By Anthony St. Clair
For the Oregon Beer Growler
Buyouts. Closures. Startups. The roller coaster of Oregon’s brewing industry has seen more twists and turns than ever lately. As we start 2018, it’s time to take a good hard look at what this year and the next few might look like for craft beer in this state. And there’s no better person to talk with than Patrick Emerson. The Oregon State University economist also produces and co-hosts the “Beervana” podcast with Jeff Alworth, and his research focuses on development, labor economics, industrial organization and applied microeconomics. He offered his thoughts on where the industry is going — and whether or not there’s cause for alarm.
What is your outlook for 2018 through 2020, especially for Oregon’s craft beer industry?
The future is still very bright, but markets are now maturing — particularly Oregon — and in these markets competition is increasing and the pressure that this creates is starting to result in exits from the market. I expect this dynamic to increase in the next few years. There are still a lot of new breweries opening up, but not all will be successful and some more established breweries will exit as well. A good example is The Commons Brewery in Portland, an established brewery with an excellent reputation recently called it quits.
Why are new Oregon craft breweries growing more than more established ones?
In most industries, smaller businesses tend to have faster growth than bigger, more established ones. In craft beer there is definitely a novelty effect where new breweries have a certain buzz, which helps propel sales and growth. What we are seeing more and more nationally is the larger legacy craft brewers like Sierra Nevada, Widmer and Boston Beer Company are finding it harder to sustain sales, let alone continue to grow as they face intense local competition from newer brewers. The old model of growing through the focus on a flagship beer is starting to fade as the industry becomes more and more fad-driven.
What is driving craft beer’s current growth?
Innovation and novelty is a big part, but the artisanal nature of craft beer plays a big role, too. Consumers want some kind of personal connection to the beer. They want to know about who makes it, are proud of local beer and are interested in new and unique experiences. Macro brewers cannot offer any of that.
What does the merger-and-acquisition trend of the past few years portend?
The hurricane has subsided as the overall growth has slowed a little and as the macro brewers have grown fairly large portfolios of regional craft breweries. There is less of an incentive for venture capital and less of a need for companies like AB InBev to find more breweries to acquire.
How much do people care about who owns a brewery?
It has less to do with ownership and more to do with beer. Yes, there is a small percentage of consumers who really care a lot (and know enough about the industry to know who owns whom), but I don’t think this is very significant. More significant is great beer at a good price. If breweries with large corporate owners can maintain quality while leveraging the scale and distribution that corporate ownership can provide to keep prices low, I think the consumers will be there.
Are we reaching a point where there will be a brewery shakeout? What factors do you think will cause craft breweries to close up shop in the next couple of years?
I would not characterize it as a shakeout, but there will be a lot more breweries going out of business simply due to the maturation of the market. The breweries that are more likely to close are those with inconsistent quality, poor business acumen, are overly leveraged and/or fail to gain traction with their brand. All pretty standard factors, but the window for really gaining traction with a brand is becoming smaller and smaller as so many brands proliferate. It is going to become more and more important that brewers do the job of telling their stories and helping consumers connect with their brands.
How is increased shelf space competition forcing breweries to rethink distribution?
When there is a distributor in the middle, many breweries are relying on these folks to tell their stories and try to get shelf space and tap handles. But distributors represent many brands now. Breweries are really going to need to do more personal outreach to retailers and pubs. Distribution is tricky, but many breweries are doing self-distribution for this reason.
Should Oregon expect to see more growth in urban markets, such as Portland or Eugene/Springfield, or are we going to see more breweries opening in rural areas and small towns?
We will see both. Smaller towns have relatively untapped markets (pun intended). Bigger cities have established markets and are exciting places for brewers to be — not to mention all of the brewers currently getting on-the-job training whose dream is to have their own brewery someday.
How much attention will Oregon craft breweries give international markets?
This will continue to be a very minor market for most craft brewers, especially as transport costs are high and local craft beer is growing in those markets as well.
Is the industry healthy, and how should breweries steer the ship?
People should not view brewery closings as a sign of a market in trouble, but the sign that the market has matured. This is good for consumers: it will result in higher average quality and consistency and lower prices. For breweries, however, the market is going to demand a high degree of discipline: good and consistent beer, good brand management, good business acumen and tighter margins.
At the 2015 Craft Brewers Conference, stainless steel was the order of the day for brewing tanks, bottling machines and tap systems that were on display at the trade expo. Exhibitors came from the United States, Germany, Canada, Chile, China, Italy, the Czech Republic, France, Belgium, the United Kingdom, Denmark and Spain. Photo by Patty Mamula
By Patty Mamula
For the Oregon Beer Growler
If the size of and attendance at the 32nd annual Craft Brewers Conference indicate the health of the industry, it’s thriving. The largest-ever event drew more than 11,000 brewing professionals and 600 exhibitors to Beervana in April for discussion, education, off-site events and tours.
Craft brewing continues its impressive surge. Benj Steinman, president of Beer Marketer’s INSIGHTS, said that 2014 was the fifth straight year of double-digit growth.
Craft breweries opened at a rate of 1.7 per day -- 615 for the year — with 2,051 breweries in planning stages, according to Bart Watson, chief economist for the Brewers Association. He and Paul Gatza, the association’s director, presented an optimistic outlook at the opening session.
Total sales of craft beer were at 22.2 million barrels last year. Growth of 18 percent from the previous year continues to build as does pricing, which increased 3 percent. In fact, last year was the first where case sales increased by more than $1.
To further segment the market, brewpubs are leading the growth at 20 percent with incredible diversity in the brewpub model.
Steinman in his seminar “Halfway Home? Craft Continues Climbing, but Ascent Gets Complicated” said the hottest trend in craft right now is hyper local.
As examples he mentioned GoodLife Brewing Company and Worthy Brewing Company in Bend.
There are marked regional differences across the country, with Portland being the most developed (craft is nearly half of the market here), San Diego being the hottest (craft gained five shares for a total of 30 market shares) and Florida coming in as the most underdeveloped.
The consumers’ love affair with IPA continues. Half of craft growth was IPA and 20 of the top 50 brands are IPAs.
Storm clouds are brewing. Steinman noted that the first big shifts in the craft industry happened last year with several deals and acquisitions. “Growth is still turning the industry upside down. Big brewers and big money see this,” he said.
He counted 12 deals in the past 15 months with Anheuser-Busch InBev buying up Seattle-based Elysian Brewing Company, Blue Point Brewing Company out of Patchogue, N.Y. and, of course, Oregon’s own 10 Barrel Brewing. Steinman projected himself inside the mind of A-B InBev, a $47 billion dollar company, and figured their logic was pretty simple — something along the lines of, “if you can’t beat ‘em, buy them” or even more transparent, “drop the price.”
Private equity groups accounted for six of the deals over the past year with several notable breweries selling part of their company -- Founders Brewing Co., Sweetwater Brewing Company, Oskar Blues Brewery and Southern Tier Brewing Company.
“Many crafts are starting to make real money. They can project future earning streams. They might potentially even go public. Craft is cool and investors see this and the prospect of outsized returns,” he said.
“Eventually, this could change the meaning of craft,” Steinman said.
He feels big brewers and big money are a disruptive force in the craft segment and wonders if the “soul of craft” is starting to erode.
Other concerns, said Watson, are overexpansion with the consequent issue of keeping beer in stock and distribution problems with more reports of wholesale difficulties. The U.S. Food and Drug Administration created a fuss over spent grain last year that fizzled out and mostly went away, but the big issue now is menu labeling, which is required for all chain restaurants with 20 or more outlets. The concern is that small breweries will be responsible for providing the required nutritional components of their beers.
Long-term environmental conditions, like climate change and water availability, are a concern for brewers and all food producers. “The movement of hop breeding from public to private” is another red flag, said Watson.
Although Gatza said craft brewers are the “belle of the ball” with state legislators, Steinman cautioned that craft brewers still don’t rule politics, especially not the feds, and he does not think the Small BREW Act, which seeks to reduce the federal excise tax rate on the first 60,000 barrels by 50 percent, is likely to pass.
Still, craft is well on its way to putting up another year of strong double-digit growth.
Steinman proposed a couple of things to watch. First, it’s possible that those who sell a share to private equity could, because of the infusion of cash, do even better. Second, there’s also a chance the small, independent craft brewer retains an image advantage.
Watson noted some promising trends, including an overall growth of off-premise sales at places like sporting events, growing production of sessionable beers, convenience stores starting to figure out craft and a prevailing emphasis on quality.
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