Bumps in the Road for Craft in 2016

As previously discussed here on more than one occasion, 2016 has been a tough year for craft beer. On the heels of several consecutive years of double-digit growth, there was a significant decline this year in the all-important retail channel.

Recent stats for grocery (in proprietary publications) show craft up just over 7 percent in dollars and 4 percent in volume for the year. The picture is worse for the 12 weeks through late November, which show dollar growth up less than 4 percent and volume under 2 percent.

There are reasons for everything, of course, and part of why craft is suffering in grocery is surely the brewery explosion. Local beer is more readily available to folks who didn't have easy access to it before. But that's only part of what's going on, I think.

Seasonal beers are another part of the story. Those beers are typically strong in retail and grocery stores between October and December. Not this year. Seasonals are down 8 percent for the year in multi channel retail, and down well over 9 percent in recent weeks.

The reality is that seasonals don't carry all that much weight these days. In our wacky craft beer world, "seasonal" is code for beer that is "old and tired." It's specialty beers consumers are chasing, beers that are rare and unique in some way. Tried and true seasonals are old hat.

Another pesky piece of the puzzle is imports, which have seen increased dollar and volume growth across all retail channels this year. That momentum accelerated throughout the year and reached double-digits in some retail channels over the last 90 days. Right where craft ought to be.

Could price differences be the reason for craft's decline and imports rise? Interesting idea. The average price per case (from a proprietary publication) of imports across a wide retail spectrum is about $30, compared to craft at about $36 per case.

I can't think of many mainstream imports I'd choose to buy instead of well-known crafts from places like Sierra Nevada and Deschutes. Even at a lower price point. I get that imports suggest more flavor and specialness than domestic macros. But most of the imports I see in grocery and convenience stores are seriously lacking.

If consumers really are turning to imports, maybe craft prices have gone too high. It's something I've wondered about since I saw six-pack prices at my local Fred Meyer pass through the $10 and $11 barriers. The notion of a $36 per case craft beer is pretty sketchy for non-sale beer. Seems low.

It's a pretty good bet that rising prices are a drag on craft growth. The gap between dollar and volume growth was fairly wide in recent years. Dollars stayed well ahead of volume because consumers accepted rising prices. But that's changing. The gap has narrowed, suggesting some (perhaps much) of current craft volume growth is fueled by discounting.

We face a lot of unknowns as we close out 2016 and move into the new year. That's as true of the beer industry as it is of the transition in Washington, D.C. Hang on.

The Trap of Large Scale Distribution

The Brewers Association recently announced that the US brewery count has surpassed 5,000. That's a new record, topping the previous high of around 4,100, set back in pre-Prohibition 1873. Most breweries were small in those days and we seem to be returning to that general theme.

Nonetheless, the bulk of the craft beer sold today is made by a few large breweries. No need to name names. These are mostly well-known brands that joined the craft movement long ago and have built strong followings via regional and national distribution.

If you've been reading along here, you know some of the larger craft breweries have been struggling of late. The stats are quite clear. It appears that, with a lot of breweries opening in places that never before had local beer, locals are buying local brands instead of national or regional ones. Go figure.

Improved access to local beer is actually a wonderful thing. And we aren't done, yet. Despite significant overcrowding in the retail sector, we haven't reached peak brewery count. There's still room for small breweries that target underserved local clientele. Seriously.

That applies even in Portland, which has (too) many breweries concentrated in and around the city core. My guess is some of those breweries will struggle in coming years. But there are still neighborhoods in the metro area that would proudly support a local brewery or brewpub.

What we don't have room for, I think, is breweries that enter the market with plans to extend their reach and profitability via large scale distribution. Stiff competition for limited retail shelf space and taphandles makes that an increasingly problematic strategy for most, though some have certainly succeeded.

That's why I find it odd that so many breweries, even relatively small ones, try to navigate the distribution angle. Sure, a bit of local distribution is good marketing. Being seen on store shelves can be good for business. But reaching beyond local distribution makes sense for only a few.

Industry sources tell me some Oregon breweries are reconsidering their commitment to extended distribution. These are breweries whose beers are distributed in Oregon and around the Northwest. They're starting to wonder if the strategy is worth the time, effort and investment.

It's a good question because distribution on that kind of scale is a different challenge than selling beer in your pub and in local retail channels. Once you cross the threshold into distribution outside your home market, you're walking into a brutal numbers game where the cost of entry is high and the margins are extremely low. Moving a lot of beer is just one piece of the puzzle.

Most who enter into serious distribution invest heavily in infrastructure. But that strategy also requires an ongoing investment in marketing and support. Besides good beer, you need a solid image and a viable marketing plan. And you need boots on the ground, folks who live in or travel to remote markets to create the buzz that generates brand recognition and sales.

I honestly don't understand why successful brewpubs, in particular, get caught up in the distribution gambit. It seems to me they would be well-advised to stay tightly focused on running their pubs well. That's where they get the greatest margin on their beer. Going deep locally typically offers a much better return than going wide regionally or nationally.

It's fair to wonder why, when faced with the reality of high entry costs, low margins and stiff competition, so many attempt to distribute beer outside their home markets. Possibly it's ego. Possibly owners and brewers experience success at home and assume they can and must duplicate it outside their area.

It often turns out to be a fool's errand and a trap. No offense to the mangled egos.

The End of an Error

Today marks the official anniversary of the end of Prohibition, the failed experiment that lasted far too long in the United States. We've made a lot of mistakes in our history and we continue to make them. But Prohibition was a disaster by almost every possible measure.

The end came on Dec. 5, 1933, when Utah (irony) became the thirty-sixth state to ratify the 21st Amendment, which repealed Prohibition. Recall that there were then 48 states and amending the Constitution required ratification by 36 of them.

People tend to forget that Oregon, which was the seventeenth state to ratify on Aug. 7, 1933, had been wallowing in Prohibition longer than many states. Statewide prohibition was approved by voters in the 1914 election and went into effect on Jan.1, 2016.

In fact, prohibition was largely a rural phenomenon. Portland and Multnomah County narrowly approved statewide prohibition in 1914. By the time Oregon voted on national Prohibition in November 2016, those same folks had seen enough and rejected it by nearly 10,000 votes. But rural Oregon went the other way and national Prohibition arrived on Jan. 16, 1920.

The stench of the Prohibition era rubbed off fully in Oregon. Most breweries closed. Those that remained converted to sodas, syrups and near beer. But beer was never the problem. The problem was liquor. During Prohibition times, that included local moonshine as well as whiskey brought in from Canada via speedboats up the Columbia River.

There was little interference with the movement of contraband. Portland became a hub for liquor distribution, supplying establishments that consumed vast amounts of alcohol, often with the knowledge of paid off local police. Some speakeasies were paying $100,000 a month for police protection. When they did conduct raids, police typically targeted small time operators who couldn't afford protection. Confiscated liquor often found its way into the hands of high ranking officers and city officials. As was the case in many cities, Portland never accepted Prohibition.

Most Americans knew by the late 1920s that the grand experiment was not working. Corruption was everywhere, infesting public and private institutions. Gangland killings were a regular occurrence. To many, prohibition laws appeared to be unenforceable. Still, the end didn't come as soon as many hoped and expected.

Anticipating repeal of the 18th Amendment, Portland's largest breweries, Henry Weinhard and Portland Brewing, merged in 1928. Arnold Blitz, owner of Portland Brewing, was named president of newly formed Blitz-Weinhard Brewing. The company had jumped the gun on the end of Prohibition by five years.

In the end, it was the Great Depression that finally tipped the balance in favor of repeal. In tough times, Americans decided the country needed the economic stimulus provided by legalizing the manufacture and sale of alcohol more than they needed to continue on with a failed law.

Franklin Roosevelt, running on a wet platform in 1932, won all but six states and beat Herbert Hoover 472-59 in the Electoral College. In Oregon, Roosevelt won by 75,000 votes out of 350,000 cast. Just as important, Oregonians voted to repeal state prohibition by 70,000 votes. Multnomah County accounted for 40,000 of those votes.

Although the end didn't officially come until Utah ratified the 21st Amendment, more immediate relief arrived in the from of the Cullen Bill, passed by Congress and signed by Roosevelt in late March 1933. The law legalized the production and sale of low alcohol (3.2% ABV) beer and wine and took effect on April 7, 1933...fondly referred to today as National Beer Day.

In Portland, brewers were woefully unprepared to meet the expected demand on Beer Day. Congress and Roosevelt had given them just two weeks to ramp up production and it wasn't enough. As a result, thirsty Portlanders consumed every available drop of beer. Blitz-Weinhard, tapped out completely, was unable to fill orders for two weeks.

Most of this story is lifted from Portland Beer. One thing I don't address in the book is why Prohibition failed. The main reason, I think, is that it's difficult to legislate and enforce morality. The other is Americans like to drink and most of them didn't stop drinking during Prohibition. They simply ignored the law, which led to a lot of arguably more serious problems.