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Wednesday, March 31, 2010

How Many Breweries Can a City Support?

A couple days ago, Ben Edmunds wrote an intriguing piece over at The New School. His thesis: Portland has reached the saturation point for new breweries and we may be due for a shakeout.
A look at the 2008 Brewers’ Association statistics is telling (the 2009 ones should be released in the next New Brewer). Compared to the previous year, the number of barrels produced by Portland-based brewpubs grew by over 16%, a strong number that far outpaced the national average for craft beer growth. But, during the same year, at least eight of the city’s brewpubs (Old Market, Roots, both Lucky Labs, Kennedy School, The Mash Tun, Tugboat, and Rock Bottom) saw dwindling production and contracted. What exactly happened? A fair share of the responsibility for the growth of the market and the shrinking of some businesses belongs to Hopworks and Deschutes, both of which opened in the middle of 2008. While none of the new slew of breweries portends to make as big a splash on the market as either HUB or Deschutes, the numbers don’t lie: one brewery’s gain means another one’s loss. And while the spirit of collaboration runs high amongst craft brewers, competition will be the new reality in a market where supply already outpaces demand.
I'll go this far: there is a point of saturation. It's possible we've already reached it, too. But there's a big difference between a point of saturation--equilibrium--and the apocalypse Ben fears.

Let's run a few numbers. According to the Brewers Guild, Oregonians consumed 2.72 million barrels of beer in 2008. Oregon breweries produced 912,000 barrels, 327,000 of which was sold here. These numbers don't tell the whole picture--we consumed craft beer from other states and countries, too. In fact, Portland consumes more beer than any other city. As far as craft beer is concerned, it's a very big market.

For a shakeout to suddenly strike the city, those numbers would have to drop, not plateau. Ben mentions that something on the order of ten new breweries are open or will be opening soon. If every one brewed 500 barrels (a robust start), that would add 5,000 barrels into the city's supply. But that's less than 5% of all the good beer sold in Portland. If the market didn't grow at all, it's hard to imagine anything too dire resulting from this modest infusion.

But forget raw numbers. The issue has less to do with economics than culture. Portland is such a good brewpub town because residents prize neighborhoods. They want coffee shops, restaurants, grocery stores, and pubs they can walk to. This ethos creates the environment for dozens of brewpubs to flourish. Would St. Louis support 40 brewpubs? Would New York City? Probably not, but it's not because there aren't enough people or even enough people drinking good beer. The patterns of consumption and local culture in other cities differ. Portlanders will support their local, and as a consequence, they can support a lot of breweries.

Brewpubs are among the safest businesses in Portland, but they're not foolproof. We've seen brewery failures since Cartwright's time, and we'll continue to see them. Poor beer and bad business decisions will kill a brewpub, even in Beervana. (Anyone remember all the way back to the pre-Rogue incarnation of the Green Dragon?) Yet the neighborhood brewpub is still a solid bet for breweries devoted to making good beer.

For a shake-out to hit Portland, something more disturbing would have to happen--we'd have to experience a change in culture. Of course, that could happen eventually. Cities change, people move to the suburbs, they change the way they socialize. But that's a very slow process, and not one in evidence. (In fact, the evidence suggests the opposite as this desire for a local neighborhood reaches further and further into the suburbs.)

One more Portland-specific observation and then I'll quit rattling on. Back in the 80s and 90s, brewpubs tended to open on shoestrings. Owners cobbled together used equipment and found less-than-central locations. If they thought about branding and image at all, it was only cursorily, and usually after the fact. Now when a brewpub prepares to open, it has a name and logo and lives virtually for weeks or months online. These new places are well-financed, sport brand-new brewhouses, and are located in the center of neighborhoods. All of this allows them to shoot out of the gate in a way that wasn't possible 20 years ago. The risk of starting a brewery now is actually lower than it was back in the day.

Breweries will fail. Some will be over-leveraged and have overly optimistic business plans and will fail. But in ten years, Portland will have more breweries than it has today and Portlanders will consume more good beer than they do now. No apocalypse is imminent.


  1. I don't think we've hit saturation yet either. What I think is happening is that we're going to see three types of breweries emerge: National, regional and neighborhood. Rogue, Deschutes and Widmer are national and it took them a long time to get there. Ninkasi is a great example of a regional brewery that just popped up and HUB is well on their way. These types of operations are riskier and will likely see more failure. Ultra local, if that is their plan and they stick to it, should be able to thrive for the reasons you stated.

  2. Assume for a moment that start-up costs sum to $500,000 and ongoing costs are $137,472 ($10k a month plus $8.40 an hour minimum wage for a one-man show at 40 hours a week).

    At 10% debt service on those start-up costs and $6 a pint, a brewpub would need to serve 52,076 pints to break even.

    Such a brewpub could break even with 36 customers would came in seven days a week and drank four pints a day.

    So looking at Portland demographics, what is the growth rate of net new adults (roughly those between 21 and 59) and of those, how many are beer drinkers? Of this group, what is the per capita beer consumption, in ounces.

    Only with these salient facts, can anyone know if it is prudent to open a brewpub anywhere in Portland.

    As to specific location, a potential owner would need to survey a neighborhood, discovering how many of beer drinking adults live within walking distance as well as reasonable cab ride.

    Such an owner would need to discover how many other brewpubs are in operation already serving the same drinking pool of adults.

    By virtue of opening within walking distance, a new brewpub could poach some customers from other nearby pubs, which drinkers now perceive as far away.

    Yet, in the end, the quality of beer along with the quality of service delivering those beers goes a long way for shoppers deciding to become regular customers.

    So can a one-man brewpub find 36 adults willing to belly up seven days a week for four pints?

  3. Can we stick to quality, not quantity? Right now we have more QUANTITY than QUALITY. How kitschy do we really want to look?

  4. Ketch, your numbers include neither food sales nor beer sales off-premise. I would suspect few business plans get thus written.

  5. That seems like a silly set of assumptions to use. A 1 man/40hr brew pub open 7 days a week? (meaning if he spent 0 hours actually brewing, the pub would be open ~5 hours a day) Does the break even calculation (at $6/pint? jeeez) include the cost of actually making beer? Why not phrase the break even point in an actually likely scenario (like a customer base of 20,000 people to be capable of serving 1000 beers a week vs the same football team coming in every night of the week).

    That aside, can anyone name Portland brewpubs that had good beer and/or food that went of business recently?

  6. I agree with almost everything you say, except I think you're wrong about NYC. Or, perhaps, right for the wrong reason. New Yorkers actually are pretty loyal to their neighborhood restaurants, delis, and bars. When virtually everyone walks rather than driving, that's just natural. However, new businesses face two obstacles. First, the abundance of choice means that any business which isn't up to par from the start won't get a foothold. Second, more specifically an issue for brewpubs, real estate is very expensive and I suspect it's prohibitive to brew on site in most places in the city.

  7. @Andy, I liked the original Green Dragon food menu a lot more than the current one, and the beer selection hasn't changed significantly, so I'd say, yes, that's not sufficient to stay in business.

  8. And don't forget that it's not just locals, Ketch--Portland is a beer destination. Many savvy (and thirsty!) beer lovers arrive every week looking to experience Beervana. The amazing bounty of choices is a big part of the allure.

  9. I posted something before, but not sure if it made it to the thread. So sorry if this is a repeat.

    At some point you have to grow the pie of craft-beer consumption. Many restaurants/brewpubs have low profit margins, so new competitors coming in and trying to take 5% of the market every year or two, isn't necessarily a small deal. As the article states, some pubs have already seen contraction.

    I think that location will become very important. Trying to find those spots on the map that aren't already covered by two or three brewpubs. In the inner areas, we may be headed towards saturation in places.

    Personally, I think the grocery aisle is where the shake-out will really occur. A place like the Mash Tun can lower production, keep a couple of outside beers on tap, and get by as a restaurant/ bar.

  10. I don't think the original green dragon is a good example of a business that didn't make it in the sense that we're talking about here. The way I understand it, (coming from a friend of the landlord green dragon rented the space from), it wasn't that they weren't making enough money to cover the cost of operation, but rather that they moved into a space that wasn't approved for occupancy, opened a bar anyway, and then when the city found out, they couldn't afford all the upgrades required to the building to continue. (seismic, fire suppression, etc..)

    So not that it wasn't successful, but rather that they just made some poor choices and it came back to bite them in the ass.

  11. PedXer,

    On the Green Dragon: I think it's a pretty good example. Brewery failures have never been driven by market reasons; they've always been the result of poor decisions or bad beer. In the case of GD, all the reasons you cite, not a saturated market, explain its failure.

  12. Jeff,

    My point was that Green Dragon closing down isn't a good indicator of market saturation. It wasn't the saturated market that they couldn't compete in, it was all internal stuff.