has cut in to macro beer but how far will that go? Now that several former craft breweries are owned by ABInBev, how will that change things?
My guess is that a new craft beer production by larger craft breweries is going to make it harder for the little guys to sell beer outside their breweries. Mostly this is due to distribution dynamics as beer is moved from the breweries to the retail grocery store, gas station, and liquor store shelves.
Distribution is accomplished very differently by small breweries compared to larger entities. Us little guys either drive beer around ourselves or go through an existing wholesaler. The latter option is by far the dominant choice because most breweries don’t have the capital to finance trucks, drivers, and insurance to distribute beer. And some states do not permit self-distribution.
Most breweries pay a wholesaler to distribute their beer, and these wholesalers also distribute everybody else’s beer. In fact, most of these wholesalers also distribute the large macro beers. That’s where things get fuzzy for me. As a tiny brewery, I have a simple unwritten agreement with our local distributors that they will buy and sell our beer for us. No contract and no terms. I am guessing that larger craft breweries have contracts with terms regarding sales targets, market extent, etc.
I would further guess that large craft breweries can fairly easily get their distributors to sell any new production they have. I’m guessing it is also easier for larger craft breweries to extend into new markets and develop new contracts to sell their beer. For us little guys, these things are extremely difficult.
Long story short, I predict that new craft beer production is going to largely be from the top 50, or top 30, craft beer producers in the US. The little guys like me, if they try to grow into distribution markets, are going to face increasing obstacles keeping their beer off of the shelves. There are only so many tap handles and so much grocery store shelf space. If demand stays about the same and competition for that space increases, the big guys are gonna win.
And that’s all fine and good. Except when I hear about A) how well craft breweries are doing, and B) how this environment benefits all craft breweries. Both of these sentiments are false.
Yes, large craft breweries are doing well and craft beer, in general, is increasingly popular. But the majority of craft breweries are doing about the same as they have been and are face new challenges as the bigger guys grow. So saying craft breweries are doing well is a bit misleading. Or at least it depends on your definition of the term ‘well’.
Also, and more importantly, when larger craft breweries grow I think they are cannibalizing smaller craft breweries and not necessarily macro breweries. Sure, market share that goes to larger more well established craft breweries probably comes from both small craft breweries and macros, but the point is the same. The growth of the brands you see in your local grocery stores is, to a degree, limiting the growth of the smaller brands.
Does it matter?
Personally I like and prefer local craft breweries. But as competition for resources has increased, and the market for small craft breweries has become more challenging. Most small breweries appear comfortable staying small and serving their local markets. These guys will be fine. I think even small towns can support a small tap room that doesn’t intend to distribute beer outside the brewery.
But in some places increasing challenges and expenses require growth, and this growth is going to be superceded by larger craft brands getting there first.
So what I think is happening is that, like our country, the middle class is being effectively removed. If a brewery wants to stay small, pay it’s bills, and not really make a lot of profit I think that’s going to be fairly easy to do if you are already established. Getting into that market is probably . prohibitively expensive at this point, howeverAt the other end of the spectrum, the big guys will find it fairly easy to stay big and even grow.
What I don’t understand, about craft beer or the US economy, is why it is so hard to get into, or stay in, the middle class or the medium sized brewery arena. There seem to be some magical ranges in both economies where people or businesses exist and where they don’t.
Growing beyond 1,000 barrels or $50k annual household salary (or whatever middle class is) is really hard. Maybe that’s just the way it is. Maybe that makes perfect sense. I really don’t mind. My concern is that we understand the difference between $50k and $1M, or 1,000 barrels and 100,000 barrels. I’m not elequent enough to explain why, but I know it matters.