The Gentrification of Craft Beer is Escalating

A while ago, I wrote a piece on what I called the "emerging gentrification" of craft beer. You can find that article here if you're so inclined. At its most basic level, the article looked at what was then happening to craft beer in terms of high-end product.

My thoughts in that original piece were mostly based on observation. I'd noticed, for example, that it had gotten pretty easy to find higher priced, $10+ bottles. There was a time not all that long ago when that was not so common. A change was underway.

Looking at that same scenario today, more than two years after the fact, it's pretty obvious that the trend is entrenched. It's now commonplace to find $15 bottles and $20 bottles are not unusual. Extrapolating to packaged product, $12 six-packs and $10 four-packs are fairly common.

The difference between now and late 2013 is I've seen stats that support what I'm seeing. In simple terms, high-end or premium craft brands are making a greater contribution to overall category growth than they did in the past. And the trend is escalating.

What's considered high-end product? Looking through some industry reports, the dividing line is $40. Brands selling for more than $40/case are split into: Premium ($40-$49.99); Superpremium ($50-$59.99); and APEX ($60 and up). Everything below the $40 watermark is considered Craft. This doesn't necessarily translate directly to large bottles, but you get the idea.

The growth stats are revealing: While the entirety of the $40+/case segment represents just 20 percent of overall craft volume, that group accounted for 54 percent of year-to-year dollar growth, April 2015-April 2016. Brands in the $40 and under set, which make up 80 percent of total craft sales and have traditionally driven growth, showed negative or flat growth.

Taking it a bit further, the 1,000 or so brands that fall into the Premium category saw dollar sales increase 34 percent. We're talking about 12 percent of total craft sales volume accounting for more than a third of growth. Superpremium, representing a smaller number of brands than Premium, was up a shocking 51 percent. Finally, APEX brands accounted for 11 percent of growth.

Some part of this is being driven by the collapse of previously top selling beers in the Craft category. Indeed, Sam Adams Boston Lager, New Belgium Ranger and Sam Adams Seasonal were all hit with double-digit declines during the period in question. And the top 15 bands were down 10 percent, collectively, in dollars. There is that to consider.

But you have to balance the decliners with brands that experienced big growth in the base tier. Goose Island IPA, Firestone Walker 805 Blonde and Founders Day IPA all doubled sales. Several brands from Lagunitas and New Glarus also showed solid growth. So the news is not all bad in the under $40/case category.

Keep in mind that growth at the top is happening at a time when overall segment growth is slowing. As referenced during the recent Craft Brewers Conference in Philly, craft's dollar share of overall beer is higher than ever at about 21 percent. But year-to-year growth, which was 18 percent during the two previous years, dropped to 13 percent. And the decline appears to be deepening.

There are logical explanations for everything. Brewers Association chief economist Bart Watson explained that slowing growth is the "new reality." Why so? Because once you achieve the share that craft has attained, it gets tougher to sustain crazy growth rates. "This is something we need to get used to," Watson said.

He's right, of course. If you're going to be worried about some aspect of craft beer, it isn't overall growth. Growing a 21 percent share of the pie by 11 or 12 percent annually ain't half bad. On the other hand, a base that's collapsing in favor of high end product might be reason for concern. A good analogy is a car brand whose sales are increasingly dominated by luxury models.

As I see it, part of what's happening is that higher priced specialty beers have turned the industry gaga. Intense competition in the Craft tier means a growing number of brewers are looking to specialty beers to define who they are and make more money per barrel. It's hard to blame them.

At the same time, brands in the Craft tier are being largely abandoned or priced upward. A lot of tired, under-performing brands live here. Go to a store, any store, and see how many craft brands sell for less than $10 a six-pack. Not many, if you're excluding sale beer, and likely few that you want. The brands doing well in this tier likely won't be in it for long.

It's worth noting that the trend is a team effort. The migration upward is being driven by brewers, distributors, stores, bars, etc. The greater profit per ounce of product moved is one of the unanticipated benefits of the craft beer craze. Everyone is rolling with the punches (and in the dough), refusing to look a gift horse in the mouth and hoping to ride that horse into the sunset.

The question is this: Is growth in the high end tier sustainable long-term? I don't think it is. I think there's a limit to how much consumers are willing to pay for supposedly fancy beer. We just don't yet know what the limit is.

What's going to drive craft category growth when demand for high end product crashes or significantly declines? I don't have an answer. But the question is worth asking.

The Emerging Gentrification of Craft Beer

There's nothing new about stratification in the beer industry. It dates as least as far back as the 1950s, when heavy advertising split macro brews into premium and popularly-priced brands. The beers weren't much different. What was different was how much and how premium brands were advertised.

Premium (as well as super premium) macro categories have been decimated by the rise of craft beer. Brands like Michelob, Budweiser and other standards are in virtual free fall. Popular brands aren't doing any better. This has been well-documented in many places. The macros sell a lot of light beer these days and that's about it.

In actual fact,  we've arrived at the point where craft beer is itself undergoing stratification...or gentrification, if you will. This transformation is nothing like what happened with the macro brands. It is not driven by advertising. The craft beer industry was not built on TV or in magazines.

Gentrification is an interesting concept, I think. It typically refers to shifts that happen in urban communities when wealthy residents take up residence and displace poorer ones. In a beer terms, gentrification is the growing presence of increasingly expensive products, exclusive events or access and special services.

This trend is happening for several reasons and it has consequences for some, which I'll get to. But first some examples of what I'm talking about.

Not that long ago, you could walk into your favorite bottleshop and be pressed to find more than a few $10 bottles of beer. Try that today. You'll have no trouble finding bottles priced at $10 or more. In fact, you'll find plenty of $20 bottles, largely unheard of a few years ago. This reality is supported by Brewers Association numbers, which show that craft beer dollar growth exceeded volume growth by 2 percent in 2011 and 2012. Any bets on 2013?

Another form of gentrification is VIP access at brewery events and festivals. It's similar to flying: There's first class and coach. Take a look around. Most of our local festivals offer some form of VIP entry, in which the badge holder gets access to exclusive beers, a chance to mingle with brewers, beer and food pairings or something similar. For a price.

Then there are the new beer clubs. There have been beer clubs for many years, but they mainly offered standard issue craft beer. The newer clubs are much more focused on exclusive beers and related items. For a couple hundred bucks, you get yearly access to barrel-aged beers that will never be sold at retail, invitations to special events, brewery schwag and more.

Many will argue the trend is merely a sign of a maturing industry. It's quite nice that craft breweries can now sell their best beer at a wine prices. That never would have been possible in the early years, when one of the biggest hurdles for craft brewers was that their beer cost a bit more than the macros. My how things have changed. Today, frenzied fans will pay seemingly any price for access to special beers.

Of course, some people are being left behind. The price is too high. Beer is historically a drink of the common man. But the growing demand for specialty beers and special access is pushing the market in that direction, squeezing out cheaper products as well as those less able to deal with escalating prices. This situation has existed in wine for years, but is quite new to beer.

You might say what's happening with craft beer reflects our time and place. We live in a society that is increasingly stratified, where those with money lead a different existence from those who aren't as well off. The gentrification of craft beer is just a small part of that. But it is part of it. Where will it lead? Stay tuned.