There are now over 8,000 breweries in America. This renaissance of beer brewing has created jobs, revitalized real estate, and developed its own subculture. But with the market growing ever-more concentrated, thousands of quasi-profitable small businesses are nervously wondering which way the wind is blowing.
Multinational companies have made a point of cashing in on the trend. The script is simple: buy a brewery, leverage their scale to make that beer less expensive at retail, and undercut the truly local and independent competition. So what’s a neighborhood brewery to do? Growler Deputy Editor John Garland argues that small breweries must band together and become like the conglomerates that they must inevitably fight off. Michael McCoullough, Professor of Agribusiness at California Polytechnic State University and CEO of the Beeronomics Society, argues that there’s still room for breweries to grow because independence and local responsiveness are still valuable assets.
Argued by John Garland
John Garland is the Deputy Editor of The Growler Magazine.
Consolidation is coming for craft beer. It started when AB InBev began gobbling up regional favorites like Goose Island, Kona, and Golden Road. It has continued as America’s most respected craft breweries—including Lagunitas, Ballast Point and New Belgium—have “sold out” in million- (even billion-) dollar deals.
If this trend continues (and there’s nothing to suggest that it won’t) the brewing industry will arrive at a point where independence will not be a badge of honor, but an outright liability to doing business.
Independence has always been hailed as a self-evident virtue in craft brewing. But small breweries are also inefficient—smaller brewing capacity and material orders, and greater cost of overhead per unit means a craft pint doesn’t come cheap. With over 8,000 of them in the U.S. (and more on the way) there’s nothing but stiffer competition and dwindling shelf space on the horizon.
It won’t be long before the market pushes back on the self-inflicted retail absurdity of $16 four-packs of the latest double dry-hopped IPA. We’ve previously published opinions that craft beer is pricing itself into a bubble—a problem that gets worse every time AB InBev buys a brewery and puts their “craft” four-pack on the shelves for $4.99.
Craft beer is only around 13% of the overall beer market by volume, remember, and the market’s total volume is flat (or even decreasing). So if we want craft beer to grow, how much of the other 88% can we expect to find some intrinsic value in independence and grab at that craft sixer at double the price?
But there’s no reason that independent breweries need to be shut out of the economy of scale. Why don’t a bunch of Davids band together to become a Goliath? Through mergers, co-ops, or less formal collectives, small breweries can take advantage of a scale that’s previously been inaccessible to them.
Large brewing concerns can leverage capital streams to bulk purchase (and get better prices on) malt and packaging. They can contract-buy huge tracts of hop farms instead of spot purchasing from the dregs. Together, they can streamline and spend less per unit on the cost of marketing, accounting, legal fees and all the other costs of doing business.
This kind of collective strategy is imperative because the dream of a multi-regional business is all but dead for the vast majority of breweries in America. Any brewery looking to break into a new market must contend with a critical mass of local competition. It’s nearly impossible without a strong ground game (e.g. starting a satellite taproom) backed by a huge marketing push. But if 10 breweries with a combined budget all make an assault on a new market at once, and sustain it with area managers and consistent marketing, that might be a recipe for long-term growth.
Two of the most powerful craft breweries in the country have recently seen the writing on the wall. The Boston Beer Company, the powerhouse behind Samuel Adams, Angry Orchard, and Truly Seltzer, has merged with Dogfish Head Brewery, the most iconoclastic brewery in America, one with perhaps the greatest name cache among beer drinkers from coast to coast. Shouldn’t forward-thinking independent breweries be searching out like-minded partners do to the same?
Collectives do not have to squelch the independent spirit of the breweries they encompass. They could retain their private ownership and individual brands. The ties between them could run as shallow or deep as the market demands. They could (and maybe should) be geographically oriented: if the five biggest breweries in Central Minnesota collectivized, they’d be the size of the fifth-largest brewery in the state with the story of an entire region to share with new consumers.
There are of course small niches in brewing that large conglomerates will never fill. There are some brewpubs that will have the loyalty of their neighborhood come hell or high water. But make no mistake that high water is coming—and all but the most anchored local breweries might be swept out to sea if they don’t prepare for a more conglomerated future.
By Michael McCoullough
Michael McCullough is a Professor of Agribusiness at California Polytechnic State University and CEO of the Beeronomics Society, an international non-profit association of scholars and professionals analyzing the economics of beer and brewing.
The merger of Boston Beer Company and Dogfish Head stunned craft drinkers and left many wondering if that was to be craft beer’s ultimate destination. True, many large craft brands have had to become more creative in order to compete in their market, especially since the environment for regional brewers has become quite competitive. In 2018, the 230 regional breweries that produced more than twice as much as their smaller counterparts, microbrewers and brewpubs, had a very small decline in growth (-0.1% according to the Brewers Association).
However, this is not the story for the entire craft industry. There is still a lot of room for micro- and nano- breweries catering to the hyper-local. According to current industry market research, the local craft market is one of the only growth categories for craft beer in 2019. My argument for the resiliency of the craft industry, and why we will continue to see growth, stems from these producers, with a few small caveats.
First, why local matters: Like the initial rise of the craft industry, where independent breweries popped up in locations across the U.S. that were overlooked by big beer, these small and locally focused brewers have a better ability to cater to their own towns’ tastes and preferences. Most consumer research has shown that brewpub and taproom premises are the preferred places for folks to drink craft beer. For the brewer, this is the part of the distribution channel that yields the highest margins.
Of course, not all beer can be sold on-premise, and space is limited for many. If growth beyond limited taproom sales is the main concern, brewers must distribute for lower margins. For some, however, there are ways around this. For instance, many states allow for self-distribution up to a barrel limit which keeps margins high, but this can quickly become a logistical nightmare.
Second, why location matters: There are still parts of this country that are just getting started. On May 8, 2017, Georgia state legislature passed SB85 allowing for brewers to sell a limited supply (3,000 barrels/year) at the brewery. Prior to this, on-premise sales had to be part of a paid tour. This has allowed small brewers to enter the market. Before this bill, Georgia brewers had to enter the market ready to profitably distribute, which meant starting a 30,000-barrel brewery, an extremely capital intensive and risky proposition. Most new breweries today have been of the 1,000- to 5,000-barrel size. Since 2016, 29 Georgia breweries have opened cellar doors to the public, a growth rate of 54.7%.
So which states have room to grow? If you take the number of craft breweries per 100,000 drinking age adults as the measure of concentration, as of the Brewers Association’s 2018 data, Vermont tops the list at 13.5. Well-known beer state Colorado trails in fourth with 9.2. Compare these to the bottom 25% of states that barely reach 1.9 breweries per capita. Even California, the state with the most craft breweries (841), has only 2.9 breweries per capita. Mississippi, the last state to legalize homebrewing, which has been shown to be a driver of the craft beer industry, has only 15 craft breweries with a concentration of .7 breweries/100,000 21+ adults. This country truly has beer deserts.
What does this all mean? There is a lot of room for growth, but it has to be thoughtfully directed. There is little room for so-so craft beers, and some cities don’t need another brewery. New brewers need to make high-quality beer, be comfortable with maintaining a steady-state level, and have a good long-run business plan.