Monday, September 14, 2015

Nine reasons why there might be an upcoming 'craft' beer bubble-burst.

The American 'craft' beer business is thriving spectacularly. But there may be problems, uh, a-brewing.

Mitch Steele is the brewmaster at Stone Brewing of Escondido, California. On the side, he writes a blog called The Hop Tripper: Musings on IPA, beer history and craft brew travels. In his most recent post —"Craft beer sales are at an all time high - and why this could be scary"— Steele identified nine danger signs of a potential burst of this 'craft' beer bubble.

  • 1. 'Craft' breweries are beginning to not 'play nice' with each other, legally and illegally.
  • 2. There aren’t enough trained brewers to go around. Some breweries are operating with unskilled and/or untrained brewers that are bestowed with the title “brewmaster”.
  • 3. Large brewing companies are purchasing 'craft' breweries and wholesalers with increasing frequency.
  • 4. 'Craft' beer may be headed towards the mainstream with consolidation and homogenization.
  • 5. To succeed these days, it isn’t enough to brew excellent beer, a 'craft' brewery must also have a catchy marketing angle and a message that separates its from other breweries. With some 'craft' beer distributors, there are already far too many brands in the portfolio to put adequate focus on all of them.
  • 6. Long-term hop supply is a concern because craft brewers are using more and more hops on a per barrel basis than ever before. Combine that with the 20% growth rate of 'craft breweries, and one will see that hop demand is starting to outpace supply.
  • 7. The fickleness of the craft beer consumer is creating concerns for long time flagship brands. This situation makes projecting sales and ingredient requirements an "impossible" task for brewers.
  • 8. The death of Pale Ale and the IPA-ification of everything.
  • 9. The 'craft' beer business is turning from a brewer-driven focus to one where marketing determines brewing decisions.

Backing up Steele's third and forth assertions, one has to look no further than the recent 50% stake purchase of Lagunitas —the 5th largest U.S. 'craft' brewery— by international brewing company Heineken. Craft Brewing Business wrote of this overseas 'outsourcing' as a trend that may only intensify.
  • As shown by the Lagunitas-Heineken deal, large foreign brewing companies are increasingly considering strategic investments in U.S. craft breweries as a way to direct funds into a growing market segment and as a way to diversify their business.
  • These transactions have the potential to open up international distribution opportunities for U.S. craft breweries without compromising existing production plans or disturbing U.S. distribution channels (subject, of course, to the terms of existing contracts and obtaining any required consents thereunder).
  • The joint venture can be structured as a cash sale of a portion of the craft brewery’s equity (often with a post-closing contractual arrangement concerning management, distribution, etc.) or an exchange of craft brewery equity for stock in the acquiring company, depending on the legal and financial needs of the parties.
  • The reaction among craft beer drinkers to these transactions has been less negative than to similar transactions involving AB InBev or MillerCoors. This allows a U.S. craft brewery to increase its resources and begin distributing to a larger audience, without sacrificing the allegiance of their core demographic.

Add another reason why: the American tax code rewards foreign investment in American business. That's not a bad thing for economic growth, but it's not a sturdy peg for continuing American ownership of 'craft' breweries.

When the Heineken/Lagunitas deal was announced, a false-dilemma cacophony arose on the web. There was much wailing and gnashing of teeth about 'sell out' and the like. (Lagunitas owner, Tony Magee's over-the-top explanation didn't help.)

In rebuttal, there were condescending tut-tuts: hey, it's only business. It's only beer. Get over it. (And, this has happened now on several occasions: Anheuser-Busch with Goose Island and Ten Barrel, Duvel Moortgat with Boulevard and Firestone-Walker, to name a few.) Other gray-speckled 'craft' brewers may have been envious that it was Magee's mobile phone and not theirs which had vibrated with call-waiting from 'Big Brewer.'

The truth lies, as it often does, somewhere in between. Who are we to begrudge brewers their financial stability in retirement? 'Craft' beer is neither a non-profit public trust, nor is it an ordinary product like the widgets of Econ 101. It's a legal drug with little utility other than amusement, but containing a small measure of nobility. (Maybe believed after consuming one.) "Craft breweries have a soul, and I think the big money coming into the industry is kind of a challenge to that soul," said Steve Hindy of Brooklyn Brewing.
I am 100 percent with those who characterize beer as something ineffable—it’s one of the few truly international human practices that unites us through time and space. Sitting with friends drinking beer made by a local family in the next room is as ancient as civilization itself. [...] But beer companies? They are organs of commerce, however wonderful the brewers and publicans they employ may be.
—Jeff Alworth. All About Beer: 9 September 2015

'Craft' beer proponents —manufacturers and drinkers— can occasionally demonstrate a messianic streak. 'Saving the world' is a meme promulgated by some of the poobahs of established breweries —who declare the Lydia Pinkham miraculousness of their products— shared by the arrivistes of 'nano-breweries' —who bedeck themselves with the honorific 'brewmaster,' declaring the end to bad beer, despite nary a professionally-brewed drop in their portfolio. Where's Professor Harold Hill when you need him?

'Craft' beer can often show little regard for the lessons of its own short history. Why, for example, were there almost no observances or celebrations of the half-century mark of craft beer's re-birth in America? I'm afraid that there are many in the 'craft' beer world who could not have cared less.

When the American small brewery industry was resuscitated fifty years ago —in 1965, when Fritz Maytag bought the Anchor Brewing Company, and followed eleven years later, in 1976, when Jack McAuliffe opened his short-lived New Albion Brewing— few could have foretold the growth, of what now most call 'craft' beer, from null to significant. That first generation of 'craft' beermakers, the second in the 1980s, and the third in the 1990s, together had, as one of their goals, if unspoken, the 'mainstreeting' of 'craft' beer. Where good beer had been once very difficult to find, the goal was to make it —as has been achieved fifty years later— readily accessible to all Americans. This is an important milestone of doggedness and success, worth trumpeting.

Steele finishes his analysis of the state of American 'craft' beer in 2015 worried but hopeful:
When you see established breweries veer off their tried and true path, or brew a beer that someone else has already made popular, that is most likely a marketing decision, not a brewer decision. Maybe I’m a bit naive, but the idealist in me finds this unsettling, and I don’t think it bodes well for the future. All this being said, I am still quite bullish on craft brewing and will remain a lifelong fan of great beer. But I think there will be some rough roads ahead as the industry growth continues.

  • Mitch Steele knows of what he speaks. Stone Brewing is the ninth largest 'craft' brewery in the United States, producing 287,075 barrels of beer in 2014. Before signing on with Stone in 2006 (when its production was around 40,000 barrels), he had worked for Anheuser-Busch, managing brewhouse and fermenting operations, and new beer development. He is the author of the Brewers Publications style guidebook, IPA: Brewing Techniques, Recipes and the Evolution of India Pale Ale. And, 'craft' beer or otherwise, one has to appreciate the muscular alliteration of Stone and Steele.
  • A hat tip to Alan McLeod of A Good Beer Blog, who first pointed me to Mr. Steele's post.

  • For more from YFGF:

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