Craft beer continues to grow as a segment of the total brewing industry. Like wineries, there is a craft brewery in all 50 states. Craft brewing, as a category in the spirits industry, has only been around for about four decades; however, there is no specific event to delineate an official genesis of the industry. In 1859, the Anchor Brewing Company in San Francisco began brewing operations. Unfortunately, until 1965 the company had a sordid history of financial failure brewing fine beer. However, since 1965 it has had a stellar record of success and is now recognized as America’s first craft brewer.
Despite the growth of breweries, the craft beer industry is experiencing significant problems. For example: ever-changing consumer trends; rapid expansion of the industry; growth in product offerings (this includes new products such as hard cider); distribution restrictions; response to market trends; and imports. However, in December the new tax law came into effect and should free up capital to finance expansion and marketing programs without incurring debt. “CMBTRA (Craft Beverage Modernization and Tax Reform Act of 2017), as part of the new tax law, is cutting the excise bill in half for the nation’s small brewers,” reports Bart Watson, chief economist of the Brewers Association. That is a good part of the capital to reinvest. “There are also benefits for wine and spirits producers.”
Per capita beer consumption in the US has been flat for about a decade. However, and this is an important point, “craft beer” appears to be up about 5% in 2017. The biggest concern in the “here and now” is the loss of shipments that occurred in 2017 for the industry as a whole. . Beer Institute economist Michael Uhrich notes that “the 2.2 percent decline in shipments (through November 2017) is the largest percentage decline in annual domestic beer shipment volume since 1954.” This raises the question: Does this signal change in the industry? Beer sales are reported by barrels shipped; 2017 figures indicate 3.8 million fewer barrels shipped. In 2017, US brewers produced 170 million barrels; each barrel represents 248 glasses of beer. A barrel of beer is 30 gallons compared to 60 gallon barrels of wine. Separately, the craft spirits industry posted a 4% increase and wine is expected to post a 2% increase in production.
Mr. Bart Watson attributes the decline in domestic shipments in 2017 to consumers shifting their preferences from domestic lager and light lager brands to imported brands. Also, marketing/branding issues, distribution, changing demographics, etc. they are also affecting the industry. “I expect this trend to continue in the medium term,” Watson writes. “In addition, the growth of wine and spirits in market penetration are two other reasons.” Craft brewers are leading the way in tackling new niches like styling and marketing.
US households that consume wine, beer and spirits (26 percent of households and 55 percent of adult beverage sales) now outnumber those that consume just one or two of them, according to figures from Nielsen Homescan. A Harris poll conducted on January 1. 16-18, 2017 found that 39 percent search for beer first, while 29 percent opt for wine, 27 for spirits, and 4 percent for hard cider. That’s more for the wine 21 percent who said it was their choice a decade ago, but less for beer 45 percent and spirits 32 percent. This reflects a shift toward wine as millennials age.
Younger consumers don’t drink wine as often as older consumers, according to Nielsen Scarborough and the Wine Market Council.
It’s important to realize that the craft beer industry is producing over 400 styles of beer; many are geared towards regional drinking preferences. A demographic of craft beer consumers is:
44% have a household income of $100,000+ (90% of the household including 2 or more people)
80% of craft beer drinkers are white
57% of the market are men between the ages of 25 and 54
22% of the market are women from 25 to 54 years old.
50% have undergraduate and graduate degrees
81% have some college, undergraduate or graduate degrees
55% of craft beer markets are on the West Coast and Atlantic
One of the many things that have fueled the growth and interest in craft beer is the hobby of homebrewing. My first experience with home brewing was in 1976 when I first tried home brewed beer; It was exciting. Even in the case of wine, there is a cottage industry of people producing some of their own wine. This includes people who buy vines and have their own mini-vineyard.
Quite simply, beer and wine have had the advantage of being able to nurture as a small batch hobby. This has allowed people to experiment with new beverage products. It is interesting to note that Fritz Maytag, who saved Anchor Brewing from yet another bankruptcy in 1965, also entered the craft distilling field in 1993 with Anchor Distillery. Anchor Distillery is now recognized as the first craft distillery in America.
Craft distilling will not be a threat to brewers started by hobbyist distillers! Corie Brown, writing for “Entrepreneur Magazine,” makes an important point: “Home still distilling remains illegal, a law that seems to be carved in stone as much by fear of blowing stills and accidental poisoning as by an aversion to ‘demonic’ spirits.” So, the movement has grown much more slowly. There are no firm numbers on the size or value of the craft spirits sector.”
As of 2017, there were 8,800 (licensed) breweries in the US; 1,100 are in California: however, many are not fully operational. A more realistic number is closer to 6,100 active. On average there are approximately 150 craft brewers that close their doors. (That’s a lower percentage failure rate than restaurants.) Of all the breweries, approximately 2,000 are considered breweries. Still, craft beer breweries don’t compare numerically to the nearly 10,000 wineries in the US. But one thing beer and wine have in common; California accounts for about 50% of beer and wine companies.
What are the beer attributes that are driving the craft beer industry?
beer is refreshing
There may be some distinctive scents.
Numerous profiles/styles of beers
affordability
Flavor options can be easily achieved
Product accessibility.
Something unique to craft beer is the need to understand the demographics of the customer and the market. Interestingly, new styles of beer can appear from a brewer in a relatively short time, whether it’s a seasonal, event-oriented beer or changing consumer preferences.
The craft beer brand is not exclusive to anyone in the spirits industry, but it is intense due to the immediacy of the market. The brand is dictated by markets, customer base, budgets, competition, dealer capabilities, interstate laws, and long-term strategies.
In conversations with more than 20 craft breweries, all say that local tasting rooms and sales rooms are critical to establishing branding and product credibility; it is important to create an experience around the craft product. Coronado Brewing Company in Coronado, CA has been effective in building a perceived experience between the consumer and the company.
Distribution in the spirits industry is plagued with customer relationship building issues. At the end of prohibition (in December 1933), the three-tier distribution system began; Basically, producers discount the product to their sole distributor, who then sells that product to the retailer. However, over time, each state has honed its approach to beer distribution. California is one of those states that allow self-distribution and breweries. Again, each state has a slightly different approach to distribution regulations.
The problem for a small brewer, if you feel that distributors are a better fit for your needs, distributors are only interested in selling craft beers that can produce volume. Furthermore, this system means that a small producer is at the mercy of a limited number (due to consolidation) of distributors, even if they may also be working with a competitor.
In conversations with consumers at a large brewery in the Sacramento area, I ask them how many craft breweries they visited in the past year. The average was 6. The next question was, do you have a favorite? The answer surprised me because yes, they have favorites, but not because of the brand but because of the quality of the beer. Price was not the consideration, quality was the determining factor. Unsurprisingly, bad beer is the death knell of a brand.
Looking ahead, the craft beer industry faces four major challenges:
· Greatness. Aggregators that generate market share (control) by gobbling up independent producers will put pressure on small producers who lack access to capital or distribution.
· Over time, the prestige of “craft”, “estate” or “select” may diminish and that will affect many existing brands.
Distribution cost will affect craft beer brands, customer exposure, margins and company value; whatever the channel used.
· Ability to recognize market changes and respond effectively. There are several prominent universities that have expanded their programs to address the craft brewing market. UC Davis and Sonoma State in Rohnert Park, CA have recognized the importance of the beer category and have classes on brewing, marketing, and beer ingredients; all to help the industry anticipate and respond to change. They also offer outstanding research on all things beer.
Like all industries, they experience economic cycles. Success depends on finances, product and messaging, responding to competition and trends and a good dose of luck. The question remains: Is the craft beer industry overheated and headed for a retrenchment? It is probably the best answer. Craft brewing is a business and therefore must be managed within all the accepted disciplines related to a business: finance, marketing, operations, legal, sales, distribution, and internal controls.
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