The Craft Beer Market Bubble

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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?"

 

When the inevitable shakeout occurs, people are still going to refer to the craft beer "bubble" having burst.

 

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.

 

There are definitely "local" bubbles already in place. See San Diego County; 82 breweries in operation and 32 more in planning. There will be 30 to 40 going away in the next few years.

http://www.westcoastersd.com/sd-brewing-industry-watch/

 

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.

 

Can you please cite data that supports this claim. Thank you.

 

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.

 

There is no bubble anywhere. Bubble is the wrong word period. For a real bubble read about tulipomania.

 

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.

 

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.

 

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.

 

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.

 

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?