Friday, December 11, 2015

Craft Beer Bubble Redux

I was quoted in a Los Angeles Magazine article that makes me sound like a doomsayer when, in fact, I am still quite bullish on craft beer so I just thought I'd share the Q&A I had with the writer to make sure my opinion is clear.

- Is it possible to have too many breweries in a given market?

Yes, of course, it is possible but I don’t think we have reached that point in even the most mature markets like San Diego and Portland. The main reason for this is the fact that it is not just the supply of craft beer that is growing, the demand itself that is growing dramatically and this growth shows no sign of slowing down. Until we reach the point where demand appears to be leveling off, I think it is premature to talk about too many breweries. Now, this doesn’t mean that we won’t see a lot of failure along the way, there will be increased competition, and this competition will result in weaker breweries exiting the market because of poor relative product quality or lack of business acumen. But this is more a sign of a robust market than of an ailing one.

 - If so, how do you know that the market has reached brewery carrying capacity?

You don’t and never really will because there are a lot of dynamics in the craft beer market that make it very hard to predict what the mature market will look like. There is the increasing demand, as I mentioned before - who knows where it will level off? But then there are a couple of competing trends as well. One, brewing is an industry that has massive economies of scale, meaning that the bigger the brewery is, the more efficient it is and thus big breweries can produce at a lower cost per ounce. This means that there is incredible pressure on breweries to grow and suggests that in the end there might be only a few breweries. However the second trend is the strong demand for local and more artisanal beer which is associated with smaller more personality-driven breweries. This suggests that smaller boutique brewers might be able to continue to charge a premium for their product which can compensate for their relative inefficiency - they can sell their beer for more because of their connection to the local market.

- Early Los Angeles breweries were mostly hobby home brewers looking to go legit. But the breweries opening today are investor-backed ventures with a lot of money behind them. Is the era of the home brewer going legit over in places like San Diego, Portland and LA?

 This is the most fascinating trend in brewing today, the question of what all this macro brewing industry money and venture capital money will mean to craft beer is an open one. It also speaks to my point about local versus big - what we don’t yet know is if these investors can turn a local brand into a successful national brand. As they grow big will the consumers lose their appetite for the beer? I think there may be a few more national craft beer brands on the horizon along the lines of Sierra Nevada, Sam Adams (Boston Beer) and New Belgium but I think in local markets there will be a lot of room for small, local breweries. In fact, AB appears to be placing their bets on establishing a stable of local brands rather than trying to take one or two and turn them into national brands, which to me suggests that they believe in the inherent local-ness of craft beer. I do think that the marketplace will become more and more competitive over time and these breweries will no longer be can’t-miss opportunities and the new generation of successful breweries will be characterized by great beer, great marketing and great business acumen. It will no longer be possible to fumble your way to success. That said, I think in most markets, with the year over year increase in demand, there is still a lot of room for new ‘homebrewer gone pro’ businesses.

4 comments:

Derrick Peterman said...

One thing that isn't alway realized is that there is also an economy of scale for breweries to remain small in that if all their sales are on premise or if they self distribute, they have higher margins than if they would have to split their revenue with a distributor. A few small breweries I've talked to have pulled back their distribution, since they make more money selling the beer out of their tap room or in their brewpub that they would in retail markets.

Thus, I think were going to see more and more larger breweries due to the economies of scale that exist at higher volumes in the industry, while also lots and lots of smaller breweries that do most of their business either on premise or locally, as there is an economy of scale to doing business that way as well.

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