2,000-Plus Reasons…

When the Brewers Association released mid-year numbers for the U.S. craft brewing segment last month, the story wasn’t so much that dollar sales were up 14 percent and volume was up 12 percent—the low double-digit growth, has, after all, become the norm for craft of late—but the fact that, as of the close of the first half of 2012, there are now 2,126 breweries in the U.S. (2,075 of those designated as craft), an increase of 350 since the same point in 2011. Yes, that’s an average of nearly one new brewery a day. 

Additionally, the number of breweries in planning increased by more than 500 since the mid-2011 tally, 1,252 breweries as of June 30, 2012. They’re opening faster than at any time since the day Prohibition ended. And the number of those actually operating is greater than it’s been since the late 19th century. 

Such figures are reason enough for the segment to celebrate, as the numbers reflect a movement among a still-small, yet rapidly growing number of consumers toward the more palate-challenging styles those 2,000-odd crafts offer. 

However, those kinds of numbers, some say, have their share of drawbacks, as well. 

“There’s going to be pluses and minuses,” says Brandon Skall, co-founder of Washington, D.C.-based DC Brau, itself a fairly new entry into the craft brewing ranks, having opened just shy of a year and a half ago and already expecting to produce about 5,000 barrels for 2012. “Obviously, as more and more breweries open up and are competing for the same market, there’s going to be a little less security for the microbreweries that are out there now. What people don’t want to see is a big collapse like what happened in the ’90s. But I don’t think we’re headed toward that. ”

The shakeout that occurred after the initial micro-brewing boom looms as a cautionary tale for the entire craft segment. But the consensus appears to be that the dynamics of craft brewing have changed since then and the significant players—many of which survived that bump in the road—are setting the pace for craft’s overall growth trajectory. 

“[The ’90s market] was a bubble that burst pretty quickly for a couple of reasons,” recalls Maureen Ogle, historian and author of “Ambitious Brew: The Story of American Beer.” “One of those was that frankly, a lot of those people didn’t have the faintest idea what they were doing and they were only doing it because they said, ‘Oh wow, look at this, apparently there’s this cool new industry, let’s just get into it. Let’s get some money and go cash in.’ Frankly a lot of the beer was complete crap.”

But beyond the questionable quality of many “me-toos” who got into the business during the previous wave, there were also numerous technical barriers for beer-passionate entrepreneurs. For one, the equipment was pretty hard to come by for small brewers. “It was really only about 10 years into the whole craft brewing thing and at the time there were very few people, for example, who manufactured scale equipment,” explains Ogle. “And there were very few companies that would sell small amounts of things like malt and hops.”

Anyone who’s attended the BrewExpo America trade show component of the Craft Brewers Conference knows that such a scenario is no longer the case. Whether it’s brewing equipment, packaging and labeling machines, bottles and cans or malt and hops, there’s fierce competition among vendors—many of which didn’t even exist five or 10 years ago—to supply small brewers.

“The trade floor is just jam-packed with companies that are making scale equipment and that will sell you this, that and the other thing, for which, in 1990, there were no resources,” notes Ogle. “Plus, back then, trying to get money from a bank or a conventional lending source was very, very difficult. And those are the things that have changed.” 

And then of course there’s the internet and social media, which have, in some respects, leveled the marketing and promotional playing field for clever, yet budget-bound entrepreneurs. “There’s also the sort of ethos now to supporting local businesses and thinking locally and that didn’t exist 10 or 15 years ago either,” Ogle points out. “The whole atmosphere for any kind of venture, whether it’s someone who’s making crafts to sell on Etsy or someone who’s sitting in their house writing apps for the iPad or someone who’s taking a big leap and going into brewing, I think there’s a rich concoction of advantages right now, that there weren’t before.” 

That much market access can, however be a double-edged sword. It might not create the bubble-like dynamic of the ’90s, but it still makes some brewers nervous about whether all the new entries have the same commitment to quality that the more seasoned craft operations have. As if to call out some of those potential transgressors, Brewers Association director Paul Gatza in his May 2012 Craft Brewers Conference address to a standing-room-only general session crowd (some relegated to watching via closed-circuit TV in an adjacent foyer) uttered the now-semi-famous words, “If you are a startup here and quality is not on the top of your list, get out.” (No one got up and left.)

The fact that there are so many new players in the market that such a directive even had to be issued has Longmont, Colo.-based Oskar Blues Brewery founder Dale Katechis feeling a little ambivalent about the numbers. 

“Right now it’s growing so much, it’s almost hard to comprehend,” offers Katechis, whose company started brewing in 1997 and started canning in 2002. “It’s odd to go to a brewers festival on a weekend and not know anyone there. Five years ago you could look around the room at the brewers conference and you knew everyone there. You could have a beer with that person and respected them. We all got into the business for a similar reason and it does seem that that could be changing a little bit. I’d hate to see people starting to do business in the craft world in a way that’s maybe contrary to why we all got into this business. If the new guys are going to have any legs at all, they’ve got to be about quality.” 

That sentiment is not lost on relative newbie DC Brau’s Skall. “The microbreweries that don’t hold themselves to a high standard of quality are going to have trouble,” Skall warns. “Because in the end, quality trumps everything. Quality trumps local, quality trumps friends, quality trumps relationships. It all comes down to is the beer good or not and if you don’t have a product you can stand behind, there’s going to be trouble.” 

But product quality is not just an issue for the brewers, as there’s a whole new set of issues to deal with after the beer leaves the brewery. While most in the distributor tier of the industry agree that the craft boom has made these very exciting times to be in the beer business, the exploding number of new players adds complications to already complicated operations (though a good chunk of that 2,000-plus number are brewpubs that don’t distribute beyond their premises). “There’s not shelf space or draft space for all of these brands and velocity’s not the same as it used to be,” says Gary Thompson, executive VP and COO of Orion, Mich.-based Powers Distributing, which in 2011 was named Craft Beer Distributor of the Year by the Brewers Association and National Beer Wholesalers Association. “Quality can suffer quickly in a lot of ways.”

For instance, owners of on-premise establishments are not going to want to expand their cooler space and likely would start running more draft lines off of a single CO2 tank, adversely affecting quality. “Then in the off-premise, obviously there’s not more space in these retail outlets and retailers aren’t going to blow out the end of a Kroger store so they can bring in a bigger craft beer selection,” Thompson says.

Another issue that affects both retail and wholesale is cooler space. Many unpasteurized craft SKUs should be in coolers, but they’re kept on the warm shelves because there’s just not enough space. And their velocity is not that of the macro brews so they could sit there long enough to have a severe impact on quality. 

“The fight for space is going to be enormous and momentous,” Thompson predicts.  

So with all of the new players, just how do any of them get the attention of a distributor like Powers? Thompson says it’s not just about how good a job they do getting wholesalers’ attention, but consumers’ attention as well. 

“We’re really just a conduit,” Thompson points out. “The age-old story is that a consumer spends seven seconds in front of the cold box making up their mind what they’re going to drink. So how are we and how is that local guy going to get into that seven-second consideration?”

One word: branding—and not just for the individual products that breweries make, but the overall identity of that brewery. Think New Belgium, Stone Brewing, Oskar Blues or Sam Adams.  

“The brewers that we’re going to represent are the ones that have a full, 360-degree concept of what they are and where they’re going to be in four or five years and how they’re going to get there,” Thompson explains. 

Despite all of the challenges associated with so many breweries on the market and so many more in the pipeline, the positives associated with such a robust marketplace tend to significantly outweigh the perceived negatives.

Oskar Blues’ Katechis asserts that more competition is healthy and everyone in the segment will stay on their toes and never get too complacent. “Everyone will do a better job with more competition,” Katechis says. It also means potentially even more variety for consumers, which is rarely a bad thing.

One thing’s for sure, says Powers Distributing’s Thompson, “It’s fun and it’s crazy and it’s really going to test us all.”  

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