Lessons From Speakeasy's Closure

Update: I finally had a chance to correct that egregious typo in the title. So many apologies.

Yesterday afternoon, San Francisco's Speakeasy Brewery shuttered their doors. A tweet came out followed by this announcement:

"Speakeasy Ales & Lagers has been forced to immediately cease brewing, packaging, and tap room operations at their San Francisco brewery for an indefinite period of time. Difficulty securing capital investment and outstanding debt obligations led to this difficult and painful decision. The company’s primary creditor will determine the future of the brewery and brand, and no decision or further information is available at this time."

"According to Speakeasy founder and CEO, Forest Gray, 'The brewery has worked with multiple investment banking groups and have had numerous meetings. One fact has become central to the process, and that is the company is financially insolvent and requires new capital to move forward. Whether that will happen is unclear, but I do hope the brewery and brand will persist.'"

It was an unexpected announcement and I haven't seen any description of the particulars, but I think we can infer quite a bit from this:

In 2015, the company announced an ambitious $7.5 million expansion project, financed by Union Bank, that was slated to increase its production capacity from 15,000 barrels to 90,000 barrels. At the time, the company’s products were sold in 14 states and Gray had projected sales of 50,000 barrels.

Speakeasy was a big brewery. In 2015, it was the 86th largest craft brewer--or among the largest 1%. Small breweries close all the time--and have, even during that growth boom in the past few years.  Not every business plan is well-conceived, not every brewery capable of making good beer. But Speakeasy has been around 20 years and understands the business of making and selling beer. 

Some people link this, misleadingly, to 1,200-barrel Valiant Brewing, which also closed last week. But Valiant was founded in 2013, and was a typical closure. Over the past five years, a brewery closes every week in the US on average. Most were small and meh, so we rightly pay no attention. 

Without details, we're left speculating, but Speakeasy fits a pattern we saw--well, just about the time it opened in the late 1990s. That was during the first craft beer "shakeout," which wasn't a shakeout at all, but a flattening of growth that stranded breweries that had overleveraged themselves based on expected steep growth. Any time a brewery expands, whether that's from a nano scale to a seven-barrel system, or the leap that Speakeasy took, there's risk. It's hard to lose when the market is growing at 15%; breweries can exploit whatever level of market they plan on entering. But carrying millions in debt when sales flatten out can end a brewery. 

In the late 1990s, that's exactly what happened. Breweries made the jump to large facilities capable of producing a quarter million barrels just at the moment they flat-lined at sixty thousand. This led ultimately to high-profile failures or buyouts. Here in Oregon, Full Sail, BridgePort, and Portland Brewing all spent the late 90s and early aughts trying to survive expansions. 

Speakeasy will certainly not be the last casualty of the current tightening. Their timing was unfortunate, but far from unique--many breweries of all sizes are looking uneasily at their sales figures and wondering what the future holds. Craft beer plateaued in the late 1990s and didn't start growing again until the mid-aughts. When it did, the industry looked a lot different. If this is a second plateau, it may last for years. If so, Speakeasy is just the first of many failures to come.

Big Beer Makes a Big Move

Each year, General Distribution's Jim Fick closely tracks the sales of Oregon beer in Oregon, and he very graciously forwards me the spreadsheet with the numbers. Frustratingly, the OLCC, which tracks these numbers, has gotten fairly lax and the figures aren't terribly reliable. One obvious example is that they somehow don't capture CBA's sales (Widmer/Redhook/Kona)--one of the two largest breweries in the state. Some of their other numbers are suspect as well. Given these troubles, I figured 2015 would be the last year I commented on these, but there are a couple things that leap out so profoundly I can't help but comment on them. Actually, commenting may not even be necessary--just look at these two graphs.

and

To put precise numbers to these--excluding GoodLife, for which the OLCC had no numbers in 2015--the two beer companies owned by multinational corporations grew 18,161 barrels in 2016, and the other top ten breweries grew 10,851. Combined. And even that sort of understates matters. Have a look at the top gainers in 2016:

ABI and MillerCoors account for 40% of all gains among the ten breweries growing the fastest. There is probably a lot of context one could provide to explain why these two brands grew so much (discounting, distribution, etc), but the fact is they did. Oregon has one of the most parochial markets in the country, and they still posted these remarkable increases. Two of the top five best-selling brands in the state are owned by companies in Wisconsin Chicago and Leuven, Belgium.

Things change. Who knows if this is a stable trend and whether 10 Barrel and Hop Valley will continue to grow--or even keep their share (look what happened to BridgePort). But for the moment they're selling like hotcakes, and I doubt there's a brewer in the state who's not unsettled by this development.

How Doomed Are We?

Raptor of death.

Pete Dunlop has an excellent but alarming post in which he warns:

AB is quietly implementing a plan designed to bury independent craft brewers. And they might just pull it off...

You might not know it, but the High End kicked ass in 2016, a pretty lousy year for craft beer. The High End's growth rate hit 32 percent, easily trumping the craft segment's single digit growth. Bigly. Every High End brand grew and they're all showing continued growth into 2017.

High End is of course ABI's portfolio of erstwhile American craft breweries (Goose Island, Elysian, 10 Barrel, Breckenridge, et al).  His post led to a spirited debate on Facebook in which two camps formed: 1) we are so screwed, and 2) don't overreact; it's not as bad as it looks. Since you know me as a man of subtle and restrained opinion, I will refrain from identifying my own camp. Rather, I'd like to point out a few variables to consider as you decide which team you'd like to join.

The Emergence of Craft Tiers
 Until pretty recently, when you went to the grocery store all the beer in the craft segment (hereafter "craft beer" for brevity) was about the same price. Some sixers might be on periodic discount, but this was a retailer decision. Not too long ago, we saw the emergence of an upper tier of beer that was noticeably more expensive and shortly thereafter, a tier of cheaper craft. This was inevitable, as brewers began to segment and find sales in different pockets of the craft segment.

Guess where ABI's High End products mostly live? Sure, Goose Island still has a giant barrel program, but they're all about mainstreaming Goose IPA as the national mass market IPA. They do this through the efficiencies of their giant plants and distribution network, and they use it to drive down costs. The margins get thinner and thinner, but that's okay so long as the volume's going up. But most craft brewers will stick to the middle tier or gravitate to the upper tier. I've already talked about "mass craft," and when we look at Pete's numbers, we're seeing an explosion within that segment.

Retailers Follow Customers
There are no end of stories about the ways in which big companies attempt to pervert the market. In the 90s, Bud initiated a power play against craft beer by demanding its distributors only sell their products--something it toyed with again recently. Pay-to-play rumors are ubiquitous, and more than a few turn out to be real. Most recently, I have heard a rumor this week that Kroger, which owns a substantial amount of Portland's grocery outlets, was going to start radically paring back their 22-ounce offerings, apparently a sop to ABI.

I have no doubt that ABI will use its increasing might to control things at the distribution and retail level--they've done it in the past, and it is a great way to increase market share. There are many legal mechanisms for this kind of thing, which is exactly why we have antitrust laws. But here's the thing: retailers service customers, not manufacturers. Big breweries will try to limit the offerings on the shelves, but retailers aren't going to sacrifice business just to please a big partner. In competitive markets like Oregon's, it would be bad business indeed for a grocery chain to limit the sale of locals in favor of a giant section that includes Goose Island, Devil's Backbone, and Four Peaks. The reason AB's distributor-loyalty program collapsed in the 90s was because customers wanted variety and Bud couldn't provide it. 

Don't Over-value Current Trends
Humans can't help themselves. We over-value current trends. If you Google "craft beer sales" and limit the search to 2013, you find article after article trumpeting the unstoppable juggernaut that is craft beer. (Sample title: "Craft beer sales to triple within 10-year period, says research group.") In those heady years, everyone was writing the obituary of ABI.

Today we're seeing similar numbers from the High End (32% growth!), and our minds begin to accept that as a stable trend. Likewise, we hear that some of the bigger craft breweries had years of stagnation or decline, and that also seems stable. Never mind that craft grew at something like 7% overall, which is a much more impressive figure, given the size of the segment, than the High End's growth spurt on its much-smaller base.  Indeed, you'd sort of expect ABI's brands to get quite a jump-start given 1) that many of them were relatively small to start with, 2) ABI has a nationwide network and the might of the biggest beer company in the world, and 3) ABI appears willing to exchange profit for growth, at least in the short term.

______________

On Facebook, I argued pretty strongly for one of the camps (doomed vs not doomed). The truth is neither I nor anyone else can see into the future. Pete thinks the market is headed in the direction of mass craft, and that the number of drinkers who want high-quality locally-made beer is going to lose out. I'd bet against it, but I wouldn't bet much. 

Still, I do think nearly all of the analysis is a reaction to current trends. So far, we have seen no brand in the craft segment grow over a couple million barrels (I think that's roughly where Blue Moon is, but they're pretty secretive about those numbers). It's easy to grow at 50% or even 100% when you're making 100,000 barrels of beer. But where's the ceiling? If I squint hard enough, I can see a world in which Goose IPA stops all comers in their tracks. But that takes an awful lot of squinting. I wouldn't bury craft just yet.

How to Tank Spectacularly in the New Market

Update. By some cosmic serendipity, Patrick and I went to Corvallis yesterday to record an interview with Tom Shellhammer--a hops researcher and professor in the Fermentation Sciences program at OSU. As we were touring their test brewery, he mentioned how supportive BridgePort has been, and that Carlos Alvarez had cut them a check for $100,000 to support their projects. This doesn't change any of my analysis below, but it certainly adds an important layer to the BridgePort story.

(l-r) John Foyston, Dick Ponzi, Carlos Alvarez

Over at Willamette Week, Matthew Korfhage has an article about Oregon's tightening beer market. The story is an Oregonized version of one we've seen applied to the national market a number of times over the past couple years. Thumbnail: in a tightening market, it's harder for the biggest players to maintain their barrelage even while small and mid-sized breweries continue to post big numbers. This is, in fact, what you'd expect in a mature market and it's not particularly surprising. Korfhage's case-in-point in the article is BridgePort, which is busy imploding before our eyes--but I think this illustrates a different lesson: in a tightening market, a brewery can no longer make a series of stupid decisions and expect to avoid tanking spectacularly.

We have to go back a ways to tell the story. BridgePort is Oregon's oldest extant brewery, and was for the first 20 years of its existence synonymous with the city of Portland. Its flagship beer was named after the city's beloved bird (Blue Heron), it had one of the best pubs in the city--a pilgrimage site for beer travelers. It cemented its connection through things like Old Knucklehead, a barleywine that featured a prominent local beer guy on the label. And then, in 1996, the brewery released its IPA, a beer that changed the course of brewing in Oregon. BridgePort was, ten years ago, one of our healthiest; it sold 24,000 barrels in Oregon, making it the third-largest seller in the state.

But it was about that time that the consequences of a decision made a decade earlier started to become evident. In 1995, Gambrinus, a Texas-based Corona importer, bought BridgePort. It took owner Carlos Alvarez a while before he started tinkering heavily with the direction of his Portland acquisition, but the first real danger sign came when he renovated the pub, turning it into a generically upscale restaurant and destroying one of the company's chief assets.

His next step was to begin tinkering with the beer lineup (only one beer, IPA, survives from a decade ago). This was inevitable and smart, and most breweries have followed a similar course. But BridgePort's approach was haphazard and bizarre.* They killed off brands like Old Knucklehead and Blue Heron that had strong niche followings. They introduced a series of random beers that had no native connection to BridgePort's identity. Some were good (Hop Czar), some not (Cafe Negro) (seriously, that was one of their great ideas). They let the IPA languish. The approach seemed to be: let's release whatever's a year out of fashion and hope to catch the dregs of a wave. 

How's that working out? Here's their Oregon sales numbers, via the OLCC:

Three years ago, Alvarez and his executives came up to Portland for a dog and pony show celebrating the 30th anniversary. It was without a doubt the weirdest event I've ever been to. Alvarez was aggressively out of touch with Portland and seemed to go out of his way to emphasize that we were doing it wrong. The restaurant chain Chili's came in for a lot of praise, and that seems to be the model he's attempted to place on BridgePort. He was happy to trademark the word "Beervana" and promulgate the slogan "keep Portland beered," but he seems to dislike anything actually weird. I doubt "Portlandia" occupies a lot of space on the Alvarez TiVo.

In my review of the newly renovated pub back in 2006, I wrote this, rather more hopefully than subsequent events warranted:

But it is not a classic, nor does it reflect anything intrinsic about the brewery or Portland. Styles will change and so, presumably, will the brewery. In ten or fifteen years, as aesthetics have changed, it will have the dog-earred, slightly embarrassing aspect trendy restaurants inevitably acquire. And then Gambrinus can update it. I hope, for the sake of the brewery and the city, that the company recognizes the beauty and history resident in the massive beams that still span the old warehouse and restore some of the old Portland funkiness. That may seem a long wait, but hey--I recall the brewery of 1991, and it doesn't seem that long ago. The beams will still be there.

It turns out that wasn't a one-off; it was a signal of the future direction. And indeed, the pub hasn't aged well.

Craft breweries have to connect to their local market to succeed. There are a few rare exceptions--Rogue sells 84% of its beer outside the state--but even breweries like Widmer and Deschutes depend enormously on local sales. The Texas-based ownership of BridgePort has not just neglected its home market, but seems actively antagonistic to it. Until recently, it was possible for BridgePort to bumble along and still hang onto its local volume, which was basically flat from 2006-2013. But mature markets are not kind to bumblers. Why is anyone going to gamble on a six-pack of ORA (Oatmeal Red Ale) when there are twenty other much safer bets at the store? They're not. The numbers starkly demonstrate this point.

Ten years ago, BridgePort was one of Oregon's best and best-selling breweries. It had the kind of credibility you can't manufacture. It was indelibly connected to the city and seemed to be one of the most stable, reliable breweries in the country. Today it teeters on the edge of failure. If we were running a dead pool now, it would be at or near the top. It's main function now seems to be as a cautionary tale about how not to run your brewery.

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*Based on conversations with people inside the brewery and direct observation of the way Alvarez treats his employees, I think this comes entirely from San Antonio. I have long admired the work people do at the brewery, who have to turn out quality products in spite of the terrible leadership from above. My criticism is for the decision-makers, not the brewers.

Here Comes "Mass Market Craft"

Source

Bryan Roth, beer's Nate Silver, has applied some data journalism to the idea that rare beers dominate "best of" lists--and beer geeks' hearts. Riffing on that, he wondered about causality: do we just happen to like rare beers, or do we like them because they're rare?

"It’s a long-winded way of saying: we may be underestimating the power wielded by the growing number of one-off programs and specialty releases. Emphasized through last 2016’s collection of best beer, there should now be a growing expectation that the most celebrated beers are often going to be ones we can’t enjoy ourselves."

Fair enough--there are scads of scientific studies out there showing how susceptible we are to influence when we think something's special. But what does this phenomenon look like when you flip it around and instead examine those large regional or national brands? Here, I would argue, is the real story. Within the craft segment (however you define it), there are emerging sub-segments. The vast majority of craft beer is still just a few brands--Lagunitas IPA, Sierra Nevada Pale, Sam Adams Boston Lager, Blue Moon and so on.

There are millions of barrels of interest in what beer geeks now deem boring beer. If a brewery wants to appeal to this, ahem, mass market within the craft segment, they can't hope to do it with a brett-aged saison. Indeed, the opposite is happening. As big money flows into the craft segment, it's looking to find stable, large chunks of customers for its products. Buoyed by Heineken money, Lagunitas shipped nearly a million barrels of beer in 2016, 60% of it IPA. Goose Island IPA is actually growing faster than Lagunitas IPA and poised to overtake it. Constellation is pushing tons of Ballast Point Sculpin in all the colors of the fruit bowl. None of these brands is younger than a decade old.

In order to capture that mass market, other breweries are far from "innovating." As one example, everyone is trying to recreate Sculpin's fruit-IPA success. Sierra Nevada has a fruit-infused pale and an IPA that tastes like fruit (Tropical Torpedo). Kona has a passionfruit, orange, and guava IPA. Dogfish Head has Flesh and Blood, a ... fruit IPA. Full Sail's got one with papaya just coming out. New Belgium has Citradelic. And on and on. (It's actually entertaining to visit the website of one of the larger craft breweries and see that they all have one.) Or take Firestone Walker, which scored an unexpected, massive hit with 805, a golden ale. Guess what style we're starting to see the big breweries brew now?

Of course, most of those breweries are also putting out the rare beers Bryan mentions. They have barrel programs or specialty lines, and they make the kinds of beers that make geeks' hearts sing. What this signals is that the market is in the midst of a stratification, and we're seeing breweries attend to both "specialty craft" and "mass market craft" sub-segments. (No doubt drinkers pass back and forth between the categories, as they do between craft and mass market lagers. These are not separate populations of drinkers, but they are separate sub-sectors.)

By chance, I was perusing this page by the consumer research company Mintel and discovered that they were already out in front of me. They distinguish between "true-craft" and "mass-craft." For the moment, they use the dichotomy to honor the Brewers Association's definition of "craft," but that is a dying (or perhaps dead) distinction. There is a real market difference, both in type and price, between the specialty and mass craft segments. And it is only going to widen. Once you introduce the idea of "mass-craft," there's no going back.

So to return to Bryan's thinking. What I'd say is that it's the upper end that's abandoning the aficionado. They're no longer competing to make the most distinctive, interesting beers for the large regional and national markets. They're looking to put out products that capture a large portion of the audience, for however long that beer can keep their attention. Beers like Citradelic and IPApaya were not designed to be workhorse brands that will take breweries into the next decade. They're quick, trendy, and disposable (and of course, occasionally very good). We fall in love with the rare beers because we're not meant to fall in love with these. They're like some of my filler blog posts.* A few clicks/bucks and everybody's happy. You'll know when I put out the good stuff.*

I have a hunch this will hasten the tide of rising cynicism among some beer drinkers, but it's not the breweries' fault; people are going crazy right now for fruit IPAs and golden ales, and so that's what they have to brew. I'm sure your local brewer would rather drink a saison, too, but there's just not enough interest to push one to a national market. Welcome to the era of mass-craft.

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*Ha, ha, kidding. Of course none of my blog posts are filler. They're all carefully considered and reported and run through my team of editors.

Get Your David-and-Goliath Story Straight

Boak and Bailey direct our attention to a spat  that, despite its ordinariness (these debates are hundreds of years old), captivated me. It's the classic little guy versus behemoth throw-down. Perhaps I've become more sensitive to truth and reality lately, for reasons that have absolutely nothing to do with politics. In any case, the whole thing got me thinking. But first, let's pick up the debate at Honest Brew, a British beer retailer, who is battling Beer Hawk, an ABI-owned beer retailer:

You see, the honest truth about Beer Hawk is that they are owned by AB InBev, the multinational behemoth behind Budweiser. For simplicity’s sake, let’s call them Blandy. Blandy likes a world where mediocre beer is made as cheaply as possible, sold at profit-maximising prices, and where as much shelf (and online) space as possible is colonised by its own ubiquitous brands.

To which, surprise upon surprises, Beer Hawk took exception:

In fact, the change has enabled us to do a better job of hunting out the world’s best beers. We have been able to secure a warehouse five times as large and employ twice as many people. As a result, we have added 300 new beers to our stock and reduced delivery charges by nearly 30%, making all our beer even more accessible to beer lovers.

There is of course a great deal more in the arguments of both companies, and connoisseurs of the "craft versus crafty" genre of fan fiction will know them intimately. I selected these excerpts because I think they illustrate the different stories people on both sides of the debate tell themselves, and where the true drifts into projection.

Since this post doesn't lend
itself to an obvious picture,
here's glowing beer.

Let's start with the pro-indie camp. Particularly in Great Britain, where brewing gigantism is far older and more nefarious than in the US, the David and Goliath stories are shot-through with moral overtones. Big companies exist do cause harm--harm to smaller breweries they wish to crush, harm to palates they wish to destroy. That leads to sentences like this one, which contradict themselves halfway through: "Blandy likes a world where mediocre beer is made as cheaply as possible, sold at profit-maximising prices...."

On the other hand, Goliaths are no great defenders of reality-based environments. One of the first arguments any whale makes when gobbling a minnow is that this is somehow an act in service of diversity and variety. This is also laughably self-contradicting (and self-serving).

To little breweries and retailers I would say: no one is more concerned with quality than big breweries. Their empires depend on it. Furthermore, they have no interest in leading the market to any particular flavor profile (bland or otherwise); their interest lies in following customers' every whim. The great IBU drop in 1960s and '70s was not a conspiracy to crush America's palate. It followed national trends toward hyper-sweet foods and beverages. Everything got sweeter, not just beer. Now that the national palate is moving into other flavors, ABI is moving right with them. It's a habit of mind for good beer fans to think that there's a structural barrier that keeps people from drinking saisons and IPAs. There is not: people just want to drink Bud Light.

But the bigs err, um, bigly when they think all we only care about price. One of the central lessons of the "craft" backlash is that people care a lot about things like localness and invention. Little breweries are quirky and they make oddball beers. They do so because they're not chasing a market of 35 million people. Although I hate the word "innovative," it's manifestly true that all the great things about good beer we now love and celebrate have all come from little breweries. Not a single one came out of St. Louis, Golden, or Milwaukee. Were we to leave beer-brewing to them, they would quickly dump all the marginal sellers (take that, variety!) and devote R&D money to consistency and efficiency.

If I were writing the talking points for the little players, I would tell them to stick to the facts. Cynicism is born of falsehoods, intentional or un-.  For the most part, an entirely-honest PR war between little companies and big companies would be won in a landslide by the little guys. There's really no reason to make up stories about the malignant effects of big companies. Just stick with the actual stories and everything will be fine.

The Changing Market

I will be posting spottily this week--and you will probably be reading in the same mode. However, a Facebook post by Stephen Beaumont has been perking in my brain for the past few days:

US Beer numbers: In 2015, AB InBev & MillerCoors together lost over 4.34 million barrels of volume, equal to about 18% of craft beer market. If trend continues, and the US beer market overall remains stagnant, that makes room for 4 new Sierra Nevadas every year.

And will the trend continue? Yes, unless it accelerates.  Let us consider the trends:

Mass Market Lager: shrinking substantially
Imports: growing
Craft segment: slowing growth
Beer overall: shrinking marginally

All of this makes for an interesting and dynamic marketplace, which is the cause of both interest and (for some) anxiety.

The Paradox of Choice

I got into an unexpected Twitter conversation two days ago following this exchange:

Maureen's obvious and mild comment then sparked a discussion that ran 51 tweets, was joined by eleven people, and lasted 21 hours before everyone finally got exhausted by the terrible medium and wandered away. (Or anyway, that's how these conversations make me feel.) Along the way, it touched on just about everything that we love, hate, and worry about in the beer world.

Maureen's point was hardly controversial: "Sure, [they're] fun to try, but again, daily basis? I don't need zillion choices." I don't think there are many people who haven't confronted a wall of beer in the cooler and had exactly this thought--which is true at the pub as well. As the conversation went on, Maureen and others started stacking observations to the mix like cord wood:

• When retailers stock many different beers, it's inevitable that some will get stale. (Good retailers and distributors, of course, will remove that stock, but that doesn't happen in every case.)
• The risk of buying stale beer further makes consumers gun-shy.
• The proliferation of beer means a decent amount of it is meh at best.
• Lots of people do want choice, of course; this is true not only of advanced-case beer geeks, but regular consumers (who have made seasonals and mix-packs perennial best-sellers).
• As another data point, pubs don't pull out handles because there's too much choice.
• Breweries love choice, because it's a great way to attract new drinkers, but...
• They also hate the need to continually offer new products and worry when workhorse best sellers flag due to disinterest.
• The churn of choice can be expensive, particularly because not every choice is a win.
• Finally, Joel Winn pointed to this article in which Anthony Bourdain complains that some of this choice seems to feed the thirst of dilettantes: "the entire place was filled with people sitting there with five small glasses in front of them, filled with different beers, taking notes. This is not what a bar is about." 

The truth is, all of this is right. Beer is no longer simple. That is both its great strength and weakness. When I came up, you walked into a bar and there were four taps all pouring the same basic beer. Since all the beer was the same, people made decisions based on loyalty or price. You went to the pub to drink, but not for the beer--it was the opposite of what Bourdain describes. This was a time of simplicity, but it was dismal.

There is no doubt beer drinkers have it far better now, but the world offers no utopias. With choice comes chance--bad beer, stale beer, and of course wondrous beer. This bounty has delivered a new culture and several subcultures. Even those of us who (sometimes) love fussy taprooms with exotic beer and little glasses can sometimes just want a nice session with simple, nuanced beer and no complications. There's a reason craft beer has been subject to satire about twee hipsters. All this choice has given brewers many more customers and sales, but also headaches. Trying to stay ahead of the novelty curve is maddening, and some breweries have had trouble replacing capacity lost when a flagship's sales start flagging.

All of this is why Schell's brewmaster, David Berg, tweeted "the paradox of choice strikes again." These are the best of times--but even still, they're not without their troubles.

Related: Bryan Roth riffs on the same Twitter storm.

The Modern Age

If you follow beer news at all closely, you notice that at any given moment, there's a gestalt to the way the stories coagulate. Each one seems to arrive as a piece in a larger puzzle, one we slowly assemble in our minds. A few years back, that news gestalt told a happy story: the beer biz was forever improving, buoyed by ever greater selection, quality, and evolution. We'd surf over to stories about obscure breweries in remote parts of the country--ones we knew we'd never visit--because the brewer there was making all-foraged beer, or had captured and cultivated wild, local Saccharomyces, or had invented a new process or India pale something. We even celebrated the growth of formerly-small breweries that opened new plants across the country. The gestalt was excitement, discovery, possibility.

Then things changed. When big breweries began buying smaller ones, the mood darkened. It wasn't totally clear how this was bad, just that it somehow had to be. All that growth and discovery has atomized the market on the bottom end even while it's consolidating on the top end. What's the current gestalt? Have a look at these four articles that came out over the past week:

• Chicago's Revolution Brewing had to recall a huge amount of beer over five brands because of a "quality issue." Said the brewery: "The affected beers exhibit ester or phenolic flavors, which are more characteristic of Belgian-style ales, and which should not be present in our standard American ales.  We believe these off-flavors were produced by a wild yeast that has gotten worse over time and was not identified in time by our quality control methods.   Our brewing team has re-propagated our house ale yeast, and all beer now being packaged at the brewery meets our standards for taste and flavor."
• From Brewbound comes a story that can be told in the title: "After Raising $3.5 Million, Fort Point Beer Company Prepares for Next Round of Funding."
• Meanwhile, Boston Beer is not only experience sharply falling sales (bad), but the brewery seems to have no idea why or how to reverse things (far, far worse). 
• And finally, and perhaps most pointedly, there's this story of a Swedish brewery that is unironically selling five potato chips for $54. This whole article reads like an April Fool's joke (I'm still wondering if it can be true), but here's a taste: "All of the chips have been made by hand," the chef says. "It took a delicate touch, a finely honed sense of taste and time to ensure that each chip would achieve a perfect balance between the various ingredients. The taste is a very Scandinavian one. … Most people recognize potatoes and onions, but what stands out is the quality. All of the ingredients are of a stature that not many will have tried before. These chips are an excellent accompaniment to craft beer, or simply enjoyed on their own."

I smell the flop sweet of greed and anxiety in these news stories. The craft segment now constitutes around 25% of the beer market, which places it squarely in the mainstream. It's no longer a quirky niche where anti-establishment oddballs could make weird beer for a few thousand fellow-travelers. Sam Adams, which has been the largest player in the craft market for a generation, is in the awkward position of having none of that niche support, nor being big enough to trade blows with multinational beer companies.

Breweries like Revolution are rushing to establish a presence in the market, and they're pushing products onto shelves that aren't ready. (I have no idea what the story is with Revolution, but that explanation doesn't quite add up.) It's so extreme that breweries are in constant states of growth, rushing to get as big as possible in as short a time as possible--with no time for reflection or loyalty-building. You may get big overnight, but you don't build a durable customer base overnight. Finally, that potato chip debacle seems emblematic of a huge danger for small breweries--using the "craft" concept to produce wildly overpriced, high-concept products that look far more cynical than anything coming out of ABI. (ABI, for its part, is trying to do the opposite by projecting their small-brewery cred with press releases like the one I got from 10 Barrel last week with this subject line "Holy Sh*t - Our First Newsletter!" So edgy and alternative!)

Most breweries will continue to make great beer because they love to, but we probably won't be reading much about them. "Brewery continues to make great beer, barely grows," is hardly going to grab eyeballs. But most breweries still make up only a small percentage of the beer. For the rest, this is the modern age, when craft beer is all growed up. Both the competition and the risk are real, and so the gestalt has turned from discovery to something far more prosaic: money.

In the Public Interest, But Not the Public Domain

This morning, NPR ran a story about an effort to preserve pubs in the UK:

The British pub is as much a part of the fabric of the United Kingdom as fish and chips and the queen, but each year hundreds close their doors for good. The reasons include the high price of beer, more people drinking at home and rising land prices. Now — in an apparent first — the London borough of Wandsworth has designated 120 pubs for protection, requiring owners who want to transform them into apartments or supermarkets to get local government approval first.

This is not going to be another demise-of-the-British-pub posts, partly because "demise of the British pub" articles have been a going concern since the first Bush presidency. In fact, I recall but cannot find a post/article that pointed out these articles have actually been popular for centuries. It seems the English pub is always endangered.

No, what it made me think of was something related: the demise of the independent brewery.

Since 2011, when AB InBev bought Goose Island, something like 15 breweries have been purchased by large companies. That's compares with the nearly 5000 that remain independent. And yet, we do harbor a gnawing worry that independence is in danger. Part of this is because we don't relate to pubs and breweries the way we relate to, say, iPhones and soda brands. The part of that NPR piece that really crystallized it was this comment by Jonathan Cook, deputy leader of the Wandsworth Council:

"What we're saying is, 'Well, hang on a minute — we have an interest here as well. The community values the pub and you've got to factor that into the equation,'" says Cook.

We don't relate to pubs as interchangeable service-providers any more than we relate to breweries as random widget-makers. In our minds, they're something of a public trust. The Councilman says it more baldly than most, but there's a piece of this thinking that goes into every angry comment on a Facebook post announcing the latest buy-out.

Pubs and breweries, for their part, strongly encourage this thinking. What business would fail to capitalize on this rare emotional connection customers have to their favorite brand/establishment? We want to have connections to these entities. But, as Martyn Cornell pointed out when he addressed this issue of restricting pub sales two years ago, as much as they may be in the public interest, they're not actually in the public domain:

The whole idea that pubs need special protection is nonsense, anyway, as I have frequently argued. Pubs are not sacred. The rights of pubgoers do not trump the rights of property owners. The disappearance of any pub is not the same as, eg, the disappearance of a Saxon church. Pubs are, and have always been, “churned” all the time: one closes, another one opens. (It may surprise you to learn that JD Wetherspoon has closed more than 100 of the pubs it has opened over the years). If a pub is making less money for its owner than it would under another use, the owner must have the right to maximise their income. If a pub closes, and a community feels it needs a pub, let someone open a new pub, in a more viable site with fewer overheads. 

I am perhaps more sentimental than Martyn. When an old pub closes to make way for a convenience store or fast-casual restaurant, I feel the poorer. Were Deschutes or Sierra Nevada or Breakside or Other Half to sell to ABI, I would feel the poorer. As a guy interested in policy, I'm with Martyn that efforts to restrict the sale of private businesses is bad public policy. It does not necessarily follow that I'm happy to see the churn.

I participate in the false sense that I somehow have a piece of the pubs and breweries I like, as do they, and I will continue to do so because it's a more pleasant way to live. But it's good to acknowledge from time to time how silly this is of me.

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.

The DOJ Clips AB InBev's Wings in Merger

I'm really getting tired of business news, aren't you? I'm going to try to talk about it less in the future. But when a $107 billion merger of the two largest beer companies in the world is approved by the US Department of Justice, clearing a path for a titan that will control a third of the world's beer production, I should at least acknowledge it in passing. And the news is actually good.

In its approval, the DOJ did two things that will ensure ABI's position in the US doesn't improve much. I was really dreading this merger, and I still think it's going to have malign effects on the world market. But in the US? Not so much. There were two issues here, control of the US market and distribution, and the DOJ addressed both (the full ruling is here).

Spin-Off MillerCoors
As expected, ABI has to spin off MillerCoors as a part of the deal. DOJ: "The settlement requires ABI to divest SABMiller’s entire U.S. business – including SABMiller’s ownership interest in MillerCoors, the right to brew and sell certain SABMiller beers in the United States and the worldwide Miller beer brand rights." This is not unexpected, and has been an acknowledged assumption about what it would take to get the deal past US regulators.

Restrictions on Distribution
More importantly, the DOJ puts strict limits on what ABI can direct its distributors/wholesalers to do, and how many distributor/wholesalers they may own. The press release doesn't detail these, so I'll turn directly to the ruling for the language. Here is the DOJ on the amount of the wholesale market ABI can directly control. "Defendant ABI shall not acquire any equity interests in, or any ownership or control of the assets of, a Distributor if (i) such acquisition would transform said Distributor into  an ABI-Owned Distributor, and (ii) as measured  on the day of entering into an agreement for  such acquisition more than ten percent (10%), by volume."

And here they are on the question of whether ABI can demand certain measures of loyalty from their independent wholesalers. "Defendant ABI shall not unilaterally, or pursuant to the terms of any contract or agreement, provide any reward or penalty to, or in any other way condition its relationship with, an Independent Distributor or any employees or  agents of that Independent Distributor based  upon the amount of sales the Independent Distributor makes of a Third-Party Brewer’s Beer or the marketing, advertising, promotion, or retail placement of such Beer."

The second condition is especially important. Recently ABI had instituted the Voluntary Anheuser-Busch Incentive for Performance Program (VAIP), which incentivized loyalty among its independent distributors. (Why they rolled that out when the merger was pending is anyone's guess. Seems hopelessly clueless to me.)

The DOJ's stipulations were stringent enough that even the Brewers Association, the trade organization that represents small breweries, gave it a qualified thumbs up. All of which means you can safely return to ignoring this issue and just enjoy your fine pint of ale.

One last note. Interestingly, despite having made it over this regulatory hurdle, the merger may not go forward after all--in part thanks to the Brexit.

The takeover of the London-listed brewer has come under scrutiny in recent weeks as a drop in the British currency has reduced the relative attractiveness of the all-cash offer aimed at most SAB shareholders. A source familiar with the matter told Reuters on Wednesday that the company’s board was weighing the terms of AB InBev’s offer, amid rising shareholder disquiet.

Stay tuned.

Big Change Possible in Massachusetts Wholesale Laws

You may recall that last year Boston-area distributors were caught giving kickbacks to retailers. The repercussions of that incident seem to be rippling through the Massachusetts state house in a serious way:

Massachusetts brewers unveiled a last-minute legislative proposal that would dramatically reorder the state’s beer industry, making it far easier for breweries to switch among distributors that bring their brews to bars and package stores.

The measure, filed Wednesday by state Senator Barbara L’Italien, would effectively repeal the state’s decades-old beer-franchise law, which makes it difficult and expensive for breweries to fire their distributors.... Instead, the legislation specifies that distribution deals would be governed by the same type of private business contracts common in other industries.... Under current law, a brewery is effectively locked into its distributor after six months unless it can prove to state regulators the wholesaler has met one of several conditions — such as violating the law or failing to “exercise best efforts” in selling the beer.

The distributors were incensed, and it's not clear that the bill is going anywhere. Still, it's a sign that the beer market is in flux and there could be seismic changes coming. Indeed:

Treasurer Deborah Goldberg, whose office oversees the Massachusetts Alcoholic Beverages Control Commission, is also threatening to shake up the industry by launching a task force that will conduct a top-to-bottom review of the state’s liquor laws and regulations. 

It's not actually clear that this would 1) solve the very real problem in which distributors currently act as a gateway for small breweries getting to the market, without 2) damaging them in the process. Distribution is always a weird part of the brewing industry, one nearly invisible to consumers. In states like Oregon, legislators have relaxed the law on self-distribution, so wholesalers have to compete on service if they want to lure little breweries, and that seems to be an effective solution. But each state has slightly different rules, and those rules affect little breweries in different ways. If Massachusetts does pass this bill, it will certainly be something the rest of the US will be watching closely.

How Far Will Mass Market Lagers Fall?

There's a (surprisingly weak) piece on the online New Yorker that includes this remarkable comment:

Over the past decade, varieties once thought of as boutique beers, such as I.P.A.s, have exploded in the United States, thanks to the locavore movement. Craft brewing is now doubling in sales, by volume, every five years; today, craft-beer sales make up twenty-one per cent of the beer market, and twelve per cent of the volume. The Brewers Association, a craft-brewing trade group, expects craft beers to have a fifty-per-cent market share in a decade. Since craft brewers use about ten times more hops than megabrewers, the trend has been a bonanza for Hopsteiner and the other big hops companies. [emphasis added]

Let's leave aside that unsubstantiated (and untrue) intro sentence about the locavore movement. The bolded sentence is the real whopper. It's not clear whether he's talking volume or dollars when he refers to the market--even predicting that the craft market will more than double in ten years is a pretty staggering prediction. That would require 10% year-over-year growth for the entire period. For volume to hit that mark, craft would have to grow more than four-fold in ten years time--and someone better at calculating compound growth can run those numbers. [Update. In a tweet, Brewers Association economist Bart Watson confirmed he was misquoted. "No. I think I said something like the high end could get to 50% of dollar sales eventually."]

It is interesting to consider where the floor for mass market lagers is. Rather than just guess at random, let's look at a similar product category: coffee. Much like beer, it was an industry once dominated by a single kind of product and a few large national players. Like beer, a "craft" movement arrived in the 1980s and began gobbling up market share. Like beer, consumption habits vary for younger folks than older folks. Like beer, total consumption is declining even as consumption of good coffee increases. And finally, like beer, people drinking outside the home is on the rise. And what's happening in coffee?

Only about 8 percent of the coffee beans Americans buy are fresh whole beans, which upscale coffee brewers, like Blue Bottle, will tell you is the much better way to buy coffee beans. And ground coffee isn't just outpacing whole bean coffee — it's increasing its lead, each and every year. 

I couldn't find solid stats on coffee, which has no equivalent to the Brewers Association. Coffee is also fragmented in a way beer isn't (espresso vs ground vs whole bean vs pod). But this one teaser graph from Statista is illuminating:

Folger's and Maxwell House are objectively inferior products. They're made with inferior beans and produce coffee I think most people would agree is marked by harsher flavor notes. This, too, is different from beer. Mass market lagers may be less interesting, but they're not made from inferior ingredients. The difference is subjective. And yet, Folger's and Maxwell House are still rocking it. Why?

But just the opposite is true: People in this country, on the whole, are actually drinking worse coffee today than they have in the past. And the reason appears to be that they value cheapness over quality — and convenience over everything.

This is certainly going to be the case with beer. There will always be a large market for cheap beer, because there will always be a large group who prize value over flavor. (Or, more accurately, a group that prizes value at least part of the time.)

My rough guess, based on business news from the past couple years, is that about 50% of the coffee sold in America is "cheap"--the equivalent of mass market lager. That seems about right. I suspect the number might tick up or down depending on trends, but the low-end market is never going away, no matter how ubiquitous Starbucks seem. At some point in the future, we'll settle on a definition for mass market beer, and it will probably include some flavors and styles we currently call "craft." (Witbier is cheap and easy to make in volume, as one emerging example demonstrates.) By the time the market matures and we have settled on that definition, most of us will think of mass market beer about as often as we think of three-pound cans of Maxwell House now.

The Future Battlefield is "Local"

A couple of days ago in Pittsburgh, Donald Trump sounded a theme that seems to suffuse, like the scent of smoke, every corner of our world. “It is the consequence of a leadership class that worships globalism over Americanism ... As a result, we have become more dependent on foreign countries than ever before.” Voters in the UK felt their country had lost its sovereignty and chose to leave the EU. Politicians from Bernie Sanders and Jeremy Corbyn to Marine Le Pen and Geert Wilders argue for more local control. I'm sort of joking, but only halfway, when I point out that there's a similar mood in beer: people have adopted a new skepticism to big breweries, even when "big" may be a craft brewery from a neighboring state.

I identified one data point for this trend yesterday when the Oregon Brewers Guild released statistics for 2015. Today we have more. Lagunitas' Tony Magee, in the midst of a world-conquering push that includes new brewery openings and a partnership with Heineken, today unveiled a go-local initiative. As with everything Magee writes, there's a lot more light and heat than clear explanatory prose, but the upshot looks not terribly different from AB InBev's own High End portfolio of craft breweries. In a far clearer and less self-congratulatory post, Michael Kiser and Matthew Curtis describe what's going on:

Announcing on his blog yesterday, Lagunitas founder Tony Magee reveals that he has purchased stakes in three US craft breweries. These are Moonlight Brewing Company of Santa Rosa, CA, Independence Brewing Company of Austin, TX and Southend Brewery and Smokehouse of Charleston, SC. The latter of which will be turned wholly into a Lagunitas branded brewpub.

Magee also commented that his company, which sold a 50% stake to Heineken last year for a reported $500m, is to open two ‘non-profit fund raising community rooms’ in Portland, OR and San Diego, CA.

(It's a wonderful piece: go read it.) They continue:

Citing the new brewpubs from Goose Island and 10 Barrel as examples of his competitors working the “local” angle around the country, Magee seems compelled to follow in their footsteps as he has in the past — but puts a different spin on it. As much as he derides his largest competitors, he tends to follow their lead often, as he does with his efforts to consolidate distribution and control store shelves and retailers' buying behaviors by creating recommended "shelf sets." But in this case, Magee is nervous about watering down the Lagunitas brand by appearing to do the same things that Goose and 10 Barrel have. So it’s through these local brewery acquisitions that Magee hopes to earn local relevance and growth, which positions him in a role more akin to AB-Inbev than Goose Island in his own metaphor.

And the final data point I'll offer is the quick and steep decline of national independent craft brands like Sierra Nevada Pale and Sam Adams Boston Lager as well as large brewery craft brands Blue Moon and Shock Top. All of this is happening even while growth in non-mass market lagers continues to be robust.

And now we come back to Trump, globalization, and localism. We have entered a moment in beer where quality and availability has reached a point of saturation. For decades, most markets had deficits in one or the other category. If drinkers wanted a quality beer, they often had to turn to a Sierra or Sam Adams. That's no longer true. In nearly every town of any size, you're going to be able to buy tasty, well-made pale ales, IPAs, and amber lagers. In another era, you might have valued Sierra Nevada's pale as much as your local brewery's, but we're not in that era. All things being equal, people seem to be gravitating to local beer--at least within the craft segment.

The big breweries know this, which is why everyone from ABI to Constellation Brands to Lagunitas/Heineken has been investing in local brands. The big craft brands also know this, and they still appear to be developing a strategy for how to handle it. Pay attention to this word--"local"--because it will define beer over the next half-decade or so. (At some point we can assume the word will be drained of all meaning, like "craft," and the battlefield will shift.)

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I suppose I should use this occasion to direct your attention to my manifesto, which keys on this very point: Buy Local, Buy Good, Drink on Tap.

A Draft Beer State of Mind

Bart Watson and I were on the same page. Yesterday, I ran across this data set from My Beer Haul that shows the percentage of breweries in each state that bottle or can their beer. It all comes from internal data, and I can't verify whether it's accurate or not, but based on the brewery counts, it at least looks quite up to date. The national average is 45%. But when you start scanning the state-level data, you see incredibly wide variance. I dumped the numbers into Excel and did a few sorts. I quickly realized that brewery number really affects the percentages (only one of North Dakota's nine breweries bottles or cans--but all of Puerto Rico's four do), so I eliminated states with fifty or fewer breweries. Here's the variance at the top and bottom of the list

States With Highest Bottling/Canning Rates
76% - Massachusetts (109 breweries)
61% - Vermont (54 breweries)
60% - Wisconsin (139 breweries)

States With Lowest Bottling/Canning Rates
32% - Michigan (204 breweries)
29% - Iowa (54 breweries)
28% - Arizona (72 breweries)

There are a lot of ways you could slice and dice these data, and my crude cut-off doesn't capture much of the nuance. Sorting by breweries per capita would be more informative, but that would require me to find the populations of 50 states, and the benefit doesn't justify the effort. The upshot is evident in these numbers: there's huge variation state to state.


Bart Watson, the Brewers Association's economist, posted a highly relevant article yesterday that further illuminates this phenomenon. He finds exactly the same thing.

The first note is that the size of the on-premise beer market varies wildly by state. This is due to a variety of factors: beer’s share of beverage alcohol, overall beer consumption levels, number of on-premise outlets, on-premise culture, consumer preferences and socioeconomic factors.... [T]he variations are pretty huge, ranging from almost 44 pints per 21+ adult in Colorado to 5.5 pints per 21+ adult in Mississippi. 

He then adds another layer, explains it in technical statistics-ese, and summarizes his finding this way:

In crunching the numbers, the size of the on-premise beer market appears to be far more important for brewery per capita numbers than the size of the overall beer market....  In layman’s terms, that means when you know both the size of the draught market in a state and the size of the total beer market, the size of the draught market is a much better predictor of the number of small and independent breweries.

(For you stats folk, his r-squared was a muscular 0.7, which ain't bad.) Watson has three cool graphs, so click through and read his piece.

The Big Upshot: Draft is Good
I have been promoting the maxim "buy local, buy good, and buy on draft" as a guide to developing healthy beer culture, and Watson's numbers back me up.

The data suggest that states where on-premise is more important to the beer market, craft does better in the off-premise. The logic is fairly simply: in places where more beer lovers are in bars and restaurants drinking beer and thus encountering craft, off-premise locations have better sales for craft brewers as well.

So there you have it. Drink on draft and you will create a virtuous cycle that buoys local breweries.

Other Downsides of Consolidation

Whoops.

Lorenzo Mendoza greets and kisses worker at his shuttered brewery in Caracas, Venezuela. He's trying to boost morale. Mendoza is the chief executive of Venezuelan food giant Empresas Polar, which was founded in 1941 and is now the largest private company in this socialist country. But Polar has come upon tough times. Many of its processing plants are running at half-speed, and thousands of employees have been furloughed since April, when all four of the company's breweries were shut down by a barley shortage. The government controls access to foreign currency, and Mendoza says it has refused to provide the dollars Polar needs to import barley, which doesn't grow in Venezuela's tropical climate.

The problem, of course, is this:

For Venezuelans who want to unplug from all these problems by popping open a beer, that's no longer possible. Polar used to produce 80 percent of Venezuela's beer, and now the supply is rapidly drying up.

Venezuela needs more breweries!

The Strength of Regional Breweries

If you wanted to characterize brewery trends the in mid-teens, you could say "the rush to nationalization." Big, regional breweries are pushing out to establish a national footprint, many have begun to open far-flung facilities to make this possible, some are joining forces with other mid-sized breweries, and still others are selling part or all of their stake to multinational breweries. Everyone is thinking that the window to establish national craft brands is closing, and only those who get in now will be competitive. Being national seems like an obvious move. I wonder, though, if being a regional power isn't a smarter play?

Ninkasi's big tanks.

Curiously, this isn't the first rush to nationalize. At the outset, some breweries raced to become national brands, no doubt working on the model created by Budweiser and Miller et. al. Sam Adams, Sierra Nevada, Pete's Wicked, Rogue--these brands quickly shot out over the landscape. What they soon learned was that it was very hard to maintain a national network. Larger breweries, which have established distribution networks, relationships with large retailers, sales teams, and so on, do this very well. Little guys don't have the money, volume, or connections to build 50-state networks while brewing 50,000 barrels. In the 1990s, beer went through a re-set and breweries retrenched and focused on local markets.

Yesterday I visited Ninkasi for the first time in years, and while I gaped at all the recent growth, I chatted with founders Nikos Ridge and Jamie Floyd about business strategies. Ninkasi has always been focused on establishing a firm foothold in the Pacific Northwest, and while I don't think they would foreclose going national, that seems to be their near- and middle-term focus. While we were talking, I began to muse about the role of the dominant regional brewery in the future beer ecosystem.

Regional breweries have always existed. Even in the worst days of consolidation, the Yuenglings and Schells survived by cultivating a loyal following near their home base. There are also examples across Europe of the strong regional player. In Oregon, the Blitz/Weinhard brewery survived well into the craft era (1999), selling a million barrels of beer in the Northwest. Indeed, where you have strong local breweries, they often far out-sell national competitors. Because, even when national brands do have good national networks, they can't outcompete brands with a home-court advantage.

Ninkasi is a good example of a strong regional brand. Most of the production is sold in Oregon, and nearly all of it is sold in the Northwest. They do very well in Portland and Eugene. It's easy to imagine Ninkasi growing to a quarter million barrels of beer based on sales on the west coast alone. New Glarus has managed to grow to be the 27th largest brewery in the US by and they only sell beer in Wisconsin. (Rogue, which sells nationally, is the 41st largest. Ninkasi is 43rd.)

The market is poised to nurture these kinds of breweries, too. Because the national market is getting so tight, building a base near home will be easier, cheaper, and more stable. It allows breweries to cater to local preferences and respond to local trends. Customer engagement is easier when your footprint is five, rather than fifty, states. And given that the craft segment is likely to continue to grow for the next decade or two, breweries can continue to grow themselves without becoming predatory.

It also occurs to me that these forces will make maintaining national brands a constantly-challenging prospect. If the entire country is chunked up by strong regional players--imagine fiefdooms dominated by Brooklyn, Bell's New Glarus, SweetWater, Abita, Harpoon, Victory, Great Lakes, etc.--the national brands will be fighting against locals everywhere they go. That was the reason consolidation happened in the first place--it was easier to buy regional brands than out-sell them in local markets.

The idea of being a 5m-barrel national brewery must be enticing to ambitious breweries, but shooting for 500,000 barrels and regional dominance might make more sense in the long run, especially if you want to remain an independent.

The Brewers Association Wrestles with Buy-Outs

If I could have teleported into Philadelphia for just one event in the Craft Brewers Conference (CBC), it would have been the one where the Brewers Association (BA) addressed the wave of buyouts over the past two years. It sounds like it was every bit as fascinating as I'd hoped. The situation, as you all know, is that the largest and most successful American breweries are ripe for acquisition by bigger international players. And that has happened in dramatic fashion, with nearly 30 sales in the past year and a half. The BA is a trade organization, and was set up to advocate for small brewers. As the most influential members of that organization leave--to the very competition BA has protected its members from--it represents a serious crisis for the organization.

Brewers Association Director Paul Gatza addressed the CBC on Thursday. He did the only thing he can do--parse between the deals that are bad for his membership and those that are (at least for now) relatively benign. Chris Funari:

“Private equity investments are different,” he said. “The company doesn’t get the market access benefits or the ingredient access benefits. It feels like it is more a form of banking.”

source

As more money pours into the space and as savvy business-minded investors become craft brewery operators, the deep passion for brewing — which has long been a cornerstone of craft and a major reason for the category’s impressive growth spurt in recent years — is becoming less of a focus, Gatza argued. “It feels like its differing and it feels like we’re losing some of that,” he said.

And it views even small labels owned by bigger companies as a threat on a different scale than that presented by private equity. Even knowing that private equity’s passion might lie more closely to business than to brewing, the BA still regards investments from that sector as potentially less harmful to the overall craft universe, however.

Although this seems awkwardly legalistic, it's fundamentally accurate. The BA wandered into the weeds when it tried to clothe itself in the language of heroism (craft beer as a revolutionary social change). But its role as a protector of the little guy is critical for an open, healthy market. And in this regard, BA really does travel with the angels. Here's what at stake:

Part of the reason these acquisitions are such a threat is their impact on access to raw ingredients and distribution networks. As the largest brewer in the world, ABI can buy ingredients in much larger quantities (for much cheaper prices) causing availability issues for small craft brewers. In addition, ABI owns a significant portion of the American distribution network, outright owning distributors in 10 states and having significant influence over their distributor network nationwide.

“What is needed is a truly independent beer distribution system” said Pease. “Anheuser-Busch InBev has rolled out an incentive program… that basically aligns their distributors not to sell brands that are over 15,000 barrels in their house. We have no problem with Anheuser-Busch InBev incentivizing their distributors to sell more of their own product, but for them to incentivize distributors not to sell other products is something we want to see remedied.”

Consolidation does pose real dangers, and in the coming years, the Brewers Association is going to be the blade edge leading the fight. They were caught flat-footed by the recent buyouts (which were entirely predictable), but now they have become a given. The BA's going to have to give up being a champion for that nebulous concept of "craft beer" and retrench for the fight for small beer. That's the battleground of the future.

Dusting Off an Old Manifesto

We are entering the week of the Craft Brewers Conference, when a huge amount of energy will be devoted to this theoretical netherworld called "craft beer." It follows a week in which Stone's Greg Koch announced he'd be dumping $100 million into "real" breweries. Or something. Oh god, I grow weary of all this. Titans are arguing about which purity tests to apply (Greg Koch has A LOT more in common with the Busch family than he does with me.) And all of these titans will be appealing to your emotions to get you to buy the right brand, and it's starting to feel awfully tawdry.

What should a good drinker do? Six years ago I wrote a post that got very little traction, but which always struck me as the right answer. Consumers want good beer and a system that supports diversity. I think you should ignore all the blather about craft and consider my old manifesto. It looks even better to me now. Below I've reprinted an edited version, with a few additions in italics. Since I wrote this post, I've traveled the world and learned a bit more about beer, but it all convinces me I was right in the first place.

Buy local, buy good, drink on tap.

Back in the 1970s, Charlie Papazian founded the Association of Brewers--and the more well-known American Homebrewers Association--as advocacy groups for fledgling brewers. The mission grew out of the particular circumstances of that time and place, and was, for at least a decade, clear, accurate, and important. There were two categories of beer: insipid, tin-can beer and handcrafted, artisanal beer. The former had eaten its own, stamped out diversity and quality, and was busily consolidating itself into a single, monolithic product where the only distinction could be found in the color on the label. The latter cared about beer, brewing history, and beer styles, not money. The Association of Brewers therefore had an easy task: support the little guy, support good beer, support independence. It was a moral as much as business crusade.


Unfortunately, breweries can't easily be divided into good beer/bad beer, big/little, and independent/multinational. The brewing industry is a market, and markets grow like amoebas. Trying to contain them in boxes is of no use. And markets are by nature amoral. I have no particular interest in how American breweries organize themselves politically. This manifesto is designed not for brewery owners, but beer drinkers concerned with creating an environment that fosters a healthy market for good beer. It is designed to create the conditions for the production of good beer and a sustainable market. It could also be said to be a blueprint for how Beervana became Beervana, how Bamberg became Bamberg, and how Prague became Prague. These things, rather than a series of ever less explicable categories of being, are what we want to nurture.

Buy Local
Show me a town where the beer drinkers are avid fans of good beer, and I'll show you a town with local breweries. It makes sense, right? If locals are buying your beer, you're inclined to make them happy. But it's not just small breweries that have this effect: look at the great brewing regions, the areas around Portland, Seattle, Denver, Philadelphia--have or had large, regional breweries located nearby. Beer is local. If you have a beer city, it means you have beer people. If those beer people buy locally, they'll have access to good beer. Good beer is fundamentally a product of culture; a dialogue between the people who drink beer and the people who make it. You find good beer where you find good beer culture, and you only find good beer culture in places where beer is made locally by a number of breweries.

The Brewers Association has focused on the independence, but this misses the point. Markets require masses. Towns with breweries have those masses. The problem with consolidation in the 60s and 70s was that local brewing culture died out--vast swaths of the country, lacking any local beer, drank whatever was cheapest, further fueling consolidation and turning beer from a product of local culture into a generic commodity. It's counterintuitive, but even bigger regional breweries help smaller ones flourish because they make the market even that much bigger. You don't have to be xenophobic about it, but spare a copper or two for the local guy(s).  And of course, when you're traveling, drink local wherever you happen to be, to..

(Buying local also helps communities, and is a source of local wealth and prosperity.)

Buy Good
Of course, it's not enough to only buy local--consumers have to demand good beer. Rather than descending into a long philosophical dispute about good, let's use the Judge Stewart rationale: we know it when we see it. Minimally, it's a beer brewed with quality ingredients and attention to style. The reason we should support good beer--whether or not it comes from a small brewery--is that this creates the market for good beer. If consumers always eschew the good for the cheap, they'll get the cheap. If they spend a bit more and buy the good, they'll make it possible for breweries to continue to brew the good. And round it goes.

Buying good creates the environment for local culture to flourish. The commodification of beer creates a generic blandness. Buying good encourages breweries to offer more enticing offerings. What we've seen in the US in the last decade is a race to the top, as breweries use techniques like late-addition hopping to create a new style of hoppy American beer (which is anything but cheap) and embrace techniques like spontaneous fermentation, kettle souring, and barrel-aging. In communities that develop a taste for one of these techniques, local styles may emerge. That has been the history of beer style for 10,000 years.



Drink on Tap
You can buy many of the world's greatest beers in bottles. You can buy brewery-fresh local beer in bottles. But from time to time, you should go to your neighborhood pub and plunk down a five spot on a pint (an honest pint, naturally). The brewing ecosystem is large and diverse. If we don't support pubs, we fail to support the incubators of beer culture. Seeing others in a public space, sampling different kinds of beers, talking with your local publican (who may be the brewer)--these things are the fertilizer for healthy markets. When people go to pubs, they support local beer and local business. More importantly, buying on tap means that the communication between the brewer and the drinker is direct and transparent; it's the basis of that responsiveness that leads to local culture. Markets respond to product trends; publicans respond to people.

Buy local, buy good, drink on tap. Do these things, and good beer will continue to be brewed in your neighborhood. After all, isn't that's what we're really after?