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.

Channel Conflict: 3 Tier Battles Heat Up – Stinging Defeat in KY Raises Questions

Channel Conflict: 3 Tier Battles Heat Up – Stinging Defeat in KY Raises Questions

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).

This buds for you

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.

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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.

2015-01-21 11.18.45  IMG_6561The 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

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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.

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New Beer Industry Technology Symposium™ “BITS™” Set For June 30 & July 1 in Napa, California

New Beer Industry Technology Symposium™ “BITS™” Set For June 30 & July 1 in Napa, California

Excited to announce the first Beer Industry Technology Symposium in collaboration with our 10th Annual Wine Industry Technology Symposium… it will be a technology extravaganza!

New Beer Industry Technology Symposium™ “BITS™”
Set For June 30 & July 1 in Napa, California

Craft Brewing Industry Leaders to Collaborate on Best Practices and Strategies
BITS to partner with the 10th Annual Wine Industry Technology Symposium® “WITS®” for First Event

For Immediate Release
February 20, 2014

(NAPA, Calif.) – Leaders of the brewing, distribution and technology industries have formed the new Beer Industry Technology Symposium, BITS, to create a dedicated industry forum where technology and strategy intersect. The first BITS will be held in Napa, California in conjunction with the Wine Industry Technology Symposium® – WITS® June 30 & July 1, 2014 at the Napa Valley Marriott.

The purpose of BITS is to address the unique information technology, and service needs, of the beer industry. BITS is dedicated to bringing the world’s leading beer industry professionals together with the world’s leading technology experts, to foster learning and discussion. Panels of experts will discuss specific examples and case studies that will deliver tangible take-home value and create relationships.

SteadyServ Technologies®, has built technology to help bars and restaurants, distributors and craft brewers — even patrons — keep track of the beer remaining in a keg and more effectively manage their beer inventories. SteadyServ’s Founder and CEO Steve Hershberger said, “Given the massive changes occurring in the beer industry, BITS is the right gathering at the right time. Getting the craft beer industry together, to discuss technology solutions and the strategies needed to ensure continued growth and success, is difficult due to both the high number of beer producers and the vast geographic differences in their physical locations. BITS will provide an important venue for the industry’s thought leaders to collaborate for the greater good of the industry. SteadyServ will be there in full force.”

The growth and importance of craft beer is widely documented. According to the Brewers Association, the number of craft breweries in the US has risen from a low of > 100 1977 to > 3,500 in 2013. Over the next 5 years, the growth in craft beer volume is expected to be greater than over the past 25 years combined. Given this explosion in consumer demand, and the number of new operations that have been formed, there is a specific need to understand best practices and strategies within the industry. Many new brewery owners are attempting to reinvent the wheel in terms of processes and systems to run their businesses. BITS aims to be the industry-wide resource to help educate beer industry members and unite them with best-of-class technology providers.

“After owning a rapidly-growing craft brewery from 2010 – 2013, and then working with a number of others to help build their beer businesses, I spent a lot of time networking with other breweries and observed their efforts to manage growth and establish systems that are vital to run an efficient and effective business,” said J. Smoke Wallin, BITS Chairman and Founder. “While there are many beer industry events such as NBWA and GABF, there has never been a forum focused on the technology needs of craft brew operators. BITS will fill that void.”

Expected attendees include craft breweries, distributors, retailers and on-premise and technology providers. There will be content for everyone from the Owner/GM/President to the Information Technology Manager or CFO to the Brewers to the Sales Managers. Building on the successful model of WITS, with cross-functional workshops and keynote speakers, BITS will draw from industry leaders to present tangible take-home value as a result of a focused gathering.

The agenda includes sessions on: Technology Leadership – Best-of-Class Tools, Consumer Direct Sales – Managing the Tap Room and Online Presence, Trade Sales & Marketing – Craft Beer Route To Market – Gaining & Managing Distribution, Brewery Operations – Hops to Kettle to Keg or Can

Interested sponsors and speakers can contact Waunice Orchid (Tradeshow Coordinator) Waunice@swgnapa.com (707) 261-8716 today. Registration will open March 1, 2014. Space is limited and BITS is expected to sell out, so register early.
www.beertechnologysymposium.com

ABOUT BITS:
The Beer Industry Technology Symposium (BITS) was created to address the unique information technology and services needs of the Beer industry. BITS is dedicated to bringing the world’s leading breweries, distributors and retailers together with the leading technology experts to foster learning and discussion. Expert panels and keynotes discuss leading edge case studies involving consumer direct marketing and sales, operations, financial management, trade sales and distribution, brewing and input management

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