Small Brewers Challenge Traditional Industry Powers

The Brewers Association just released it's annual stats on the industry for 2017. Anyone who stops by here on any kind of regular basis probably knows of the numbers. We now have more than 6,200 craft breweries and the craft sector grew at a 5 percent clip.

Of course, there are signs of growing pains. Nearly 1,000 brewpubs and breweries opened in 2017, similar to 2016. But there were 165 closures, certainly the most we've seen in the craft era. That's not shocking. The rising brewery count makes closings more or less inevitable.

The raging growth we've seen over the last decade is historic. It's been good for consumers and brewers. There are more choices out there than ever before thanks to imagination, innovation and smart marketing. Also more places to find and drink fresh local beer.

But not everyone is happy about the altered lay of the land. The emerging popularity of taprooms and direct-to-consumer sales is upsetting the longstanding structure of the beer industry. That story is nicely documented in this Brewbound article.

The enemies of the status quo are the taproom and the brewpub, places where breweries sell their beer directly to consumers. The growth of that strategy is flipping the three-tier apple cart on its head and causing significant distress among the players that previously owned the industry.

Regional breweries have taken a direct hit. They once had no problem selling their beer in stores and in draft form. Today, consumers are buying more and more beer in taprooms and pubs. Large regional brewers, like Deschutes and Sierra Nevada, are struggling. And they don't like it.

The problem for regional craft extends to restaurants, bars and taverns. Where they once had free access, they are now forced to compete with local brands for tap handles and sales. Consumers want fresh choices. Established regional brands, considered old and tired, have lousy traction.

Traditional on-premise retailers are getting smacked around, too. With craft fans flocking to taprooms and brewpubs, restaurants, bars and taverns see their market slimming. As the Brewbound piece documents, some retailers have taken punitive action against brewers. But the reality for these folks is simple: they can adjust to the new reality or suffer the consequences.

Distributors are not immune, either. All that beer being sold direct to consumers doesn't pass through distributor hands. Distributors still get their pound of flesh for most packaged product and some draft, but the move to local beer and direct sales is a thorn in their side.

Fair is fair, though. The niche small brewers are exploiting is their best possible response to what's going on in the industry. Big beer, led by Anheuser-Busch, is locking down grocery store sets and squeezing small brewers out. That situation will only get worse moving forward.

The best case scenario for craft breweries has always been selling their beer directly in a taproom or pub. Higher profit per ounce, glass, gallon or keg. The emerging reality in distribution has encouraged and forced craft brewers to actively develop that model. It's no accident.

And the success of that model is changing the beer world. But it's unclear how far this can go. The size of the US beer market is declining, not growing. Which means all breweries are, in a sense, chasing the same customers. Right now, local craft brewers are on a roll, transforming the industry.

There's undoubtedly a limit to how many small breweries the market can support. Are we approaching that number? Maybe. But, for now, the little guys are flourishing and the traditional power structure is on edge. Oddly satisfying.

Tracking Craft's Emerging Mass Market Status

It's vacation week for me. While my Portland friends are stuck shoveling snow and braving treacherous roadways and walkways, I'm enjoying a week in the tropics. It's a tough job, but I guess someone has to do it. Might as well be me.

These respites away from the real world give me a chance to think about beer, something I seem to spend less and less time on these days. I've been trying to connect the dots between two articles I read on this trip. One by Andy Crouch, the other by Jeff Alworth.

Crouch's piece is in this month's BeerAdvocate, a publication I read sparingly these days. (There is no current web version of the article that I can find.) His basic premise is that our fixation on chasing multiple exotic beers at pubs and bars has ruined the simple experience of enjoying beers with friends. He describes a setting outside the U.S. in which all patrons are drinking one beer and having great conversations unrelated to beer.

Alworth's piece appeared on the Beervana blog, though it probably should have appeared in formally published form somewhere. His premise is that stratification is occurring in craft beer and that the largest brewers, though they continue to pander to the specialty audience, are aggressively going after an emerging mass craft market with trendy, disposable brands.

I'm not really sure Americans can ever return to a situation where we're satisfied drinking a single type or brand of beer in an evening. That was certainly the reality 40 or more years ago, when most of us drank tasteless industrial lager. There were a lot of different brands, but we were drinking basically the same beer and there wasn't much conversation about it.

Even in the early days of craft, there was nothing like the promiscuous market we see today, with folks striving to drink exotic variety. In those days, people were often satisfied to spend an evening drinking pitchers of the same beer. Breweries and bars typically had only four or five brands, so options were limited. It was a different world.

The specialty craze ramped up over the last 10 or so years, driven by breweries in an increasingly crowded market wanting to differentiate themselves and by a small, but aggressive crowd of geeks that became virtually addicted to exotic beers, pretty much regardless of cost. This crowd, though small, helped push craft dollar volume growth into the double digits in recent years.

What the large craft brewers have come to realize is that the specialty crowd is not the future. They recognize that the mainstream popularity of craft beer has created a huge pool of consumers who enjoy good beer, but aren't really interested in chasing exotic styles. That mass market is craft's future and that's where the large brewers are turning.

There's nothing, really, to add to what Jeff wrote in his piece. His notion that large brewers are targeting the mass market with trendy, disposable brands is absolutely correct. Consumers currently demand zesty IPAs and that's what brewers are delivering. They will easily move on to the next trendy thing when it comes along with new disposable brands. And so on.

Will we ever get to a scenario in which consumers drink a single type of beer, such as Crouch describes? Some might argue we've already crossed that bridge in some sense with the popularity of IPA. Even here, there's demand for numerous brands...Lagunitas, Ballast Point, Goose, etc. Spoiled Americans will probably always demand multiple brands of any trendy style.

The most intriguing thing about what's coming will be seeing how the big craft brewers implement a mass market strategy. My guess is the tactics will look something like those used in the past by macros to tap broad regional and national audiences. Irony abounds.

This transformation is gonna be comical and messy, I suspect. I look forward to watching it unfold.

When Millennials Get Fat

Millennials. We know who they are. They're the generation of Americans that came of age after 2000. It's an expanding demographic at the moment because a generation is roughly 20 years. So we will not see the last of the Millennials for another five years.

There are a few things we know about this generation. We know, for example, that Millennials are likely to be saddled with significant debt...from education or consuming. We know they're less likely to own or drive a car than previous generations. Also less likely to own a home.

In food and beverage terms, we know Millennials have all but abandoned mainstream macro beer in favor of craft beer, wine and spirits. When you look at the industry data and you see the beating macro brands are taking and the growth craft brands are seeing, a lot of that is being driven by Millennial preferences.

Which conjures up this question: What happens when Millennials get fat? It has to happen and it is happening. Metabolisms can only keep you thin for so long, particularly when you're partial to high calorie food (this generation loves fat) and drinks. Please recall that your typical craft beer has significantly more calories than macro beer.

At some point in time, it's likely Millennials are going to start looking around for lighter options. Some, probably those on the high side of the demographic in age, are almost certainly looking around for those options already.

It won't be the first time this has happened. One of the reasons light beer and lo-cal foods first became popular back in the 1970s is that Americans became diet and weight conscious. The population wasn't nearly as fat as it is today, but a lot of people wanted healthier options. Light beer was one part of that and it dominated the industry well after craft beer arrived in the 1980s.

When I think about the beer industry, I can easily see Millennials eventually moving away from big beers. That's hard to imagine given the current popularity of double IPAs, barrel-aged beers, etc., but I suspect Millennials will someday accept the idea that lower ABV beers are or can be okay.

In fact, despite the effort that big beer has put into targeting the young crowd via craft brewery buyouts and shoddy, high alcohol products, the big guys are counting on Millennials getting fat and drifting back to macro beers. That may not happen quite the way they think, but it's possible that some part of the Millennial crowd will relent and start drinking light beer.

The more likely scenario is that lower ABV beers made by craft brewers will capture a larger share of the market than they hold today. There are some great lagers and light ales on the market and more are on the way. Brewers who manage to produce beers that are light in ABV, yet full in body and flavor, will probably have the greatest success in this area.

We'll have to wait and see how this plays out. The only thing we know for sure is that Millennials will get fat. Unless they decide that fat is okay, their consumption habits will change...and so will the beer industry.