Wednesday, August 8, 2012

A Brewery Bubble?

The U.S. now boasts 2,126 breweries—an increase of 350 additional breweries since June 2011. The BA also tracks breweries in planning as an indicator of potential new entrants into the craft category, and lists 1,252 breweries in planning today compared to 725 a year ago. Additionally, the count of craft brewers was at 2,075 as of June 30, 2012 showing that 97 percent of U.S. brewers are craft brewers.

With the latest Brewery Association numbers comes renewed worry that we may be seeing a bubble in brewing.  First, to be a little pedantic about it, in economics a good working definition of a bubble in when prices become detached to the fundamental value of the good in question.  Of course, careful economic students will think about how prices are set in marketplaces and represent the market value of a good - which leads to the first existential question in economics: can bubbles exist.  But leavoing that aside, I understand the usage here: are there now too many breweries than can be sustained long term in the market? [This is a bubble in the sense that the price folks are willing to pay to start a brewery may be too high given the present discounted value of the expected stream of revenues]

In general the market for craft beer is showing stong growth:
Dollar sales were up 14 percent in the first half of 2012, while volume of craft brewed beer sold jumped 12 percent during that same time period.
So the fact that the number of craft breweries is expanding makes sense. However, the overall market for beer is shrinking - something the big brewers are grappling with by getting into more and more flavored malt beverages to try and compete with cocktails and the like.  In other words, the craft beer niche is expanding at the same time the overall beer market is shrinking.  What to make of this?  I actually think it is not contradictory at all.  Whereas before most drinkers would find themselves behind a Bud, new drinkers are looking for more - more flavor, more variety, etc.  Both spirits and craft beer offer this.

Which is all to say that I think craft beer is in a good place and maybe we should think of craft beer in the same way we think about spirits and not lump it in with the macro lager industry.

Which is not to say that there will not be some bloodletting in the craft beer industry.  I imagine that at the rate of new openings we are currently seeing there are probably a number of breweries with inadequate experience, poorly thought out business plans or poos locations.  But brewery closings in these cases are a sign of industry health - creative destruction as economists call it - not a sign of an ailing industry.

Overall, then, I see no reason why the marketplace can't sustain vastly more brewpub models.  I think the pressure will be on production breweries - the economies of scale reality and the limited shelf space in supermarkets make pure production brewing much more cutthroat and I expect that we will soon start seeing some failures in this area even with overall increases in market share.  But again, I think this is healthy - better breweries will survive and lesser ones will not.

The winners in all of this are the punters who will get better beer, more variety and lower prices as a result.


The Oriole Way said...

I think you are right to highlight shelf space as a critical constraint. Not only is there limited square footage within retail establishments, but the profitability of the distributor/brewer relationship is critical for which breweries are allocated that retail space. It would seem to be much more profitable for a distributor to allocate a sizeable share of its shelf space to several "macraftos" like New Belgium, Lagunitas, and Sierra Nevada rather than manage dozens of relationships with smaller brewers. Economies of scale are definitely at work throughout the industry, not just on the brewing side.

Levi said...

One thing I think people forget with this graph is that the US population in 1870 was 38 million. Today we have a population over 300 million. On a brewery per capita basis, we should have ~16,000 breweries in the US to compare to the 1870's. Having 2100 is far from a sign of a bubble in my opinion.

OleFattGuy said...

Thanks Levi for pointing the obvious out! I agree that the population naturally has to be taken into consideration! Another thing that would be interesting is the demographics overall - how many beer drinkers are there today as compared to before? Women have started to drink beer in a much higher degree than back then, is my guess?