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The Craft Beer Market Bubble

Discussion in 'Beer News' started by kudos, Dec 15, 2013.

  1. At least in my neck of the woods, it would be due to small breweries making mediocre to poor beer (especially relative to the major national competition, much of which is now being distributed here) and not finding enough customers for their products to generate revenue and stay in business.
  2. RI's total beer consumption (based on wholesale state excise tax payments, as per the The Beer Institute's Brewers Almanac) is currently about 663,000 barrels/yr.

    10,000 in-state "1 bbl. capacity" nano-breweries would produce 2.5m bbl. a year (figuring a standard 1 batch per working day). More than enough for the state's beer needs, not even considering "exports" from other states.:D
    JimKal, VonZipper and azorie like this.
  3. azorie

    azorie Advocate (715) Florida Mar 18, 2006


    nice math problem, solved. wtg.

    Do you think there will be a bust?

    Still its not like SN and all them big players are going to go out of biz. Its the little ones, like the article said.

    I think It will really be a shake out or a peak # of brewers hit and it slowly go back down. I do not think it will crash without a worldwide crash in the markets of money.... Thoughts?

    I do think its near when everyone wants in, but who knows?
  4. HRamz3

    HRamz3 Advocate (630) Pitcairn Feb 9, 2010

    Well since you decided to take that bit of hyperbole litterally, I have to ask, how a 1brl nano is going to crank out a barrel every day? Even the most basic brown ale needs to sit in the tanks for two weeks.
  5. Well, yeah, I did take your example literally, but not seriously - just having a bit of fun. Thus:
    Well, "capacity" implies they have enough fermentation/aging tank volume for their 1 bbl./day production. (Granted, I was the one who added "capacity" to the example;)).

    So, in the simplest (and unrealistic, since most brewers' fermentation/aging tanks are larger than their brew size) terms, using your example, the brewer would brew every workday for 3 weeks, filling up the 15 1 bbl. hypothetical fermenters they own. On that 16th brew day, tank #1 would have been racking/packaging previously (after 2 weeks) - emptied, cleaned and ready to be refilled with batch #16.

    After that, it'd be one batch brewed, one packaged daily.
    Last edited: Dec 16, 2013
  6. D-Nice

    D-Nice Disciple (55) Illinois Nov 22, 2013

    Great article. Long and pretty informative. But, overall, why would this suprise anyone? Any industry will have their boom periods, bust periods, flat, but relatively stable periods, and a near constant state of businesses being born, dying, and in all different states of health. Craft beer is no exception. Even if the craft market continues to expand (which it is doing), businesses will still go under, whether due to inferior product, luck, bad business practices.
    rlcoffey likes this.
  7. Ranbot

    Ranbot Savant (435) Pennsylvania Nov 27, 2006

    I think the growing international thirst for craft beer in Europe and Asia will buffer against a bubble, but that's mainly for established brewers (e.g. Stone, Sam Adams, etc.) or those with connections to In-Bev or Miller-Coors (e.g. Goose Island, Craft Brewers Alliance, etc.)
  8. D-Nice

    D-Nice Disciple (55) Illinois Nov 22, 2013

    Despite how the author labels what is going on, I didn't read it as a necessary "bust" or "bubble", simply a "shakeout". Bust or bubble would mean that the whole segment is going to decline. I simply think that even if the craft market expands or remains even, there will, as with any industry, be a shakeout of businesses that can't survive in that industry. The craft "explosion" made many people rush into the brewing business. Some, inevitably, won't have what it takes to remain - undercapitalized, inferior product, poor distribution/visibility, poor business management, etc. A bust or bubble isn't always necessary for this sort of shearing.
    rlcoffey likes this.
  9. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    Shakeout is a much better term. And thats just business.
    sacrelicio and BrettHead like this.
  10. drtth

    drtth Champion (850) Pennsylvania Nov 25, 2007

    Exactly. Without knowing the basic data for breweries a very good prediction based on startups in general is that 25% will close/be out of business in their first year of operation.

    http://www.statisticbrain.com/startup-failure-by-industry/

    So the prediction that some of the 3000 currently in business will close is pretty easy to make. Kind of like being in Seattle and predicting rain for tomorrow or being in the Sahara predicting tomorrow will be hot and dry.
  11. Yes, of course, it's a business and you're always going to have sucesses and failures. But how many of these failures come from people getting into beer brewing without a working knowledge of brewing and a working knowledge of how to run a business. Also - since when does a 10.2% market share [and growing yearly] indicate a bursting bubble? Unless the author thinks that everyone who is going to be curious about craft beer has already tried it, I don't understand how an industry segment that has shown growth for several years and which growth shows no signs of subsiding is on a bubble.
    5thOhio likes this.
  12. tozerm

    tozerm Savant (365) Washington Jul 1, 2005

    As in most industries it will come down to the price vs quality proposition for each brewery AND if their business plan is sound. It takes both to succeed. You also have to consider that craft beer still is less than 15% of the total domestic consumption in the US. Markets like Seattle and Portland are well over 30% and yet the breweries there continue to thrive. Breweries with bad beer and bad business plans will fail... regardless of a bubble.
  13. Spider889

    Spider889 Advocate (650) Ohio Mar 24, 2010

    You're doing a good job of being argumentative without reading. It's all relative to a bubble when there's not enough room for everyone, in which case those who can't stake their claim, stand out, or otherwise edge out the competition will be hurting. This is also market specific. There may be a bubble in Cleveland but not Cincinnati, California but not North Dakota.
  14. D-Nice

    D-Nice Disciple (55) Illinois Nov 22, 2013

    And, as the author mentions, there's obviously increased competition among craft breweries. It's simply not just Craft v. Goliath.

    So, let's say the craft beer market is 10% of the total beer market. There are 10 craft brewers who split that 10% market share equally thus, they're all 10% of the craft beer market. The craft beer market expands to 20% of the total beer market. The 10 craft brewers could simply each take an equal share of the increase in the craft beer market, so that they all are still 10% of the craft beer market. But, as happens, a couple of the 10 craft brewers are "better" and/or have the money to expand, are more ambitious, are not satisfied with their 10% and increase their share of the craft beer market to 20% causing one or more of the remaining craft brewers to see sales declines. Maybe one of the declining brewers can deal with the decline, but another cannot and shuts down.

    Further down the road, the craft beer market reaches 25% of the overall beer market. But, there are not only the 9 remaining craft brewers, but 5 new kids on the block. The increased competion and accompanying lower sales (for some) causes a couple of more brewers to shut down.

    Obviously, these are just simple hypothetical examples. Just a long way of illustrating that even without a bubble or bust, even with the market increasing, breweries will still inevitably shutdown in a natural shakeout.
    otispdriftwood and rlcoffey like this.
  15. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    That still isnt a bubble.

    If there isnt room for 1 more restaurant (or oil change center, or whatever) in Cleveland, that doesnt mean there is a restaurant bubble, its just business, and 1+ will shut down. If the market share of craft crashes to 3% over the next few years, then yes, we are in a bubble.
  16. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    Exactly.

    One of my pet peeves is people misusing the term bubble.

    However, I can think of one possible beer related bubble, because this was the actual true bubble from the 90s too...equipment manufacturers. If there is consolidation, then brewhouse and tank manufacturers may find that there market was a bubble.

    But maybe not, as the growing big boys will still need more stainless.

    But the secondary markets will become full again.
    BrettHead likes this.
  17. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    I have "recent" data for breweries and brewpubs:

    brewery brewpub
    Year opn cls opn cls
    2012 310 18 99 25
    2011 187 12 88 28
    2010 100 13 63 51
    2009 71 15 49 43
    2008 59 15 70 50
    2007 60 22 65 56
    2006 38 14 63 43
    2005 27 18 48 66
    2004 28 13 67 96
    2003 25 15 66 71
    2002 19 22 36 100
    2001 20 36 66 75
  18. sfoley333

    sfoley333 Savant (340) Brazil Oct 26, 2006

    Well thought out and written article and it express what I've been thinking for the last 4 years now. It impossible for the increase of breweries to continue and it has probably already reached its limit in some markets. The San Diego area is aready too bloated with breweries in my opinion and will see a die back sooner or later simply because of shelf and tap space. As for, tapping into foreign markets, its not as easy as popularity for the product. Take Brazil, where I currently live, for example. Yes, there is a demand for American craft beer, but with import taxes, the price of shipping, and problems with expiration dates and proper storage, you end up selling less than you thought you would and jeopardize the quality of your brand. In Brazil, you can find Founders, Greenflash, Rogue, Anchor, Coronado, Lagunitas, etc. But whats the point, the consumer here has to pay the price of a six pack for one beer. The beer sales quickly the first month cause people want to try it but then very slowly until its a few days away from its expiration date( usually about a year after the beer has been imported) when the retailers then slash the price by more than 50%. To really profit on the foreign market breweries would need to open a brewery in that market thereby eliminating import taxes and shipping cost.
  19. The bumper to bumper traffic reference is just another "journalist" making the story more likely to be read. In other words, an incorrect but relatively harmless "fact" used to get you curious.
  20. kylelenk

    kylelenk Savant (350) Michigan Apr 17, 2012

    There are a bunch of factors at play that, in economic opinion, would point to an unsustainable rise in number of breweries. Without delving too far into the macro and micro headwinds I'll say this:

    1) Scarcity, the biggest threat. There isn't enough shelf space around to market the availability of craft beers. BMC will always dominate the shelf space market which forces "bigger" craft breweries to pay more for already limited space. Therefore, the barriers to entry for smaller/newer breweries will simply be too high. If they are sacrificing margins down to nothing or are selling at a loss to get on shelves, then they are simply running an unsustainable business that will soon run out of gas.
  21. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    Why?

    In Portland, IIRC, over 30% of beer sold is craft. Nationwide its 1/5th of that. When the rest of the US catches up to Portland, there is going to be a need for more breweries. 5 times as many as now? Maybe not. Or maybe. Or maybe more than that if most of them are small, neighborhood breweries.

    It takes over 2000 1k bbl/yr breweries to replicate the volume of Sam Adams.
  22. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    The problem with that is that it assumes that shelf space is necessary for a brewery to be successful. More and more are going with a by-the-drink/keg only model. There is a limit to how big you can grow with that model, but it can be profitable at a local level.
    bnuno likes this.
  23. tinypyramids

    tinypyramids Savant (445) Illinois Jul 19, 2012

    this is sort of why i think chicago is going to bust before others. people are getting fatigued on $10 bombers and the fact that there's no way to try these beers on tap for cheaper because bars simply don't have the tap handles to sustain draft turnovers (plus bars can't dispense growlers unless they're brewpubs/taprooms). and when a local nano does get thrown on a tap handle, prices seem to be all over the damn map and usually way too high on beer that should in no universe be an $8-$9 pour.
  24. kylelenk

    kylelenk Savant (350) Michigan Apr 17, 2012

    I had wanted to put this thought in as well but didn't really want to get too academic. I don't believe we'll see regiocentric breweries be affected by the bubble bursting. A local brewpub that has no intentions of expansion caters to a relatively stable and finite marketplace.

    The problem with any brewery wanting to expand or grow is that it is an incredibly capital intense business that requires constant reinvestment of cash flows. This is pure speculation but it would be my assumption that even the bigger breweries aren't that profitable due to the constant need of further asset purchases.
  25. Spider889

    Spider889 Advocate (650) Ohio Mar 24, 2010

    Seeing as I wasn't attempting to define "bubble" but mention what I see as potential symptoms of a future problem I don't see the issue here.

    One point was that this isn't going to be a 1 for 1 replacement. Bigger breweries will shake out dozens of smaller ones. At some point (may be distant, I never gave a time frame) the market will reach saturation, and imo a contraction in numbers, not necessarily quantity, will occur. We don't need to lose over half of the breweries over night to define this as a bubble, but I sympathize with those who had to live with the collapse in the 90's.

    I think this time, the issue isn't the same. The "bubble" isn't whether the current market share can be maintained, it's whether the current rate of growth, expansion, sheer number of breweries, etc can be sustained. When the saturation point is reached it is going to be a very rude awakening for many people.
  26. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    I am. And this isnt a bubble. Market share of craft isnt going to crash. The demand for craft beer isnt going to just go away when people see the light and realize they really want to drink Bud Light.

    Or, secondarily, when they decide that $10 for a 6 pack is insane.

    Either would be a bubble. This isnt a bubble. You have been putting the word in quotes, but I think it just needs to stop being used.
  27. rlcoffey

    rlcoffey Savant (490) Kentucky Apr 20, 2004

    Of course 15% growth cant be sustained. But before we reach the saturation point, we will go to 10% growth and 6% growth and 3% growth.

    If the saturation point is somewhere north of 20% market share, we could probably easily support 5000 breweries, as long as lots of them want to stay small.
  28. As I wrote the last time a "craft beer bubble" thread was posted (*ahem*):

    "When will the bubble of threads about the craft beer bubble bursting burst?"
    StuartCarter, rlcoffey and kylelenk like this.
  29. When the inevitable shakeout occurs, people are still going to refer to the craft beer "bubble" having burst. ;)
    Last edited: Dec 17, 2013
  30. mattbk

    mattbk Savant (390) New York Dec 12, 2011

    how dare you bring data into this purely speculative discussion?

    'Oregon State University economics professor Patrick Emerson, who runs the Beeronomics blog... adds, "We're starting to see some closings." '

    42 production breweries closed in the past three years. 597 opened. there is NO DATA to suggest this will end anytime soon (say, in the next 3-5 years). this includes those of you who claim that the market is flooded with "mediocre" beer. you're forgetting that 90% of America still thinks MGD is a "premium" beer.

    not all of these breweries will be "successful" - as in the owner makes more $35,000 a year - but I'm guessing salary doesn't completely and personally define success for many of these smaller breweries.

    let's see the number of closings get anywhere near (like 50%) of the openings and then we can talk about this. until then, it's just a big waste of time.

    i hate myself for continuing to get sucked into these discussions.
    Spikester, luwak, 5thOhio and 2 others like this.
  31. kylelenk

    kylelenk Savant (350) Michigan Apr 17, 2012

    I think we're looking at traditional economic models and trying to force the craft beer market in just because it has seen such exponential growth in the past 15-20 years. While there may not be a spectacular burst that wipes out 60% of the market players, it would be naive to say that there won't be a correction to the mean soon.

    Interest rates have been at 0% for what seems like eternity. When the Fed begins to taper and interest rates rise, it will make it extremely difficult for those breweries in planning to secure financing and more expensive for smaller breweries to expand.

    And the fact that the general beer market has been on the decline for the past 20 years:
    http://www.gallup.com/poll/163787/drinkers-divide-beer-wine-favorite.aspx

    The headwinds, in my opinion, all point to unsustainable.
  32. mattbk

    mattbk Savant (390) New York Dec 12, 2011

    Can you please cite data that supports this claim. Thank you.
    DoubleJ likes this.
  33. The next U.S. recession will definitely wipe out some breweries. I have no doubts about that, but I don't think it will be that bad or of "bubble bursting" proportions.
  34. BrettHead

    BrettHead Advocate (525) Nebraska Sep 18, 2010

    There is no bubble anywhere. Bubble is the wrong word period. For a real bubble read about tulipomania.
    rlcoffey likes this.
  35. 395er

    395er Aficionado (180) California Apr 29, 2011

    Re: the article's no brand/brewery loyalty idea and infatuation with new breweries. Seems like some of the new guys can literally become flavor of the month. Although I'm sure it's always been somewhat prevalent since beer is a bit of a geek domain, the "beer/underground band" analogy is starting to become more noticeable to me. Especially here in SD county. As in "Oh, you dig (insert slightly obscure brewery name)? Yeah I remember when they first started. Have you had (dude brewing in his garage brewery) yet? It's amazing." Just listened to it this weekend as a guy lamented about his favorite local getting too big. And the hype around some of the new breweries has a real "I was into them way back when" feeling to it. That just doesn't seem like a good thing long term, especially if the beer isn't amazing.
    joeebbs likes this.
  36. How about some real world observations? When you visit a number of these new tasting rooms in San Diego County and the staff outnumber the patrons 3 of the 4 days they are open, I have a tough time believing that they are making enough money to pay their bills over the long run. Attempting to add an additional 32 breweries to the mix won't help.

    A beer glut is also certainly taking place in the retail sector. Every "craft beer" liquor store/gas station/grocery in the County has 6+ months of product on the shelf at any one time. The popular fresh IPA's in the coolers and the limited production specialty beers certainly sell out quickly but the other styles are aging gracefully on hundreds of shelves in the region.
    SunDevilBeer and kylelenk like this.
  37. kylelenk

    kylelenk Savant (350) Michigan Apr 17, 2012

    This is a much worthy read --- http://people.hofstra.edu/geotrans/eng/ch7en/conc7en/stages_in_a_bubble.html

    And once again I think we're looking a bubbles in asset prices and trying to apply a business "sector" like craft beer. Housing, Tulip, South Sea, tech sector were all speculative bubbles in asset prices and not rapid/over expansion of a business sector. 99.9% of craft breweries aren't publicly traded assets therefore most financing is done through SB loans and family/friends.

    What we do know ---

    1) Craft brewing is a relatively new market. Although US brewing has been around longer than the Constitution, it's been a market traditionally dominated by larger players and only recently (20-25 years) have smaller players been allowed to compete almost nationally with larger brands. From prohibition to early 1990s, the market was largely an oligopoly created by a three tier distribution system. Let's say larger, modern players (SN, SA, Goose, Stone, Lagunitas, etc.) begin entering the market late 80s to early 90s and modern craft brewing begins.

    2) I think there is rampant speculation by smaller breweries trying to enter the distribution market fueled by mania in the industry. Growing up here in West Michigan, we had Bells/Founders/and maybe early Short's towards the introduction to my craft beer drinking. I would say that since then, we've had roughly 10-12 new Michigan breweries competing for shelf space at local liquor stores. I would find it hard to believe that you could say with a fact that new breweries are satisfied with only "serving their local community." It is, after all, the purpose of business to make a profit and I believe higher concentrations will ultimately hurt smaller businesses looking to compete in those markets (We have 16 breweries here in GR/West Michigan I believe). Breweries that are unable to compete on differentiation (i.e. Founders/FW/Deschutes/Bells having huge brand equity through their portfolios) will ultimately have to compete on price which will reduce margins and ultimately their profitability.

    3) As I've mentioned before, the industry isn't that profitable without scale. It requires constant reinvestment of cash flows to maintain and grow your footprint. In an environment with 0% interest rates it makes it incredibly easy for anyone to borrow money to finance a new venture or grow their operation. As expected, when the Fed begins to taper it will undoubtably increase interest rates meaning it will be harder to start a new venture and will be catastrophic to higher leverage breweries.

    So it's a bubble in ways and it's not in other ways it isn't. It's not an asset class that greater fools can be duped into buying but I do think we'll see breweries become harder and harder to open and there be some type of revision to the "mean" as soon as interest rates rise.
  38. 395er

    395er Aficionado (180) California Apr 29, 2011

    We did a tour this Sunday in Vista, and the scene across four stops was pretty significant, not just in the size of crowd, but overall vibe. I should note that there were about 6 tasting rooms within a mile of one another, just a few blocks apart in some cases. I know attendance has fallen off at some already, and two newbies just opened doors in the same area. And there are at least 4 more a slightly longer drive away, and others just beyond that. And none of those we hit are heavy hitters in the SD scene. Crazy.
    Last edited: Dec 17, 2013
  39. joeebbs

    joeebbs Savant (360) Pennsylvania Apr 29, 2009

    The big takeaway I get from this is the fight for shelf/tap room. Greg Koch hits it right on the head. The brands that have wide distribution that were mainstays are getting elbowed out for new and local. But once people have drank up the new beers will they continue to do so?

    But I'm not sure what will last. Will breweries overstep their bounds and have to pull out of markets or will a brand from across the country close down your local brewery? Or will both be able to co-exist?

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