The Tipping Point: Part I


Copyright Chris (ooaona) at Picasaweb

The first in a three-part stream of consciousness thought on the state of craft beer.

James Watson of HSBC: “Question for you on shelf space: I read in the last couple months statements from a few retailers saying they were either maintaining or expanding shelf space for craft beers. I was wondering what you guys have seen on that front. I’ll start there.

Boston Beer Co. CEO, Jim Koch: “Yes, I think over, not just this year but previously in 2008 and 2009, we’ve seen a significant increase in shelf space for craft beer, typically at a greater rate than the sales. So your craft beer certainly benefited from more shelf space; the shelf space has grown faster than the sales. That eventually has to come to an end because sales per SKU or per foot of craft beer space have been declining as the category has expanded itself.

So I think we, you know, we may be at an inflection point where the rate of increase for craft shelf space may slow down. I’d certainly hope that it would match the volume growth of the category. But it can’t exceed it forever.

That statement came during a second quarter earnings conference call earlier this month.

2010 has been a superb year for craft beer and the last several years have been a significant improvement over the early part of the last decade. Even greater than this current renaissance was the craft beer boom of the mid-90s. Data from the Beer Institute shows that “specialty breweries” grew from 376 to 1,625 from 1992 to 1998. Absolutely staggering. Then what happened? Craft beer volume growth (and the number of craft breweries) leveled out for the next five years before its resurrection in 2004. Despite the great year craft beer is having, there is the inevitably that current trends will come back down to earth. The question is when will that be? Two years? Five years? Ten years?

World Class Beverages, a major distributor of craft brands, provoked much thought in the beer community with its blog post back in March titled, “Less is More? Are There Too Many Beers?” The post discussed the challenges facing distributors with the resurgence in the number of craft breweries over the past few years.

Jim Schembre, World Class Beverages of Indianapolis, had this to say at the beginning of the year:

The big concern for the year 2010 for the wholesaler is the continued development of more and more brewers; there are now over 1,500 craft beers in America and the craft brewers are wondering if the category has so many brands that the brewers will lose their identity. Something like the wine industry: you know that you like Zinfandels but name one? So some of the major craft brewers are pressing the ideal to slow down the development of other brands. Brewers like Magic Hat even suggest that as wholesalers we do not need to even carry anything but the top four, as they currently represent over 70% of the grand total. So the big thing for 2010 for wholesalers will be access to market and who gets it. Remember there is only a small shelf at retail and how many brands and packages can you even put on it. So the list of brewers that want to come in the state and the number that can actually get to market are two different things. We as wholesalers and you as consumers, because of this aggressive growth of new brewers, must be concerned about quality and we are seeing people get in the craft side and have no beer skills at all. That is a problem.

Compounding that fact, the Brewers Association recently reported that at least 100 craft breweries have begun operation this year. How can craft distributors effectively handle these new brands with their current portfolios, which in some cases, already include dozens of brands?

On the retail side, there is a sentiment among core beer drinkers that wine has done just fine with over 6,000 wineries present in the United States. Why can’t there be 3,000 or 4,000 craft breweries? Wineries have had one luxury in the past couple decades that craft breweries, for the most part, don’t have and that is extra shelf space. There are new beverage shops opening each day but in existing stores, space comes at a premium. A craft brewery that opens a couple years from now is probably going to have more difficulty than one opening today.

Beer industry veterans are leery of this “winofication” of beer. I’m not referring to exclusive beers going for hundreds and beer culture turning all hoighty-toighty. That’s another discussion. This is about the importance of “brand” to craft beer sales. Over time, a very savvy wine drinker may learn to recognize and differentiate between hundreds or thousands of wineries on the shelves but picking a wine, for most of us, is based on a varietal, is mostly random or we’ll ask the wine department person to pick something for us. Nielsen research says that this would be detrimental to craft beer in the long run, “Craft Brewers will sustain growth via brand-building marketing strategy, rather than a style route-to-market. Brands command pricing and credibility. Marketing & merchandising ‘varieties’ may seem easier…but that drives ‘substitutability,’ undermining pricing.”

I asked a couple retailers for their input on brands and variety. One said that the only major hit his business was really taking was with high-end imports. When asked about craft, he said, “Everyday, year-round beers are slightly down. It’s more about special releases and seasonals.” He identified long-time customers as going for the latter while casual customers are buying more year-round selections from small craft brands (and are presumably moving away from bigger brands).

Another retailer said the following:

“The selection is getting to be too much. I used to carry everything available locally but now it is impossible to do and keep it all fresh. There is no doubt that the biggest hit has been to imports over the past few years. I sometimes wonder if it is going to end up like sherry (foritified wine) where only the older clientele drinks. Nobody under 50 comes in to buy Harveys Bristol Cream Sherry to drink. I even wonder about things like Dewars Scotch which is mostly older clientele, the younger crowd drinks Single Malt scotch mostly. Craft beer is going that way, the ‘older’ regulars are the ones that still buy the Bass, Newcastle, Chimay, Becks and Heineken. The ‘younger’ crowd almost strictly buys American craft with the exception of hard-to-get Belgians like Cantillon and Fantome, plus American-influenced craft like Mikkeller. I think Heineken, Newcastle and others need to find a way to reinvent themselves to the younger crowd.”

He also identified Mendocino Brewing, Arcadia, Flying Dog, Rogue, Anchor and North Coast as moving more slowly than they have in the past. With the exception of Rogue, which has always been at the center of discussion regarding its high prices, the other brands have been slow to introduce new seasonals on the off-premise side.

Seasonals, while seemingly a low risk-high reward proposition, come with a price. The same retailer mentioned that Southern Tier seasonals were selling like crazy when first introduced but not as much this year. So should Southern Tier swap out some of its seasonals and introduce new ones? Seems like a good idea in the short run but a brewery that does this takes the risk of alienating drinkers who are a fan of that seasonal. Magic Hat is a prime example of one that consistently rotates in new seasonals to the detriment of its relationship with core beer drinkers. Just read the sentiment here.

New year-round offerings and seasonals may not seem like a sustainable brand model but they this movement has staying power, at least for another couple years. A brewery can easily add a second layer of seasonals if interest in the first batch of seasonals fades. Package four seasonals in 6-packs and offer four new ones in bombers. Reduce the time available for each one. For example, instead of four seasonals, a brewery can mix in a maibock, a summer ale/lager, a pumpkin ale, a Marzen, a barleywine and an imperial stout into one calendar year. There are a lot of options (and beer styles that match a season) at the disposal of craft brewers.

That’s it for now . . . I will circle the wagon on the fate of new breweries and new brands in the next edition on Monday.

[Update: here’s part II]

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13 thoughts on “The Tipping Point: Part I

  1. Great piece. BeerSage is always good.

    Craft beer is currently about 5% of overall beer sales and growing. But that 5% of sales comes from around 1,600 brewers. I hope there is room for more of them, but while there are around 6,000 wineries in the US, that represents 100% of US produced wine sales – not just 5% of it. I’m not sure that makes the number of producers an accurate comparison – though it is a point that should be looked at.

    Also, craft beer is already a great “value” versus wine and costs less than wine, ounce to ounce. Does that build in some inherent protection against “undermining pricing” in the “winofication” process?

    Lastly, I would argue that the “style approach” to market is not a key factor in undermining pricing. The markets that I see the lowest pricing in are not markets that are “winofied,” they’re mature craft markets where brands have a strong presence and sheer competition has ultimately pushed pricing lower.

  2. Thanks for the comment, Bob. And a helpful note that I eventually learned myself…when starting a tweet with @, your followers will not see the message.

    Re: wine, I feel that we’re getting a bit into semantics here but my brief research shows that there are mega producers in wine just like there are in beer: (top 30 wine companies make up 90% of the volume). So there are thousands more “small” wineries out there than “small” breweries. Not sure if wine has a definition similar to beer’s “craft” though.

    Re: competition in markets ~ I think it also depends on the region’s economy which I suppose goes without saying…in New York or Boston, you’re going to find higher prices despite there being dozens and dozens of breweries represented on the shelves.

  3. one thing that comes to mind is that all this speculation on growth, shelf space, distribution, availability, and such is based on, within, and around the 3 Tier Distribution system, a system which is out-of-date and already flawed/crippled in regards to handling the craft/artisanal segment’s growth. but instead of looking at and thinking of ways where distribution may be updated and tweaked to nurture and nourish the craft/artisanal segments growth, industry is stuck looking within the limited confines of a system over 70 years old instead of looking within, without, and all around.

  4. Kristyn
    in regards to your remarks about the 3 tier system and how it has flawed/crippled the craft growth!!! I am always amazes me how people who make remarkes about the things that they do not know about and yet probably believe it to be true without thinking. Not sure how you can justify your remarks when all you have to do is look anywhere in the world and see how the 3 tier distribution system works in the US and you would be easily convinced that the only place in the world where there is variety and choice is the USA. Would love to understand your comments better so let’s talk if you would like.
    Jim Schembre at [email protected]
    World Class Beverages a beer wholesaler and proud of it.

  5. Beersage – thanks for the Twitter note. You’re right, of course.

    It does stray into semantics I agree, but I think the entire wine world versus craft beer is an unfair comparison. I am a huge fan of and proponent of craft beer, but I think it’s fair to say that craft beer is still in its infancy. It surely is a relatively small segment of the overall beer industry. I admit to not being knowledgeable on the comparable wine world situation, but I don’t think it’s an “apples to apples” comparison.

    On pricing, I’m not sure that my experience is that larger markets like New York or Boston are higher priced. Bars and restaurants may be higher, but I often see lower pricing for carry out beer in Boston and New York than I see in the Midwest. I think it is often the opposite. As craft is very regionalized it is difficult to do a brand to brand comparison, but I would stand behind the assertion that competition is the key factor in determining pricing, not “winofication” as some suggest.

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  7. In re: to Kristyn’s comment, and Jim Schembre’s reply, I too have a hard time believing in a system where the only way I can get Dogfish Head product is off of a truck owned by Bud, the very company that seemed to delight in suing DH every time they turned around?
    Distribution, via the NBWA, succeeded in making it illegal for me to get beer or wine by way of the internet, or any other way that didn’t put money into the distribution monopoly. So you MIGHT be doing an amazing job making sure the wicked breweries can’t sell to me directly, but it sure doesn’t feel like it when i look at a reach-in beer case or the price tags…

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