It is a bright spot in an otherwise stagnant sector. But is the market at ‘peak craft’?
James Watt, co-founder of BrewDog, says he would rather “shoot himself in the head” than sell out to “big beer”. The imagery is extreme but there is no doubting the passion of the craft brewer from Aberdeen, who this year inserted a clause into the company’s rules to prevent a sale to “a monolithic purveyor of bland industrial beer”.
It was a defensive move to ward off the attentions of the big brewers. But holdouts like Mr Watt have become rarer after multinational beer companies — including Anheuser-Busch InBev, Molson Coors and Constellation Brands — have spent billions buying up smaller craft brewers in the US and Europe in recent years.
The attraction is clear: the craft sector’s explosive 8 per cent compound growth over the past five years, according to Plato Logic, the market research group, has come largely at the expense of the big brewers’ mass production offerings like Budweiser and the Miller brands. Private equity has also sought a piece of the action with firms such as LNK Partners buying 15 per cent of Dogfish Head last year and Encore Capital acquiring Full Sail Brewing.
Jean-François van Boxmeer, chief executive of Heineken, last month spelt out the potential for growth in the craft sector. “In the US, the craft market is 12 per cent of volume and more than that of profits …[But] you see it not only in the US and Europe,[craft is] also popping up in big cities in emerging countries like Rio de Janeiro or São Paulo or Mexico City. You see it in Shanghai, you see it everywhere.”
The shift in tastes to local brews particularly in the US and Europe has led to an explosion of microbreweries over the past decade, while at the other end of the industry the large brewers have grown even bigger. The consolidation culminated this month with the completion of AB InBev’s £79bn takeover of SABMiller — the biggest beer deal ever — which highlighted the polarisation in an industry grappling with stagnant growth.
In some ways, the backlash against lager-style, easy-to-drink beers represents a return to a brewing tradition dating back to the 1870s, rather than a break with the past. “Once upon a time, nearly all beer was beer with attitude — hoppy all-malt lagers, ales, wheat beers, Abbey beers, and stouts,” says Trevor Stirling, analyst at Bernstein Research. “Consumer preferences in the US and countries such as the UK, moved towards lighter styles of beer. Over time, tastes evolve and it seems inevitable that consumers would want to differentiate themselves from the mainstream.”
The rapid rise of craft beer has changed the landscape of cities from Chicago to Denver, London and Dublin as microbreweries and tap rooms dominate the streets of hip neighbourhoods. Even dive bars and more conventional taverns can carry a vast range of beers.
The $22bn craft sector represents 21 per cent of the value of the $106bn US beer market, according to the Brewers Association, up from just $8.8bn six years ago. As the craft sector squeezed the bigger brewers’ market share on one side, so did wine and spirits on the other. Muscling in on their smaller brewing rivals, whose beers command higher prices and greater margins, was the obvious place for big beer to shop for growth.
AB InBev has been particularly acquisitive. After buying Chicago’s Goose Island in 2011 it has snapped up another 11 craft brewers in the past two years, ranging from Blue Point in New York to Elysian on the west coast in Seattle, and Camden Town Brewery in the UK. Molson Coors, which following SABMiller’s merger with AB InBev bought SAB’s stake in their MillerCoors venture, has acquired four craft breweries in the past year.
Despite these deals, craft beer still accounts for just 1 per cent of AB InBev’s US volumes. But Goose Island is now the fifth-biggest contributor to the group’s overall volume growth in the US, according to Bernstein Research. Earlier this year, AB InBev chief executive Carlos Brito told investors that despite being one of the leaders in US craft beer “it is one [area] where we are under-represented”.
Selling their souls
Each time a craft brewer is bought out, there is an outpouring of grief and anger on social media from fans for whom craft is not only about taste but about the ethos of small, iconoclast microbrewery Davids against the Goliaths of the beer industry. When Jasper Cuppaidge, founder of Camden Town Brewery, announced the sale of the UK company best known for its Hells lagers, to AB InBev in December, one former fan tweeted: “What’s the going rate for a soul these days?”
Indies go mainstream I
SELECTED AB INBEV ACQUISITIONS: Goose Island Beer Co, Chicago, acquired March 2011; Blue Point Brewing Co, Long Island, New Jersey, February 2014; Elysian Brewing Company, Seattle, January 2015; Breckenridge Brewery, Colorado, December 2015; Camden Town Brewery, London, December 2015; Bosteels, Buggenhout, Belgium, September 2016
It is an attitude BrewDog’s Mr Watt, who on Twitter calls himself a “dystopian puppeton a mission to save the world from bad beer” appreciates. He has been particularly critical of big beer’s cheque book invasion into craft brewing, accusing them of having “bastardised and commoditised beer over the past 50 years”.
He refuses to stock brands brewed by companies bought out by larger corporations at the 44 bars his business owns. Under the ownership of a big multinational, the “beer might be OK for a while, maybe a year but ultimately the beer’s going to go downhill and the brewery becomes a pawn in these big mega-corporation games,” he says.
Larry Bell, founder of Michigan-based Bell’s Brewery, one of the top 10 craft brewers in the US, has also resisted approaches from outside investors. He believes the takeovers — said to be worth close to $2.5bn globally — have sapped the soul of the industry as some breweries become more focused on the top line. The camaraderie among independent brewers also has been eroded, he says.
Some have raised concerns over whether the quality of the beer and ingredients declines once a large company takes over.
Benj Steinman, president of Beer Marketer’s Insights, a trade publication, thinks those fears are overblown. “I don’t think the big guys have screwed with the taste,” he says. “Actually, they’re trying pretty hard. They’re looking to invade the space, so looking to keep [their] craft brewers good at what they’re doing.”
Some craft brewers believe they have found a halfway house where they can retain control but secure investment to boost their export operations. Having previously denounced rivals who sold their companies as “selling all of one’s best friend’s careers, their hearts, the portion of their lives they spent working for you”, Lagunitas’ founder Tony Magee last year sold half the brewer to Heineken for an unconfirmed amount, estimated by analysts at $500m.
Mr Magee wanted to expand his export business and needed a partner with an extensive distribution network. He was also thinking about his brewery’s ownership when he retired, he explained in an extensive blog post. Twelve months on “nothing has changed”, says Karen Hamilton, spokesperson for Lagunitas, adding that it now exports to France, Denmark and Mexico, and will be shipping to Italy and other countries soon.
“We were in overseas markets so we knew what we were up against” when it came to exporting without knowing the language or market, says Ms Hamilton. “We can do things so much faster now.”
After years of strong growth, however, there are signs that the craft beer boom is maturing. Sales growth is slowing and M&A activity is cooling. Mr Bell, who intends to pass his business on to his children, says that at one point he was fielding inquiries from private equity groups twice a week but interest has died down. One analyst says that valuations are reaching a plateau.
Indies go mainstream II
MILLERCOORS ACQUISITIONS: Hop Valley Brewing, Oregon, July 2016; Terrapin Beer Company, Athens, Georgia, August 2016.
CONSTELLATION: Ballast Point, San Diego, November 2015.
ASAHI, Meantime, London (bought by SABMiller in May 2015 and sold to Asahi in October 2016).
HEINEKEN: Lagunitas, California and Chicago (50 per cent bought by Heineken in September 2015).
KIRIN: Brooklyn Brewery, New York (25 per cent bought by Kirin in October 2016)
“We’re reaching peak craft in the US,” says Spiros Malandrakis, senior alcoholic drinks analyst at Euromonitor. “High double-digit rates of growth cannot be sustained forever.”
Sales of craft beer grew by 18 per cent in the US in both 2013 and 2014; this slowed to 13 per cent last year and there has been a further drop to 8 per cent this year, according to the Brewers’ Association. There has also been a slowdown in the number of breweries opening. This year, Ibisworld, the research group, expects the total figure for the US to reach 4,114, a 6 per cent increase from 2015, which saw a 26.5 per cent increase. That compares with 1,512 establishments a decade ago.
There are several reasons for the slowdown in craft beer. As the base gets bigger, a slower but more sustainable level of growth is inevitable, analysts say.
The Brewers Association’s definition of craft beer will also have a short-term impact on the sales data as it disqualifies any group that is more than 25 per cent owned by a larger corporation from the category. That criteria has removed a number of the recent acquisitions from the sector.
Some US markets may also be reaching saturation point. While craft beer only accounts for 12.2 per cent of the US beer market in volume terms, in certain cities, such as San Francisco or in areas of the Pacific Northwest, it has won as much as half of the entire market, according to Lagunitas.
Craft brewers are also competing with other alcoholic drinks, such as bourbons and whiskies, that have equally compelling stories of local production and authenticity that attract drinkers. With per capita consumption of alcohol growing at very low levels and craft beer prices often relatively high, competition to win consumers is intense.
Analysts expect craft beer sales to continue growing but at a more sustainable pace. However, says Euromonitor’s Mr Malandrakis, there will be casualties: “I expect slowly to start seeing many of them falling by the wayside. And I do expect that in the next couple of years, there will be loads of bargain stills and fermentation banks available on the second-hand market.”
Many analysts, though, believe that even if the US industry has reached peak craft in the US, the brewers remain attractive targets for the multinationals. Consolidation between craft brewers — something that has already begun — is also expected to pick up pace.
Bart Watson, chief economist at the Brewers’ Association, believes tie-ups between craft producers will provide a noble exit for founders who do not want to sell out to the large brewers.
“We certainly have seen craft companies banding together,” he says, “forming partnerships, either through private equity or on their own to get scale purchasing.”
That consolidation, say analysts, will leave the industry facing an existential dilemma. “If it becomes too big, then it is not craft any more,” says Euromonitor’s Mr Malandrakis, “that is the paradox at the core of the craft proposition.”