Thursday, February 28, 2008

Full steam ahead: Craft Beer in 2008?

Craft Beer Rocks Again in '07.

So trumpeted the headline, yesterday, over at The figures are indeed impressive:

Information Resources said craft beer sales rose 16.7 percent from $493 million in 2006 to $575 million in 2007, marking the second straight year of double-digit increases. IRI tracks sales only in the off-premise trade.

Stan Heironymous talked about this last week with his post: Hey, people are still spending money for beer. And he looked at other figures which indicated that the trend was continuing into 2008.

From Miller Brewing's Brew Blog:

For the four weeks ended February, the national average weighted case price for craft beers increased by 4.9 percent [in supermarkets], according to beer sales statistics from Nielsen. That’s more than the major brewers or the import category.

Regardless, craft beer gained 0.8 points of case share – and 1.3 points of dollar share – during the period, according to Nielsen.

Indeed, Beer Marketer’s Insights Express earlier this week quoted executives of Coors Brewing Company and Miller Brewing Company as saying they hadn’t seen signs of trading down.

But you'd have to scroll all the way down to the end of the ProBrewer post to see this ominous augur:
Price increases that many brewers have implemented due to increased hop and barley costs were introduced last month or the first of this month, and shelf prices are just now beginning to reflect those higher prices. February, and particularly March will be important indicators of how the higher prices of craft beer will be affecting sales at retail.

At the end of 2007, many wholesalers and retailer purchased large inventories to take advantage of not-yet-raised pricing. Thus these retailers may have only just raised their prices to consumers.

From Beer Marketers' Insight:

At same time, there are clouds on horizon for craft brewer financials, especially sharp rise in raw materials such as barley and hops (well-documented in numerous media articles). Cost pressures so bad that there’s even talk that a fair number of smaller brewers may be unable to make it thru [sic] 08. Others are planning huge price increases, 10%+. One of top 20 told INSIGHTS such a big increase won’t affect its growth rate. We wouldn’t want to bet on that.

Tuffening [sic] economic conditions could make higher craft beer prices less palatable for some consumers, especially as craft brews face increased competition from Big 3. Blue Moon up 50-60% in 07, total Leinenkugel volume also growing almost 30% in latest SABMiller fiscal yr, and now Michelob takin’ [sic] direct aim at craft. These competitors usually sell at lower prices, without as much cost pressure. [I've referred to these as the dangerous Trojan Horses of craft beer.]

Despite continued stellar sales growth, Boston Beer stock kept falling after its last quarterly report primarily because of cost pressures. Down fully 40% from peak, losing $200 mil in market cap. Some recent craft moves about consolidating/ cutting costs, reflecting new realities. Recently realized Widmer/Redhook Craft Alliance detailed as effort to be more efficient #3 craft player. Flying Dog announced it would close its Denver brewery and make all its beer in East in bid to reduce costs. [Earlier announcement of that move.]

Some anecdotal evidence ...

Retailers in the greater Washington D.C. area are telling me that their beer and wine sales in premium categories are down in February. At bars, I've been told that January were up over those in January 2007, but that in February there has been a possible bleed of wine sales into beer and liquor as less expensive alternatives.

1st quarter for craft beer will be up slightly over 2007. And income at retail will be up slightly. But that increase may reflect higher prices, not necessarily higher profits.

The real test will be in the second quarter: April through June.

Costs for a wide variety of the finished and raw materials—paper, glass, ingredients and all the multiplier effects up and down the chain—will still be increasing, while at the same time national economic growth will be decreasing.

With less personal worth and higher prices, consumers will have less disposable income and greater reluctance to buy (gulp) non-essential things like ... beer.

Craft beer may have an ace-in-the-hole, however.

The price for imported beer will increase at a greater pace than that of domestic beers.

Yesterday, the euro finished above $1.50—its highest level ever—and the dollar fell to record lows versus several other currencies. Before that watershed, signals were mixed on imports: US sales were down 6.4% in November, but for InBev, for example, the 4th quarter of 2007 produced record worldwide sales.

So, maybe, just maybe, the prodigal beer guys—those who will only drink beers if they are from somewhere, anywhere, other than close to home—may return to a great value: fresh local beer, well-made, delicious, and cheaper.

Hang on!

See related posts:
Thanks to a friend in the beer biz in Washington, D.C. for alerting me to the posting.

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