The Craft Beer Market Bubble

Completely agree. I am loving the fact that I live in an area dynamic with brewing, almost all of it less than ten years in business.

The question is of course, as with any business, how far will the market grow and how much will the market buy?

 

I wanted to respond to this in a timely manner, but wanted data first. The holidays have allowed me to compile some info.

While not unprecidented, that is a pretty unlikely ramping volume.

I took the Brewers Accociation info on breweries between 1000 and 14999 barrels produced in 2012 and sorted them by "class", their first year of production (2007-2012 classes). Here are average results:

Class of 2007 (7 breweries):
2007: 137 bbls
2008: 987
2009: 1612
2010: 2240
2011: 3309
2012: 4309

Class of 2008 (15):
2008: 440
2009: 1424
2010: 2869
2011: 4620
2012: 6129

Class of 2009 (35):
2009: 465
2010: 978
2011: 1842
2012: 2797

Class of 2010 (36):
2010: 387
2011: 1382
2012: 2386

Class of 2011 (47):
2011: 614
2012: 2179

Class of 2012 (13):
2012: 1916

Some notes:
2007 is behind 2008 because a number of 2007 breweries have recently moved up to regionals and thus the top end is missing from the averages. 2008 has 3 breweries that will probably move up to regional in 2013 or 2014.

2012 has the highest first year because everyone who started under 1k barrels was excluded. The average couldnt be under 1k, because I set 1k in 2012 as the minimum for inclusion.

 

Found this pdf from beer marketer's insights which I thought was an interesting read. I find the assertion that increased market complexity equals commoditization to be a strange one though, surely the increased number of craft brands and styles of beer has counteracted commoditization within the beer industry if anything? Would it be easier to fend off commoditization trends if the industry consisted of pale AALs and pale light AALs? I think Luiz Edmond conflates, or deliberately confuses profitability with commoditization. Yes, in a market which is increasingly driven by the craft beer brands and the stylistic diversity that is craft, it will be more difficult to charge top-premium pricing for mass-market AALs. But I fail to see how there's a risk for commoditization where a DIPA is interchangeable with a RIS, or a pale ale, or a pale lager, or an AAL.

 

Well, this is partially what I have been shooting my mouth off about for so long: U.S. pale ales are now frequently hopped to (D)IPA levels...and many U.S. "craft" pale lagers taste more like SNPA than Spaten. That leads to a risk of commoditization for the large majority of consumers -- save for the most enthusiastic of "craft" drinkers.

Money quote from the article: "As goes California, so goes the rest of the country...of 8 top retailers in Calif, only 2 are up. And both are the only 2 where premium and subpremiums are up as well as craft."

 

Well when I think of the pale lager category I still think of European imports, as distinct from US craft, and US AALs. You do have a point about there being a drive towards homogenity within the heavily-hopped pale-beer segment of US craft, but even if we would combine the hoppy pale lager beers with hoppy pale ales and hoppy IPAs and DIPAs into a single category, there's still a hoppy-pale beer category, a not-so-hoppy pale beer category (imported pale lager), domestic AAL, and dark RIS/stout/porter at the very least. Even with such a rudimentary typology this represents an increase in complexity of the US beer market compared to 3 decades or so ago, and I would argue that this increased complexity acts as a defence against commoditization.

The big volume drivers continue to be the premium and subpremium AALs, I think it is inevitable that overall volume will continue to decrease, whereas the value and volume of the craft category will continue to increase. The mass-market AAL segment hasn't yet bottomed out.

 

Couple of things here:

1. In my local market at least, many Euro imports have lost shelf space (or, at the very least, premium, high-visibility space) to more and more U.S. "craft" IPAs/hoppy beers.

2. The prized RISs rarely even make it to the shelves before they are snatched up by "traders" or others determined to supply their "tasting group." The ones that make it to and stay on shelves are frequently decried by the selfsame (and frequently very vocal) groups as "shelf turds."

I think I'd agree that the increased complexity of offerings acts as somewhat of a defense against commoditization; however, the risk is exacerbated by the sheer number of new breweries now versus 3 decades ago.

 

This could indicate a weakening of the segment, and I think it only makes sense that the import segment will suffer somewhat due to the successes of the domestic craft beer market (since imports have been viewed as a speciality segment similar to craft, in the past at least). But I would think that the volumes are still such that one can comfortably say that European pale lager beer still is a viable category in the US beer market, and adding to the diversity/complexity of said market.

Well I seriously doubt that a few RIS brands makes up a majority of stout/porter sales within the craft beer market. Hype doesn't always equal sales volume. But even if they did, RIS would still amount to a distinct category in the market, and a rather distinct one at that.

I think there is a risk for commoditization within styles of beer, particularly the most popular styles, but I don't think commoditization is a risk for the beer category as a whole, and I think the diversity of styles makes for dynamic market conditions which allows the individual brewery (particularly smaller breweries, i.e craft breweries, which haven't invested as heavily into making one single style of beer) to adapt to the market and to the consumer. The style of beer which was a flagship yesterday might be replaced by another style, but they might still brew the old flagship only in smaller volumes. I.e, they don't have to bet the farm on the continued success of their current best seller.

 

Euro pale lager, as represented by Heineken and Stella, is well-represented, and will likely continue to be. Now, whether these brands truly add to the diversity of the market...that's another question!

I know this may sound like hyperbole, but I can't think of any RISs I regularly see on store shelves (speaking primarily about supermarkets and the like; in the specialty shops they seem to occupy shelves alongside all of the other 750s and bombers or American wilds, saisons, and other strong ales). While they may represent a major contribution to U.S. "craft" brewing, they don't seem to have found much popular purchase. I could be wrong here....

The potential for adaptability may theoretically be there, but the reality seems to be very different. U.S. "craft" brewers seem to be good at hoppy styles, and considerably less talented at brewing other styles. Again, I know this is highly subjective, but according to the report you posted, much of this anecdotal "evidence" seems to be playing a role in a growing sense that U.S. "craft" is beginning to be haunted by (real or perceived) risk.

 

IMHO, the only Craft Beer bubble is/are the carbonation bubbles in the beer. And they're a good addition.

 

Right, I include both Heineken and Stella Artois in the European pale lager beer category. I realize that most on this site will consider beers like this to be of poor quality and hardly any taste, whereas I consider them to be milder versions (amalgamations) of European pale lager styles such as Münich Helles lager, Dortmunder lager or pilsner. I still think they are tasty beers and beers of taste, albeit milder and adapted for a mass audience. But I think we can at least agree that tastewise it offers something different compared to an American craft stout like Anderson Valley Oatmeal stout, or Anchor Porter, or Sierra Nevada Porter (not saying that these brands make up a significant portion of the top fermented dark beer market in the US, they are merely examples which I have personally had).

Well my point was that they don't represent a major contribution volumewise, in agreement with you, but that there are a number of stout and porter variants that make up a significant portion of craft beer sales in the US. I thought your argument was that since these RIS beers barely touched the shelves due to the hype that surrounded them, that they had cornered the dark top-fermented beer market. But that wasn't the case it seems. My point was that dark top fermented beer makes up a healthy and growing part of the craft beer segment.

Well there is alot of room for subjectivity when it comes to "tasty beer" (which is the basis for most purchases I would imagine). Even if you personally might dislike the beers being made by a certain US craft brewery, what matters for the category is that most people enjoy the beers that they are making.

As it concerns the risks that are haunting the craft market I think the risks are played up by brewers such as ABInbev, who are facing downturns in demand for their major brands. It's in their self-interest to play up the value of brands in these new market conditions, even as distributors might find themselves earning higher margins off of craft beer brands compared to mass-market brands. ABInbev still have volume on their side (a larger portion of the wholesaler's or retailer's beer sales), and thus profitability, but if volume were to slide further, at some point they will lose this advantage. They are trying to maintain their own profitability as well as the interest and focus of their retailers, which contributes to their profitability by playing up their own brand-focused strategy.

 

This topic is fairly complicated, but my view as someone with an education in this is that as long as supply grows with demand, there won't be a crash unless if demand for beer tanks, which I doubt. Potential demand for craft beer is basically capped at the overall demand for beer, and we are far, far, far, far, far, far, far, far, far, far from reaching that number.

There's no bubble in the craft world. A 'bubble' would only exist if demand rapidly jumped out ahead of whatever the average demand for beer overall has been the past ten years. When supply and demand go up harmoniously, everything is gravy. There may be 'bubbles' for individual breweries that take out too much money to build pubs/breweries/expansions that their individual markets can't possibly support, but overall things are good. Those scenarios are for people who act before doing all of their research.

Now, what can happen, and I'll tell you right now a brewery like the Alchemist is a prime target for this, is that breweries that make great beer in the middle of nowhere could die off as craft continues to expand. Once your local brewery makes an IPA as good or close to as good as Heady Topper, why the heck are you going to go out of you way to pick up some Heady Topper?

So I see a world where we have some big brands and a whole ton of small local brands. Like now, but with even more brewers than today.

 

To be the 3rd largest craft brewer and not sell in the Northeast in quiet a feat when you think about it.

 

The only thing in the craft beer world that even comes close to being a bubble is the trade market and second hand sales market. There are a a lot of beers that people hoard based on the idea that their value will go up, and I think value is peaking for most of them. How many bottles of Rare and King Henry are sitting in basements right now? How many recent releases are being hoarded because people think they will rise in value? How crazy have trade values and second hand prices been lately? The only bubbles popping will be in cellars.

 

I think in the coming years, this industry may operate similarly to the restaurant industry - new places opening and closing all the time. It would be more of a continuous cycle than some sort of epic "one-shot kill" event. New players will always come to light, and the ones who grow tired or don't have value will fade.

Additionally, I think it would be interesting to see craft beer get big enough as an industry that some of the major players like Stone or Dogfish start buying up smaller producers with really great product to try and manage competition and increase reach. I feel like that may be more palatable to the craft consumer than an InBev buyout. Thoughts?

 

That is an interesting notion about major craft brewers buying smaller producers. I like that idea if they increase production at the smaller brewers and get more beer to more places. I do think that market saturation is coming though. Although craft beer revenue has, according to th Brewers Association's statitics, increased in sales dollars by 17% from 2011 to 2012, the overall domestic beer market only increased by 0.9%. This is the kind of situation and I think craft will eventualy reach, and cause the breweries with less competitive advantage to fade as you put it. The rapid growth rate will eventually level off as the maret becomes more and more saturated. However, I don't believe there will ever be a shortage of great beer to choose from, just less and less start-up breweries.

 

Craft beer represents 6.5% of the beer market. That leaves a lot a room for continued growth....

 

Hipsters drink Budweiser now. Its an ironic thing.

 

Unfortunately this hasn't happened in wine, so it likely won't happen in beer.

 

I'd argue that the wine supply is much more limited and weather-dependent than beer. You can make a similar beer year to year and don't have to own your barley or hops fields to do so. Vines and grapes are pretty scarce commodities, hence the high value of great wine and vintages.

 

Maybe they can throw in some mid-90s MLB rookie cards to sweeten the deals.