28 Mar 2011 @ 10:08 PM 
 

Competitive disadvantage: Why craft needs to stay small to survive as a distinct industry.

 

I started writing this column in August of 2009, and I’ve come back to it and worked on it just about every month since then. The news that AB-InBev (finally) took financial control of Goose Island, though, really got my brain churning again.

So, this isn’t going to be an article about how the beer at Goose Island is going to suck now that it’s an A-B-I house. Nor is it going to be an article about how the beer is going to be fine, even though Goose Island is now an A-B-I house (it’ll probably get better). Frankly, it’s not an issue to me.

Andy Crouch wrote a little piece today covering what’s been bothering me about the industry all this time in The Graying of the Craft Beer Industry. In it he notes that, hey – these guys who started companies 20, 25, 35 years ago? They’re getting old. They might want to retire and do something else with their lives. It’s a tough business to be in – especially from the early days – and they have grown up some really successful companies. Are they making raindrops compared to Bud’s volume every year? Certainly. But that doesn’t mean that they’re not at the top of their market segment. They’ve earned the opportunity to rest on their laurels.

If someone called Ken Grossman tomorrow and offered him $500 mil for Sierra Nevada, could you blame him for taking it? The guy is 56 years old. He’s got plenty of years in front of him. He started, grew, and has run one of the largest craft beer companies in existence. A sale would mean a successful exit from a successful company and he could pull up on his own island in the Pacific somewhere, build himself a little nano-brewpub and never worry again, and he’d deserve it.

But I’m getting a little ahead of myself. Just bear in mind that, as Andy says, the industry is aging. But you know? It’s still young. This is the first time that we’re seeing a generational shift in the business. It’s no wonder that there’s going to be some growing pains somewhere.

If you’ve read my blog in the past, you’ve probably gotten the idea, over time, that I’m wary of super-regional breweries, and if you don’t know what I mean by that then this paragraph is for you:

From a definition standpoint, a regional brewery is somebody who makes between 15,000 barrels and 6 million barrels of beer each year. That’s a really big hat. I have a hard time comparing, say, Highland or Geary’s to Sierra Nevada or Sam Adams. It’s just not apples to apples. One of them I can get regionally (see? regional?) and then the other one I can get pretty much freakin’ anywhere. So, for the sake of argument, let’s call anything from 100,000 bbls/year up through 6 million bbls/year a “super-regional” brewery.

For those of you playing along at home, that would be (based off of 2009 numbers, which are all that have been released at the moment.):

  • D. G. Yuengling and Son Inc.
  • Boston Beer Co
  • Sierra Nevada Brewing Co.
  • High Falls Brewing Co.
  • New Belgium Brewing Co.
  • Gambrinus
  • Craft Brewers Alliance, Inc.
  • Independent Brewers United
  • Minhas Craft Brewery
  • Deschutes Brewery
  • Matt Brewing Co.
  • Boulevard Brewing Co.
  • Harpoon Brewery
  • Alaskan Brewing and Bottling Co.
  • Bell’s Brewery, Inc.
  • Goose Island Beer Co. / Fulton St
  • Kona Brewery LLC

(Breweries in italics don’t count as “craft” under the “Independent” clause of the BA’s craft brewery definition.)

Late note: Exception here is Yuengling who is independent but does not count as “craft” under the BA definition because of their use of corn as an adjunct.

Those breweries up there make the vast majority of the craft beer that is sold on the market. There are roughly 10 million barrels of beer sold. All of the other breweries in the country that are smaller than this (yes, ALL 1600+ of them (minus some that didn’t report barrelage)) add up to make roughly 4 million barrels a year – less than one-half what these super-regional breweries add up to make.

So why am I focusing on this? Those guys up there? They’re the small giants. These are the next generation of beer magnates. They are the companies that will be growing to put pressure on BMC. These super-regionals are already in airport lounges everywhere. They’re in your grocery store and on tap at every bar you walk into. They’re already talking exports and world markets. They’re businesses built to grow and flourish. Of course they are. Who would build a business to fail?

Small breweries, I think, often suffer from a little bit of grandeur. There’s a lot of demand for craft and the “local” movement has grown out of its “movement” small pants and is now a full-on trend. Small craft brewers often seem to get caught up in their own mystique. We’re passionate about the product, and we see ourselves as artisans and craftsmen, and that’s supported by the rhetoric that we see around us and that people spout at us in our own establishments every day. People love supporting these small local businesses, sure, and they love telling us about it. But show up at any random bar and see how many people are drinking a product from a multinational conglomerate brewery? It’s a lot. I’d guesstimate 95% of them just based on volume market share of craft.

See, what small craft brewers constantly forget is this: most people don’t know – or care – where their beer is made. If it’s good beer, they’ll buy it. Story over.

This is why, sad as I am to say it, the biggest competitor that small craft breweries face right now is large craft breweries.

In most bars – and I’m not talking about the swanky beer bars that know their shit inside and out, but just your average bar – if there’s a craft tap, 9 times out of 10 it’s going to be by one of those super-regional breweries. And those super-regionals? They make good beer. Some of them make great, wonderful, outstanding, amazing beer. What’s more? It’s well-known, sought-after beer that consumers aren’t just buying because it’s there. They’re looking for it. They want it and ask for it.

On top of that, those super-regionals are coming in through distributors that are using all the old tricks that they’ve been using for years with macros to keep taps tied up and shelf space all to themselves. They know what sells well and they’re damn well going to push it. To them, a sale is a sale and while craft isn’t large volume it is large dollar. Craft is profit heavy.

How is a small, local, relatively unknown, craft brewery supposed to compete for tap space against all of that? Especially when you’re one of a dozen small, local, relatively unknown craft breweries competing for the same spot?

I wish I knew a better answer than, “Try to keep larger craft breweries out of my local market.”

It’s a tough sell, because those same super-regionals have been opening the market for small new brewers for years. We couldn’t exist if they hadn’t beaten the path for us, but the Goose Island acquisition today is a reminder that those guys up at the top of the list aren’t just big craft breweries. They’re acquisition targets; especially, as we talked about at the beginning of the article, as owners start to age out of their businesses. Of that list of super-regionals, 30% of them are already controlled by larger interests. When will that number rise to 50%? Or 75%? Or 100%? What if those large interests turned out to be A-B-I, MillerCoors, and Diageo? Some of them are. And one of those on that list, since the list was made, was fully acquired by another member of that list. That’s business.

Occasionally people talk about how the macro-breweries will never succeed in making a craft beer because they don’t have the passion or the drive or whatever. That they’re too industrial. They’re soulless, faceless corporations that can’t manage to make a flavorful product. But what those people forget is that the big guys have the cash to turn around and buy a craft brewery. Then they can use their immense amount of capital, experience, technical skills to make the beer better and more consistent, to market the ever-livin’ crap out of it, and to push it in larger distribution channels.

At that point, small craft breweries are no longer competing with super-regionals. They’re going up against the multinational conglomerate because their myriad of brands – their excellent craft beer – is getting pushed in every available avenue and it is exactly what most consumers are looking for. And not just the Bud drinkers anymore, but the people who want a nice Bourbon Barrel-Aged Stout or a good American Pale Ale.

As of this year’s Craft Brewer’s Conference, the count of regional breweries in this country was at 80. (17 of those being the super-regionals I mentioned up above). I ask you this: How many other regional breweries can we support while the big craft breweries keep getting bigger? I know, I’ve attempted to shoot down the specter of market saturation, and I still think I’m right, but to echo my own point:

Craft has too many big players in the game for long-term market sustainability.

The market can handle a lot of brands and a lot of SKUs when those brands are specialty products, but not when they’re all fighting for top shelf placement. More and more craft breweries are modeling themselves after their largest competitors. They’re not just the Sam Adams and Sierra Nevadas of today, they’re potentially the Anheuser-Busches and Coorses of tomorrow. Expand! Grow! Conquer new markets! Bigger bigger bigger! WE NEED MOAR STATES! RAAAAGGGGHHHH!

I honestly believe that the market can handle the 1700 breweries we have now and can probably handle 2400 more breweries until we’re in line with the number of wineries in the U.S. But it can not, by any stretch of the imagination, handle 1700 regional breweries. I have my doubts that it can handle many more regionals than it has now, or very many more super-regionals than it has now. 100, 120 tops, and where does that leave the rest of us?

One of three places:

1) Consolidated into a brewing conglomerate that allows us to compete with the super-regionals and macro-breweries.
2) Bought out by a larger company. (See option #1)
3) Small and working our asses off, just like we are now.

The thing is about #1 and #2 up there? That’s the death of craft. It’s the first step in the re-birth of the beer giants of the 19th and 20th Centuries. Oh, sure. The beer will be great. I have absolutely no doubt that it will be technically brilliant and that consumers will be happy with what they’re buying.

But on the business end, it will be the sad industrialization of art, the end of an era of warm professional camaraderie amongst potential competitors, and nobody (except the people who partake in what little is left of it) will mourn its passing.

Tags Tags: ,
Categories: industry, op-ed
Posted By: erik
Last Edit: 29 Mar 2011 @ 10 34 AM

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Responses to this post » (12 Total)

 
  1. Well thought out.
    As part of the discussion, we’ve linked to this from both http://www.yourbeernetwork.com
    and
    http://www.facebook.com/yourbeernetwork.
    Many thanks for your thoughts.

    YBN

  2. Russ says:

    Clearly the only way for American craft breweries to expand is to expand America. Drop your knickers, Canada.

  3. Pottsville Paul says:

    How is Yuengling not independent?

  4. erik says:

    No. You’re right. They are independent. They don’t count as “craft” in the BA’s definition because of their use of corn as an adjunct.

    Thanks for bringing that up.

  5. Hi Erik,

    Nice post, well thought-out and compelling. Just a couple points:

    1. Yuengling did join the BA after the barrel limit was raised: http://beernews.org/2011/01/yuengling-joins-the-brewers-association/

    2. Wine currently supports a spectrum of vineyards and wineries. Yes, Gallo and Kendall Jackson buy a ton, but there are also mid-size wineries with followings like Bonny Doon and Coppola, and very small wineries no bigger than, say, Mystery Brewing. There is consolidation, but it does not mean the death of small winemakers any more than bank consolidation has meant the death of community banks.

    I see no reason to believe that growing consolidation as you predict (which I agree is coming) will be a return to the 1950s era of beer giants. The market may well support both, just as Blue Moon is not the only Belgian White produced in Denver. In any food or drink, there are big boys, mid-sizes and artisanal brands, and there’s movement up, just as . I can certainly understand alarm in your position, but I think calling options #1 and #2 the beginning of the death of craft might be premature.

    Thanks again for the great post.

    • erik says:

      Greg –

      Thanks. I’m not sure you’re assessing my viewpoint correctly. It’s not really alarm, so much as concern. I’m not really into running around screaming about how the sky is falling so much as I like to contemplate the possible outcomes. I am, more than anything, a pragmatic realist when it comes to business and I think that this is a possible future – albeit one that’s probably decades away.

      The problem with the wine comparison (which, yeah.. I made) is that wine doesn’t have big market players like beer does. There isn’t an Anheuser-Busch InBev of wine (is there?) that controls a substantial part of the market, which makes the larger wineries much more on par with craft’s super-regionals. We have an extra tier of market pressure that, I think, has a real chance at stifling small business very much in the same way big box stores close down mom-and-pop shops.

      • Greg says:

        Hey Erik, this got stuck in a spam folder for three weeks; my apologies for the LONG delay. I checked some numbers, and we’re sort of both half-right; Wine does have a couple big players (EJ Gallo has more than a quarter of the market), but it’s not as top-heavily consolidated as beer.

        A friend suggested to me that the real fight will be over taps in states that allow bigger breweries to buy tap space. If that’s the case, the real fight will be between super-regionals and big boys, and the smallest craft breweries will remain relatively safe. I think an interesting side note to watch will be how ABI et al. try to develop their consumers’ tastes for craft beer, which would of course largely cannibalize their own sales.

        And (since I’m a former copy editor) @grammar: “Guesstimate” is neither redundant nor a non-word (http://www.merriam-webster.com/dictionary/guesstimate). Guesses are not all estimates, and not all estimates are guesses (just as population estimators, who use sophisticated modeling and statistics). Furthermore, blog posts are informal writing, so use of colloquialisms and terms in the common vernacular is not standard but appropriate.

  6. grammar says:

    “Guesstimate” is redundant and also not a word.

    A guess is an estimation.

  7. Mark says:

    erik,

    This was a very informative and well written article. You have made some great points that I unfortunately have to agree with. So now that my glass is half empty, I am going to fill it back up with some Craft Beer.

  8. […] Brewing but writing on his personal blog Top Fermented, meanwhile, has a sobering thesis: that craft brewers aren’t competing against the big boys, they’re competing against each othe…. That Community Beer Works has more to fear from Sierra Nevada and even Southern Tier than […]

  9. […] nearly all “super regionals” (a term I’m stealing from Erik Myers) growing at least 8% last year, production is down for both Redhook and Widmer Brothers. Kona, on […]

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