Yes, The Future of Craft Beer Is In Question. Don't Panic

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The beer industry in America is in flux. Not since the post-prohibition consolidation that led to an industry controlled by just a handful of conglomerates has beer culture in this country been in greater jeopardy. Craft beer has evolved from an underground subculture into a driving force in the beverage industry worth nearly 20 billion dollars. A shift in drinking habits is well underway, and the perception of what beer can be has changed. There are more craft breweries making more beer now than anytime in the last 100 years, but all this success could threaten what the industry’s pioneers built. All the gains that the craft brewers made in market-share and mindshare finally woke the giants of the beer industry, and the giants seem poised to stomp on the little guys. It isn’t too hard to imagine a future where all those gleaming tap handles behind the bar at your favorite watering hole belong to just a handful of international consortiums, while the scrappy craft brewers have been forced back into the peripheral of the industry to once again fight for the crumbs.

If the nightmare future comes to pass, we might look back to the summer of 2015 as the beginning of the end. By September, the number of operating breweries exceeded 4,000, and the pace of new openings was staggering (more than one new brewery every day). Craft wrestled double-digit market share from the macro brewers, as more than 11% of all the beer brewed commercially in the U.S. was made at a craft brewery. But rumbling in California threatened to shake up the industry, and it felt like everything was about to change.

The first stirring of the sleeping giants was in 2011 when Anheuser Busch purchased Chicago’s 22-year-old Goose Island Brewing Co. The acquisition sent a shiver through the craft industry. Nobody was really sure what it meant, but nobody liked the implications. Over the next four years, a few more mergers happened, including AB buying Portland, Oregon’s popular 10 Barrel Brewing, and then the pace of change accelerated. At the beginning of 2015, AB acquired two more breweries: Long Island’s Blue Point and the Pacific Northwest regional favorite Elysian Brewing. The latter acquisition was particularly distressing for craft purists because the brewery was co-founded by one of craft’s most outspoken and respected figures, Dick Cantwell. AB was aggressively expanding their portfolio of craft breweries, and spending a lot of money to do it.

In 2014, AB had formed a new business unit that they called the “Craft and High End Team.” They brought in one of their executives from the Brazilian parent corporation to head up the team, gave him some import brands and the craft portfolio, and told him to grow the market. Felipe Szpigel—the head of AB’s Craft and High End division—lays out the mission for the new division in a recruitment video posted to the “Working at AB InBev” YouTube channel.

“We’re creating like a start up within the company,” the young executive says. “The whole idea is a combination of having an enhanced culture and much more focus on the consumer experience and the beers.” The new taskforce’s mission is to create more demand for premium beer. “The biggest challenge is to grow,” he says, but, “much more important than [growth] is the dream that we have: to elevate the beer category. To get beer into places that you would expect only liquor and wine to be before.”

Szpigel wants to change how people think about beer. It’s the same goal that the craft brewers have been fighting for during the last 30 years. Craft beer culture — the idea that choice and quality and innovation matter more than price and image — has spread throughout the country since the first craft brewers started making weird beers in California’s gold country in the early ‘80s. About one dollar out of every five spent on beer in the US is now spent on craft beer. Many of these new craft beer buyers have converted from macro beers, and once you’ve become accustomed to the variety of flavors that craft beer offers, it’s hard to go back to American light lagers. But much of the new craft customers didn’t drink beer at all before drinking craft beer. They were wine or spirits drinkers who thought that that they didn’t like beer because they didn’t like American light lagers, but once they discovered the vast variety now available to beer drinkers, they became craft fans and never looked back. Craft breweries created this cultural shift organically, largely without advertising and relying on word of mouth, the passion of the producers, and the quality of the product.

The giants of the beer industry know they can’t compete on the merits of their traditional products. The market has changed forever, and to recapture some of what they lost to craft, AB and ilk will turn to the playbook that worked so well for the craft beer industry. They need to offer variety, quality, and brands that consumers can relate to.

So AB continues to acquire craft breweries to add more choices to their portfolio of brands, most recently Golden Road Brewing in Los Angeles. The young brewery opened in 2011 and quickly grew into prominence in a region that had a vastly underdeveloped craft beer industry, and their growth and aggressive expansion was attractive to AB. “The brand fits in [with AB’s portfolio] great,” says AB CEO of Craft Andy Goeler. Goeler was a marketing guy for AB when he helped the Shock Top brand become a successful competitor of Blue Moon (produced by MillerCoors). “There’s so much room for a variety of beers out there.”

When AB bought Goose Island, the backlash from the craft beer industry was a challenge for Goeler. “It was controversial, to say the least,” he deadpans, “It was the first one and Chicago isn’t easy.” But with each new acquisition, things got easier. “It took a while to prove to people that it would work, and that we had all the right intentions.”

Integrity of AB’s intentions aside, there are plenty of opportunities for them to add to their stable, even as craft breweries continue to thrive. The first waves worth of craft brewery founders are aging and beginning to look towards retirement and succession, and now more money is changing hands. “I think we’ve paved the way for other companies in the industry to follow suit,” Goeler says about AB’s success with acquisitions. “Now, there’s less and less consumer pushback.”

The summer of 2015 also saw Saint Archer Brewing, a two year old San Diego craft brand, sell to MillerCoors, and European beer company Duvel-Moortgat add West Coast powerhouse Firestone Walker to their portfolio of American craft partners (that also includes Brewery Ommegang and Boulevard Brewing Co). Perhaps the summer’s biggest shock was when Tony Magee—founder of California’s fan-favorite Lagunitas Brewing, and an outspoken opponent of taking corporate money—announced that he’d sold half his company to Heineken (the world’s third largest beer company after AB InBev and SABMiller). Magee had helped fuel the rise of IPAs in America, and now he wanted to change the taste of the millions of beer drinkers just south of the U.S. border. Magee and Heineken have their sights on the wide-open Latin American market, and Lagunitas is even building a third production brewery to meet the demand.

Image via Lagunitas/Facebook

Goeler knows that the millennial generation will decide the future of beer in the U.S., and these are new drinkers entering a changing marketplace. “Today’s millennial consumer coming into the industry doesn’t have the past history of there being just four [national] brands,” he says. “These kids are used to this landscape of choice and options.” This demographic is a chance for AB to cast off their old image and create new brand loyalties free from the craft vs. crap idea that polarized drinkers. “We knew we had to evolve with the industry,” Goeler says. “I think the [craft vs macro paradigm] has already fallen away; to a lot of consumers, it’s just all beer.”

Why am I so concerned with macro beer competing in the craft beer world? These conglomerations pose a threat to the craft brewing industry as we know it because they have deep pockets and access to economies of scale that craft brewers can’t imagine. They can leverage the supply chain; AB owns both a barley farm and one of the largest hop farms in the country. Everything from the malt that makes a beer to the bottles the beer goes into is cheaper for these corporations. They can push the price of kegs down and make bundled purchases of brands in their portfolio more attractive to bars and restaurants. There’s also access to the preexisting network of wholesalers and distributors that they’ll use to saturate a market. AB alone has spent hundreds of millions of dollars to acquire craft brands, and they’ve built a sales and marketing team that Szpigel says, “thinks different and is nimble, creative, disruptive and very passionate about beer.”

How these new entities and initiatives will affect the craft brewers is unclear, and how the consumers react is even more foggy. “We know there will be more mergers and acquisitions, but we don’t know how that’s going to play with the consumer,” says Tom McCormick, the executive director of the California Craft Brewers Association, adding, “the future is going to look different. It will continue to grow, there’s still a lot of room.” He expects craft beer’s market share to double in the next five years.

That would mean by 2020, craft beer would make up 20% of the beer brewed in the country. It’s an optimistic figure by some estimates, but there are many regional markets around the country where craft beer’s market share is already that large. In Portland Oregon, McCormick says, 45-50% of the money spent on beer is spent on craft beer.

To reach those numbers the craft beer industry needs to find a balance between the large-scale regional and national brands, and the smaller local operations serving a small community, and the neighborhood brewpubs that have helped turn Portland into an icon of American beer culture. While some of the biggest craft brands like Sierra Nevada Brewing and Stone Brewing have become national players, with Sierra Nevada opening an East Coast brewery to supplement their production, and Stone following suit in Virginia (not to mention the ambitious project in Berlin), other large craft brands have had to fund their expansions by exchanging some of the control of their company with outside investment money. There’s been a rush of private equity money into the industry with players like Oskar Blues and even the fiercely independent Dogfish Head selling minority stakes to raise the capital needed to expand their operations.

These private equity firms don’t garner the scorn that acquisitions from the big beer companies do, but they still represent a danger to the craft industry. These investments come with uncertainty, and investment firms are concerned with making money, not making beer. They want the breweries they invest in to grow so that they can make a big return on their investment. “They’ll run you 100 miles per hour, and then they’ll dump you,” Elysian Brewery CEO and co-founder Joseph Bisacca told the Seattle Met when discussing why Elysian sold to AB instead of a private equity investor.

This influx of private equity money “has to change the landscape,” says Allagash Brewing founder Rob Tod. “It’s going to have an impact for sure. But where your money comes from—is one type of money more pure than the other? I’m not one to judge.” Tod founded the Maine brewery in 1996 because he wanted to make a beer that most people had never heard of: Belgian Wit. It took him nearly a decade, but Allagash White is now considered one of the finest examples of the nearly lost style, and Allagash is a respected leader in the craft industry. Tod says the success is due to controlled growth and an emphasis on what he thinks of as the two most important aspects of craft beer’s success: quality and innovation.

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Image via Allagash/Facebook

“Quality needs to be the focus,” Tod says. “There are still a lot of people that haven’t yet discovered the craft category — a lot of people that haven’t come into the fold, and if the first experience they have with a craft beer is not a pleasant one, then it’s awful tough to keep them in that fold.”

When Jack McAuliffe founded New Albion brewery in 1976, it was the first craft brewery in America. McAuliffe had to fight to sell every bottle of pale ale he made. He knew he could only succeed by building a community of drinkers who appreciate quality beer, and he was terrified of making a bad batch. He once apocryphally said, “the reputation of a small brewery is like that of a high school girl. Easily spoiled.” Even at the very dawn of the craft beer industry, he knew that quality and consistency was key to winning over drinkers.

“Seven years ago, I never would have guessed in a million years that the industry would look how it looks now,” Tod says. “Who knows how it will look in five years, but despite what happens we’re going to be just fine as long as we focus on those things that have served us well: quality, innovation and community.”

The future of the beer industry could revert to a market controlled by a handful of giants, but at this point in the rise of craft beer, that seems unlikely. Beer culture has developed too far, and there are too many educated and passionate consumers who demand quality and integrity in their beer. Even if the conglomerations of formerly craft brands use their strength and resources to squeeze the market, it won’t be enough to quash the craft brewers completely. But craft brewers still face an uphill battle, and now that the giants are fighting back, it is going to be even more onerous for craft to capture that next 10% of the market. It’s going to take more innovation and more disruption of the big beer paradigm, and most importantly, it requires an educated consumer who cares about where their beer comes from, who makes it, and where the money is going.

It’s not the beginning of the end for craft beer. Rather, as Bell’s Brewing Founder Larry Bell told Bloomberg for a story called Can Craft Beer Survive AB InBev?: “We are in the middle of the end of the beginning of craft beer.” What’s next is up in the air, but a mature and thriving craft beer industry should be able to withstand the industry giants who are now awake and hungry.

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