The Craft Beer Market Bubble

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.

 

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.

 

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?

 

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.

 

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.

 

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.

 

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.)

 

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.

 

Shakeout is a much better term. And thats just business.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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

 

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.

 

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.

 

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.