3 Reasons I Still Care About the ‘Craft Beer Bubble’

beer bubble craft beer bottle

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

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15 thoughts on “3 Reasons I Still Care About the ‘Craft Beer Bubble’

  1. As far as Cincinnati is concerned we’ve had about 5 new breweries in the past 2 years. 2 of those I consider very stable due to backing from other companies, 1 is a brewpub so I also think it’s not going anywhere. However I’m relatively confident that 1 won’t survive much longer, which is tragic because they make great beer… however it’s not hugely marketable beer and they’ve encountered a number of problems which hurts their tight budget.

    That said I agree we may be in a bubble, but also not one likely to burst just one to slowly deflate.

    • That’s too bad. One of the benefits of the immense brewery growth here in NC has been how well spread out many of the businesses have become. There’s most definitely a market here and customers aren’t a problem, but if they were located within the same 10-mile radius, I’m sure it would be a slightly different story.

  2. In Baltimore almost every brewery around here is putting out solid beer. In fact, some of the newer guys have stronger products than the guys who broke in a little earlier. With that said, with so many breweries popping up I worry about the lack of originality in recipes as much as I worry about the recipes just being bad or uninteresting. Almost every single brewery thinks their flagship beer should be an IPA or something uber hoppy and I really feel that the days hop bombs being the talked about drink of choice are numbered (I already feel like sours are starting to take some of that thunder). We don’t need 3000 versions of the same beer. At least I don’t. I think the craft beer world can sustain big growth but they need to keep up with the new innovations before they start being formulaic and people lose some interest.

    • There’s a brewery in Asheville (Wedge Brewing) that has its own serving area for their “flagship” IPA. Granted, I have only been there once for about an hour, but it was a Saturday night and it didn’t seem like demand was enough for its very own sale spot.

      Either way, I think you’re very right. Everyone and their brother has an IPA and the only way to differentiate is for MORE HOPS! Although, I wonder if there’s a cost issue as well, as buying traditional, American “C” hops would presumably be cheaper than buying a wide variety of hops to play with and experiment to find something novel or unique…

  3. Good points – Jim did a write-up along these lines a week or so ago on Beer & Whisky Brothers focusing the dynamics of the surge of craft breweries in the 90s. He also believes the “glut” of weak products, poor QC, and clueless distributors/retailers back then lead to a mini bubble burst of sorts.

    Not sure if we’re looking at the same dynamic here but it has some similarities. Fortunately, the beer consumers (all of them/us) are much better educated now and one would hope that means that most of the newcommers will brew to standards high enough to maintain some relevance without dragging down the craft beer space as a whole.

    In the end. the majority of successful new craft brewers will be the ones who have passion in the right place (and enough reserves to keep them going long enough to become self-supporting. Look at the really little guys up in Maine – Maine Brewing Company is barely a “company” outside of the legal defenition but they’re turning heads all over the place and growing becuase they really care about the beer and have rockstar brewing talent. If they were only in it for the money they’s probably have been an afterthought long ago.

    Cheers!

    • I didn’t catch that Beer & Whiskey Bros post, but I’ll be sure to check it out now. I’m sure I would’ve included their thoughts in this!

      You raise an excellent point regarding education – which has exponentially grown since the problems of 20 years ago. In my first “beer bubble” post from a few weeks ago I pointed out that one of the best things about this explosion is that hearts are in the right place. People seem to be getting into it because of an honest, genuine love for beer and what they can do with it.

      That’s a great reason to raise a glass!

  4. Hey Bryan, great writing as always. I wrote a post a while back which touched upon this very subject. I believe there will definitely be some fat trimming (closed breweries), but a lot of new brewery founders will be lifestyle entrepreneur types. I personally know a couple brewers/co-owners who don’t have world domination plans and seem content finding a solid, very small market and holding onto it.

    This is definitely true with the brewpub model. I think we’ve all seen that brewpubs work better in a local context, arguably not as well when they try to turn into a national chain. Not naming names. Starting a small beer company with very modest ambitions will be the continued face of craft beer. Lets just hope new start-ups don’t under fund themselves, that could be a real issue.

    One last thing to consider, it is possible that craft beer could chew up more and more of that large pie that is occupied by the big boys, which means there is more room for everyone. 1% of the national beer pie is a $&*#load of room for new small breweries.

    • Very true, Brett. Thanks for adding this to the conversation!

      I think that the idea of people adding “brewery” to their business plan has been a good thing as of late, although I feel that it might be stale in the coming months/years. I hope that those getting involved offer something new and innovative to the craft beer-loving public.

      That said, 1 percent is certainly a lot – and one that AB InBev will certainly (and willingly) take.

  5. What you said makes a lot of sense. Living in a state (MN) where the market is climbing incredibly quickly due to legislation changes and general popular interest, people opening breweries under your third point isn’t yet prevalent. But it makes me wonder when it will be.

    • Thanks for your kind words and adding to the conversation!

      The craft beer boom has certainly been big in certain regions of the country, but as you point out, I don’t know if any particular state can avoid this tidal wave of interest in well-made brew. There are simply so many factors (both in business and politics) that influence other industries that I feel are coming to the forefront in beer. Not to say they haven’t always been there, but it’s easier to spot more than ever.

      Cheers!

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