While a focus on beer in
mid-summer is timely, the economics of the industry are fascinating
rear-round (hopefully even to non-drinkers). The big growth is happening
in the craft segment, where sales are up about 15% in an overall
declining market. Big brewers have responded predictably, buying such
brands as Blue Point, Shock Top, and Goose Island. And, oh yes, the
world’s two biggest brewers look like they will merge, minus some
divestitures. I’ll leave the details of AB InBev/SABMiller to the
bankers and financial reporters; it’s a pretty complex deal. Apart from
that, what is the current state of play in the U.S., why are craft brews
thriving, and what might the future hold?
The current state of play in the U.S. beer market can be summarized as big and light. 7 of the top 10 sellers are light beers, led by Bud Light with sales of $2 billion annually. The second 10, smaller in revenue by more than a factor of 10, is much more interesting, led by Blue Moon (always owned by Miller Coors but branded like a craft beer) and including Pennsylvania’s Yuengling, Samuel Adams, Sierra Nevada, and Leinenkugel out of Wisconsin. Considering that the light beers in the top 20 add up to $5.5 billion in sales, $140 million for Yuengling or $80 million for Sierra Nevada might seem like a literal drop in the bucket.
The relevant number for a Goose Island or a New Belgium Fat Tire, however, is not necessarily sales, but growth. The number of U.S. craft breweries surged from 284 in 1990 to more than 1,500 in 2000, then past 2,000 companies in 2011 and nearly 3,500 in 2015. Imports are fairly stable, running about 35 million barrels from 2004 to 2014, but the 24 million barrels of craft beer sold in 2015 represented a 13% annual increase in quantity and a 16% increase in dollar volume over 2014. There's a loose craft-industry effort to hit a collective 20% market share by 2020; it's not an impossible target.
Just about any locale can now have some microbrewery presence; there are four (plus one in the process of being reopened) in our county alone. Skill is necessary, as is capital: those 100 barrel stainless steel tanks you might see in your local brew pub list for about $35,000 apiece. The U.S. craft phenomenon is entering middle age: Sierra Nevada was founded in 1979, when Jimmy Carter deregulated the industry; Boston Beer Company (Samuel Adams) followed five years later. Thus some founders are finding ways to cash out and/or generate capital for expansion. One path is an employee stock ownership plan, where employees buy out some percentage of the business. Another is private equity, while still other firms sell to an acquiring brewer, often from outside the U.S.: recent deals included major acquisitions by a Belgian company and a Spanish brewer as well.
Indeed, the global nature of the beer industry is a topic unto itself. Given the high shipping costs and perishability of the product, local production can be a competitive advantage (especially if the primary facility might be threatened by drought). Licensing agreements are common: Australia’s Fosters Lager is owned by SABMiller (headquartered in London) and brewed for the North American market in Toronto at a Molson facility. Sierra Nevada added capacity to its California operation with a vast facility in western North Carolina, as did Colorado brewers Oskar Blues and New Belgium at a smaller scale. California-based Lagunitas opened a Chicago taproom in a former steel mill. Now that the two global giants — AB InBev (headquartered in Belgium and owning Anheuser-Busch) and SAB Miller — are set to merge, there will be more waves of change that could affect most any country on earth at some point.
Returning to the local impact of craft brewing, I haven't seen anything connecting brewing to the alleged U.S. manufacturing revival, but maybe it should be included. The Atlantic’s James Fallows posited a list of factors that predict a town will be in good shape after he traversed the continent in his small plane for three years of research.
“#11: Craft Breweries. A city on the way back will have one or more craft breweries, and probably some small distilleries too. . . . A town that has craft breweries also has a certain kind of entrepreneur, and a critical mass of mainly young (except for me) customers. You may think I’m joking, but just try to find an exception.”
Jeff Alworth, in All About Beer magazine, expands Fallows’ observation from correlation to causation: he argues that craft brewing drives economic development, and his logic is compelling:
“Breweries are industrial operations, and they’re expensive. Beer is a mass beverage, and even making it on a brewpub scale means you have to have quite a bit of space for the brewhouse, fermentation, and storage. All that equipment costs a lot, and real estate does, too. When you’re spending a quarter- or half-million dollars on equipment, you can’t afford expensive commercial space. So breweries end up on the fringes, in bad parts of town where the rent is cheap. That alone is the first step of revitalization.
But breweries aren’t like the average industrial plant. They are people magnets, bringing folks in who are curious to try a pint of locally made IPA. In fairly short order, breweries can create little pockets of prosperity in cities that can (and often do) radiate out into the neighborhood. Pretty soon, other businesses see the bustle and consider moving in, too. It doesn’t hurt that breweries often find run-down parts of towns that have great buildings. Once a brewery moves in and refurbishes an old building, it reveals the innate promise of adjacent buildings to prospective renters.
. . .
But the effect may even be stronger in smaller communities. Little towns are often underserved with regard to cool places to hang out. When they open up shop, they provide much-needed social hubs. That the rent is cheaper there than in big cities gives these breweries a competitive boost, to boot—and we have seen many small towns (like Petaluma, California; Kalamazoo, Michigan; and Milton, Delaware) spawn outsized breweries. And whether they’re in small towns or cities, breweries serve an important community-building function. They’re not only a nice place to spend an evening, but serve as venues for events like meetings, weddings, and even children’s birthday parties.”
*****
The consumer appeal of craft beers has many facets, but a few of these include the following:
-Craft brewers eschew light beers, the nearly-clear light lagers that dominate the U.S. sales charts. Instead, nearly every craft brewer needs an India Pale Ale to prove its mettle. IPAs can have up to twice the alcohol content of an American “lite,” the taste is rated by bitterness units from the hop content, and they cost more to brew, driven by lower volumes and more expensive ingredients (bought in smaller quantities). Thus the craft movement represents a strong case for government deregulation: consumer welfare has improved with increased choice and availability. If only airline deregulation had so many positive outcomes.
-Craft brewers often have a strong experience component, whether in tours, tastings, or just ambience. The Guinness tour in Dublin is highly orchestrated (thanks to the deep pockets of Diageo, the parent company) but still pretty engaging. I’ve heard good things about Troegs in Harrisburg, Yuengling in Pottsville, PA, Rogue in Portland, and Harpoon in Boston. Sierra Nevada offers a range of tours, including deep-dive sessions for true beer geeks.
-That experience component can be enhanced and/or amplified by social media. Dogfish Head is a leader in this regard. Advertising spend has never tightly correlated to improved sales, as Schlitz proved (to its detriment) in the 1970s, so social media's low cost, responsiveness, and intimacy make it a great tool for the job.
-The craft movement represents a cyclical return to regionalism. In 1900, and even in 1950, there were no dominant national brands. Schlitz, Falstaff, Ballantine, Schaefer, Hamm’s, Olympia, and Stroh’s all thrived until AB began its surge in the 1960s, Coors expanded beyond being a mountain-region favorite, and then Miller enjoyed first-mover advantage in the light beer category it invented in the 1970s. Yuengling is a special case (being the first U.S. brewery, it’s not really a craft), and still doesn’t have wide distribution. Regionalism aside, there is worldwide interest in craft brewing, so growth prospects remain strong: San Diego's Stone Brewing just opened a facility in Munich, and there's no reason to think other beers won't follow them overseas.
-Experimentation is rampant, and rewarded by the market segment. Seasonal brews are a common offering from crafts but not the majors, further emphasizing uniqueness rather than standardization. In the last week alone, I've seen beers featuring habanero peppers, passionfruit, grapefruit, rye wheat, and coffee in my routine travels. Oskar Blues has produced at least 10 variations of its flagship Dale's Pale Ale, according to Beer Advocate; the 17 versions of its Scotch Ale include one flavored with chocolate and marshmallow.
-Beer is being treated more and more like wine, with more “varietals,” ratings, competitions, food pairing guides, and so on. Label art can be low-budget, exquisite, or weirdly idiosyncratic. Different glasses are recommended for different brews, the same as wine.
-The home brewing movement connects the hobbyist and the professional in ways that the majors cannot; I’ve never heard a home brewer try to recreate Natural Light in his or her basement. As of 2014, sales of home-brew starter kits had been growing at about 20% year/year. That’s positive for microbreweries in many ways.
While researching this piece I found a report from the Federal Trade Commission from 1978 (on the eve of deregulation, I imagine not coincidentally). The author -- one Charles Keithahn -- was incredibly far-sighted, predicting that San Francisco’s then-tiny Steam would be the start of something: that very brewer was crucial in the birth of Sierra Nevada, now the archetypal craft brewer.
“And a number of the smaller companies will probably be able to survive for one or more of the following reasons: local loyalty, exceptional knowledge and responsiveness to local tastes and conditions, low transport costs and low advertising costs associated with serving a small market, excise tax breaks, . . . or finding a special niche in the market. A few examples might include Latrobe, Pickett of Dubuque, Iowa, Spoetzl (Shiner) of Texas and, at least at last report, the Nation's smallest brewer, Steam Beer of San Francisco.”
Is there any other example where industry consolidation has spawned a counter-movement of variety, experimentation, and market enthusiasm? Medical devices, automobiles, airplanes, retail, energy, and tech don't really suggest any comparable examples -- especially if you look at the community-building aspect. All told, beer is good in more ways than the obvious ones. Happy summer.
The current state of play in the U.S. beer market can be summarized as big and light. 7 of the top 10 sellers are light beers, led by Bud Light with sales of $2 billion annually. The second 10, smaller in revenue by more than a factor of 10, is much more interesting, led by Blue Moon (always owned by Miller Coors but branded like a craft beer) and including Pennsylvania’s Yuengling, Samuel Adams, Sierra Nevada, and Leinenkugel out of Wisconsin. Considering that the light beers in the top 20 add up to $5.5 billion in sales, $140 million for Yuengling or $80 million for Sierra Nevada might seem like a literal drop in the bucket.
The relevant number for a Goose Island or a New Belgium Fat Tire, however, is not necessarily sales, but growth. The number of U.S. craft breweries surged from 284 in 1990 to more than 1,500 in 2000, then past 2,000 companies in 2011 and nearly 3,500 in 2015. Imports are fairly stable, running about 35 million barrels from 2004 to 2014, but the 24 million barrels of craft beer sold in 2015 represented a 13% annual increase in quantity and a 16% increase in dollar volume over 2014. There's a loose craft-industry effort to hit a collective 20% market share by 2020; it's not an impossible target.
Just about any locale can now have some microbrewery presence; there are four (plus one in the process of being reopened) in our county alone. Skill is necessary, as is capital: those 100 barrel stainless steel tanks you might see in your local brew pub list for about $35,000 apiece. The U.S. craft phenomenon is entering middle age: Sierra Nevada was founded in 1979, when Jimmy Carter deregulated the industry; Boston Beer Company (Samuel Adams) followed five years later. Thus some founders are finding ways to cash out and/or generate capital for expansion. One path is an employee stock ownership plan, where employees buy out some percentage of the business. Another is private equity, while still other firms sell to an acquiring brewer, often from outside the U.S.: recent deals included major acquisitions by a Belgian company and a Spanish brewer as well.
Indeed, the global nature of the beer industry is a topic unto itself. Given the high shipping costs and perishability of the product, local production can be a competitive advantage (especially if the primary facility might be threatened by drought). Licensing agreements are common: Australia’s Fosters Lager is owned by SABMiller (headquartered in London) and brewed for the North American market in Toronto at a Molson facility. Sierra Nevada added capacity to its California operation with a vast facility in western North Carolina, as did Colorado brewers Oskar Blues and New Belgium at a smaller scale. California-based Lagunitas opened a Chicago taproom in a former steel mill. Now that the two global giants — AB InBev (headquartered in Belgium and owning Anheuser-Busch) and SAB Miller — are set to merge, there will be more waves of change that could affect most any country on earth at some point.
Returning to the local impact of craft brewing, I haven't seen anything connecting brewing to the alleged U.S. manufacturing revival, but maybe it should be included. The Atlantic’s James Fallows posited a list of factors that predict a town will be in good shape after he traversed the continent in his small plane for three years of research.
“#11: Craft Breweries. A city on the way back will have one or more craft breweries, and probably some small distilleries too. . . . A town that has craft breweries also has a certain kind of entrepreneur, and a critical mass of mainly young (except for me) customers. You may think I’m joking, but just try to find an exception.”
Jeff Alworth, in All About Beer magazine, expands Fallows’ observation from correlation to causation: he argues that craft brewing drives economic development, and his logic is compelling:
“Breweries are industrial operations, and they’re expensive. Beer is a mass beverage, and even making it on a brewpub scale means you have to have quite a bit of space for the brewhouse, fermentation, and storage. All that equipment costs a lot, and real estate does, too. When you’re spending a quarter- or half-million dollars on equipment, you can’t afford expensive commercial space. So breweries end up on the fringes, in bad parts of town where the rent is cheap. That alone is the first step of revitalization.
But breweries aren’t like the average industrial plant. They are people magnets, bringing folks in who are curious to try a pint of locally made IPA. In fairly short order, breweries can create little pockets of prosperity in cities that can (and often do) radiate out into the neighborhood. Pretty soon, other businesses see the bustle and consider moving in, too. It doesn’t hurt that breweries often find run-down parts of towns that have great buildings. Once a brewery moves in and refurbishes an old building, it reveals the innate promise of adjacent buildings to prospective renters.
. . .
But the effect may even be stronger in smaller communities. Little towns are often underserved with regard to cool places to hang out. When they open up shop, they provide much-needed social hubs. That the rent is cheaper there than in big cities gives these breweries a competitive boost, to boot—and we have seen many small towns (like Petaluma, California; Kalamazoo, Michigan; and Milton, Delaware) spawn outsized breweries. And whether they’re in small towns or cities, breweries serve an important community-building function. They’re not only a nice place to spend an evening, but serve as venues for events like meetings, weddings, and even children’s birthday parties.”
*****
The consumer appeal of craft beers has many facets, but a few of these include the following:
-Craft brewers eschew light beers, the nearly-clear light lagers that dominate the U.S. sales charts. Instead, nearly every craft brewer needs an India Pale Ale to prove its mettle. IPAs can have up to twice the alcohol content of an American “lite,” the taste is rated by bitterness units from the hop content, and they cost more to brew, driven by lower volumes and more expensive ingredients (bought in smaller quantities). Thus the craft movement represents a strong case for government deregulation: consumer welfare has improved with increased choice and availability. If only airline deregulation had so many positive outcomes.
-Craft brewers often have a strong experience component, whether in tours, tastings, or just ambience. The Guinness tour in Dublin is highly orchestrated (thanks to the deep pockets of Diageo, the parent company) but still pretty engaging. I’ve heard good things about Troegs in Harrisburg, Yuengling in Pottsville, PA, Rogue in Portland, and Harpoon in Boston. Sierra Nevada offers a range of tours, including deep-dive sessions for true beer geeks.
-That experience component can be enhanced and/or amplified by social media. Dogfish Head is a leader in this regard. Advertising spend has never tightly correlated to improved sales, as Schlitz proved (to its detriment) in the 1970s, so social media's low cost, responsiveness, and intimacy make it a great tool for the job.
-The craft movement represents a cyclical return to regionalism. In 1900, and even in 1950, there were no dominant national brands. Schlitz, Falstaff, Ballantine, Schaefer, Hamm’s, Olympia, and Stroh’s all thrived until AB began its surge in the 1960s, Coors expanded beyond being a mountain-region favorite, and then Miller enjoyed first-mover advantage in the light beer category it invented in the 1970s. Yuengling is a special case (being the first U.S. brewery, it’s not really a craft), and still doesn’t have wide distribution. Regionalism aside, there is worldwide interest in craft brewing, so growth prospects remain strong: San Diego's Stone Brewing just opened a facility in Munich, and there's no reason to think other beers won't follow them overseas.
-Experimentation is rampant, and rewarded by the market segment. Seasonal brews are a common offering from crafts but not the majors, further emphasizing uniqueness rather than standardization. In the last week alone, I've seen beers featuring habanero peppers, passionfruit, grapefruit, rye wheat, and coffee in my routine travels. Oskar Blues has produced at least 10 variations of its flagship Dale's Pale Ale, according to Beer Advocate; the 17 versions of its Scotch Ale include one flavored with chocolate and marshmallow.
-Beer is being treated more and more like wine, with more “varietals,” ratings, competitions, food pairing guides, and so on. Label art can be low-budget, exquisite, or weirdly idiosyncratic. Different glasses are recommended for different brews, the same as wine.
-The home brewing movement connects the hobbyist and the professional in ways that the majors cannot; I’ve never heard a home brewer try to recreate Natural Light in his or her basement. As of 2014, sales of home-brew starter kits had been growing at about 20% year/year. That’s positive for microbreweries in many ways.
While researching this piece I found a report from the Federal Trade Commission from 1978 (on the eve of deregulation, I imagine not coincidentally). The author -- one Charles Keithahn -- was incredibly far-sighted, predicting that San Francisco’s then-tiny Steam would be the start of something: that very brewer was crucial in the birth of Sierra Nevada, now the archetypal craft brewer.
“And a number of the smaller companies will probably be able to survive for one or more of the following reasons: local loyalty, exceptional knowledge and responsiveness to local tastes and conditions, low transport costs and low advertising costs associated with serving a small market, excise tax breaks, . . . or finding a special niche in the market. A few examples might include Latrobe, Pickett of Dubuque, Iowa, Spoetzl (Shiner) of Texas and, at least at last report, the Nation's smallest brewer, Steam Beer of San Francisco.”
Is there any other example where industry consolidation has spawned a counter-movement of variety, experimentation, and market enthusiasm? Medical devices, automobiles, airplanes, retail, energy, and tech don't really suggest any comparable examples -- especially if you look at the community-building aspect. All told, beer is good in more ways than the obvious ones. Happy summer.
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