by Tamara Scully
Craft brewing has launched itself into the mainstream, and in doing so has encountered growing pains. Like all awkward teenagers, developing into adulthood isn’t without a few missteps, some conforming to the crowd, and possible “selling out” of closely kept ideals, which may not fit in with the reality of the adult world. What will the emerging young adulthood of craft beer look like in the near future?
Gregory Dunkling, program developer of the University of Vermont’s Continuing and Distance Education’s Professional Certification in the Business of Craft Brewing program, and host of the “Business of Craft Brewing” podcasts, interviewed Bart Watson, Chief Economist of the Brewers’ Association (BA). The podcast “Bubble or Sustainable Growth? Examining Today’s Craft Beer Industry,” focused on industry statistics, and what they mean for today’s craft brewers as the industry undergoes changes as it matures.
While statistics show a slow down in craft brewing growth, a lower growth rate is “a natural progression of a growing industry. I certainly don’t think that anything we’re seeing suggests a bubble,” Watson said. “Slower growth for many businesses is going to be very normal,” it is not a bad thing, and is an indication of a maturing industry with room left for growth.
Although craft brewing growth has slowed, this doesn’t indicate market saturation, Watson said. Craft brewing is still in expansion mode, with room for new brewers and products. Incremental growth in number of barrels produced by the craft beverage industry will still occur annually, although the double-digit growth seen recently may not.
Competition is becoming more apparent as some retail markets are changing to best meet the demands of their consumer demographics, and sort out how many craft beverage taps work best for them. Offering top national brands, plus a mix of some local craft brews, is a move some venues are making.
“Some of this is the retail chains re-establishing what their real value proposition is to their customers, and figuring out where craft fits within that.” Watson said. As the number of taps in some restaurant chain markets is decreasing, and these retail channels are getting more crowded, Watson said, “It certainly is a challenge for small brewers.”
Partially in response to this retail market change, craft brewers are now selling more of their product themselves, on their premises. Focusing on local consumers, and distribution through their taproom, is a viable model for urban and rural small breweries. Although each community has its own characteristics, with differences in population, tolerance for beer drinking, appreciation of local businesses and affluence, it’s “hard to find cases where there are too many breweries,” even in high-density locations such as Portland, OR, he said. Rural breweries, too, are thriving on this model.
Small and Local
While statistics show a decline in today’s microbrewery, this does not indicate that the microbreweries are in decline, Watson said. Prior to 2015, many microbreweries were seeking to expand, putting profits back into growth and developing into regional brands.
Today, many existing microbreweries are opting “to stay small, and be a local player, Watson said. “Growing a brewery is really expensive. You don’t make any money when you’re growing.”
Those that decide to remain small, with a local focus and a concentration on their taproom sales and connection to a local clientele, can still thrive, and there is room for new entrants, too. Some of those new entrants will no doubt expand their yearly production, so microbrewery production numbers should move upward again.
One advantage to staying locally focused is the connection to the local consumer, and even control over the product. If a local bar is having issues with the tap, a small brewer can respond. If a bar sells out unexpectedly, distributing your own product can mean a rapid response time, for example.
While some breweries may opt to remain small, and not enter the wider regional, national or international markets, others may develop niche products, which travel well making expansion an option by eliminating a lot of the competition.
While some craft brewers are able to get out in front of a trend, this can be difficult, particularly for smaller breweries. The other alternative is offering products that are unique in some way. Local ingredients, exploring different beer styles, and a focus on telling the brewery’s story are several ways to stand out in the crowd.
“As competition increases, doing the same thing as everyone else means having to do it better, faster, or cheaper,” Watson said. “So the only thing left is to do it differently.”
Students in UVM’s Craft Beer program focus on this, Dunkling said, trying to define “what is the message they want to convey to their local or regional market.”
Large Players: Diluting the Market?
Local ingredients are still very important in craft beverage production, even as large international brewers enter the craft market. Seventy percent of the general population, and even higher percentages in the 21-34 year old age bracket, consider local ingredients to be an important factor in purchasing decisions, Watson said. Local equates with freshness, economic benefits to the immediate community, and employment opportunities for local residents.
As larger players acquire craft beverage brands, a large part of their acceptance and success may come from whether or not they remain focused on the local community of origin, he said. Craft brewers are integrated into their communities. This is a very important part of the craft beverage scene, and whether or not larger players will be able to do so and gain acceptance may play a role in their success. Craft beverages come with a unique identity and a story, and not losing that critical component can be key to successful acquisition, Watson said.
Distribution is another point of contention in the craft beverage world. The three-tier distribution system – brewer to distributor to retailer is dominated by Anheuser-Bush or MillerCoors aligned distributors. This system has the potential to cause restrictions to markets for craft brewers, particularly as the mega-merger involving factions of the two beverage powerhouses has been playing out in recent months.
Franchise laws, which began in the 1970s, when small beer distributors were plentiful and large national breweries dominated, don’t work to protect the craft brewer in today’s distribution market, with thousands of craft brands seeking shelf space, Watson said. These beer franchise laws make it extremely difficult for a brand to switch distributors. Recent changes to the franchise law in New York allow brands that comprise less than three percent of a distributor’s portfolio to switch distributors after paying fair market value. Since its inception, a handful of craft brewers have opted to change distributors. Other states may follow with similar legislation.
While craft beer is becoming a mainstream market player, the definition of a craft brewer, as defined by the BA, is “small, independent, traditional,” Watson said, and that isn’t going to change. Craft brewers now represent 12 percent of the beer market by volume.
“As we move more mainstream, you’re just generally going to represent the larger population a little bit more,” he said.
The craft brewing industry “is something that is built on fundamental demand shifts,” Watson said. “We’re seeing people demand more flavor products, more variety. They want products from small, independent brewers. That’s the opposite of a bubble.”
Craft brewing: Dilution, saturation, or opportunity?
by Tamara Scully