News "We are in a time of irrational exuberance in craft brewing" - Greg Koch

Discussion in 'Beer News & Releases' started by Levitation, Nov 15, 2012.

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  1. stupac2

    stupac2 Zealot (518) Feb 22, 2011 California
    Beer Trader

    No one thinks the industry can sustain this growth indefinitely. If craft beer grows at 10% a year for 100 years then there would be 13,000 times as much beer around. That's more than we can possibly produce or consume.

    But "this growth can't continue forever" doesn't mean "bubble". A bubble is when something is out of line with the fundamentals. So a stock bubble is when the stock is priced higher than it's actually worth. A wheat bubble would be when more wheat is being produced than consumed (like pre-dust bowl). There's no indication that more beer is being produced right now than people are willing to consume.

    As I said upthread and none of the beer who continue to use the word "bubble" seem to have noticed, it's perfectly possible to imagine craft beer plateauing, and reaching a rate of growth consistent with population growth but not above it. That would mean that, despite growth slowing, there was never a bubble.
    That's not a bubble, that's creative destruction. No one says that there's a restaurant bubble, but that's probably the market segment with the most failure in it.
    That wasn't a bubble, that was people seeing a way they could make money and going for it, also known as "capitalism".
    Beerandraiderfan and cavedave like this.
  2. mrkrispy

    mrkrispy Initiate (0) Apr 5, 2006 California

    A lot of BA's are relative noobs to the craft beer industry. However, there are many of us (that includes me) that were around for the mid-to-late 90s boom and bust. I see similarities within the last year back to that time. While things are different now market-wise as far as people wanting better quality (i.e. "real") food and drinks, there is a growth curve comparable to the late 90's craft beer bust. There are a large amount of craft and not-so-craft beers flooding certain markets. Many of these beers are not good quality and can have an overall negative impression on gateway craft beer consumers. Additionally, prices have gone up quite markedly the last 2 years (in San Diego the $4 craft pint is now $6).

    In the 90s BMC had a large part in the demise of the craft beer boom by market leverage, as did investors who knew nothing about craft beer nor cared - they just wanted what looked like an easy profit.

    The latest boom has more of a backing of people that feel strongly about craft beer (at least in San Diego) but it doesn't mean they have the money to avoid regular investors. That coupled with the higher startup costs, higher material costs, and lower profit margins make for gloomy prospect of the growth sustainability.

    In my vision, every neighborhood will soon have a good local brewery, and maybe a great one. It's those other mediocre ones that may not be around in a couple of years.
    pwoody11 likes this.
  3. YogiBeer

    YogiBeer Initiate (0) May 10, 2012 Illinois

    I have a bit of a different viewpoint, coming from a bit of a different background. Let me explain.

    For the past four or five years (up until about 6 months ago), I spent an EXORBITANT amount of money on craft beer. I bought basically every 12, 15, or 20 dollar specialty bomber that I came across, I would drive long distances to great craft bars that I knew had insane selections and spend upwards of 80 dollars on beers, I spent lots of time researching on the internet... all on a chef's salary. Long story short, witht he money that I spen on craft beer in the past half decade, I could have put a hefty downpayment down on a rental property.

    Finally, I started to think abotu all of this money that I had poured into my obsession. I realized that yes, I had learned a lot, and had enjoyed a large portion of the beer I had consumed. However, I realized that I couldn;t continue my spending habits if I ever wanted to own anythin substantial or save any money, so I've since cut back, and buy an expensive bottle ($10+ for a 22oz) MAYBE once a month. The rest of the time, I've found myself considering much more affordable, yet still completely delicious and satisfying beers. Do I miss the more expensive ones? Kinda, I guess. It made me realize that that half hour of self indulgent pleasure wasn't really worth the crazy lines or insane price tags.

    Why the novel? I think that craft beer drinkers in the future are going to be thinking along the same lines as I do currently, and I think the mosts uccessful breweries will be the ones thats upport this type of thinking, with a few super-special (but still affordable!) seasonals to back up a solid regular line up. Look at the brewery that started it all.... a ton of middle-of-the-road, affordable beers... and some fancier but only slightly mroe epxensive beers for people who become a bit more adventurous. BTW, they also donate thousands and thousands of dollars to upcoming craft breweries, as they believe that competition is a great thing.
    peteinSD likes this.
  4. pwoody11

    pwoody11 Zealot (549) Nov 23, 2009 Delaware
    Beer Trader

    As I prefaced in my last post, I apologize if I was mis-using that term. Plateau may be a better term, although I feel like there would be a nice decline before leveling out. The word I think fits best is over-saturated.
  5. stupac2

    stupac2 Zealot (518) Feb 22, 2011 California
    Beer Trader

    You think it currently is oversaturated?
  6. pwoody11

    pwoody11 Zealot (549) Nov 23, 2009 Delaware
    Beer Trader

    No, at least not where I live. I'm speaking in the foreseeable future at the current growth rate.
  7. 395er

    395er Initiate (0) Apr 29, 2011 California

    As someone that also lives in SD county, the new breweries get one shot from me. And their beer, whatever style, has some well-established benchmarks to measure up to. If they fall short, there's no reason to give them a second chance. That's the market deciding. I honestly think some are opening breweries here just for the SD origin, thinking it'll give them some sort of credibility. But mediocre or bad craft is as bad as BMC in the grand scheme for me. The frustrating thing are the great beers that are hard to get even here in the county. Alpine obviously, but I've enjoyed the Societe beers I've had, and they're just not very prevalent. The only new brewery I'm really looking forward to is Bagby's, and they inked their lease this week about a mile from my house.
  8. Icarus

    Icarus Initiate (175) Oct 6, 2012 Minnesota

    Well more craft beer for me to drink seems like a good "problem" to have, bring it on!
  9. sandiego67

    sandiego67 Initiate (0) Feb 25, 2008 California

    I think Bagby is looking for investors.

    "Experienced Restaurateur and an Awarded Master Brewer are looking for an investor to help them open a brewery. The Restaurateur has nearly 10 years experience as an owner (and currently owns a successful local restaurant) and another 10 years prior experience in the industry. The Master Brewer has about 20 years experience with GABF and World Beer Cup Double IPA Gold Medals. We already have the brewing equipment and are working to finalize a warehouse location. We are looking for additional funding for the T.I. costs and initial running capital. The concept involves brewing beer to be kegged and bottled at the warehouse for distribution to bars, restaurants and stores, as well as sold at an in-house tasting room. Additionally, the Restaurateur will carry all beers at his existing restaurant, which will immediately create additional exposure and sales. We are ready to move forward immediately and could be open by the end of the first half of 2013. Serious inquiries only, please. We are looking for someone who as $100,000 - $200,000 to invest in a very profitable and successful industry in San Diego."
    1424IpA likes this.
  10. ChadQuest

    ChadQuest Initiate (0) Mar 4, 2009 Illinois

    Craft Drinkers will continue to grow, but the amount of breweries will be cut back. TOO MANY NEW AND MEDIOCRE BREWERIES.
    YogiBeer and pwoody11 like this.
  11. TheBigEast

    TheBigEast Initiate (0) Oct 21, 2004 New York
    Beer Trader

    There is a limit to how many big micros can be supported in the marketplace. However, there is room in every city in the country for multiple small little breweries selling beer out of their brewery to locals. Heck, in the Finger Lakes region nearby where I live, we have over 100 wineries and nowhere near that number of breweries. The market share of craft brew is still very small and has lots of room to grow. Fortunately, the growth rate is nowhere near the bubble we saw back around 1996 when craft surged ahead at a 50% growth rate. The next year it was down to 5%. The growth rate today is far more sustainable - with bumps in the road to be expected. Sure there will be many casualties along the way (in part because of mediocrity along with poor business plans) but we're just getting started folks and we've come a long way since I got started in this hobby in 1990. Cheers!
    RyanShipman likes this.
  12. cavedave

    cavedave Poo-Bah (2,164) Mar 12, 2009 New York
    Beer Trader

    Mr. Koch gives excellent advice not only for breweries but for business in general, and in fact doesn't really foretell any up nor downturn in the fine beer industry. It basically needs to be understood as what it is, a simple primer for how entrepreneurs need to plan and think. Make a good product, watch the bottom line, keep your eye on the ball, you have a good chance to succeed. Don't, you have a good chance to fail.

    Any industry can fail as a whole for unforeseeable reasons. Ask buggy whip manufacturers. Beer can be replaced as a popular beverage by another, more popular. Likely? Ummmm, I'm thinking no.

    Here's another lesson Mr. Koch doesn't give. Find an industry growing at 13% annually that currently has only 6% of the potential market, and that is an industry that offers opportunity. Anyone think of an industry like that?
    JediMatt, IceAce and hardy008 like this.
  13. Flashy

    Flashy Initiate (0) Oct 22, 2003 Vermont

  14. WhatANicePub

    WhatANicePub Initiate (180) Jul 1, 2009 United Kingdom (Scotland)

    It’s actually the other way around. I hear the majority of American breweries are brewpubs. On the other hand, most microbreweries in Britain are production breweries that supply pubs. It is quite rare for a microbrewery to have a bar on the premises, though this is slowly changing. Many do not have a suitable location or enough space to operate a bar.
  15. pwoody11

    pwoody11 Zealot (549) Nov 23, 2009 Delaware
    Beer Trader

    Interesting. I saw this docu called Beertickers or something and this guy had like 30k ticks. He went to small breweries all over the UK. Are they content with supplying a couple local pubs? Or do they aspire to be the next Samuel Smith?
  16. hopfenunmaltz

    hopfenunmaltz Meyvn (1,255) Jun 8, 2005 Michigan

    While it is true that there are more Brewpubs than Breweries, the trend now where I live it to open Breweries. You don't pay for a kitchen (unless you want to), and you can also distribute the product from a Brewery.
  17. gopens44

    gopens44 Poo-Bah (1,755) Aug 9, 2010 Virginia
    Beer Trader

    This would make the third "bubble moment" that I will have seen in craft, but this time there would be a slight difference. The local movement creates an environment where good local brewers can thrive in while forcing out mediocre national or regional brands, who in turn could become more viable by accepting contraction. The brewers that may fall off the bus are the ones that fail to recognize the climate around them, due to hubris, shortsightedness or failure to reevaluate their business model.

    Just sayin'..........
    cavedave likes this.
  18. rlcoffey

    rlcoffey Initiate (0) Apr 20, 2004 Kentucky

    I dont think we are going to go 10% 10% 10% 0%. But it woudnt surprise me to go 10% 8% 6% 4%. But not for a while.
  19. hopfenunmaltz

    hopfenunmaltz Meyvn (1,255) Jun 8, 2005 Michigan

    Had an interesting discussion this afternoon with some local brewers who think a shake out is on the way. The more you talk to people in the industry, the more you hear this.

    In Michigan, many of the biggest brewers have completed big expansions. The Bells and Founders will continue to grow. Some of the small ones with questionable quality may not stick around.
  20. Inoracam

    Inoracam Initiate (0) Nov 17, 2012 California

    No need to worry, prohibition log ago. It won't be revisited.
  21. Inoracam

    Inoracam Initiate (0) Nov 17, 2012 California

    I'd say these breweries should expand and open up more stores that offer their product. I love Stone Brewery; they're the ones that got me into the craft brew side of things, so making it readily available is required. They just opened a Stone Store in Pasadena (Los Angeles County), so it's a start. It's in a prime location and word of mouth will begin to build up. You can bring in growlers for fillings and they will have ultra special editions for sale in bottle and tap form. Obviously the SD breweries are extremely saturated in those areas, so it makes sense to branch out and open up brick 'n mortar shops offering the same high quality brews for everyone to try out. Unless you have tip-top marketing you will only ever get the tourists to come out to visit the breweries. Bring the craft brews to the masses as opposed having the masses come out to the breweries.
  22. mattbk

    mattbk Devotee (467) Dec 12, 2011 New York

    it always frustrates me when the Brewers Association statistics are ignored in these discussions.

    2011 US Openings

    2011 US Closings


    174 open, 12 closed. 12! thats a 14.5 to 1 ratio of open to closed. this is growth. when the numbers start to equalize, or reverse: ie 1 to 1, or worse, youll know this "bubble" is here.

    and, btw, this speculative "bubble" is on number of breweries only. as others have said, with only 6-7% of the market, craft brewing is nowhere near saturated. the double digit growth will continue for the industry, with (again already said) the guys who brew good beer and run their business well consolidating the other guys.
  23. hopfenunmaltz

    hopfenunmaltz Meyvn (1,255) Jun 8, 2005 Michigan

    The brewpub stats are a little less stellar.
  24. mattbk

    mattbk Devotee (467) Dec 12, 2011 New York

    still 3:1. i attribute the difference to the fact that brewpubs are tied into restaurants, which has a much higher rate of turnover. if you want to own a good brewpub, i would guess youd have to make good food, have good service, nice atmosphere, be in a decent neighborhood, etc. production breweries dont have to meet these criteria.
    CBlack85 likes this.
  25. Arbitrator

    Arbitrator Initiate (0) Nov 26, 2008 California

    Technically, wouldn't that mean that the bubble has passed at that point?

    I'm no economist, but it seems to me you can't conclusively prove there's a bubble until it has burst.
    cavedave likes this.
  26. FatSean

    FatSean Initiate (0) Jul 4, 2006 Connecticut

    I think a lot of breweries and investors are going to be left holding the bag. My completely ignorant idea to survive the inevitable peak in craft beer consumption? Focus on less high-ABV beers and keep the price down nice and low. I don't want to see 4.8% beers for a buck less a 6-pack than something that is 7% or more. Face it. Consumers look at booze-per-buck.
  27. hopfenunmaltz

    hopfenunmaltz Meyvn (1,255) Jun 8, 2005 Michigan

    Back in the early 90s the failure rate for brewpubs was much <10%. It was the can't lose formula that every wanted to get into. Then things slowed down, and the poor ones went away.
  28. Sauce

    Sauce Initiate (0) Aug 19, 2005 Ohio

    Heh...the hop shortage is already here and real. Aak a startup within the last year what varieties of hops they have available now. Ask a brewery or brewpub what hops they are going to be brewing with in 2014 if they arent contracted out that far for certain varieties.

    ....Can brewers make do with the available hops out there? probably, but new breweries wont have access to signurature IPA hops like Citra, Simcoe, Amarillo unless they had the forsight and bankroll to contract in the planning stage. Of course some of these hops wil invariably free up if/when some breweries close or dont meet their production expectations, but I really didnt see much of that this fall.
  29. nanobrew

    nanobrew Initiate (0) Dec 31, 2008 California

    As a fellow SD resident I understand where Greg is coming from. There are a LOT of breweries in SD, and a lot more opening in the future. Though there are a lot of breweries in other regions (CO, OR) I think our model is slightly different. Instead of a bunch of small brewpubs it seems a lot of the new breweries want o focus more on production. Which in this time of growth is fine, however, a lot of these breweries are continually expanding. This means they are taking on more debt and will have to continue to grow to survive. I think these places should slow down their expansions and be set in a business model that does not need growth. Some of the local ones I feel like that need to slow down are Hess, Manzinita, Iron Fist, and Mother Earth.

    I want all of these breweries to succeed. What I don't want are them to mistake the momentum of craft beer as personal success and build beyond their means.

    Russian River not only impresses me with their beer, but with their business setup. I have no doubt that if the craft beer market crashed, they would still be around. They are not guided by continuous expansion, they have a nice location that serves food, and they have a simple (read: small) yet outstanding line up of distributed beers.

    I believe the Bruery is trying to get to that point, at least they have talked about slowing down expansion. I think it would help the Bruery to limit more of their distributed beer. They could focus more on staples and not be spread thinly if the craft beer market start to slow, as their price point and demographic could be the biggest victim in a down beer market. Plus it would allow them to not have to expand, yet keep the experimental beers for the local and RS market (which is a great way to guarantee sales and get up front money).
    ehammond1 likes this.
  30. sacrelicio

    sacrelicio Initiate (0) Feb 15, 2005 Minnesota

    Reminds me of a new "art/beer project" brewery opening in Duluth, MN that is taking this model to the next level, skipping straight to the expensive, hyped, members only release model, without any sort of real pedigree (the brewer worked at Fitger's for 7 years, not sure at what level though):

    Of course the beers are all barrel aged sours and crazy imperials and whatnot. Each bottle comes with artwork from local artists and even without the artwork the beers sell for about 30 bucks a pop and can only be purchased as part of the membership club. On top of that, they are basing themselves in the Duluth area, which is a pretty small market, and they won't ship the beer, so only locals can buy it. I'd be surprised if they could pull this off in the Twin Cities, let alone up there.
  31. BeerIsland

    BeerIsland Zealot (548) Feb 9, 2003 Pennsylvania

    Why can't a good drinkable beer from around the corner make a great first impression? Particularly when enjoyed on draft at a local tappie that just wants the hometown beer on along side the BMCLiteLager?
  32. jasonmason

    jasonmason Initiate (167) Oct 6, 2004 California

    Yep, I think these are the ones that aren't going to make it in the long run. I just can't see that market being sustainable, for multiple reasons.
  33. BoRaeCho

    BoRaeCho Initiate (0) Nov 25, 2010 California

    I live in San Diego and I love it! Ohh, didn't mean to go on a tangent. Long live BA's!

    HANGOVER Initiate (0) Nov 23, 2012

    Well said, I would agree that novelty is driving a large portion of the market, coupled with curiosity. l tend to try every new beer beer I can find seeking out the local entries first. I buy them because they are local, but after they prove mediocre I move on, still these breweries continue to grow at an incredible rate. Some day that shelf is going to get to crowded and the mediocre brewers will get shaken out of the market, novelty can only sell beer for so long and then you need to provide quality beer to your customers. The market for these start ups is driven by first time buyers not loyal followers. I will give a brewer the benefit of the doubt and try their whole lineup not relying on a single example, but many of them fail to produce even one above average beer. Personally I would rather see ten stone beers and ten surly beers on the shelf than twenty beers form mediocre breweries.

    HANGOVER Initiate (0) Nov 23, 2012

    The Twin Cities has a different culture than Duluth, Duluth attracts a lot of tourists who go there to ski, shop and buy overpriced art/beer. The fact that this guy has a connection with Fitger's only helps his marketing, Fitger's attracts people to the area and is a landmark in the city. Disagree if you will, but I could rattle off at least 20 names of middle aged individuals with disposable income that wouldn't think twice about dropping thirty bucks on this stuff, you forget that people that are loaded don't care about price and Duluth attracts people with disposable income.
  36. sacrelicio

    sacrelicio Initiate (0) Feb 15, 2005 Minnesota

    I agree with you that there are people who will spend big buks on beer in Duluth, but this stuff is only available to members and it's not on the shelf. If they want to brew some crazy imperials or sours that cost a ton of money and are packaged with limited art and then place them in liquor stores frequented by tourists, I get that. If they wanted to follow the Bruery's business model and generate some hype first, then start a membership, I get that. But jumping straight to a members only model seems poorly thought out, especially in that market. Members only releases are usually meant for the local market, which is a bit small up there. I don't think many Twin Cities tourists will sign up until the brand is moire established.
  37. borderican

    borderican Initiate (0) Aug 13, 2011 California
    Beer Trader

    Beer is essentially something that cannot be over-saturated. It is a product that can be altered a thousand times over until you get that right beverage that everybody wants....heady topper for example. But the competition will always be out there to make that sought after beer. Not only that, the marketing would also be a difficult task(depending on how big the person making the beer wants it to be). But you got companies like Russian River that are satisfied with their profits and can politely tell distributors to "fuck off, we don't need your money!". I guess like one fellow BA said, 90% of ALL profit goes to shitty beer. It don't matter how many taco carts you got out selling the same product(tacos). It's all about that special sauce u put in that to make the fiends come back for more! ya dig! :wink:
    CWinchell likes this.
  38. biga7346

    biga7346 Aspirant (295) Jun 19, 2010 Michigan
    Beer Trader

    I would think that in some of those "stone-age" thinking towns, there would be the most pent-up demand for local, fresh brew from people who don't even realize it until it's there. If there is a bubble, I don't think we'll see it pop for quite some time b/c there are so many more local markets to cultivate b/c despite its immense growth I still see craft beer as a regional phenomenon, not a national one.

    HANGOVER Initiate (0) Nov 23, 2012

    I can agree with that
  40. 19etz55

    19etz55 Disciple (317) Aug 12, 2007 New Jersey

    Like some years ago you may see some breweries merge to survive? Micros are the best but will probably never contend in the beer market since most people want to drink a LOT and cheaper like the Bud and Coors drinkers. I like many Microheads will do our part to keep the Micro industry alive! Keep the faith! Drink less AND better may catch on some day.
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