The craft beer industry has boomed in the last decade, but as hundreds of new breweries compete to quench our thirst, some analysts think they might soon be filling kegs faster than we can drink them
Beer from microbrewers, brewpubs, and regional producers — lumped together in a category called craft beer — has exploded in popularity over the last few years.
You can do the research yourself: visit your local grocer and ask yourself how many of the craft beers on the shelves you would have recognized two years ago. Even the brewers that have existed for a while have nearly all expanded and varied their production during the recent boom.
The Brewers Association, a trade organization of the US brewing industry, collects formal data to substantiate the subjective evidence:
- craft beer sales have been growing by more than 10 percent each year;
- over one-tenth of US beer revenue was earned by craft brewers for the first time ever in 2012; and
- more than 400 new breweries opened their doors in 2012.
Is this massive surge in craft beer a bubble ready to pop? In my opinion, no. Tasty artisanal brew is here to stay.
Natural carbonation, not a bubble
A bubble is a period of overinvestment in which asset prices are higher than their actual value. Put simply, optimism causes people to invest in anticipation of an unrealistically profitable future.
Some evidence suggests that capital is flowing into the brewing industry in quantities that assume persistent year-over-year market expansion. But there is no reason to believe that current valuations of beer companies exceed their real worth.
I argue that craft beer sales can keep increasing by leaps and bounds in the short run. In the future, growth will gradually level off as the craft market matures.
Yet this slowing of craft’s expansion will not produce a ruinous crash. Relatively few people will feel effects, as risk is not spread throughout the beer industry, much less the entire economy. As IPA exuberance settles into stable growth, the best brewers will emerge stronger while some new entrants fail.
First, let’s look at why some analysts think current investment in craft beer production is not sustainable.
US breweries in operation, 1887-2013.
Source: Brewers Association
Rapidly increasing demand is driving a mass entry into the market. The new breweries of 2012 bring the US total over 2,400 — the most since at least the 1880s, when someone first decided to count them up.
Furthermore, about 1,500 more new breweries are preparing to open in the coming months and years, even as economists and brewers alike speculate that the booming industry may not be able to support such growth, a worry best articulated in a recent piece by Noah Davis of Business Insider.
Davis essentially argues that the market’s supply side is investing in production capacity as if consumption of craft brew will continue to rise at the soaring annual rates of the recent upsurge, even though a larger total market makes slowdown in percentage growth inevitable, since bigger and bigger nominal gains are necessary to maintain the same rate of expansion.1 He foresees possible market collapse rather than natural maturation as competition intensifies, putting pressure on new and established brewers alike.
Two beverages competing to quench thirst
I disagree with this pessimistic perspective. Luckily, the craft revolution does not rely merely on innovations in business and brewing. Popular preferences are shifting away from light adjunct lagers toward flavorful beer, and this trend shows no signs of slowing.
But overall beer sales have not grown nearly as fast as demand for the craft subsector. So the only way craft beer can keep up today’s rate of escalation is to continue stealing 1 or 2 percent of the market away from big beer companies like Anheuser-Busch InBev and MillerCoors, year after year.
Interestingly, research has found that consumers treat craft and mass-produced beers as separate products. A 2011 study by economists at Washington State University uses discrete choice modeling to show that cross-price elasticities between macro lagers and high-end beers are close to zero.
This means that beer drinkers do not consider these two categories close substitutes for one another. So the reallocation of market share toward craft beer can be ascribed with confidence to changing tastes.
Moreover, it doesn’t take radical or rapid transformation of drinking habits to sustain the growth of craft beer, for now at least.
Economist Bart Watson of the Brewers Association proves this point mathematically in a blog post refuting the existence of a craft beer bubble. He shows that if each of 148 million alcohol-consuming Americans drinks just one more craft beer per month, then that equals 2.7 percent more market share for craft. And if we were to each replace one Coors Light or Budweiser with something tastier every week, then craft would immediately take nearly 12 percent of the market away from mass-produced bland beer.
We’ve established that craft beer is considered a distinct drink, and that incremental changes in purchasing patterns can keep the market for craft beer growing. But what evidence do we have that beer buyers will continue to switch to full-flavored brews?
We should start with an understanding of what propels this shift toward craft beer. More generally, what drives decision making for beer drinkers?
For one thing, beer is often consumed within a social group. You might end up drinking your buddy’s favorite smoked porter for no better reason than that he brought a six-pack over to your place.
Herein lies part of the reason for craft beer’s radical rise in popularity: the growth of full-flavored beer is somewhat self-perpetuating. Nobody wants to be the guy who brought a thirty-rack of Keystones to a party at which everyone is drinking organic, microbrewed, seasonal-release ales.
In addition, consumers develop a taste for beer. Few people enjoy their first-ever gulp of keg-cup swill, but many who continue to drink beer grow to love it. New beer drinkers end up preferring the types of beer made available to them as they acquire an appreciation for those styles’ bitterness, complex flavors, and/or refreshing qualities.
Therefore, to make certain that the craft beer craze continues, we must baptize new beer drinkers in rivers of pale ale rather than Natty Ice. And we must introduce our Miller Lite-devotee brethren to varieties that taste a little less like mere barley-flavored water so that they will learn to love beer made with quality ingredients and attentive care.2
Events like beer tastings are gaining popularity as consumers increasingly consider beer an experience good.
The objective is not to create beer snobs who turn up their noses at canned light lagers, but rather beer activists who join an emergent culture of craft champions.
This new generation of beer lovers enjoys fermented malt beverages the way the wine community takes pleasure in mindfully sipping a Napa Valley Syrah and analyzing its subtleties. Like wine connoisseurs, they appreciate local brews of diverse and constantly evolving varieties, made from locally grown grains and hops, consumed in the place of production, which itself is often a destination.
In short, the social aspects of beer choice are important; once craft is cool, the sky is the limit. In 2012, 47 percent of all draft beer consumed in Oregon was Oregon craft beer, according to the Oregon Brewers Guild. If you include craft beer from out-of-state, the portion surely exceeds half.
Keeping brewers busy
But can the permeation of craft beer drinking keep up with the propagation of brewing capacity?
One figure in particular is promising for the craft brewing industry: from 2009 to 2011, output increased from 66 to 78 percent of maximum capacity, even as hundreds of new facilities opened and many more expanded.
Anecdotal evidence suggests that the trend has continued, despite the influx of breweries in 2012. Medium and large craft breweries report trouble keeping pace with swelling demand, and many of the market’s newest entrants are microbreweries with tiny capacities. Currently, very little brewing equipment sits idle.
Supporting the craft
Of course, none of this evidence of an evolving market guarantees that beer drinkers can support 4,000 different beer makers. Much of the growth in sales is met by regional craft brewers getting bigger and bigger.
Even massive brewing conglomerates have managed to profit from the transformation of tastes.
Beer advocates fiercely debate whether faux-microbrews like Blue Moon help or hurt the craft beer movement. Coors advertises the ‘artfully crafted’ ale without ever mentioning the beer’s corporate overlord, despite the company’s massive brand recognition. Illustration: Shelly Bartek
In response to shifting beer preferences, AB Inbev and MillerCoors have developed their own widely distributed ‘artfully crafted’ brands — Shock Top and Blue Moon, respectively. These beers’ labels bear no mention of their corporate overlords, yet each year they keep a portion of the increase in full-flavored beer sales away from the craft segment of the market.
Somewhat paradoxically, though, the fake-craft beers of multinational brewing firms actually enhance medium-run penetration of the craft subsector. Beers like Blue Moon provide an introduction to flavorful suds and create interest in different styles among consumers who may not have otherwise been exposed to craft tastes. Once these beer drinkers move beyond faux-craft brands, they will contribute to craft beer’s swelling market share.
The Brewers Association defines a craft brewer as “small, independent, and traditional.” ‘Independent’ ensures that the brewery isn’t owned or controlled by one of the beverage industry’s mega-corporations, and ‘traditional’ limits the use of adjuncts to flavor enhancement rather than lightening.
The ‘small’ constraint, however, keeps loosening as brewing companies like Sierra Nevada, New Belgium (makers of Fat Tire), and The Boston Beer Company (makers of Sam Adams) brew more beer each year. Right now, a craft brewery must produce 6 million barrels or less, but if a well-known craft producer wants that cap raised, the Brewers Association will likely comply in order to hold on to its most successful members.
So craft brewers that have become major brands also soak up some of the increasing demand for full-flavored beer. How did these artisanal brewing companies become such large producers? Marketing certainly has played a role, but in this new beer culture, quality counts.
Cold-filtering the market
The exponential expansion of options has led craft fans to constantly seek out the newest and best, rather than pledge allegiance to a tried-and-true brand. And these days, the internet can make any round of pints a tasting competition.
As craft brewers run out of shelf space to conquer from cheap beer, they begin to compete with one another for coveted spots in the refrigerated aisle. Source: Delish
Sites like BeerAdvocate provide a forum for discerning consumers to critique beer, as well as a resource for developing more ‘quality controllers.’ Wannabe-beer nerds can use expert reviews to train their palates to detect intricacies like citric hop notes, caramel malt sweetness, and the fruity esters of a Belgian yeast strain.
More discriminating customers and the influx of producers combine to make the brewing sector cutthroat. Supermarket shelves are increasingly crowded; macrobreweries have locally targeted faux-craft brands; and successful craft brewers can take advantage of superior technical knowledge, years of experience, and access to capital. Some new entrants to the flooded craft beer market will inevitably fail.
Yet the intense competition will only improve the collection of tasty options on tap, canned, and in bottles, as long as beer drinkers keep buying the finest beers.
We reward the highest quality brews with no-cost promotion naturally — with or without the internet — thanks to social influences’ aforementioned effect on preferences. Someday growth in the craft market will level off a bit, and we want to make sure that the best brewers succeed.
Not a crash
But when that inescapable day arrives, and the craft beer subsector cannot keep increasing in volume at such a frenetic pace, will a bubble not pop? We all know that irrational exuberance commonly follows overconsumption of brewskis — but we also know all too well about the unwell feeling of the subsequent crash.3
To call this market maturation a bubble entails looming economic devastation thanks to overly optimistic expectations that go unmet. But greedy brokers are not using the money of unsuspecting investors to make bets that craft beer sales will continue to grow more than 10 percent per year.
Quite the reverse, these new breweries are predominantly small private investments, and many are in fact undercapitalized.
Yes, it’s much easier for a start-up beer maker to obtain financial backing than it was a half-decade ago, but obtaining a bank loan to open a microbrewery today remains far more difficult than getting a home loan in 2006. And even if new brewing companies are a risky investment thanks to imminent slowing of market expansion, thankfully no complex financial instruments have put the entire economy on the line, as happened with the housing bubble and, to a lesser extent, the Dot-com boom of last decade.
In summary, if you worry about a craft beer bubble, remember that very few folks’ life savings hang in the balance. For the most part, new microbreweries emerge from homebrew projects, with financing from some combination of personal wealth, bank loans, angel investors, and small private lenders.
More importantly, remember that we control the marketplace. So drink more craft beer, preferably with others. Convene a gathering to conduct ‘research’ and share favorites.