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Monday, July 08, 2013

The Bubble Versus Mature Market

Last week, Time posted an article that asks the familiar question: is the craft* market saturated?  (I know--I was shocked Time still existed, too.)  I was happy to tweet it and let it go--until Alan posted related thoughts yesterday.  Well, two makes a meme, and memes need feeding.  Here are my meaty bits:
  1. It's really important to distinguish between brewpubs and breweries.  Yes, there's a point at which the supermarket shelves become too packed to admit yet one more brewery's packages, but brewpubs are another matter.  If the US had ten thousand of them and they averaged 500 barrels a year, that would amount to all of 5 million barrels--or 2.5% of the beer sold each year.  We can handle that.
  2. Paul Krugman, who is more reliable than me on these matters, describes a bubble as "a situation in which asset prices appear to be based on implausible or inconsistent views about the future."  A brewery bubble would be a situation in which the overall capacity of all the craft breweries were radically higher than the actual number of barrels required by the market.  
  3. A mature market, by contrast, is one that has reached a state of equilibrium.  In beer terms, that would be a situation in which the number of barrels of capacity equal the number of barrels of demand.  In order to grow, breweries would need to cannibalize each other.  That sounds bad, but it happens to be the definition of a healthy market.  Presumably, people would quit buying crap beer and buy more of the good stuff. 
The craft beer segment has been expanding at some shocking amount for a decade (mid-single digits to low double-digits.  Every year.)  You would therefore expect a ton of new brewery openings.  But it's also true that at some point, the market will hit equilibrium.  For awhile, this will cause widespread gnashing of teeth and breweries used to amazing growth will feel like a collapse has arrived. Most craft brewers have never seen flat sales or a market that wasn't growing.  It will be deeply unnerving.

But I don't see any evidence that the capacity of craft breweries is so outstripping demand that we're in a bubble.  Can anyone point to such evidence?  Anyone?  See, no bubble.  At worst it looks like some places might finally be approaching a mature market.

We'll survive it.

Update.  Just to underscore the difference between a mature market and a bubble, let's talk about one of the classic examples: housing sales.  At the height of the housing bubble in 2005, there were 1.28 million houses sold in the US.  In 2011, only 306,000 homes sold.  In an average year, the US should be selling around 700,000 homes, if I'm reading the stats correctly.  The craft beer segment was roughly 15 million barrels in 2012.  If it were a similar kind of bubble, we would place the actual healthy market for craft beer at about 8 million barrels, and we could expect the burst bubble to drop sales down to less than four million.  Does anyone believe that's where we are?  Even if the bubble were less severe--as most bubbles have been--does anyone doubt the US can consume 15 million barrels of craft beer a year?

*Yes, "craft" is a terrible name for a brewery, but it's not terrible when referring to the market segment.


  1. I think you need to rely on the definition of a bubble to follow through on your analysis.

    "...a situation in which asset prices appear to be based on implausible or inconsistent views about the future..."

    Who sees an implausible set of prices on beer inventories and the good will asset associated with the that inventory? Everyone? Yes? Yes. Everyone.

  2. The way I look at it, there is plenty of room for growth, some 90-94% of the shipped beer market depending on how you define the craft brewing segment and its market share. Even if you halve that that's quite a way to go. Lots of room for newbies but especially ones that make great beer. There is less margin than before for something indifferent. Just as the initial spate of malt extract brewpubs died away, current and new players who make something average have less of a future than before. Sierra Nevada provides the template, make something really good and if possible new, price it fairly, and people will come. Sierra Nevada Pale Ale is one of the world stars of gastronomy currently IMO, at a price that is so fair often its super-excellence is overlooked. And they still innovate, e.g. the ubiquitous can conditioned version.


  3. The brewpub market is certainly not saturated. As you say, we could have a huge number of these things producing 500 barrels a year and be perfectly fine. Many parts of the country are still woefully under-served.

    The retail market is another story. We have a growing number of breweries seeking the same shelf space. Then there's the growing number of bottleshops and other stores focused heavily on craft beer. These places are essentially catering to the same customers. There's got to be some kind of shakeout coming. It's the timing we don't know. The only reason it hasn't happened yet is there are still areas that are under-served.

    You mention capacity, so let's talk about it. Widmer and Redhook have unused capacity. Otherwise, they could not have entered into a deal to contract brew Laurelwood beers...or a special beer for Buffalo Wild Wings. I wonder how many of the larger craft brewers have unused capacity. This isn't a huge problem as long as they can sell that production, but it will get more difficult over time given overall capacity is increasing faster than demand.

    The issue of a bubble is on the minds of many in the industry, in one way or another. However, they prefer not to discuss it publicly for obvious reasons. That's really all you need to know.

  4. The point about shelf space is a good one, and an important related issue. People thinking about going into the brewing business may want to consider going into the beer retailing business. More entrants will loosen up the probably of straightened shelf space. Of course the distributors have to be able to service the retailers, I know. Each geographic area and state tax and regulatory structure may suggest a different business plan.


  5. Pete, I will gently disagree. First off, brewer anxiety is not data. If you have a flourishing brewery in an active market like Oregon's, you're never going to be excited to see bunches of new breweries starting up. Some breweries, like Widmer, have particular circumstances that are in no way indicative of the overall market.

    But the second point is more important: in a mature market, you expect failures. This is a weird time when few fail. Failure and excess capacity will be wholly typical in a mature market. Competition will force breweries to be lean and mean, and some will make mistakes while others thrive. I give you Nokia and Blackberry as examples. Is there a cell phone bubble because they watched their sales plummet? Nope--they just failed to anticipate where the market was heading.

    I think we have a tendency to over-learn history's lessons. The late 90s "shakeout" was the result of a market coming to a plateau. There was no bubble in the sense that overall sales tanked (as in the housing market)--they just plateaued. It felt like a crisis to those who had only known wild growth, but it wasn't. The craft market was in no danger.

    I'm not sure we're even to that point again, but if we are, it won't be a bubble. A real bubble happens when sales completely collapse. In 2006, a million homes sold in the US. In 2007, the figure was 700k, and it bottomed out at 300k in 2011. That's a bubble.

  6. So, what if we change the description of events to "regional saturation points"? Is that so watered down to be a different issue or a better title for this one?

  7. I respect your opinion, but I disagree. I think capacity is out of whack with demand. I don't foresee a complete collapse...more like an adjustment. I already have a short list of places I think will fail when it happens.

    When Joe Kennedy discovered shoeshine boys were in the stock market in the late 20s, he figured there was a correction coming and got out. Of course, it was a different time and a different concept, but the idea is similar. Way too many people are trying to make money on craft beer. Some, if not many, are doing it on borrowed money. I don't think that's a sustainable model. Hopefully, I'm wrong.

  8. As a part owner in a craft brewery this topic is of particular concern to me but I agree with Pete and Jeff that the market as a whole is not yet saturated. But Alan makes a good point regarding "regional" saturation. As they say, "all good things must come to an end" and I'm sure the days of year over year excellent growth for craft will end sooner than later. But I also believe the market will adjust first before there is any such bubble popping. Right now it seems that even crappy craft beers are doing well and when the market corrects, those guys are going to go away leaving more capacity for the quality brewers.

    For what it's worth, my two cents says the market will start to correct in a few years and it just won't be as easy for any Tom, Dick, or Harry to open up a brewpub and expect to make it. In my opinion that will be good for consumers and good for established breweries. Let the laws of economics work.

  9. Need more shelf space? A new bottle shop is going in the renovated building at SE Division & 31st. Imperial Bottle Shop, if I remember correctly.

  10. Great discussion but no one mentioned anything about the changing beer culture in the USA. I think this has more to do with growth than perhaps any other single factor, and explains why breweries with poor quality beer can even exist let alone grow. The way I see it, the market is nowhere near mature. The yellow-beer guys are having a hard time defending their 90% share and it's this year-over-year lost marketshare of theirs that represents the growth in craft. This holds true for the shelf sets, bottle shop inventory, and tap handle real estate. We're all sharing the same consumer base but the ratios are changing in favor of craft because people are seeking and demanding better beer and even more locally produced products. As the population in the USA continues to grow, so will the number of beer drinkers and the ratios will keep changing. It's a dynamic system that will equalize at some point. That point will most likely be financial in nature and socio-economic; some will spend more for craft beer, some will never see the value and stick with yellow-beer, and some will maybe spend less on craft or drop a notch or two in brand quality. The bottom line in my opinion is that there is a long way to go yet, some consolidation and failure will occur, and there will always be room for great beer no matter the market. However, underserved markets will be the best markets in which to open up shop in the next several years and, for those owners/brewers that hit it just right, the rewards will be ample.

  11. I think we'll be seeing a few failures based more on inferior product than bubble. Along with the growing awareness and sophistication about good craft beer comes the knowledge that not all beers are equal and just because a new brewery opens up does not mean it will make good beer. I visit breweries all over the world each year. Last year I stopped at 375 different breweries. The quality of the beers varied wildly. Some regions in the States seem to have a higher consistency of good beer but most of the areas that I visited were up and down with regard to offering quality beer. I believe that as awareness and sophistication increase the breweries that make inferior beer will begin to fail.

  12. The Export Market has not yet been mentioned.

    I have been in Copenhagen for ~1.5 weeks. My beery time is constrained by granddaughter time; but, I have been seeking good beer, mostly at supermarkets. There is a lot of lame Euro Pale / Strong Lager, some bottled [Danish, British, Scottish] microbrews [Sons of The American Revolution (Jeff Alworth named them thus)] beers, AND American Craft Beer.

    I have counted beers from 14 American craft breweries. And, on Monday morning these shelves are more than decimated.

    Seemingly, more than 'Mericans thirst for good beer.

    I have made it to one Ølbar and enjoyed a very good Flying Couch pilsner. Dansk microbrewery hours do not match my hours well. Danmark is called the Jamaica of Europe.