Tuesday, July 26, 2016

Are we about to experience a Craft Beer Bubble?

At the time of writing this, there are over 4,000 breweries operating in the United States, the most in American History and the most from since the pre-prohibition era. From the small brewpub or nano-brewery that serves a local neighborhood, all the way up to behemoth-sized craft breweries like Sam Adams & Yuengling. Many have said this is the Golden Age of Craft Beer here in the United States and I am inclined to agree with them. However, if history has taught us anything, it's that all Golden Ages have to come to an end and there has been increased talk that we are in the midst of an over-saturation of craft breweries here in the United States. Inevitably, there has been much speculation that there will be a craft beer bubble and that we're going to start seeing all sorts of breweries shut down due to too much competition.

So is any of this true? Are we really going to see a significant collapse of our beloved craft beer industry and only be left with a few major craft brewers? To answer this question, we need to understand what a bubble is first.

In economic terms, a bubble is when an industry experiences rapid growth which is immediately followed by a rapid contraction, which is usually caused by a paradigm shift, or in layman's terms, changes in how business is done. In other cases, it's caused by unsustainable businesses models or economic conditions. When most people think of an economic bubble, they think of the Dotcom Bubble that happened in the early 2000's or the housing bubble that happened right at the beginning of the recession back in 2008. The first being caused by the lack of returns from the huge investments made into Dotcom-based companies, while the housing market bubble was caused by the great number of people unable to make payments on their homes due to inclement economic conditions, which was caused by and contributed to the great recession of the late 2000's.

In the past few years, the number of craft brewing entities has more than doubled, a feat which would be unheard of in other industries. Sure enough, this certainly fits the criteria for the first half of the definition of a bubble and that rapid growth will undoubtedly lead many to believe that the stage is being set for a industry bubble. Many people I have talked to are convinced that in the next few years, we're going to see the closure of some breweries.........and I think they're right.  I think we will see the closure of some breweries in the next few years but I don't think it will be a bubble so much as it will be a gradually deflating balloon.

First off, I want to say anyone who is vaguely familiar with economics should know right off the bat that no industry in immune from closures, and that includes craft brewing. If businesses in craft brewing were immune from going out of business, we'd see way more breweries on the market than we already have now. Plus, many craft breweries are small businesses and according to LinkedIn, about 50% of small businesses fail in the first five years they're open. Again, it's very logical to assume that small craft breweries are in that mix.

So now that I'm done painting the future of craft brewing as an economic dystopia, it's time to focus on how that will be beneficial for the craft brewing industry. Even though the industry is not immune to the laws of economics, it is unique in the sense that quality plays a huge role as to whether or not a brewery succeeds or fails. It's no secret that craft beer will often times cost more than a product offered by the likes of AB-InBev but it's also important to consider that taste plays the main role in deciding if loyalty is established.

However, I've been seeing an increasing trend where I will try out offerings from new breweries and they will sometimes taste like either average or good tasting homebrew and it has become increasingly prevalent in recent years. I firmly believe that those breweries with horrible tasting beers will be the majority of those that go out of business. I think that quality will play a role in breweries improving the taste of their beers. When your business depends on how your beer tastes, you're going to want to make sure it's drinkable. If a beer is good, people will drink it and craft beer is no doubt a consumer driven business and the desire for better quality will drive brewers to make better beer. In this case, both the business and the consumer win.

With that said, sometimes being drinkable isn't going to be good enough. Another big driver in craft brewing that is pretty recent is innovation. Meaning either releasing variations of an existing beer in a taproom, releasing a new beer every so often, or going the "Series" route, which involves making one off beers of limited release. The point is that it comes in all shapes or forms. Sadly there are some breweries out there that, for reasons we don't know, just stick to their usual flagship offerings and offer nothing else. Unless if that beer you always make is highly sought after for its flavor (Like Surly Furious, Heady Topper, etc.), people are going to start losing interest in your brewery and move on to others.

Between the issues of quality & innovation, newer start-up breweries are going to want to hit those on the head early on if they want to stay in business. This won't be so much of an issue for well-established breweries who have already established a loyal customer base but even those who are already well-established would be wise to keep up with trends in the industry as well as maintain the quality of beer their customers have expected from them.

So in short, there will be an increasing number of breweries that will be shuttering their doors but I strongly believe it will be due to poor quality or lack of innovation. As for the over-saturation argument, craft brewing accounts for 12% of the brewing industry's sales according to the Brewer's Association so I think there is still a ton of growth potential still to be had. While the harsh reality is that not everyone is going to survive, those who continue to innovate and maintain consistent quality with their beer offerings will have a better chance of becoming a long-lasting player in the craft brewing industry.

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