While craft beer continues to sell well, there are potential signs of trouble ahead.
Growth has slowed. After posting years of double-digit sales gains, the category has recently settled into a pattern of single-digit increases. In 2017 craft beer was up 4.9%, according to the Beverage Insights and Information Group. This year the category has been “stable” with 5% mid-fiscal year growth, according to the Brewers Association.
By The Numbers
“There are certainly industry headwinds, but this stabilized growth rate is reflective of the market realities that exist for brewers today,” says Bart Watson, chief economist, Brewers Association.
Namely: more competition. Every town now seemingly has their own brewery — or several. America set a new record in 2016 when the number of breweries surpassed 5,000. Watson predicts 7,000 operating breweries by the end of 2018. And active brewery permits with the TTB now total 9,000, which Watson says is indicative of the number of operating producers two years years out.
Can consumer demand support 7,000 breweries? 9,000?
One problem is that this brewery increase comes as more consumers drink across categories. Wine and spirits have recently gained market share at the expense of the overall beer category, which was down 1% last year in America.
“A big part of that is beer pricing,” Watson says. “Beer has recently gone up in price more than wine or spirits. When one category increases in price while the others remain relatively static, naturally that category will be more volume-challenged.”
Nor does Watson think the uptick in brewery openings predicts an industry bubble. “The number of breweries is not the most important thing,” he says. “The smallest 75% of breweries only reflect 0.5% of the overall beer market.”
The economic issues, he believes, will be more local. “There’s hyper-local saturation in some places as those markets achieve mature equilibrium,” he says. “Places like San Diego, Denver and Portland now see the number of brewery openings and closings moving closer together.”
Watson does believe that consumer demand can support 8,000-9,000 breweries. “All signs say ‘yes’,” he says. “When the business model is focused on ‘local’ and a taproom, we’re still seeing a number of businesses growing. We don’t see too many signs of slowing.”
Troubles at Retail
While taprooms may flourish, retailers worry about the number of beers on shelves.
“There are too many options available,” says Geoi Bachoua, owner of Bine & Vine Bottle Shop in San Diego. “Beer geeks and casual beer fans have such a large selection to choose from that they don’t need to be loyal to a brand or specific SKU.”
One of the last sources of brand loyalty was fans who faithfully tracked down rare beers. Even that has ebbed. “The hype is dying around a lot of stuff,” says Chris Ciskey, co-owner of Yankee Wine & Spirits in Newtown, CT. “People are not going nuts around anything anymore, because you can just go get something comparable from so many different places.”
Overall Ciskey is concerned that craft beer has become an “overinflated bubble. I think we’ve gone too far with the number of openings. We’ve seen this happen before: when things suddenly go the other direction.”
Ciskey refers to craft’s downturn in the late ‘90s/early ‘00s. When droves of businesses closed, including major regional players like Catamount Brewing.
Today we see struggles for similarly sized regional producers, like Smuttynose, Green Flash, New Belgium and Mendocino Brewing. Places whose production suddenly outstrips consumer demand. Does this reflect dangerous levels diminishing consumer interest?
Local, Local, Local
Or is the cause more that craft consumers much prefer hyper-local now, even to regional?
“Yes, saturation has definitely arrived. In saying that, there’s still growth in cities within counties where there’s a need for an ‘uber-local brewery’,” says Bachoua. “These are the ones, I believe, that will have long-term success going forward, not the new brewery that opens up a block away from three others.”
Which is to say that local can have issues depending on the market.
“Local is definitely losing its luster somewhat,” says Ciskey. “A year ago, if I put up an Instagram pic of the new beer from [Connecticut microbrewery] Relic, I’d sell out eight cases in three days. Now I’ll sell one case per week.”
Watson believes there remains room for local growth. Especially in underserved areas such as Texas, the South, Southeast, Florida, and parts of California like L.A. and Central Valley.
Bachoua agrees. “Local has certainly not lost its luster,” he says. “If anything, it’s where most of the growth originated from.”
The Future: Broad Picture
Despite the surge of new breweries, the amount of closures has not spiked.
“Last year it was under 3%,” Watson reports. “It’s a little higher this year, 3-4%. That’s more in line with national averages. From 1986-2017, 4.3% has been the average. 3-4% is something people should expect. We’ll be seeing more closings, because it’s a natural part of the small-business cycle.”
The Brewers Association had set a goal for craft to obtain a 20% share of the overall beer market by 2020. Last year craft achieved an 11.1% market share, according to the Beverage Information and Insights Group — up from 10.4% in 2016.
“I still do think that 20% market share is obtainable, even if not by 2020,” says Watson. “We do see markets where craft is over 20%, like Portland, San Diego and Denver.”
The retailers remain skeptical.
“11% is about right,” says Bachoua, “and I think it’ll decrease down to 8-9% within the next few years after some breweries inevitably close.”
Ciskey concurs: “At this point I think craft beer has reached its peak market share.”
Whether craft beer’s market share and consumer demand can support 9,000 breweries — and growing — remains to be seen in these pivotal years ahead.
Kyle Swartz is editor of Beverage Wholesaler magazine. Reach him at firstname.lastname@example.org or on Twitter @kswartzz or Instagram @cheers_magazine. Read his recent piece The 2018 Beer Growth Brands: 4 Trends Driving Beer Sales.