The Craft Beer Market Bubble

Go big, then go home?

 

Sounds about right.

 

Craft beer is here to stay - with so many new breweries opening , there are bound to be many closings too. Being a great brewer does not guarantee success - you must be a good businessman too or be partners with one. The number of breweries in any given area depends on demand. There are currently 15 breweries here on Long Island NY - is there a strong enough demand to keep them in business ? So far there is. How many more can co-exist ? Time will tell. As far as a "bubble" goes - I can't imagine a "crash" like the housing market 6 years ago . An economic bubble refers to something being overvalued - The number of breweries can only "crash" if the demand crashes. I don't see that happening. Economic bubble - http://en.wikipedia.org/wiki/Economic_bubble

 

U.S. population is more than three times what it was back then, so now it is the same number of brewers serving 3 times as many potential customers. We are all free to draw our own conclusions about that.

My feeling is that we can expect to grow to 10-15% of the beer market, which means there is room for the industry to double in size if I am right. And I am betting my career on being right.

 

The oligopoly in the US industry is larger and stronger today than it's ever been. The 3 largest breweries (Best [pre-Pabst], Schlitz, AB) accounted for under 6% of the US beer market in 1884, and the same 3 (order flipped- AB, Schlitz, Pabst) controlled 9% by 1938 when the industry was finally on it's feet after re-opening in the midst of the Depression post-Prohibiton. The Big 3 wouldn't reach 50% of the US market until the late 1970s. Compare that to today's Big 3 2 (AB, MC) with a commanding share of nearly 3/4 (74%).

Put another way, while the number of US breweries in the 1880s and today are about the same (+2000), the "other" breweries besides the three largest divided up 94% of the US beer market then while today's +2000 "others" account for a mere ~13% (since Big 2 = 74% and imports = 13%).

Really the entire national market being controlled by big brewers didn't happen until the late 1970s. Before that, post-WWII-1960s - there were still very strong regional players - Ballantine, Schaefer and Rheingold in mid-Atlantic (all once with 3-5% of the total US market while selling in a regional market), Narrangasett in N.E. (with 25-60% of the market in some states), Olympia, Rainier and even Blitz Weinhard in the PNW (BW sold 1/3 of the beer in OR), Hamm, Grain Belt and Stroh in the mid-West, Lone Star and Pearl in TX, etc.

Or, look at the number of "million barrel" breweries. Today, not counting the "virtual" brewer Pabst, the US has 5* - with the largest, AB, more than 30 times larger than the each of the smallest. In the mid-60s, the US had over 2 dozen million barrel breweries, and AB was "only" 10 times the size of the smallest.

*AB, MC, Yuengling, Boston and - maybe - NAB (their 2.7m barrelage also includes Labatt imported from Canada). Sierra Nevada in on the cusp of breaking the million barrel mark - I guess they'll do it for 2013.

I don't see that - competing in a national market - as a plus for small breweries. Rather it is a weakness (and certainly contributes to the higher cost of "craft" beer) compared to the small brewers of the past. Breweries like SN, NB, Stone, etc., have to ship their beer coast to coast to sell 200k-1m bbl/yr. Whereas very regional brewers were once selling in that range in truly local or regional markets. It wasn't that, in the past, small local and regional brewers "couldn't" compete on a national level - they didn't have to to sell 100k-1m bbl/yr.

Without the Three Tier system craft brewing probably never would have gotten off the ground beyond being a very localized product. If AB and the other national breweries had the pre-Pro system of company-owned "depots" scattered around the country, there would be no national network of independently owned wholesalers to allow a Stone to be sold in New England or Boston Beer Co. to be sold in Southern California. The three tier system didn't prevent oligopoly, but it may have been worse (or happened quicker) without it.

Or, to put it another way:

 

The one thing that worries be is "Beer Geek" purchasing hurting stores/breweries. By "Beer Geek" purchasing I mean those that only buy beers that require you to be on a "list", seasonals and/or limited beers. I've seen some shops in the SEPA area tell their customers that if you want more of X-Limited Beer you need to buy more of their year-round lineup.

For example a shop whose email list I am on recently sent this:

"Guys once again Please we are getting presure from the Breweries and Suppliers we must sell other products besides the limited beers only we need your support !"

 

Considering the amount of beer Blue Moon and Magic Hat sell, I don't think you are worried about anything real. Beer geek purchasing, as you call it, is such a small part of the craft market it is statistically irrelevant.

That email you reference doesn't show what you think it shows. It does show what I have been saying for quite some time, though, that craft brewers/craft distributors can squeeze shelf space for their products with the best of the big guys.

 

http://hoosierbeergeek.blogspot.com/2013/09/the-craft-beer-market-saturation.html

 

All I'm saying is I thought the article was very interesting and insightful

 

Seems to be a strong argument against saturation.

Again, I ask, why 7% and not 30%, or some point in between?

This has nothing, I repeat, nothing, to do with # of breweries. The question of saturation is about market share.

 

But it *does* have something to do with the number of breweries -- you're just choosing to ignore the big disconnect that's at work. Namely, that much of what's driving the boom is not people getting excited about a tenth of a percentage point in growth of market share measured as overall consumption, but rather the 10 new breweries that are opening in their area/state. Such consumers concentrate heavily on trying new beers, and not on consuming more of the good craft brews that are already out there. So while the latter may continue to contribute to the growing share of craft vs. macro (through M&A, expansion, marketing, etc.), the former likely will not...especially when the desire -- or ability -- of beer geeks to try everything new begins to fade (which, if you read these boards regularly, you'll notice is already beginning to happen).

 

I think everyone here would benefit from a double dose of reading about economics. As others have said--unfortunately without providing a definition in the context of economics--an economic bubble refers to something different than what is happening in craft beer. It generally refers to speculation markets on future prices.

Sure, some people do that and can sell Don Q for a buck or two, but the large majority of us purchase beer in order to drink it. There is little reason to think this isn't simply a change in tastes of the consumer. They could go in another direction at some point, but that would still not make it a bubble under the economic definition. But I wouldn't count on a huge, quick turn. The wine market has been sustained for a good while doing similar things.

For some basic discussion of this, the economist mentioned in an earlier linked article does so nicely in the link below:

http://beeronomics.blogspot.com/2013/12/a-bubble-or-maturation.html


PS - He notes that he was mistakenly quoted about the 30 or 40 brewery closings in Oregon in the past year. In fact, that has not happened. He says so right on his blog.

 

Except that isnt whats driving the growth.

The OVERALL growth is being driven primarily by current breweries growing.

Craft grew in volume by 1.7 million barrels from 2011 to 2012. (Exact # according to Brewers Association: 1,689,589).

So, lets break down that number
Boston grew +29k bbls or 1.7% of total
Sierra Nevada +109k 6.4%
New Belgium +52k 3.1%
Spoetzl +36k 2.1%
Deschutes +34k 2.0%

The top 5 accounted for 15.3% of the total growth.

Regionals (those over 15k) in total accounted for 67.6% of the growth.
Micros only accounted for 26.8%.

Thats actually more than I expected on the small end, but its still a small fraction of the growth. And even most of that isnt new breweries.

We see a lot of talk here about trying new beers and stuff, but I dont think its a large thing overall. Just like whales are a tiny fraction of the craft market.

 

So if the existing top 5 continue to grow production at 15% and the regionals at 50+%, how are the 2,500 breweries in planning (1,500 officially announced, and an estimated 1,000 unofficially announced) supposed to survive if they're left to compete for the remaining % of the market -- even if "craft" continues to gain overall share against the macros up to, say, 13-15%? I don't see many regionals making a vie (without buyout from BMC) for the top 5. And though I can see some micros moving into the 15K+ BBL/yr category, do they really free up enough room for the new micros coming on line (I don't see many breweries in planning with a 15K BBL capacity for their first year)? I just don't see that the pie is big enough to support all the new folks -- meaning the shakeout among breweries may be even greater than anticipated. And isn't that exactly what the article is talking about?

 

I think the message board is having trouble with the definition of a "bubble".

Certain regions are trending into "overcapacity bubbles".

A worst-case scenario would be that these numerous lesser brewers with inferior product compete for limited supplies of essential brewing ingredients and retail shelf space resulting in an increase of production costs for all and littering the shelves with marginal beer.

 

More math:
In 2011, 813 micros produced 1.4MM bbls. 1761 bbls each.
In 2012, 1118 micros produced 1.9MM bbls. 1704 bbls each.

So the average size got smaller because of the new guys brewing tiny amounts. I wish I had a breakout of just the carryover micros, but I dont, not without adding up the entire list myself.

Just to be nitpicky, but Lagunitas is right on Deschutes ass and growing faster, so they may already be top 5 in 2013.

Back to original point. Im saying that if the micro sector increases to ~2.6MM (same growth rate as 2012), that provides both room for the 1118 to grow and for new guys to come in at under 1k bbls each.

I dont know if I still have the spreadsheet but I played around with a power law fit model 6 months ago, and there were still room for a TON of smaller guys, even with the bigger guys growing. It does require B and MC to get smaller though.

 

The only thing as consistent as threads being repeated is 5thOhio complaining that threads get repeated .

 

That's a pretty low-ball figure for anyone wanting to create a sustainable, profitable business, IMO. If I were to open a brewery, I'd aim for at least 2500 BBL in the first year, ramping up to 5K, 10K, and even 15K in the subsequent years. Where do you put their numbers in years 2, 3, and 4?

 

With respect to San Diego in particular, I've had this discussion with a friend who thinks that San Diego is oversaturated with breweries. However, I point out that Napa / Sonoma has hundreds, if not more than a thousand small wineries, along with the usual big boys, all in a relatively small and fairly remote place. It is a destination for wine lovers and I think San Diego is becoming, or can become, such a destination. I don't think San Diego is close to being oversaturated.

There will be failures, of course, just like with wineries in wine country.

 

Why can't people just enjoy all of the beer varieties and options, and stop worrying. The people that keep talking about the "bubble" are probably the ones that want it to pop and reap the rewards. I enjoy the competitive marketplace. No competition = Crappier expensive beer