Small craft warning

Small craft warning

Lew Bryson

Where is craft brewed beer headed? This small market segment has a lot of flash, but also comes with a bewildering variety of brands, types and price points. Can you rely on them? After all, the segment doesn’t even seem to know its own name–didn’t they used to be called microbrews?

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Yes, but that’s changed because they’re no longer micro: a $3.55 billion market deserves a better name, so now they’re craft brews. From being nearly unknown in the 1980s, craft beer exploded in the early 1990s, then seemed to hit a brick wall and stagnate, completely over-shadowed by another explosion in the equally margin-fat import category. Then, just as it looked like it was gathering steam for another assault on the market, the after-effects of 9/11 took a lot of the puff out of the push.

What’s going on now and what’s ahead are interesting questions, given the category’s attractive margins and prestige image. Moreover, a shift in interest from imports to craft brews may have begun. If that’s so, it’s a curve you’ll want to get ahead of.

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POSITIVE NUMBERS

The Association of Brewers (AOB), an industry group based in Boulder, CO, tracks craft brewing numbers, and they saw a 3% rise in overall volume in 2003, with some of the larger craft brewers growing more. That looks particularly good against an overall decline in beer sales last year, a trend that has been laid at the feet of various factors: the Iraq war, the slow economic recovery, and the low-carbohydrate diet craze (a strong candidate when you consider that the naturally low-carb wine and spirit categories both showed growth).

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Craft brew growth looks even better against the imports. For the first time in eight years, craft beer sales outpaced those of imports, which grew 2%, their worst performance in more than ten years. Imports still outshone crafts in volume growth and market share, however, representing an astonishing 11% of the U.S. market, while craft brews still push along around 3%.

Is it a trend? It may be, given the broader growth in the craft category; “growth in the import category” could easily (and honestly) be called “growth in Corona,” while the craft segment’s strength comes from a number of smaller breweries.

John Lane, a partner in the Ohio-based Winking Lizard tavern chain, thinks small brewers are gaining traction. “For years I really concentrated on the import section,” he said. “When a brewery’s been around 200 years, that’s a good indicator they’re making good beer. A lot of my handles are imports, because of the assurance of quality. But that’s much less of an issue these days. I think it’s swinging to the micro category, and it’s just starting. Some of it’s education, but not all of it. Americans like bigger, and they like the big styles, the big hops, the big beers. It’s awesome. I see the market continuing to swing to micros from imports, and it’s going to be fun.”

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Fun in the future, maybe, but last year didn’t go so well for businesses that staked their image on high-end beer. “It was a tough time, I’ll tell you that,” said Keith Schlabs, the “Beer Guru” at the Texas-based Flying Saucer tavern chain. “We saw people watching their dollars pretty carefully. Although distributors raised their prices, we had to hold our prices pretty close.”

Not every craft brewery participated in that admittedly small rise. While some went on a tear, benefiting from hard work, great planning and excellent beer, some were hammered by factors not under their control. Alan Newman of Magic Hat in Vermont recalled the cool 2003 summer. “We started the year with things like wars and fear of joblessness,” he said, “and then, just as people started to perk up a bit, summer decided not to come. We didn’t have a nice weekend in the Northeast until the week after the 4th of July.”

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BREWPUB TROUBLE

One of the soft spots in the craft growth curve has been brewpubs. “According to AOB numbers, craft beer volume in brewpubs was down about 6% last year,” said Rob Gentry, vice-president of brewing operations for the Gordon Biersch Brewery Restaurant Group, Chattanooga, TN. That’s Gentry’s market, as the man in charge of brewing the beer at the Biersch restaurants. “We’re in some big, quite mature markets in the west, and we saw a dip in those markets, deeper than in the east.”

Kevin Reed, Gentry’s counterpart at the Rock Bottom brewpub group, said Rock Bottom managed to eke out 1% growth last year. “We’ve seen reductions in some brewpubs,” he said “and we shut down the Cambridge, MA store, but we were still up overall. We gained ground in Portland, Chicago, and San Antonio. We have wins and challenges, but overall we like what we see.”

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The category that AOB still calls “microbreweries” (producing less than 15,000 barrels a year) was down by 8%. Part of the loss, though, is actually a success story. When a brewery goes over 15,000 barrels a year, AOB “kicks them upstairs” to the “regional specialty brewery” segment. So when you add back in the “losses” caused by breweries moving up to the next segment, these little guys actually had a pretty good year. Several of them are approaching break-out status.

Meanwhile, the largest players in the category continue to grow or hold steady: familiar names like Alaskan, New Belgium, Spoetzl/Shiner, Widmer, Full Sail, Boulevard, Summit, Shipyard, Kalamazoo, Firestone-Walker, Stone, Flying Dog, Great Lakes, and New Glarus all grew in double digits. These are breweries that have cracked the code for success and if craft brewing is going to make the same fantastic leap that imported beers have, this is where the spring is going to come from.

How likely is such a leap? If it seems crazy to you, remember that back in the early 1980s, imported beers represented only about 1% of the U.S. market, and had been in limbo for decades.

IN THE FUTURE

We could conceivably be standing on the verge of the second stage of craft brewing’s growth. There are several factors supporting such a scenario. First, there is evidence to suggest that the U.S. market was the micro-brewers’ oyster in the 1990s, with real public interest driven by plenty of free press. It was a return of romance and variety to beer. The microbrewers were soaring, and the game was theirs to lose. Lose it they did, with a huge proliferation of brands and a dreadful problem with consistency.

John Lane remembers those days. “Even 5 or 6 years ago, there was still a lot of junk,” he said. “Everyone wanted to open a brewery, put a beer out there, and, they thought, make a lot of money. Not anymore. The beauty is that time’s weeded out a lot of bad beer. The brewers that are left are making really good beer. We change our list of beers by 40% or 50% every year. I taste everything … Well, that’s a joy now, because there’s so little bad beer.”

The beer’s better, and there are fewer brands, although Magic Hat’s Newman thinks there are still far too many brands for the market to take off. “In our 3% of the market,” he said, “we’ve got 300 people trying to steal market share from each other! We’re barely getting our head above water, and now we’re going to go out and steal from each other? Our quality and our stability are getting to a point where we deserve the customer’s trust and their business. But we’ve got too many people going after too small a share.”

Newman makes a good marketing point. Even the biggest craft brewers are not making enough money to put together a serious national ad campaign or a marketing campaign with real legs. “The problem with 3% of the market is that no one can afford to advertise,” he explained. “Our market share is so small that our advertising cost per 1,000 is deadly. So until we start getting a bigger share of the business, and until we figure out how to go after the bigger players, I think we have a serious problem.”

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EVERYWHERE YOU TURN

But there’s something that Newman may be overlooking, the second factor pointing to a great leap forward for craft brewers: ubiquity. Craft brewed beer taps are showing up almost everywhere now, thanks to national brands like Sam Adams and Sierra Nevada, and to the Anheuser-Busch (A-B) assisted distribution of Widmer and Redhook. As these brands show up more places, they become less odd in the consumer’s mind, and more likely to be sampled. They are more likely to be sampled and chosen simply because they are available.

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Flying Saucer’s Schlabs likes the low-key approach of some of the older craft brewers. “Anchor and Sierra Nevada don’t throw money at people like us,” he said. “They just brew a good product, consistently, and have good distribution. We support local guys. But Sierra Nevada Pale Ale, that’s a beer that can go almost anywhere, and has.”

It’s a critical mass effect, and when you graph out the volume growth of the top 50 craft brewers, it starts to look like it’s approaching a tipping point. The larger craft brewers are growing fast enough, and brewing consistently enough, that they’re starting to garner the same kind of attention from mainstream press that they were getting back in the early 1990s.

There’s a third factor. SABMiller is making a major play to regain its position in the U.S. market, and they’re making huge strides: sales of Miller Lite were up 13.8% for the year as of May 1, while Bud Light sales were down 0.8%. SABMiller’s main weapon has been an assault on Budweiser; A-B has responded with lawsuits and counter-ads.

The whole situation promises to get a lot bigger, and more determined, as both SABMiller and A-B pour more resources into the fight. As the two biggest brewers in America focus on each other, they’ll be doing less to counteract gains by the tiny craft brewers–much as they failed to effectively move against the importers in the late 1980s and early 1990s.

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The craft brewers will do better if they’re playing together, and Rob Gentry thinks they’ve got that under control. “We have some great individuals out there protecting us, like Daniel Bradford at the Brewers Association of America,” he said. “The craft brewers didn’t always speak as one voice, the big guys have always done a better job of that. But thanks to BAA, we’re in a better situation than ever, and that’s real positive.”

Schlabs is pretty upbeat about the segment’s long-term prospects. “It’s not going anywhere,” he said, “craft beer is here to stay. We just have to do our best to keep it fresh, as the brewer intended it, see that the glass isn’t frozen, the lines are clean, the temperature is right, and we’re selling enough to keep it fresh. And if we aren’t, we’ll fire-sale the crap out of it and get something else on!”

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Keep an eye on craft brewed beer. It may not happen this year, it may not even happen next year, but there’s a swell building that’s going to break into a wave one of these times. Be ready to ride it.

COPYRIGHT 2004 Bev-AL Communications, Inc.

COPYRIGHT 2004 Gale Group