Craft Beer's Looming Crisis

I have thought this for a while. I agree with the author that when the bubble does burst, the industry as a whole will emerge in a better state than it is in now.

Beers have been reduced to novelty in many regards. And in many cases, the novelty wears off. Many breweries have stopped making beer for the sake of making good beer. Rather, they are trying to cater to every conceivable curiosity. The mantra that 'every idea is a winner' comes to mind. For the new Fall release XYZ123 Brewery is introducing a Pineapple/Mango/Durian Quadrupel that has been kettle soured and spiked with brettanomyces aged in clay pots. The beer then receives a dose of dry hops right before bottling. Ugh...no.

Sierra Nevada, Lagunitas, and Stone will be fine. Many locals only places will also make it. Great breweries are going to fold. Which ones? Those that bottle, distribute too widely, and unknowingly let their product die on the shelves of a far away store. Or the ones that make beers like I mentioned above.

 

All truth, but nothing I didn't already know

 

These "Chicken Little" articles pop up relatively frequently. And, they're right, sometime, some breweries will fail. But, 8% annual growth, while not 12%, is still growth. This article even states that double digit growth isn't sustainable. Growth is growth, however, and the next shakeout might not be as bad as the last.

 

I think the main guys will be just fine, you may shake out some of the guys who would have failed eventually anyway but as a whole I feel the craft industry will be solid and only more dialed in with a shake up of sorts.

 

A little culling of the herd would do the craft beer world some good. Too many mediocre/bad breweries are flooding the market with mediocre/bad beer.

 

A very interesting read.

A few things that ‘jumped out’ for me:

“New brewers may actually have an advantage, the same one their predecessors had over the mainstream brewers: fresh ideas paired with a quick decision cycle. And as consumers become increasingly interested in locally-made products, there has been a rise in beer bought in brewery tasting rooms, which is much more profitable for a brand considering it cuts out several middlemen from the transaction.

So much beer is purchased there, in fact, that some people think category sales are significantly under-reported by retail sales-tracking services like IRI or Nielsen, which rely on register data from large store chains. Industry consultant David “Bump” Williams, who once ran IRI’s beer data division, thinks the amount is significant. He estimates that 20 percent or more of total craft beer sales go unreported. (He also points out that for some small breweries, meaning those that produce less than 20,000 barrels a year, direct sales are the only way their brews are available.) It’s a rapidly growing phenomenon, and one that could very well account for a percentage of the disappearing growth rate.”

I have on more than one occasion posted my opinion that IRI data does not accurately capture craft beer sales since it does not include direct sales (i.e., brewpub sales, tasting room sales, etc.). I must admit that I was a bit surprised that David Williams estimates an amount of 20% here. If this is a reasonable estimate than the fact that IRI is ‘off’ by 1/5th is pretty telling.

I have also opined in the past my opinion there is room for continued growth for those breweries/brewpubs that cater to the drink local market.

Bill Covaleski of Victory (ABV) was quoted frequently in this article including:

“I feel that it’s not going to be widespread, but there’s going to be some bloodletting,” says Covaleski.”

To this I agree. IMO the sector of the craft beer market which could be most at risk are the mid-larger scale production breweries.

I do not think it was just happenstance that Bill Covaleski (and his partner Ron Barchet) made the decision earlier this year to completely sell Victory to Private Equity. Victory Brewing is now completely owned by Artisanal Brewing Ventures (ABV). Victory Brewing held a lot of debt from recently opening a large production brewery in Parkesburg, PA. By selling out to ABV both Bill and Ron are now personally debt free.

My prediction is that we will see more and more craft breweries making similar business moves in the near future to ‘sell out’. There are two active threads going on right now about two breweries that sold out to MillerCoors (Tenth & Blake).

Cheers!

 

I wouldn't call Lew Bryson a Chicken Little, he's been writing about beer and booze since 1995.

 

I don't see a market correction as a crisis. A crisis would be the world hop crop collapsing because bees couldn't pollinate the plants. A correction will just allow the breweries that are properly funded and managed to become stronger. That will benefit all beer nerds, IMHO.

 

Very dependent upon where you are 'sitting'. For brewery owners this could indeed be characterized as a "crisis". For beer consumers it is a mixed bag but if your favorite brewery(s) closes you might also view this as a "crisis".

Cheers!

 

I'm not sure I understood what fruit beer has to do with a market correction...nevertheless, corrections occur in all markets, which is normal, and a good thing. Beer drinkers will continue to seek out delicious beer, and Brewers of such product should, for the most part, continue to thrive even in a correction.

 

Hops with seeds have been pollinated. Most hops are seedless, I.e. not pollinated.
http://freshops.com/hop-gardening/

 

"And there is also the fact that fruit beers are flooding the market, which is truly a sign of the apocalypse. (Mango IPA, anyone?) This will not end well."

He got me there

 

Ironically - I believe it's the smaller, local breweries that will weather a market correction the best. Good local following be it a single state like New Glarus or a couple of counties like Titletown etc - better set up to weather a correction over some other brewery that's trying to distribute to 5 states with a 15bbl brew house.

 

The explosion of fruited IPA over the last year shows how much hype and gimmick drive the market. I think he also hinted that during the 95' shakeout a lot of the ones who failed were brewing very sweet fruit infused beers.

 

"Brewers that will survive will have some common traits. The winners will be deeply enmeshed in their local markets and locked in with their communities. Equally important, their bottled or canned beers will still taste great at least three months after packaging. They won’t discount"

This stood out to me. I am aware of a handful of breweries with very high standards in regard to packaging/brewing their beer and they do mostly taste fine 3 months later but...

This is a huge gamble to say these guys will be the ones who survive.

 

Most often that's been my takeaway when I see these articles popping up. The beer market is not unique from others. All markets will experience a peak and a correction at some point in their lifetime. While I agree it may be a crisis to those brewers affected, no one can say that it wasn't expected.

 

I kind of think this wouldn't be a terrible thing.

There are so many breweries right now, I know I personally end up buy random beers, self made six packs all the time trying new things, which is cool. But probably not sustainable. I have a couple of regulars I pick up full six packs of semi-frequently, but otherwise just buy random things.

Choice is good but I wonder how sustainable it is. Like its too much supply and not enough demand. Gotta keep in mind craft beer as a whole only represents 12% of the market right now.

 

I think they are more likely to survive because of their strong ties to the community. The fact that they may not have to discount their packaged product is an advantage though.

 

Will there be a shakeout and a dramatic increase in brewery closures? Absolutely, the only undertainty is when it will happen and how long it will go on.

It has been an impending thing for a few years now, the only question has been when we'll reach a saturated marketplace. There is no reason for breweries to be exempt from the laws of supply and demand or from the standard failure rate for startups, i.e., normally 50% of all startups are gone within 5 years for such reasons as poor management, poor quality products, poor initial business plan that doesn't get adapted to the changing environment, etc. Also second generation ownership of the successful businesses is the exception rather than the rule.

The big surge in demand in recent years has kept some breweries going that normally would have already failed by now if not for that persistent growth that shows signs of slowing. The breweries that emphasize quality, consistence and differentiation from others (ideas borrowed directly from DFH owner Sam Calagione) are much more likely to survive the shake out.

As for a bubble bursting, there ain't no bubble to burst. A bubble occurs when prices suddently shoot up well above the value of what they represent and then suddenly collapse back to a more realistic value. (e.g., The home mortgage bubble that burst not to many years ago leaving many folks with a mortgage that was bigger than the value of their home.) That's not what we and the brewers of flavorful beers are facing. A shakeout is not a bubble, a bubble is not the same as a shakeout.