Thursday, January 7, 2016

Craft Beer: Big Enough To Fail

American brewers are ringing the tocsin again: Big Beer is on the march! Mainstream beer has taken some heavy hits on sales in the past eight years as regional and small brewers’ share of the market climbed to over 10%. True to the expected storyline, The Empire is striking back: more consolidation at the top to increase their monopoly power and cut costs; more pressure on wholesalers to drop other brands; more brewing of beers that are not light lagers; and the outright purchase of key regional brewers.

Should Craft Beer Nation tremble in fear? Before you answer, consider this: none of this is new. These are the same tactics Big Beer has been working for almost 20 years. More of the world’s brewing capacity is concentrated in the control of fewer companies. Anheuser-Busch’s “100% Share of Mind” program from 1998 was aimed at compelling A-B wholesalers to drop non-Bud family beers by leveraging discounts and supply of those Bud products. Coors has been brewing Blue Moon since 1995, about the same time Anheuser-Busch tried a series of beers in a wide variety — porter, pale ale, IPA, stout — and Miller tried the Miller Reserve line. And purchases of regional and small brewers date back to about the same time, when Miller bought Celis and Leinenkugel outright, along with a 50% interest in Shipyard (which was later bought back), and Anheuser-Busch bought a share of Redhook, Widmer, and Kona.

Gather round, boys, it's beer!
And none of it worked. As the big brewers arrayed these strategies against what was then a much smaller threat (craft beer had a little over 3% of the market, while imported light lagers like Corona and Heineken had well over 10% and were growing steadily), none of it worked. Though the rise of smaller breweries was slowed for a bit, there were also the factors of an overeager business climate, a lack of skilled brewers and packagers to make good quality beer, a lack of capital for facilities investment, and a young industry that was easily divided against themselves, the one tactic employed by Big Beer that was, arguably, effective (several lawsuits, egged on by Big Beer, pitted small brewers against one another).

Eventually the tactics proved to be wholly ineffective in the face of the rich variety of craft beers. Sales exploded and 100% Share of Mind was forgotten as wholesalers scrambled to defy A-B and scoop up profits, and while Blue Moon joined in the growth, it was hardly a category killer. Almost every bar in American serves non-mainstream beer — to the point where “mainstream” is less useful a term to define beers — and the “pull” of consumers for these beers have brought them into markets large and small. It would seem that these alternative beers have won.

But the alarm is being sounded again, as the Mega-Merger looms: ABInBev swallowing SABMiller. ABIB threatens more wholesaler pressure, and is angling to outright buy major wholesalers, making control complete (still think you want to see the break-up of the three tier system?). Goose Island cranks out more new beers, Shock Top and Blue Moon develop more varieties. Purchase of regional brewers is accelerating: Elysian, Four Peaks, Lagunitas, Firestone-Walker, Breckenridge, Ballast Point, and we’re told by the true believers that these breweries are “craft” no longer, though the beers haven’t changed.

Now the warning is that true craft beers will be throttled, denied a chance at the market because of the coercive power of the mega-megabrewer, lost in the forest of “crafty” big brewer-made beers, denied sales of raw materials.

Is concern warranted? Surprise! In a switch of how I used to think, I now believe there is a real threat, but not because of these developments. The alternative brewers' beers are still wanted, and the market will find them, if new wholesalers have to be created to move them, or state laws changed to provide them a path. The continued mad success and technological innovation of Goose Island’s Bourbon County shows that “craft” or not, beers continue to be made well by the same breweries, so they're probably not going to dilute or pollute the craft “brand.”

What’s the issue then? Size. Small brewers are finally big enough to fail.

When these brewers were still truly “micro,” big beer couldn't figure out what to do...because the numbers were too small. There wasn't a critical mass, there wasn't a brewery big enough to buy that was willing to be bought, their own beers couldn't catch enough drinkers to ignite, there just weren't enough barrels of this new kind of beer being sold for it to be worth them making it. It's actually kind of funny that they couldn't figure that out.

But now the numbers have reached the point where the big brewers can reach out and buy established regional brewers who have a real chunk of the market. As more and more brewers hit 50,000 barrels of annual sales, they become attractive to the big brewers, who don't have to create a local brand; they can just whip out their checkbook and become the largest local brand. Because no matter how much sales of light lager have declined, they're still HUGE, and that means these guys can bring an avalanche of cash to bear.

Craft beer has become big enough to be interesting, big enough to buy, big enough that it has enough fans who don't really know who owns it, big enough that the market share justifies the cash. We're going to see more of these, and if MolsonCoors is smart, they'll get in the act, and maybe Heineken should consider more purchases.

What happens then? Maybe the mass of customers loses faith in craft beer, when they learn that many of the familiar names are no longer independent. Maybe the word gets out and people are outraged and stop buying the bought brands; but do they buy independent beers, or do they buy wine, or whiskey? Maybe brewers like Sierra Nevada, and Boston Beer, and Yuengling, and Deschutes refuse to sell; hell, maybe the Department of Justice wakes up and says “No!” to some of these mergers as monopolistic. Maybe there are enough new breweries – over 4,000 now – that choices can still be made by the informed consumer, and more consumers get informed, and everything's okay.

Maybe, maybe, maybe...but definitely this: no one knows. This is market dynamite.

What should you do? Decide what's important to you. Decide what you want your local market to look like. Decide if you'd rather have a steady, fresh supply of a few brands, or a dicey choice of small local guys who may or may not make what you want, which is going to depend on what your local guys are like. It's your call.

Me? I'm always in favor of drinking beer that tastes good. If big market beer tastes good, I'm going to buy it, and drink it. But even so, 4 times out of 5, I'm drinking something local and independent. 

That's a lesson I learned 30 years ago when I was staying at a friend's house in Utica, New York and the nightly news said the local AHL franchise had given an exclusive beer contract to A-B. In Utica. Where Matt's was still clinging to life, where guys still punched in to make local beer. Bullshit to that, much-younger-me said, and we went out to the bar around the corner and drank local all night long.

Make your choice. Just remember how we got to where we are, and what we had to go through to get there. It's just beer,'s beer.

*I know I said I was going to do a post on Canadian whisky, but...I put that off for a while and gave you this instead. The Canadian piece is coming, but it's going to be a while.


Carl Pietrantonio said...

I think a lot of what happens is also gonna depend on chokeholds on distribution and on shelf space.

Lew Bryson said...

I'm not so sure. I keep hearing this fear from the small brewers, but I keep seeing their beers on the shelves. I think Alan Macleod may be closer in that the real threat to small brewers is the much bigger small brewers, who have the variety and the cachet to appeal to craft drinkers, and the size to appeal to chain buyers.
Still, as I said, I keep hearing this...but I don't see it. Yet.

Bryan Kolesar said...

Good read. Be interested to know what percentage is of the niche within in the niche that cares about being informed consumers (at least on the topic of their beer). Assuming it's rather small, the big, controlling guys won't have much room to care provided they're putting out the same quality product that its consumer base loved pre-acquisition. If I were to make a prediction, we max out in the 4,800 range of breweries in the next 2-3 years before falling back to around 3,000-ish in the next 5 years. (I should probably write my own article based around that prediction, rather than bury it in your comments, right?!)

Bill said...

I can only speak somewhat intelligently on Chicago-area Illinois and Vermont. From a distributor standpoint, Chicago has distributors that focus on what generally has been known as craft beer. Some remain independent, some have been bought by Miller-tied larger distributors -- who have left them intact as subsidiaries because they're so profitable. For AB/InBev to truly try to implement the "only carry our beers" plan through incentives -- well, they'll have to be rrreeeallly big incentives to make up the difference. For Vermont, its economy is big on locally-produced products and tourism, which will keep small brewers going strong.

I guess I do wonder if there will be a shakeout now that Chicago's non-brewpub breweries keep multiplying -- forget about telling the players apart without a scorecard -- we're a few steps beyond that. But I don't see a shakeout going from, say, 50 to 15 -- it's more like 50 down to 40. At the small level, where you just need to find and maintain a local presence, the pressure to grow beyond a certain size is lessened. What i find is more and more regionals arrive... and people don't care. Alesmith arrived last year, to crickets.

Lew Bryson said...

Bryan, it's GOT to be a fairly small niche, I've seen nothing to convince me otherwise in 30 years. As for your prediction...we're at 4400 now and no sign of letting up on the throttle. I'm betting we get closer to 6,000 before we fall back.

Bill, I think you're on the beam.

Rob K said...

I also think Bill has it right and I think it's because the laws around brewing and selling beer have loosened enough that there's no way the little guys can get stomped out by the big guys anymore. Regulatory capture is gone. It's easy enough for anyone to open a brew pub to get started. As long as the quality is there, people will buy it. And there are always going to be the people who want to get into the business, so as long as the laws allow it to be cheap/easy enough, then for every craft outfit that gets big and bought up, somebody else is there to take their place.

It might become similar to the tech industry now, where entrepreneurs create start-ups for the express purpose of making them attractive to a big company who will then buy them.

bmccarthy said...

I like your article, and I don't know much your area of the country, but I live in Massachusetts and it seems like craft beer breweries are everywhere. But the concern becomes whether these small brewers are being compromised by the larger A-B's of the world.