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Wednesday, September 07, 2016

The "Craft Slowdown" is a Fiction

The beer market is changing. For years, the craft segment has been all growth, from the tiniest nano to the category leaders (including gray-market craft like Blue Moon and Shock Top). For the first time in a lot of years, that's no longer true. The Brewers Association recently reported that the craft segment had slowed to just 8% growth (which is still crazy good, though it's lower than at any time since 2009), but here's the thing: the biggest brands are not only not growing, they're in decline:
"[C]ombined volumes for the top 12 craft brewers grew only 1% for the three months to May," Sanford C. Bernstein stated this week citing Nielsen figures in a report titled "The Dramatic Slowdown of Craft Beer Continues." The slowdown appears to be coming from the biggest craft brands.
I recently took a gander at the OLCC's numbers* for Oregon sales, and the story is the same. The state's leading seller, Deschutes, is down 16% over the first half of the year, and the third-largest, Ninkasi, is down 10%. (The OLCC no longer captures figures for Widmer Brothers, another top-seller.) What's going on, says the Brewers Association's Bart Watson, is that the “long tail of craft continues to smoke; there's very little evidence of much of a slowdown there.” The implication is that the big brands are suffering at the hands of smaller competitors.

source
This "long tail" he's describing refers to the thousands of small breweries that produce tiny volumes. (In your mind's eye, imagine a graph with brewery volumes on one axis and percent of the market on the other; a few breweries make most of the beer, and a whole lot of breweries--the tail--make marginal amounts.) There's no doubt these breweries have room to grow--it's relatively easy to build ten percent growth onto a base of 500 barrels, and some of those breweries will be growing much faster.

But here's the thing: little breweries just don't constitute much of the volume. Even when you confine your view to the breweries represented by the Brewers Association, the numbers are pretty staggering: 90% of American craft breweries make 5,000 barrels or less of beer a year, and they account for just 12% of the beer tracked by Brewers Association. The top 1.6% of breweries in this group make over two-thirds of the beer. In other words, that long tail could quadruple its production and still only constitute a third of all the beer made. That long tail is never going to account for a sizable share of the volume.

What's actually happening has to do with the breweries that the Brewers Association doesn't track--those recently purchased by ABI, MillerCoors, Constellation, and Heineken--which are growing, and incredibly fast. With Bud's might, Goose Island IPA has become one of the best-sellers in that style. Before selling to ABI, Elysian only had the available hops to brew Space Dust once a week. With ABI's access, hops are no longer a limitation, and the brand has grown 2000%. When I glanced at those Oregon numbers, I was shocked to see the movement of the number-two brewery on the list, ABI's 10 Barrel. In the first half of 2015, it sold a bit less than 13,000 barrels in Oregon. In the first half of 2016, it sold 23,000--an 81% jump.

At the top end, where volumes are measured in millions of barrels, the competition is getting extremely tight. Breweries like Sierra Nevada and Boston Beer are competing against brands that have enormous advantages they can't match:
Using ABI's distribution network, its craft brands now dominate shelf space and tap handles across the nation. Not only that, but the beer is often priced lower than other similar but independently owned craft beers. That has led to accusations that ABI is intentionally undercutting competition: Goose Island kegs, which were once $110, can sometimes be found for $56, and six-packs dip well under 10 bucks, even in major cities. If price is all that matters to drinkers, there's simply no way a smaller, independent brewery can compete.
The "slowdown" in "craft" is a fiction. What's happening is that the top end of the market has gotten competitive, and big companies can afford a price war to build volume. Mid-sized independents can't compete at those prices, and are losing a few customers to cheaper brands like Goose. Some enterprising data journalist will at some point create a database that includes all the brands that fall into the craft category and look at the aggregate growth. I'd bet my bottom dollar it shows that the growth curve is still well above 10%.
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*The OLCC's figures have grown increasingly suspect, but are probably at least accurate enough to assess the direction of trends.

3 comments:

  1. This time there is a good beer too :)
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    teefury , redbubble , threadless.

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  2. I'm skeptical that a 10 percent drop in craft growth is the result of AB flooding the market with Goose, 10 Barrel, Elysian, etc. I'd have to see specific numbers supporting that as a national trend before I'd believe it, and we both know those numbers don't exist. Extrapolating from corny Oregon numbers to suggest a national trend is comical.

    The craft slowdown is not a fiction at all. Many established brands are suffering significant dollar volume declines in grocery, according to IRI (which tracks fast growing Ballast Point and other brands that may or may not meet the BA definition of craft). I think the reasons for the slowdown are complicated and have more to do with an explosion in the number of breweries and outlets where folks can buy packaged and draft beer (outside the view of IRI) than they have to do with competition from big beer. Consumers aren't buying as much craft beer in grocery stores because they can now find it almost anywhere.

    If we could track draft and packaged sales in all stores, pubs, bottleshops, etc., craft would probably show 10+ percent growth this year. The problem is that, even using incomplete IRI data which leaves out important sales channels, craft was growing at a significantly faster rate in recent years. It isn't just cheap AB pseudo-craft causing the decline we're seeing. There's more going on.

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  3. Pete, when you take Lagunitas, Ballast Point, and assorted other mid-sized craft out of the BA calculation, of course it's going to affect the numbers. That's hundreds of thousands of barrels of production. The BA was able to fudge this trend in past years by adding Schell and Yuengling, but you can only do that once.

    You say the slowdown doesn't exist but also agree that no one has any numbers. My point was that if you included all the brands laypeople think of as "craft," you'd find that statistical anomaly--brought about when hundreds of thousands of barrels of production were taken off the BA rolls--vanish. I'd need to see some data, rather than "there's more going on" to be convinced.

    Finally, OLCC numbers are indeed crappy. But so far as I know there's no reason to doubt figures for the three breweries I cited. And, even if these aren't precise, there's absolutely no way to ignore the near-doubling of 10 Barrel's volume. It may be 67% growth or 125% growth, but there's no way the OLCC isn't showing a very real, very huge bump for the state's now third-largest brewery.

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