If you missed it on Friday, I started rambling about the state of craft beer (and this won’t make much sense without reading that part first). With the rise of craft breweries starting to trend as it did in the early 90s, some are wondering whether we are growing too fast.
To continue Friday’s discussion, the topic is more or less how to deal with craft beer growth and the concept of “too many breweries.” Rapid growth creates problems, good problems, but problems nonetheless as you’ll see below.
If you ask the industry heads at some large regional craft breweries like Boston Beer Co. and Magic Hat, they might suggest that distributors handle fewer brands or increase the price on smaller brands. The loser is either going to be the new craft brewery struggling to find placements in the market or the consumer who has to pay more for a six-pack or a bomber. Beer Business Daily recently interviewed Boston Beer Co. CEO, Jim Koch, on this topic (just published on Friday):
“There’s a risk that wholesalers are subsidizing the winification, as Steve Hindy at Brooklyn calls it, of the high end of the
beer business. Some beer drinkers want to behave like the wine drinkers who are always on a journey of discovery and never buy the same wine twice and beer wholesalers can give them that endless variety. Wine distributors work on 35% margins for items like that. Beer wholesalers shouldn’t be subsidizing this behavior at the expense of their lead craft brands.”
And there seems to be just a little animosity toward new craft breweries taking away sales . . .
“[…] I was talking to a wholesaler about the long tail of slow-moving brands that have come into craft beer. But the wholesaler was telling me that he had to bring on all these new brands so that he can find the ‘next Sam Adams.’ I said, ‘There’s probably not going to be a ‘next Sam Adams.’ But you know, here’s how you find the next Sam Adams: double your Sam Adams volume. That’s your next Sam Adams.”
A distributor rep wrote me yesterday and said, “I disagree with Jim- we had to go up on a small Southern California brewery last year because of freight costs – an increase of $2 a case resulted in a drop of over 25% in 6 pack sales.”
It’s worked for a lot of young (and veteran) breweries to ship their beer across the county to big metro beer markets (and smaller ones), but is this a sustainable model as we move into the next decade? Shipping costs, thinning distributor attention, limited shelf space- there are a lot of obstacles that challenge this model in the future. So is there a better model?
Perhaps the answer is “local.” That same distributor rep also said that one of the things he thought that his really state needed was “better support of local beers.” Would your craft beer-drinking constituency agree?
The ultimate ‘local’ model for craft breweries is probably New Glarus which is pushing 90,000 barrels this year with all of those sales in its home state of Wisconsin. When New Glarus started, there were less than 500 craft breweries in the country. Over the next couple years, breweries will be competing with nearly four times that many. Most new breweries starting up will be aiming to spread their beers to multiple states unlike New Glarus. But New Glarus wasn’t always Wisconsin-only either . . . so what happened?
“Deb Carey’s business was facing a huge problem this summer: Its sales were soaring out of sight. Normally, that’s a good thing in the business world. Production expands, bills are paid and profits grow.
But Carey’s business is beer, and her small specialty brewery was having trouble filling orders even while running at maximum production. Hiring another brewery to produce her beer was out of the question, so Carey did something that most small business owners intuitively avoid when sales are flush.
She cut back.
Carey decided to pull her New Glarus Brewing Co. products from Illinois in order to better focus on Wisconsin, sacrificing sales and profits in one of the country’s largest beer markets.
‘It is a tough decision,’ says Carey, president of New Glarus Brewing. ‘But to me, it seems really clear that the strength of the brewery is local support.’
‘We’re not big enough to take care of the business we have in Wisconsin. And that’s important to me,’ Carey says.
As a result, the company’s brands will disappear from liquor stores and other retail outlets in the Chicago area, Rockford and Peoria early in 2003. Carey acknowledges that New Glarus Brewing’s withdrawal may make it difficult to ever return to those markets.”
That was during a soft market in craft beer when growth was in the low single digits. Today, sales volume is exceeding 10%.
I continue this thought in Part III.
[Photo Credit: Justin Kern at http://www.flickr.com/photos/justinwkern/3578052933/]