RE: Is There A Craft Beer Bubble?

RE: Is There A Craft Beer Bubble?

Craft Beer Bubble? May 2015

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.

Napa Smith Brewery – Continues to Gain Momentum – Wins Silver @GABF, Opens Tasting Room, Expands to 33 States

Napa Smith Brewery – Continues to Gain Momentum – Wins Silver @GABF, Opens Tasting Room, Expands to 33 States

I have not posted about Napa Smith lately so here is a bit of catch up.. We acquired the brewery & winery in December 2010 so it has been under our control since January… 10+ months.. we spent the first 3 getting production back up and running and taking care of vendors.  Since then, we have been brewing to capacity and selling everything we make.  Steve Morgan, Don Barkley and the rest of the growing Napa Smith team have been hitting on all cylinders as we have ramped up.  The Paddington team has taken the lead on sales and distribution.  The combination has been awesome!

Napa Smith Brewery

 

Napa Smith Team

Some highlights over the past year:

  1. Paddington Brands acquires Napa Smith brewery & winery December 2010
  2. Napa Smith Beer now available in 33states.  This is from a base of just CA back in 2009.  See map.
  3. GABF Winner – Napa Smith Organic IPA won the Silver Medal at the Great American Beer Festival this year… huge!  More on this below.
  4. Napa Smith “Brew Pub” tasting room opened in Napa, CA… an awesome experience and long overdue for our home market!
  5. Numerous beer dinners and tasting and events throughout the year.
  6. Major retailer support with placements in Safeway, Whole Foods, Publix, HEB, Harris Teeter, Total Wine & More, BevMo, ABC, Cost Plus World Markets and many more….

 

Silver Medal Winner - Great American Beer Festival 201

      Don’s brewery team had a wonderful time in Denver at the GABF seeing old friends and trying so many terrific beers.

Don Barkley – Master Brewer – GABF Silver Winner – Napa Smith Organic IPA

 

 

 

 

 

Here is a short video of Don Barkley on Napa Smith Organic IPA

Don Barkley on Napa Smith Organic IPA

And here is a link to some of the pictures from the brew pub opening on facebook… Napa Smith Brew Pub Opening

Napa Smith Brew Pub Opening

 

Napa Smith Brew Pub - tasting menu

 

 

 

Napa Smith “Lost Dog” Red Ale blew out at the Brockway Pub in Carmel, Indiana just last weekend…

 

Smoke and Dave Hunter enjoying a Lost Dog at Brockway

Napa Smith "Lost Dog"

And an example of retail placements… Cost Plus World Market has Napa Smith on promotion in 130 stores right now.

Cost Plus World Markets Now has Napa Smith Beer

 

Napa Smith Lost Dog & Organic IPA

 

 

 

 

 

 

 

 

 

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