State of the industry of craft brewing

by Sally Colby

A recognizable duo of heavy hitters in the craft beer industry teamed up to present the latest facts and figures to attendees at the Craft Beer Conference held recently in Washington, D.C. According to Brewers Association Director Paul Gatza and Chief Economist Bart Watson, the state of the craft brewing industry is good.
“Things are changing,” said Gatza. “Things seem very different than they have the past few years. It’s a crowded marketplace and a competitive market. There are over 5,300 breweries in the country right now, and the same amount or maybe slightly more shelf space than we’ve seen in the past.” Gatza added companies have to differentiate and figure out their own competencies and branding because the market will become even more competitive in the future.
A notable fact is the industry is seeing more than two new brewery openings a day. Large brewer acquisitions are slowing down but large brewers are using some of the brands they’ve purchased and using those in satellite locations.
“The important thing is that large brewers are in the retail game,” said Gatza. “That is having an impact for a lot of people in this room. Distribution is very crowded as well. Distributors have really done a great job in the last 10 years of learning about how craft works in their system, but with 5,300 breweries, with a lot of them wanting to be in the distribution world, they’re finding that it’s tough to pick up everybody. Just because you make great beer is not a guarantee that you will get distribution any more.”
Gatza says the healthiest segment of craft beer continues to be microbreweries and taprooms, and the demand is growing faster than brewers can fill it. “I will caution you that it won’t always be that way, so make sure you make business decisions wisely,” he said. “There’s still a lot of growth out there and somebody’s going to get that growth. It might be large brewers climbing into the craft space, it might be craft brewers doing lighter styles climbing into what was formerly the big brewer space.”
Acquisitions are still something to watch. “The number one brewer in the world bought the number two brewer in the world,” said Gatza. “There can’t be a bigger deal in beer. The big brewers have lost 24.5 million barrels of volume in this country — that’s a lot — almost the whole craft segment.”
Gatza says while many beer drinkers care about and want to support small and independent brewers, many don’t know who is small and independent. “Certain companies are assumed to be acquired when they haven’t,” he said. “They’re still small and independent brewers. Other companies are assumed to be small and independent when in fact they’ve been acquired.”
Some companies hit growth decisions right on the mark while others missed. “We used to see some breweries not quite make it,” said Gatza. “They were open then they closed. Now we’re starting to see some breweries drop into bankruptcies.” Gatza added that the “large brewer acquiring feeding frenzy” has slowed a bit, but he questions how united the craft industry can be in the future, and will there be divisions over the age of breweries, growth rates, size or business models? “Can we stay together as a community?” he said. “I sure hope so. We have something special here and I’d really like to retain that.”
Gatza provided a brief review of craft brewing over the past 20 years: “We’ve seen the industry go through a few slower years; we saw brewers focus on quality, we saw a lot of customer awareness of beer styles and what is a good beer, people adopted the love of hops and we saw IPAs take off, and we saw some really booming years. But right now we’re at a point where growth is slowing in a growing market,” he said. “Focus on what you need to do to adapt to the situation.”
Economist Bart Watson says small, independent and traditional is the basis for statistical measurements in the industry and urges craft brewers to keep in mind that slower growth is the new normal. “You can’t keep growing at 18 percent year after year in an industry that’s our size,” he said. “At 25 million barrels, 18 percent is more than four million barrels of incremental additions. That’s just not happening any more. We need to think of this growth rate as more the new normal and I think it’s going to stick around for at least a couple of years.”
Watson says the barrel growth rate looks better. “Because we’re a bigger industry, even at a slower growth rate, we’re still adding a lot of barrels to the industry,” he said. “But it’s a much more fractured growth, so growth per brewery is going to be lower. It’s going to be much more challenging to take big chunks of market growth, even if there’s a lot of growth still out there.”
Gatza says local is still in, that people take craft beer personally and craft beer fulfills the desire for people to try something new. “People look to us as a place to do something exciting with what we drink,” he said. “I know that’s really hard with rotation nation — you fight hard to get that tap placement and all of the sudden, the keg is gone and your tap handle is gone. That’s really hard and it adds cost to the system. But that is the new reality and the reason it’s okay is because we are here to serve the beer drinker, and that’s what the beer drinker wants.”
Although the rate of brewery closings has increased, Watson says this isn’t a worry for the industry. The industry has beaten the odds, but with more competition there will be more closings. “The flip side is that more people still want to come in,” said Watson. “Even as growth slows, we still had over 800 openings and I expect this number to rise. At the end of March, the TTB was tracking more than 7,700 brewery permits, which means there are more than 2,000 breweries that are not just in planning but have gone far enough to get a brewery permit. These breweries are coming, and you can either lament it or prepare for it.”
When it comes to pricing, Watson says brewers should think about what they’re doing to justify pricing strategy. “Craft has always been something consumers are willing to pay a little more for a product they view as a little bit better,” he said. “But gone are the days you can justify that premium just by being small and local.”
Watson says IPAs are still a major source of growth at a rate of 22 percent. “We are seeing some variations and changing growth coming from lighter styles,” he said. “We’re starting to see an aging craft consumer who want something sessionable. We’re attracting more people, so we need to have beers for more occasions. As craft has grown, we’re starting to tap into the wider beer market, so we have to be making to make lighter styles.”
Gatza mentioned a 0.05 DUI bill in Utah which will go into effect at the end of 2018. “That could have a chilling effect on beverage alcohol sales and restaurant businesses,” said Gatza. “No one wants to see anyone get hurt from misusing alcohol use, but the vast majority of problems are with high BAC offenders — 0.19 or 2.0 or repeat offenders.”
An informal audience poll revealed craft brewers believe legalized cannabis will have minimal effect on the craft industry.
When it comes to trends, brewers will have to continue thinking about how to change things up. Gatza says brewing great beer is no longer enough — brewers need the right appreciation of fan base, social media, good distribution deals and the right branding.
“Craft is underdeveloped when it comes to women and minorities both as employees and customers,” said Gatza. “We need to stay away from names and labels that could be offensive — that turns off people. Our future success may depend on broadening our industry both in employees and the marketplace.”

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