Craft Beer and the Great Mirage

Predicting the future is a sketchy business. That's just as true of the beer industry as it is of sports gambling. We look at the scenery and think we know what's coming. Then everything flips and we're left holding the bag. Look at what happened to Virginia last night.

Over the past few years, craft beer growth rates were stupendous. Easy money fueled a breakneck expansion of brewing capacity across the country. The rationale was simple: double-digit growth suggested there would be a market for virtually unlimited beer.

By one publication's reckoning, the expansion of brewing capacity during the past five or so years is comparable to what happened at the end of Prohibition. If you don't recall, the brewing industry, wiped out almost completely, had to be built back up from nothing to meet demand.

Of course, we now know the growth many expected to continue unabated has guttered. Demand for beer is flattening. The double-digit growth of craft beer has slowed to perhaps half that. The result is a lot of unused brewing capacity, similar to what happened in the late 1990s.

The excess capacity scenario generally foreshadows declining prices. Brewers look to sell beer and keep their doors open by lowering prices. There's some evidence of that happening. After years of increases, the big brewers are, indeed, backing off on prices.

Craft is a little different. In the big picture, we're seeing smaller price increases than in recent years in the mainstream beers. There's an interesting caveat at the top, where specialty product pricing appears to be no object. Consumers don't care. Premium and Super Premium craft, which account for only a fifth of the business, are responsible for 75 percent of craft dollar growth. Crazy.

But not everyone plays in the Premium sandbox. Most craft breweries sell mainstream product to folks who aren't beer geeks. Their challenge, given the situation with unused capacity and downward pressure on price, is figuring out what to brew that will allow them to stay in business.

The continued implosion of domestic premiums looks like an opportunity for craft brewers to chase dollars with lighter, lower ABV products at attractive prices. Breweries like Firestone Walker, New Belgium and Founders, among others, are doing so.

By the way, that strategy fits in well with demographic realities. Millennials, who drove a lot of craft's growth in recent years, are moving out of their twenties and getting fat. They're starting to look for lighter options. We've seen this movie before with prior generations.

So the idea of targeting the domestic premium space seems valid. The problem, as industry analyst Bump Williams recently noted on the Brewers Association Power Hour, is that craft brewers cannot beat the big brewers on price. The big guys are too efficient. They will prevail.

Thus, thoughts of escaping the craft slowdown with lighter, cheaper product in the domestic premium space is largely a mirage. As soon as that market blooms, big beer will enter the fray with aggressive discounting and swallow up the business.

Yeah, just one more reason these are scary times for craft brewers.