Fortune Magazine published a story by Chris Morris May 14th that is getting a bit of attention, posing the thoughtful question: Is craft beer in a bubble?. The New York Times published Craft Beer Is Booming, but Brewers See Crossroads asking the same question on February 4th. I am now getting this question quite frequently from my friends both inside and outside the industry. I’m in Chicago at the National Restaurant Association Show #NRASHOW and this was a hot topic last night over cocktails.
It is particularly relevant given the amount of new outside money (many of my YPO and friends from other industries are investing in local breweries and increasingly distilleries.) I read the statistic that there is a new brewery opening on average every day in the US this year. In Fortune, they increase this by end of year to every 12 hours. This statistic is a bit alarming on face value, but let us dig a little deeper. To answer the question, one must answer two others:
1. Market Growth: Where is the market going – meaning is the growth in craft share going to continue and to what level?
2. New Capacity: Given the market assumptions from #1, can the size of the market absorb the growth in total capacity?
Market Growth: First, a little perspective: In craft beer boom 1.0 (circa mid 1990s), Chris Miller correctly points out there was a slow down in late 1997 and then flat to low growth for more than a decade before the current much larger boom. My company at the time was actively investing in and building multiple craft beer brands both on the distribution front in Chicago (Goose Island, Sierra Nevada, Pete’s, Bells) as well as regionally/nationally (Goose Island, Rogue). Fortunately, we also had a healthy import business (Grolsch, Staropramen, Tennant’s) that continued to boom during the slowdown. At the start of the current boom, we helped Flat12 start-up in Indianapolis and acquired Napa Smith Brewery in 2009 (sold in late 2012). There is very little comparison this time around from the 1990s. The degree of craft beer penetration into the beer market is fundamentally different. It is much deeper and wider, and is touching every market in some way. That said, the current level of craft sales as a percentage of the beer market is still quite small nationally (11% of volume according to the Brewers Association) vs in select highly developed craft beer markets (Portland, Seattle, San Francisco, Denver). That number has roughly doubled in the past 5 years. I predict craft beer sales will double again and exceed 22% of the US beer market by 2020. This mean approximately 22 million barrels of new craft sales on top of the existing 22 million.
(NOTE: one aside/caveat: craft beer is narrowly defined as independent brewers excluding cross ownership by larger companies in the alcohol industry. This is more political than it is any reality with consumers. Therefore the current share is actually a bit larger than 11%, adding in brands from companies like Goose Island and Craft Brewers Alliance (ABI). My 22% number includes craft taken over by larger brewers).
New Capacity: This is where the “new brewery every 12 hours” statistic is not the most relevant one. The important question is how much new capacity is actually being added to existing breweries combined with new breweries? 95% of the new breweries (and existing breweries) are more like restaurant businesses with a touch of manufacturing, than they are breweries. They will never sell any meaningful volume outside their four walls of the tasting room. There is nothing wrong with a local brewpub being a go-to stop for local people and there is clearly a market for this form of on-premise account. The real question is how much capacity are the production breweries adding and how many of the start-ups actually believe they are going to sell beer outside their four walls. This is where the true competitive dynamic in the marketplace will come into play. Most new breweries that intend to go to market through distribution and retail will fail. This is not because they have bad beer (some might but will die quickly) but rather they cannot make their brand relevant to the consumer in such a crowded field. This lack of differentiation and branding will prevent them from having any meaningful distribution and retail penetration.
The lack of experience in running a full service brewery with a restaurant, attached to a major manufacturing operation, attached to a distribution business, attached to a consumer marketing company will be the downfall of many. Here at the NRA, the 1000’s of operators can attest to the competitive nature of the restaurant aspect alone. There are a lot of smart investors in restaurant companies that have leadership teams with deep experience fighting hard for their share of the consumers’ purchasing dollars. Breweries that want to scale must both run a brew pub that competes with them and figure out how to sell in their beer to a limited number of tap handles available.
My conclusion as of today: The market can absorb many more breweries and capacity than exists today. The ones that remain focused on serving their local clientele will have the best chance of success. The ones that enter the fray of production and distribution will enter one of the most competitive and tough businesses that exist. Those that do not bring an experienced team, significant capital, creative and compelling branding and distribution to the table will fail. There is a bubble of inexperienced entrepreneurs combined with inexperienced investors who are entering the market. I look forward to the shake-out and the opportunities it will create for those prepared. In the meantime, I love capitalism at work and entrepreneurial spirit the craft beer market is demonstrating for all to see.
The headlines and press statements around some of the latest beverage alcohol industry channel conflict are extraordinary and gaining attention across the country.
A new craft brewery is opening up every day, adding to the over 3,000 currently operating in the USA (Brewers Association). There are 100s of new craft distilleries that have opened up over the past few years with many more in the works (American Distilling Institute). There are more than 7,000 wineries as well (Wines & Vines).
All this growth in new entrants is the result of renewed consumer interest in trying new things. The Millennials have driven much of the new growth and vibrancy. It’s an exciting time in the beverage industry. That said, every large-scale established consumer brand across multiple industries is trying to figure out what to do and how to keep their base, grow it and remain relevant. Anheuser-Busch Inbev was roundly criticized for their “anti-craft” beer advertisement for Budweise
r during the Super Bowl. As I wrote about, this was them playing the hand they hold and making the best for a giant brand in decline.
These issues are a lot more complex than they appear and have interesting and changing industry alliances. I am constantly asked (last night included) why the laws are the way they are, by consumers and business people who are not from the industry. Here is a brief explanation:
The simple answer is the current legal and regulatory framework in the US is the result of two Constitutional Amendments. The first one was to ban all alcohol aka Prohibition (18th Amendment in 1919). The second one was to repeal Prohibition (21st Amendment 1933). To pass a Constitutional Amendment the Congress must pass it with a 2/3 majority vote in both houses and then it goes to the 50 states and must pass ¾ of the statehouses to become ratified. A very high bar indeed. Prohibition was a national disaster of epic proportions. However, it was created in response to some significant excesses by the industry and public. A lot of the excesses were blamed on what is known as “Tied-Houses”, whereby the brewers owned the taverns. The drunken excess of many in the public was attributed to the brewers have a direct interest in selling as much beer as possible and controlling the point of consumption. The saying “There is no such thing as a free lunch” came from this era. The brewers would give away free sandwiches at the taverns they owned. Sounds good, but they would salt these sandwiches excessively so that the patrons would drink more beer.
Whether you agree or not that “tied houses” were the root of all evil, this was the majority view when in 1933 the nation’s failed experiment in Prohibition came to an end. Even though it was clear to most that this government intrusion into industry was a disaster, there were still large numbers of anti-alcohol constituents throughout the land. The compromise to get the 21st Amendment passed was to allow each state the absolute right to regulate the sale and distribution of alcohol within its boarders. The 21st Amendment does not have an opinion on tied houses or any other aspect of how the industry does business. The Federal Alcohol Administration Act did spell out specifics on regulations of the industry to insure the revenue and to protect consumers. It did not however, spell out any specifics regarding a “3 tier system”, but rather defers to the 21st Amendment that in turn defers to the states.
Each state proceeded to set up its own set of laws and regulations. There are 50 states and 50 sets of laws that while some may resemble each other, none are identical. Layered onto the specific statutes and regulations are the interpretations by alcohol boards or chairmen and the courts. The most common way in which the states addressed the tied house issue was to legislate a middle tier (wholesaler) to be a buffer between the suppliers and the retailers. This is what is commonly referred to as the 3 tier system. There have always been some states that allowed brewers to own wholesalers, though this was the exception.
In the case of Kentucky’s new law, Anheuser-Busch Inbev has owned distributors there for more than 40 years and had attempted to buy a 3rd. That prompted the wholesalers to attempt to stop them and when other means failed, it ended with this new legislation not only not allowing them to buy the new distributor, but also forcing them to sell their existing businesses. I have no idea of how the courts will view this, but from the sound of it, ABI will not go quietly.
I can’t help but think the latest turn in the 3 tier beverage alcohol industry channel conflict is an example of overreaction that will do nothing but cause further escalation. When one considers all the new brands that have launched and keep launching in beer, spirits and wine and the need for each to find ways to market, it is clear that broad based full line distributors provide a viable route to market for many. All of the main distributors have giant books of brands now, and they serve some very large suppliers and many smaller ones well. In many cases they serve these needs of smaller brands by creating specialty sales divisions. They do not serve every brand well, nor can they. This has created market conditions in most states where a new crop of smaller start up distributors have emerged, primarily handling specialty or craft brands. Where specialty/craft distributors have emerged, they have become a necessary escape valve for small and new brands getting distribution to retail. In markets that allow it, and many states have provisions up to a certain size, craft breweries can self distribute. This is expensive but a necessary option in cases where there are no viable distributors to carry a new brand. Stone Brewery in San Diego and Sun King in Indiana seem to be examples of self-distribution that has been successful. I wonder if this will become more prevalent with spirits as the number of craft distilleries grows.
The current approach, though ugly at times, has worked to provide a route to market for a thriving craft community. The pressure to get new brands to market is only going to increase. It is unclear to me where the craft community will end up better off – with strict laws that don’t allow suppliers to own distribution (of any size) or with looser laws that give options. I tend to think most small/new brand will end up supporting a more flexible system, but the bigger brands, that are doing well in the traditional 3 tier system, will support the stricter system.
It may be that there are simply too many competing interests to work out viable solutions to everyone’s satisfaction on these issues. It would certainly be better for the industry if there were agreement as opposed to legal or legislative fights. ABI is a powerful entity as are all the major suppliers. Poking them in the eye with a local legislative win, may end up being a case of winning the battle but losing the war in some ways. It is unclear to me that the KY law actually helps craft brewers or simply hurts ABI or it it even does that. ABI can still control largely the activities of an independent distributor, as they have been able to do, in many other states. What is clear is that this KY battle is not the end to this fight.
It will be interesting to see how this continues to play out. Love to hear your comments or questions. Cheers! Smoke
Smoke has worked in all 3 tiers of the industry, built beer wine and spirits distributors, owned a craft brewery, a winery, and multiple craft spirits brands. He built the leading technology for pricing between suppliers, distributors and retailers. He also represented the WSWA as Chairman & President and the Brewers Association on the Government Affairs Committee.
Keynote Announcement… please join us this summer at our 9th annual WITS conference… it will be great!
FOR IMMEDIATE RELEASE APRIL 25, 2013 Contact: Waunice Orchard firstname.lastname@example.org
Thought Leaders to Discuss Strategic and Tactical Uses of Technology, Building Elite Teams and Lessons From the U.S. Military Special Forces.
Best Practices To Drive Wine Brands and Businesses
at the 9th Annual Wine Industry Technology Symposium Symposium
Napa, CA— April 25, 2013— Wine Industry Technology Symposium (WITS) today announced its Keynote speakers for the 9th annual event to be held July 15 & 16 in Napa, CA. Keynotes by Larry Broughton, Jonathan Good and Miles Ward bring elite leadership, social media and the transformative cloud to the wine industry.
Keynote ELITE: 5 Special Ops Success Strategies for Building Top Performing Teams: Imagine what would happen if you place 12 highly intelligent, Type-A personalities in a boardroom and gave them a task to perform. The result would likely be complete pandemonium! Yet the U.S. Military has discovered a way to turn top individual performers into unstoppable teams literally capable of toppling countries. Award-winning serial entrepreneur, author, speaker, and former U.S. Army Green Beret Larry Broughton shares his insights on transforming ordinary teams into extraordinary ones.
“I’m very pleased to have Larry, Jonathan and Miles join us on our Keynote program.” said J. Smoke Wallin, founder and co-chairman of WITS. He continued, “I have had the privileged of interacting with each of our speakers and know they will each deliver inspirational and thought provoking discussions that will deliver real take home value to all our winery attendees.”
Jonathan Good, Senior SMR Solutions at Oracle will give a keynote on “Developing a Social Relationship Management Strategy in the Wine Industry”.
Find out how to create a strategic social media program that will build brand awareness and buzz, drive revenue and gain the trust of your online community. Learn social media best practices and how to manage and recruit a community of supporters who will embrace and recommend your brands through the use of social relationship management best practices. Jonathan Good is a Senior SRM Solutions Consultant at Oracle. He provides technical and functional support to prospective clients and customers for Oracle’s Social Relationship Management platform.
Before joining Oracle, Jonathan was the founder of HelloSocialMedia.com – a social media and marketing agency that focused on the creation and execution of social media programs, including blogging, community development, Internet marketing, design and web development.
In addition, Amazon, a company that has revolutionized whole industries, has now gotten serious about the wine industry. Find out about how Amazon is building the next generation platforms that are literally transforming how software and services are delivered, from Miles Ward, Solutions Architect, Amazon Web Services.
Miles will speak about Big Data for Real World Businesses showing tools, techniques and clear ROI for analysis in the cloud. Miles helped NASA live-stream the Mars Rover landing, developed the Obama For America 2012 presidential campaign, and has helped thousands of companies make the leap to the cloud.
“I’m very pleased to have such a strong program for 2013. I look forward to welcoming the industry to our 9th Annual event!” said, Lesley Berglund, co-chairman of WITS and co-founder and chairman of the Wine Industry Sales Education (WISE) Academy
Berglund continued, “When Larry Broughton is not speaking and coaching, his day job is running his luxury hotel company, Broughton Hotels. Having an operator who knows the wine business where it touches the consumer will provide a unique perspective to our winery attendees.”
Early bird pricing to attend WITS end June 1, 2013. Attendees can register at www. wineindustrytechnologysymposium.com beginning May 1.
About WITS: The Wine Industry Technology Symposium® (WITS) is the focal point for thought leadership in the strategic and tactical use of technology in the global wine industry. WITS was created in 2005 by a group of wine industry and technology professionals to advance innovation and to address the unique information technology and services needs of the wine industry. The 9th annual WITS is July 15 & 16 in Napa, CA. Join WITS on Youtube, Twitter, Facebook, and LinkedIn to learn more.
For more information, contact Waunice Orchid of the Wine Industry Symposium Group at 707-261-8716 or email@example.com
Thanks for all the reposts and kind comments… building on my last post, I liked John Irving’s opinion piece in the New York Times “How Wrestling Lost the Olympics”.
Also, looking at the bright side, what could possibly create a headline like this:
“Iran, US Find Common Ground…”
well, the Olympics found a way to cause it…
I also agree with wrestling great, Carl Sanderson, let’s flood the executive committee of the International Olympic Committee with POSITIVE letters showing the passion and great following of Olympic Wrestling.
Executive Committee Members:
(Address at bottom)
Mr Ching-Kuo WU – TPE (Chinese Taipei)
Mr Willi KALTSCHMITT LUJÁN – GUA (Guatemala)
Count Jacques ROGGE – BEL (Belgium)
Mr Thomas BACH – GER (Germany)
Sir Craig REEDIE – GBR (Great Britain)
Dr René FASEL – SUI (Switzerland)
Mr Sam RAMSAMY – RSA (South Africa)
Mr Patrick Joseph HICKEY – IRL (Ireland)
Mrs Gunilla LINDBERG – SWE (Sweden)
Ms Nawal EL MOUTAWAKEL – MAR (Morocco)
Mr Ser Miang NG – SIN (Singapore)
Mr John D. COATES, AC – AUS (Australia)
Mr Juan Antonio SAMARANCH JR – ESP (Spain)
Mr Sergey BUBKA – UKR (Ukraine)
Mrs Claudia BOKEL – GER (Germany)
Château de Vidy
Case postale 356
Phone +41 21 621 61 11
Fax +41 21 621 62 16
Pass this on…
Dear International Olympic Committee & Olympic Sponsors
cc: Friends of Wrestling,
Your decision today clearly upset a large number of Olympic fans around the world. While we who are not privy to all of the issues you must grapple with internally, cannot know exactly what led to your decision announced today to drop wrestling from the 2020 Olympic games, it is clear you have miscalculated on at least one front. To wit, wrestling is one of the toughest sports ever invented and anyone who has wrestled at any level or has been close to wrestling can tell you… wrestlers are a tenacious lot. In fact, we don’t give up. The level of protest you can expect from this community will surely come as a surprise to all of you.
There three main reasons why the Olympics will be diminished without wrestling:
1. Wrestling, a truly international sport, has been around since pre-historic times and was an important part of Greek culture when the Olympics got its start –
According to WIKIPEDIA:
In the Ancient Near East, forms of belt wrestling were popular from earliest times. A carving on a stone slabe showing three pairs of wrestlers was dated to around 3000 BC… A portrayal of figures wrestling was found in the tomb of Khnumhotep and Niankhkhnum in Saqqara dating to around 2400 BC. Another early piece of evidence for wrestling in Egypt appeared circa 2300 BC, on the tomb of the Old Kingdom philosopher Ptahhotep…. Greek wrestling was a popular form of martial art in which points were awarded for touching a competitor’s back to the ground, forcing a competitor out of bounds (arena). Three falls determined the winner. It was at least featured as a sport since the eighteenth Olympiad in 704 BC. Wrestling is described in the earliest celebrated works of Greek literature, the Iliad and the Odyssey. Wrestlers were also depicted in action on many vases, sculptures, and coins, as well as in other literature. Other cultures featured wrestling at royal or religious celebrations, but the ancient Greeks structured their style of wrestling as part of a tournament where a single winner emerged from a pool of competitors. Late Greek tradition also stated that Plato was known for wrestling in the Isthmian games.
When the Olympic games resurfaced at Athens in 1896, Greco-Roman wrestling was introduced. After not being featured in the 1900 Olympics, sport wrestling was seen again in 1904 in St. Louis; this time in freestyle competition. Since then, Greco-Roman and freestyle wrestling have both been featured, with women’s freestyle added in the Summer Olympics of 2004.
2. Wrestling has a tight knit passionate community of participants and followers globally, who greatly value and honor the Olympics. Wrestling does not have a professional wrestling option as many other sports. Unlike many other sports, the Olympics are the highest and most important venue for wrestling. Many other sports have other higher levels (professional ). All US (and international) wrestlers who got our start after him, grew up idolizing Dan Gable and his perfect performance (no point ever scored against him throughout the games) in the 1972 Olympic games. I had the privilege of attending Dan Gable’s Iowa Intensive Training Camp back in 1983.
3. Wrestlers and their friends have significant influence in today’s society. It is ironic that the day the IOC chose to drop wrestling happens to be wrestler and greatest US President, Abraham Lincoln’s birthday. We will use that influence to do anything in our power to change this short sighted decision. Whether the wrestling greats like Dan Gable or the many others who have gone on to excel in their professional pursuits, we will work together to fix this. Here are but a few of the well known Americans who wrestled (from the National Wrestling Coaches Association):
Chester Arthur Calvin Coolidge Dwight Eisenhower
Ulysses S Grant Andrew Jackson Abraham Lincoln Teddy Roosevelt William Howard Taft
The late John Chafee (former senator RI)
Lincoln Chafee (former senator RI)
Chuck Hagel ( Nebraska )
John McCain ( Arizona )
The Late Paul Wellstone ( Minnesota )
U.S. HOUSE OF REPRESENTATIVES
Greg Ganske (Iowa )
Jim Jordon (Ohio)
Jim Leach ( Iowa )
Jim Nussle ( Iowa )
The Late Carl Albert (Former Speaker of the House)
Dennis Hastert ( Illinois ) (Former Speaker of the House)
SECRETARY OF DEFENSE
WHITE HOUSE STAFF
ACADEMY AWARD WINNER
Rocky Aoki, Benihana
Scott Beck, Boston Market
James Bigger, Nestlé
Dan Cathy, Chic-Fil-a
Stephen Friedman, Goldman Sachs and Cornell
Ron McGruder, Olive Garden
Edward Rust, State Farm
Arthur Rutzen, Wells Fargo
Greg “Pappy” Boyington
Charles C Krulak
Stephen Neal – New England Patriots
Antonio Garay – San Diego Chargers
Davin Joseph – Tampa Bay
Ronde Barber – Tampa Bay
Joe Condo – Oakland
Chris Colley – Washington
Ray Lewis – Baltimore
Lorenzo Neal – San Diego
Kelly Gregg – Baltimore
Bryant McKinnie – Minnesota
David Patten – New England
Adam Vinatieri – Indianapolis
Ricky Williams – Miami
Coy Wire – Atlanta
Roddy White – Atlanta
Ronnie Brown – Miami
Matt Roth – Cleveland
Mike Patterson – Philadelphia
Luis Castillo – San Diego
Jim Nance – New England
Brand Benson – NY Giants
Mike Reid – Bengals
Jeff Richardson – NY Jets
Tiki Barber – NY Giants
Tedy Bruschi – New England
Larry Czonka – Miami
Bob Golic – Cleveland
Mike Golic – Philadelphia
Carlton Haselrig – Pittsburgh
Bo Jackson – Oakland
Matt Millen – Oakland
Warren Sapp – Tampa Bay
Mark Schlereth – Denver
Chuck Noll – Pittsburgh
Curley Culp – Kansas City Chiefs
At the Olympic Wrestling Trials in Indianapolis in 2004
And if I could list all the non-American’s I would. Wrestling is truly an international sport like few others.
Here is a NPR clip on the Turkish Wrestling response… an example of reaction around the world
IOC, I believe you will listen to reason so long as it is delivered by your sponsors. These sponsors are global companies most of which are based in wrestling countries as are their customer. The global partners of the Olympics include (along with their twitter handle):
General Electric https://twitter.com/generalelectric
For the Friends of Wrestling:
Here is the petition to re-instate wrestling into the Olympics.. please sign it.
If you are really motivated, tweet about it, mention the sponsors on twitter and worst case if we do not get support, take your business to other companies who are not supporting the IOC and this short sighted move.
Thanks and Kind Regards,
J. Smoke Wallin
former Cornell Wrestler, Bayshore HS Wrestler