Saturday, September 15, 2007

Craft Beer will fade ...

Or so prognosticates Graham Mackay, CEO of SABMiller, as interviewed in June by Fortune Magazine:

Save for imports and craft beers, the U.S. beer market continues to stagnate, and your profits there declined for the second straight year. What's the problem?

Two years ago we did not declare victory when things were going swimmingly for us in the U.S. so we are not declaring defeat now. The issue right now is cost pressures, in aluminum specifically. We spent about $100 million dollars more on aluminum this past fiscal year than the year prior.

What do you make of the craft beer resurgence in America?

I think it's going to fade. It's inevitable.

Tell us about Miller Chill, which you just launched.

We launched Chill in a few test markets and it was so well received that we are taking it nationwide by the Fourth of July. It's an American take on a Mexican classic - a light beer with lime and salt. That doesn't sound very prepossessing but it drinks extremely well. It is flying off the shelves now.

( I was alerted to this piece by the blog, Beer Philosopher.)

Mr. Mackay's wording is cleverly ambiguous. Does he intend to convey that the dramatic rate of growth (the re-surge-ence, as it were) will fade, or that the entire craft beer industry will fade away?

If he is implying the former, he's probably correct. Current double-digit growth will subside at some point. That's demographics and market shakeouts.

In the 1990s, the Wall Street Journal published an infamous article on craft beer. "Craft beer is dead", it shouted, "doomed by poor business practices, poor quality control, and overextension."

Back then, there was a lot of prima facie evidence to support the article's premise: stale beer on store shelves, brewery closures, bankruptcies, etc. Quite a few brewpubs had been opened by investors trying to cash in on a fad, but who had no experience in operating restaurants. These are long gone. In the mid-Atlantic region, the Frederick Brewing Company was a poster child for all this.

But the report of craft beer's demise turned out to be greatly exaggerated. The industry continued to grow, albeit at a much slower rate than that of those cowboy days.

And in the past few years, that rate has returned to double digits. Growth this year - volume of craft beers sold - is up 11% over last year at the same time.

The difference - now from then - is that a greater proportion of today's craft breweries are better operated. They employ better business practices; they are supported by sufficient capitalization. They consider quality control and assurance as integral to production and necessary for shelf-life.

This potential for a sustained capture of beer market share is something that SABMiller - and all the majors and their distribution networks- are quite concerned with. Witness MacKay's grasping at straws - er, salt: Miller Chill.

In a daft irony, SABMiller's own Brew Blog, in a 28 August posting, contradicted its leader's very observation.

Stronger craft industry means repeat of 90s shakeout unlikely.

The fast growth of craft beer calls to mind the segment’s rapid rise in the early 1990s.

Which begs the question: Could craft’s growth flatline the way it did in the mid-90s?

Most industry observers say no. While craft’s rate of growth likely will cool off in the years ahead -- a function of a bigger base, if nothing else -- history is unlikely to repeat itself for a variety of reasons. The players are different. The consumer is different.

The latest issue of Brew Magazine, which focuses on craft beer, examines this topic.


1. Craft beers are generally of higher consistency and quality than they were in the 1990s.

2. The trading-up and customization trends are more broad-based now than it was then.

3. The operators are better. During the last runup, a lot of amateurs and speculators got into the business in hopes of making a quick fortune. That’s not the case this time – at least for now. They’ve also learned from the lessons of the 1990s.

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