Craft beer’s meteoric rise has been hinting at instability across the US. The experts say the market isn’t even close to saturation and, in fact, is well on it’s way to more craft beer success. With all success comes strife and some are saying the infighting amongst regional breweries is coming soon. Experts see the instability as moving beyond just copyright and trademark infringement:
The unique “IPA” lettering used in the Lagunitas “IPA” Family of Trademarks has a distinctive serif font, distinctive kerning (or letter spacing), between the “P” and the “A”, slightly aged or weathered look, with uneven areas on each of the letters, and the elimination of any periods between the letters. These elements together are unique to the iconic design of the Lagunitas IPA.
To compete in dwindling tap space among the nearly 3,500 breweries in the US, a brewery needs to not only be at the top of it’s game, but also neighborly and community oriented. “Local” is what is selling. But, according to Thrillist, that neighborly nature is changing and what’s inevitable is that craft breweries are going to have to lower prices to compete with the thousands of craft beer options:
Craft beer’s competition isn’t the Anheuser-Busch boogeyman anymore. “We’re definitely not getting pushed around by the macros[like we were] when Sierra Nevada and Bell’s were coming around,” says John Laffler, co-founder and brewmaster at Chicago’s Off Color and the former “innovation brewer” at Goose Island. Nope, these days, it’s the brewer next door that poses the threat. Across the country, craft brewers are crowding in. The neighborly smiles are starting to strain.
The article suggests it will be the regional breweries who do the real infighting. According to The Brewers Association, regional breweries make more than 15,000 – 6,000,000 barrels a year (click here for definitions of craft beer market segments) and there are about 100 of them across the US. From the article:
In mid-2014, the BA found that US retailers had scanned 5,065 craft beer SKUs, which was almost 3,500 types of beer more than the next-broadest category (imports) had, and a solid 1,000 more than craft had just two and a half years earlier. In other words, we’re drinking a greater volume of craft beer than ever before, but we’re also drinking way more types of it. “It’s gone from the sublime to the ridiculous,” says Steinman. “There are just way too many beers out there.”
Call it “rotation culture.” While it’s great for craft drinkers like you and me, it’s a problem for craft brewers. “The novelty aspect of new beers is a big part of the market,” says Patrick Emerson, an associate economics professor at Oregon State University who writes a blog called Beeronomics. Companies “need customers to keep coming back to [their] brand, and that requires lots of new stuff all the time.”
That’s what a rotating tap list is: a glorious chance for you to try a few different beers every time you go in, without committing to any specific one. The downside for brewers, says Brian Murphy, director of sales at all-craft distributorship Massachusetts Beverage Alliance, is “you’re really just cutting the pie up more.” Brewers have more shots at a customer, but fewer opportunities to capitalize beyond a keg every few rotations. It’s not just bars that are adapting to this demand. Retailers are too. Craft’s best-selling segment is IPAs, but, according to Julia Herz of the Brewers Association, the second is the pseudo-segment of “seasonals.” For example, every fall pumpkin beers rival India pales for the number-one spot, if only for a brief time. Beer is best when it’s stored cold; that’s also when it sells best. But coolers are expensive, and retailers only have so many of them. When autumn rolls around, pumpkin-spiced brews go in, and something’s gotta come out.
With that happening more or less year-round, it’s inevitable that a growing national community of brewers, pumping out a customer-pleasing calendar of novelty beers, is going to run out of places to sell the stuff. And when quality and differentiation aren’t enough to get you a coveted spot on the shelves or the tap list… well, then you take a look at price tags.
So the article argues the “war” will be a pricing war. If they are accurate, the concern is will it be a race to the bottom? Sam Calagione, owner of Dogfish Head Brewing said,
“Craft brewery economics can’t sustain keg prices at half what they are today.” Calagione thinks a price war can be avoided by “great breweries staying together and continuing to speak with one voice [and] championing the production of quality, consistent, well-differentiated beer.”
Will craft beer stick together and communicate to keep a price war from coming? Some see it as inevitable
“Price competition will become much more severe.” Chris Lennert, COO of Left Hand Brewing Company, agrees: “At a certain point, there are going to be some price wars,” he says, with a note of regret. “That’s what’s ultimately going to happen.”
But the article also says brewpubs and microbreweries (making less than 15,000 barrels a year) are most likely to remains stable in a price war. That would mean places like Boundary Bay and every single brewery on the Bellingham Tap Trail, would weather a pricing storm the best. Even Kulshan Brewing, who’s new brewery will top them out at that magic 15,000 barrel number would be able to rely on it’s in-house taps to counteract any pricing war concerns.
If you run a brewpub, meaning a quarter of your beer sales are done in-house, the upside is relative stability. “Since you don’t package the beer and don’t have to transport a very heavy liquid,” Emerson says. “You can cut down on costs and supplement your restaurant business.” And you don’t need to look far for customers, says the BA’s Julia Herz. “Brewpubs are really tied to the local communities,” she says.
If you run a microbrewery — defined as a company that produces fewer than 15,000 barrels a year and sells 75% of its beer offsite — you probably aren’t legally allowed to sell beer directly to drinkers. So you can, if state law permits it, open a taproom and a carry-out business, keeping your money super local like a brewpub. Murphy estimates that certain small microbreweries could stand to make 60-70% of their revenue through taprooms alone.
Craft brewing almost forces a brewery to grow. The more you produce the less it costs per ounce to make. If you’re small enough there is less reason to be concerned. If you’ve grown big fast to maximize your cost per ounce, you may have an issue.
Brewers that are too big to keep their heads down and too small to compete on a national scale are already fortifying themselves for the fight ahead. You need money to make beer, and if you want to make both at the same time in a sustainable way, you’ve got to get bigger, and do it fast.
“Beer is all about economies of scale,” Emerson says. “The bigger you get the lower the cost per ounce of beer. This is fundamental and there is no way around this. So for a normal brewery the pressure will always be there to grow.”
Subdued Brewing, Bellingham’s newest announced brewery, isn’t interested in distribution. About 80% of their revenue will come from in-house taps. The accounts they will have will mainly be local. Perhaps the hyper local market will be low enough on the radar to be relatively unaffected. If Bellingham is one thing, it is local. No one in Bellingham wants to see infighting. Perhaps it won’t impact us. Perhaps, as Calagione argued, communication and collaboration will win out. But the economics suggest some will be forced into a more defensive stance and that something in the turbid and exciting world of craft beer will shift.
We should be proud that Bellingham Tap Trail breweries exist in such a congenial community. Collaborations and communication abounds. Friendliness and transparency is the currency of success in this town and we expect to see that for years to come.