Why Craft Brewing Is About to Go to War With Itself
We love craft beer. We love craft beer, craft beer loves us, craft brewers love each other, and all is well forever and ever. Amen. That’s the prayer, and it’s been working. Craft beer is ubiquitous, from Michelin-starred restaurants to grimy dive bars. Its enthusiasts are voracious, educated, curious. And its brewers have managed, even amid the torrid growth, to maintain their binding spirit of independence, ingenuity, and kumbaya all-for-one-ism unseen with other businesses. Examples abound. Boston Beer Company has helped upstarts get loans and wholesale hops; breweries like Stone Brewing, Dogfish Head, Allagash, and Cigar City have collaborated on beers; and most companies have just generally been willing to lend a hand when duty calls.
And it’s paid off. The retail bounty that craft beer rakes in has grown an average of almost 11% each year for the past decade, and is now valued at $19.6 billion. Every day, about 1.5 new breweries open in the US. In 2014, craft brewers produced 21.7 million barrels of beer, up from 15.6 million barrels in 2013, and 13.2 million the year before. Craft beer now accounts for 11% of the US beer market’s overall volume. This is all according to the Brewers Association (a trade organization that tracks and advocates for indie beer). The BA thinks that number will hit 20% by 2020.
We love craft beer, craft beer loves us, craft brewers love each other, and all is well. Amen.
Except... maybe not. There’s been talk over the last year of a craft beer bubble, fueled by the meteoric rise of the American craft movement in the 21st century. But the growth we’re seeing isn’t the prelude to an economic bubble. It’s the run-up to a civil war. Few brewers will talk about it, and not even the diehard craft disciples who repelled Big Beer’s siege in the ‘80s and ‘90s and have insulated the industry from bloody economic strife ever since will be strong enough to hold the line when the fight comes home.
“There is something about craft that’s more collegial,” says Benj Steinman, second-generation publisher of Beer Marketer’s Insights, a trade publication founded in 1970, “but it’s also competitive. And that’s coming more to the forefront with time.”
Already, there have been skirmishes. In early 2015, two legal disputes over naming rights: Lagunitas (big) initiated an infringement suit with Sierra Nevada (bigger), while Bell’s (big) filed a federal trademark action against Innovation (tiny!), all over graphics and beer names. In Massachusetts, state officials investigated an alleged pay-for-play tap arrangement at several bars. Big brewers and their distributors have been known to cut this legal corner plenty, but this time, the violence was craft-on-craft, spurred on by tweets calling foul from microbrewer Pretty Things. Business Insider reported in 2013 that small brewers like SingleCut in New York City (in a state that, statistically, is less brewer-dense than half the US) are already breaking from one tradition and refusing to offer help to upstarts.
“There are just way too many beers out there.”
As much as I hate to admit it, it makes sense. Craft beer’s competition isn’t the Anheuser-Busch boogeyman anymore. “We’re definitely not getting pushed around by the macros [like we were] when Sierra Nevada and Bell’s were coming around,” says John Laffler, co-founder and brewmaster at Chicago’s Off Color and the former “innovation brewer” at Goose Island. Nope, these days, it’s the brewer next door that poses the threat. Across the country, craft brewers are crowding in. The neighborly smiles are starting to strain.
Wars don’t just start. There’s always a reason, and in craft beer that reason is simple: “There’s a fuck-ton of breweries out there, and a lot of them make really good beer,” says Laffler. According to the Brewers Association's latest head count, “a fuck-ton” can also be expressed as 3,464 independent American breweries, up from 1,468 in 2004. (The number varies depending on how you define craft; the BA defines it like this.)
There’s also a finite amount of territory -- ever-dwindling shelf space and tap availability -- for an industry whose growth shows no signs of slowing. This is what industry insiders refer to as “SKU-maggedon”: an apocalyptic overabundance of craft beers that simply won't fit on the tap lists and in the coolers where they must be sold, no matter how high-quality and well-differentiated they are. (SKU stands for “stock-keeping unit”; each different type of packaging has a unique one.) In mid-2014, the BA found that US retailers had scanned 5,065 craft beer SKUs, which was almost 3,500 types of beer more than the next-broadest category (imports) had, and a solid 1,000 more than craft had just two and a half years earlier. In other words, we’re drinking a greater volume of craft beer than ever before, but we’re also drinking way more types of it. “It’s gone from the sublime to the ridiculous,” says Steinman. “There are just way too many beers out there.”
Call it “rotation culture.” While it's great for craft drinkers like you and me, it's a problem for craft brewers. “The novelty aspect of new beers is a big part of the market,” says Patrick Emerson, an associate economics professor at Oregon State University who writes a blog called Beeronomics. Companies “need customers to keep coming back to [their] brand, and that requires lots of new stuff all the time.”
That's what a rotating tap list is: a glorious chance for you to try a few different beers every time you go in, without committing to any specific one. The downside for brewers, says Brian Murphy, director of sales at all-craft distributorship Massachusetts Beverage Alliance, is “you’re really just cutting the pie up more.” Brewers have more shots at a customer, but fewer opportunities to capitalize beyond a keg every few rotations. It's not just bars that are adapting to this demand. Retailers are too. Craft's best-selling segment is IPAs, but, according to Julia Herz of the Brewers Association, the second is the pseudo-segment of “seasonals.” For example, every fall pumpkin beers rival India pales for the number-one spot, if only for a brief time. Beer is best when it's stored cold; that's also when it sells best. But coolers are expensive, and retailers only have so many of them. When autumn rolls around, pumpkin-spiced brews go in, and something's gotta come out.
With that happening more or less year-round, it’s inevitable that a growing national community of brewers, pumping out a customer-pleasing calendar of novelty beers, is going to run out of places to sell the stuff. And when quality and differentiation aren’t enough to get you a coveted spot on the shelves or the tap list... well, then you take a look at price tags.
Brewing's brotherhood won’t hold when the fight comes home.
Back in July of 2014, Bon Appétitquoted Sam Calagione predicting a coming “bloodbath” for the craft beer business. Coming from Dogfish Head's honcho, a beer world visionary, this comment rippled through the industry at the time. When I spoke to Calagione six months later, however, he told me the quote had been taken out of context. “My [complete] comment was if indie craft breweries try to engage in a pricing war, there will be a bloodbath,” he said. “Craft brewery economics can’t sustain keg prices at half what they are today.” Calagione thinks a price war can be avoided by “great breweries staying together and continuing to speak with one voice [and] championing the production of quality, consistent, well-differentiated beer.”
As someone who loves good beer, and knows a lot of brewers, I'd love to believe him. But as a cynical consumer and a person covering the industry, I just don't. And I’m not alone. “I think that there will be a lot of churn in the market over the next decade,” says Emerson, singling out smaller breweries that don’t have the benefit of scale. “Price competition will become much more severe.” Chris Lennert, COO of Left Hand Brewing Company, agrees: “At a certain point, there are going to be some price wars,” he says, with a note of regret. “That’s what’s ultimately going to happen.”
In the run-up to war, many craft breweries have two options: go big, or stay small. And if you stay small, you have two options: brewpub or microbrewery.
If you run a brewpub, meaning a quarter of your beer sales are done in-house, the upside is relative stability. “Since you don’t package the beer and don’t have to transport a very heavy liquid,” Emerson says. “You can cut down on costs and supplement your restaurant business.” And you don’t need to look far for customers, says the BA’s Julia Herz. “Brewpubs are really tied to the local communities,” she says.
If you run a microbrewery -- defined as a company that produces fewer than 15,000 barrels a year and sells 75% of its beer offsite -- you probably aren’t legally allowed to sell beer directly to drinkers. So you can, if state law permits it, open a taproom and a carry-out business, keeping your money super local like a brewpub. Murphy estimates that certain small microbreweries could stand to make 60-70% of their revenue through taprooms alone.
“There are going to be some price wars. That’s what’s ultimately going to happen.”
Either way, you get the point: stay low to the ground, and when the bullets start flying, they'll go over your head. That’s the upside. The downside? Money. When a brewer stays small and local, “you’re locked in making $35,000 a year,” Laffler told Business Insider in 2013, “and hopefully your business can last 10 years.”
Bart Watson, the BA's chief economist, thinks America's craft beer market might be able to support “a bunch of local neighborhood brewpubs” and small microbreweries, like our lager-loving compatriots across the Atlantic. Maybe we could. Unfortunately, that's not really what we've got. We've got a handful of powerhouses -- Sierra Nevada, New Belgium, Boston Beer Co. -- and another 100 or so regional craft brewers. These are the in-betweeners, making 40,000-60,000 barrels a year, and they’re going to be doing the fighting.
The Gathering Armies
Brewers that are too big to keep their heads down and too small to compete on a national scale are already fortifying themselves for the fight ahead. You need money to make beer, and if you want to make both at the same time in a sustainable way, you've got to get bigger, and do it fast.
“Beer is all about economies of scale,” Emerson says. “The bigger you get the lower the cost per ounce of beer. This is fundamental and there is no way around this. So for a normal brewery the pressure will always be there to grow.” Those big-not-huge craft outfits with the war chests to expand already are. Look at Oskar Blues’ North Carolina outpost, Victory’s massive Parkesburg, PA, facility, or Stone’s bi-coastal andGerman expansion.
“Three years from now, is anybody going to give a shit?”
Then there’s private investors. Jason Notte, a beer industry reporter for MarketWatch, has written extensively about private equity’s increasing prominence in craft beer, pointing to partial and whole sales at SweetWater, Southern Tier, Uinta, and, most recently, Full Sail. Private equity is odious to craft purists, who view the financial institutions' goals as an obvious conflict to breweries' independent values. But the impending battle royal for craft beer makes for strange bedfellows, and the bottom line is that PE is a ready source of cash to buy up competition and consolidate your power in the market.
The consolidation is already underway around craft beer, and it's going to start happening with increasing frequency. The phenomenon of corporate macrobrewers gobbling up indie operations is well documented (for example, Goose Island, Red Hook, Blue Point, 10 Barrel, and now Elysian have all been acquired in whole or in part by Anheuser-Busch), but there are plenty of bigger craft brewers buying up smaller ones -- Oskar Blues, Green Flash, and Boston Beer Co., among others, have all been making acquisitions. More are on the way. It's not out of greed, either; it's out of necessity. The acquired brewer needs money and expertise to keep making their beer; the acquirer needs the access to local markets and another revenue stream to keep growing. And as they grow, by necessity, independence as we know it will fade and an era will draw to a close.
The Eve of Battle
But here’s a question: “Three years from now, is anybody going to give a shit?”
That’s Lennert, thinking aloud about whether drinkers will continue to pay a premium for craft brewing’s tenets of independence and camaraderie. He was asking the question rhetorically, but I’ll answer it: forget about three years. I don’t think most American drinkers give a shit right now. Sometimes, I’m not even sure I do.
I’m not a coldhearted economist. I’m just a writer who drinks a lot of beer. I don’t want craft brewers to start undercutting each other in an ever-accelerating race to the bottom, but after reporting this piece for the last few months, I see no way around it. And I know this from watching myself. I’m one of those guys who wants new beer every time they walk into the bar, loyal to the type of beer, but not picky when it comes to the brewer. That’s because, despite what coolheaded apostles like Calagione and Lennert (not to mention the entire BA) believe, quality doesn’t matter as much as it should. Marketing does. Distribution does. Price does.
If I want a lager, and my favorite bar has Blue Point’s Toasted on tap (they usually do), I’m going to order it. I don’t care that Long Island’s one-time craft powerhouse sold out to “the world’s biggest brewing company,” as Calagione disdainfully refers to A-B. If it’s right in front of me, and it’s the only lager on the tap line, and it’s priced the same (or a dollar less, even) than something similar, I’ll drink that fucker. I’ve seen me do it. Because I don’t care. Well, I do care, but not enough to make a stand every single time I see a supposed imposter. And I love beer.
In the end, the industry’s individuality and cohesion just doesn’t matter as much to many (I’d argue most) consumers as it does to some brewers. And as that becomes more apparent, more brewers -- heavily armed with increased production and aggressive marketing bought with the help of outside cash -- will make a play for the shelves and taps that are right in front of the mainstream consumer.
When that happens, craft beer will go to war with itself. I just hope the winners are the good guys -- the ones who have stronger bonds to the founding principles of quality and independence than drinkers like me do. But at this point it’s impossible to know. All I know is that there’s a civil war coming, and war is hell. Crack a beer and say your prayers.