I’ve mentioned before some general hesitancy about the reality of a craft beer bubble. There was some great conversation that stemmed from my original post and it’s something I’ve continued to think about, especially in the wake of Craft Brewers Conference and feelings of cautious optimism that seemed to come from that.
So while we can still easily ride the wave of craft beer popularity and all the good things that come with it, here are three things that have caught my eye that should at least keep the beer bubble from floating off our radar…
1. It’s still a business
Something to consider is the influx of beer on the market and what that would do to sale prices. In a simplistic “supply and demand” way, it’s an issue of excess capacity. As craft beer interest has swollen, so too have the number of breweries (and the size) to keep up with demand. That, however, costs money.
So as breweries expand to keep up the pace of demand industry-wide, how will that demand impact individual breweries? Especially when:
In 2012, 409 breweries opened, the most since the period right after Prohibition, bringing the total number of operating craft breweries to 2,347. There are 1,254 more breweries in planning, maybe even more, because as Gatza noted, “It’s really hard to keep track of.”
If breweries want to grow in order to supply more beer for the demand, yet more beer (and breweries) enter the market, that presumably leads to stable prices. Good for the consumer, perhaps not so good for business margins? I suppose it would be necessary for brewers to raise prices or really start selling more product in this instance.
… and that’s not even getting into the time/cost comparisons for something like barrel aging, which certainly is growing in popularity.
2. Taxation on fermentation
Then there’s the issue of taxation, which has seemed to pick up steam in recent weeks with discussion of the Small BREW Act, which seeks to lower federal taxes for smaller brewers:
… on their first 60,000 barrels of beer by 50 percent (from $7 to $3.50 per barrel). For every barrel over 60,000 and up to 2 million, a new rate of $16 per barrel would be imposed, as opposed to the rate of $18 per barrel that currently applies even to breweries that produce over 100 million barrels. To qualify for the reduced and new tax rates, a brewery could not produce greater than 6 million barrels per year.
Why is this a problem? Because Big Beer is trying to push it’s own legislation – the BEER Act – that would lower taxes on ALL brewers, including craft beer lovers’ favorite scourges AB InBev and SABMiller.
Of course, none of that includes the disparity of the Small BREW Act itself, which would bestow half its annual federal tax savings to the top 30 craft breweries in the country out of 2,400+, as defined by the Brewers Association.
It hasn’t been made entirely clear if either bill would pass – tax breaks are a bit harder to come by these sequestered days – but the point of this tit-for-tat is clear: Big Beer wants tax breaks to lower their overall costs (who doesn’t?), which could increase profits, which will free up money to spend elsewhere, like TV ads or “crafty” products (Campfire Wheat, anyone?) or buying craft breweries.
3. It used to be about the money, now it’s a matter of whether brewers have money
The above title is paraphrased from an astute comment by DigBoston‘s Heather Vandenengel during a recent episode of Seacoast Beverage Lab. Heather had recently returned from the annual Craft Brewers Conference and said that while things are going very well in Suds City, there’s still a lot of hesitancy and caution as more breweries open. There are a lot of dedicated, beer-loving people getting into the industry these days, but do they fully understand the financial risks of it all?
“Make sure you know what you’re doing before you get into this because what you do affects everyone,” she said.
… and she’s right. More from Heather:
Forty-six breweries also closed last year and there might be many more than that this year.
“It wouldn’t surprise me if we saw this number really start to climb,” Gatza said, which could be due to small breweries that weren’t able to turn a profit and support themselves after several years of operation.
It’s OK to call craft beer what it is right now. It’s kind of sexy. People love it (yay!) and sales are obviously strong. But what about all those people who decided to go pro because … well … they simply could?
What that might create:
Harry Schuhmacher, editor and publisher of Beer Business Daily, agrees with Brewers Association projections that craft brews could claim 10% of the beer market by 2017, but he cautions against an “irrational exuberance” that “brings non-brewers into the industry.”
“We could end up like we did in the late ’90s, with bad batches of beer out there, without regard for freshness or quality,” he says. “If that happens, history shows us it dampens the whole category.”
If banks make it easier for people to get into the business because of these great sales we see from the Brewers Association, that doesn’t necessarily mean everyone has a strong portfolio of beers to sell or business acumen to make it work.
What might it mean?
As I’ve noted before, I don’t think the “bubble” here means a huge crash, but I think it does mean a drop off. Shuttering breweries seems like an inevitable concept, either because of poor sales, poor product or advancement from larger breweries/corporations.
It’s clear by now that the U.S. craft beer scene has plenty of room for innovation and experimentation, but that doesn’t necessarily mean anyone and their mom can get into the business.
Do any of these recent discussions resonate with you?
+Bryan Roth
“Don’t drink to get drunk. Drink to enjoy life.” — Jack Kerouac
