An American Phenomenon—A Trend Situation that was Never Expected to Survive
T. Pearse Lyons
CONTENTS
22.2 Who are the Craft Brewers?
22.3 What are the Challenges Now Facing Craft Brewers?
22.4 The Beer Industry versus the Craft Industry
22.5 Who are the Big Craft Brewers and Where Did They Come From?
22.6 Is this Phenomenon Occurring Only in the United States?
22.7 What Craft Styles are the Most Popular?
22.8 An Example From Within Our Own Company
22.9 Opportunities in the Overall Craft Market
22.1 INTRODUCTION
When we think of craft brewing, we go back to the early days in Great Britain with CAMRA and the campaign for real ale. There is the image of “off-centered people (eccentric)” who emerged from the home brewer’s segment. These were people who we never expected to take the chance of brewing for a bigger audience! Were these the people that we would expect to succeed? They were the people who would invite you to their house once they heard that you had a background in brewing, and they would ask you to taste their beer. It was often brewed in bathtubs, could be chilled or not chilled, filtered or not filtered. It was often hazy, loaded with hops, and for the most part, it was undrinkable!
The smaller brewers were looked down upon by the big brewers, who by the 1970s had eliminated all the small breweries, including the Erie Brewing Company in Pennsylvania. The three or four breweries left in Philadelphia were taken down or reduced in size, such as Iron City Brewing, and the list over all the United States was endless. These were conventional small brewers, and they could not compete with the advertising dollars available to Anheuser-Busch, Miller, Coors, Stroh, Schlitz, and Pabst.
We now move to 2017 and remember the demise of the independent brewers, Pabst (founded 1844), Schlitz (founded 1849), Stroh (founded 1850), and the Heileman Brewing Company (founded 1858). They are virtually all gone! The other big brewers Molson, Miller, Coors, Labatt’s, and Anheuser-Busch all expanded, and there are now fewer and fewer of them! However, even with the large brewers, the mergers have continued, culminating with the Anheuser Busch InBev/SABMiller mega-brewery formation (details in Chapter 1). This new combined company now controls 31% of the global beer market. Yet, despite all of this, the so-called craft brewers have continued to grow in number since 1973 (Table 22.1).1
Table 22.1 Change in the Number of U.S. Breweries from 1873 to 2016
Year |
Number of Breweries |
|---|---|
1873 |
4,131 |
1973 |
122 |
1979 |
90 |
1989 |
247 |
1993 |
466 |
1999 |
1,564 |
2005 |
1,447 |
2009 |
1,653 |
2010 |
1,813 |
2011 |
2,033 |
2012 |
2,456 |
2013 |
2,917 |
2014 |
3,722 |
2015 |
4,269 |
2016 |
5,005 |
Source: Brewers Association, Statistics—Number of breweries. Historical U.S. brewery count, 2017, https://www.brewersassociation.org/statistics/number-of-breweries/
What is behind this phenomenon? Why are the big brewers of this world adopting this philosophy? Part of the answer is: “If you can’t beat ’em, join ’em.” At a recent brewing convention, Jim Koch, the founder of the Boston Beer Company, was asked where he thought craft brewing would be in 5 to 10 years. He quickly responded that there will be three types of craft brewers:
Jim Koch saw this as the landscape of the future, and he may well be correct in his predictions.
However, it does not explain why there are now more than 5,000 craft breweries operating in the United States, an increase of more than 3,000 from the year 2010, with more than 2,000 more breweries in the planning stages. The beer volumes produced by this category in 2015, as well as the number of breweries in each category, are shown in Table 22.2.2–4
Table 22.2 U.S. Craft Beer Production—Volumes by Category and Number of Breweries in 2015
Category |
Percentage of Beer Volume |
Number of Breweries |
|---|---|---|
Regional brewery |
77.8 |
178 |
Microbrewery |
16.0 |
2,397 |
Brew pubs |
5.2 |
1,650 |
Contract/other |
1.0 |
44 |
Source: Sundale Report, State of the Industry: Craft Beer in the U.S., 2016, http://sundaleresearch.com/foods-and-beverages/state-of-the-industry-craft-beer-in-the-u-s/; Beer Canada, Industry Trends, 2016, https://industry.beercanada.com/statistics Brewers Association, Statistics—Insights and Analysis, 2017, https://www.brewersassociation.org/
In 2015, the craft beer market in the United States accounted for 13% of the total U.S. market. What has happened to stimulate this growth?
When we think of craft beer, we should think of a world of taste, curiosity, and a bored and confused customer. The customers were bored (and still are) with big beer, produced by the big brewers, and with binge drinking. Yet they enjoyed the taste of beer and were looking for new and unique products, especially the millennials (that part of the population born between the 1980s and 2000). Millennials are constantly communicating with each other when they come across a new beer. They share the new product experience with their friends on their Facebook, Twitter, Snapchat, Instagram, Pinterest, and other social media platforms. Millennials as a population group total around 70 million in the United States, and in 2016, this generation reached the legal drinking age of 21 years. They are a key market for craft beer products as they are willing to spend money for premium products and for the characteristics that appeal to this particular demographic (such as local, organic, seasonal, unique) that can be produced by the craft industry much easier than by the mega-brewers.
22.2 WHO ARE THE CRAFT BREWERS?
Many craft brewers aspired to open a business of their own. As Steve Jobs, of Apple, said “Sell dreams, not products.” They felt that customers wanted to go to places that had a pub feel, and they knew that the customers were not particularly loyal to a brand. Rather, they were loyal to craft. They came to these pubs to be entertained, engaged, and to meet their friends.
However, it is not always about giving people what they want. Indeed, as Henry Ford once said, “If I had asked people what they wanted, they would have said faster horses.” No, it was about creating something different, thinking in a new way, and doing things differently.
22.3 WHAT ARE THE CHALLENGES NOW FACING CRAFT BREWERS?
The challenges start with poor quality beer, which can destroy a craft brewer if they are not careful. Education becomes crucial—on how to brew beer, the process, what quality controls and checks to perform, and how to give your beer shipability, traceability, durability, and most of all drinkability! The emergence in numerous U.S. states of many local brewing courses, which are local for the brewer (e.g., Western Kentucky University with which Alltech has partnered), now offer an education that was previously only available at locations such as Heriot-Watt University in Scotland, the University of California (Davis), and Weihenstephan and the VLB in Germany. People can complete a degree in brewing (including learning how to set up a brewery) from process, quality, safety and financial aspects, and brewers can study for a master’s or doctorate.
These types of programs, similar to those in Europe, are now being established at universities throughout the United States, offering the opportunity to learn the art and science of brewing locally. This is some of the reason for the increase in quality, but it does not necessarily explain the increase in consumer interest in craft beer production that has occurred and why it happened.
22.4 THE BEER INDUSTRY VERSUS THE CRAFT INDUSTRY
The U.S. brewing industry’s overall production from 2009 to 2015 was relatively flat. In 2009, there were 213 million barrels of beer brewed; by 2015, that figure was 223 million barrels. (Note that one U.S. barrel is 31 U.S. gallons/26 Imperial gallons/117 l.) However, of those 213 million overall barrels brewed by the industry, the craft brewing industry’s portion of that number grew from 8 million in 2009 to 24 million barrels in 2015. Although the entire U.S. market only grew by 0.2% in 2015, the craft beer market, according the Brewers Association,3 grew by more than 12% in 2015. The overall beer market in the United States is valued at US$105.9 billion, and the craft portion of that is US$22.3 billion, a 16% sales dollar growth. Indeed, it is predicted that the industry is on its way to accounting for US$31 billion in revenue by 2020. From 2015 to 2020, dollar sales are expected to increase by an average of 12.1% per year and volume sales by an average of 9.7% per year.4–6
In Canada, craft beer sales account for over 10 % of the Canadian beer market and over 80% of Canadian breweries are craft.7
22.5 WHO ARE THE BIG CRAFT BREWERS AND WHERE DID THEY COME FROM?
Tables 22.3 and 22.45–9 present an overview of sales volumes of the top 12 U.S. brewers using two categories. The sales data in Table 22.3 used the Brewers Association definition of what constitutes a craft brewer in 2015 (a controversial definition that has been subject to change over the years).
Table 22.3 The Top 12 Craft Brewing Companies Ranked by Sales Volume (Pro-Rated) in 2015
Rank |
Company |
City |
State |
|---|---|---|---|
1 |
D. G. Yuengling and Son, Inc. |
Pottsville |
PA |
2 |
Boston Beer Co. |
Boston |
MA |
3 |
Sierra Nevada Brewing Co. |
Chico |
CA |
4 |
New Belgium Brewing Co. |
Fort Collins |
CO |
5 |
Gambrinus |
San Antonio |
TX |
6 |
Lagunitas Brewing Co. |
Petaluma |
CA |
7 |
Bell’s Brewery, Inc. |
Comstock |
MI |
8 |
Deschutes Brewery |
Bend |
OR |
9 |
Minhas Craft Brewery |
Monroe |
WI |
10 |
Stone Brewing Co. |
Escondido |
CA |
11 |
Ballast Point Brewing & Spirits |
San Diego |
CA |
12 |
Brooklyn Brewery |
Brooklyn |
NY |
Sources: Kell, J., What You Didn’t Know About the Boom in Craft Beer, Fortune/Retail, 2016, http://fortune.com/2016/03/22/craft-beer-sales-rise-2015/; Statista, Dossier—Craft Beer in the US, 2016, https://www.statista.com/study/20232/craft-beer-in-the-us-statista-dossier/; Noote, J., These 11 Brewers Make Over 90% of all U.S. Beer, Marketwatch, 2015, http://www.marketwatch.com/story/these-11-brewers-make-over-90-of-all-us-beer-2015-07-27; Beer Canada, Industry Trends, 2016, https://industry.beercanada.com/statistics; Brewers Association, Brewers Association Lists Top 50 Breweries of 2015, Brewers Association Press, Boulder, CO, 2016; Grand View Research, Organic Food & Beverage Market Size Worth $320.5 Billion By 2025, 2017, http://www.grandviewresearch.com/industry-analysis/organic-foods-beveragesmarket
Table 22.4 The Top 12 US Overall Brewing Companies Ranked by Sales Volume in 2015
Rank |
Company |
City |
State |
|---|---|---|---|
1 |
Anheuser-Busch, InBev, Inc. |
Saint Louis |
MO |
2 |
MillerCoors |
Chicago |
IL |
3 |
Pabst Brewing Co. |
Los Angeles |
CA |
4 |
D. G. Yuengling and Son, Inc. |
Pottsville |
PA |
5 |
Boston Beer Co. |
Boston |
MA |
6 |
North American Breweries |
Rochester |
NY |
7 |
Sierra Nevada Brewing Co. |
Chico |
CA |
8 |
New Belgium Brewing Co. |
Fort Collins |
CO |
9 |
Craft Brew Alliance |
Portland |
OR |
10 |
Lagunitas Brewing Co. |
Petaluma |
CA |
11 |
Gambrinus |
San Antonio |
TX |
12 |
Bell’s Brewery, Inc. |
Comstock |
MI |
Sources: Brewers Association, Brewers Association Lists Top 50 Breweries of 2015, Brewers Association Press, Boulder, CO, 2016; Grand View Research, Organic Food & Beverage Market Size Worth $320.5 Billion By 2025, 2017, http://www.grandviewresearch.com/industry-analysis/organic-foods-beveragesmarket
The Boston Beer Company (Samuel Adams) is one the largest craft brewers, and they experienced an 11% increase in sales from 2009 to 2014. Sierra Nevada Brewing had a sales increase of 8.6%, New Belgium Brewing a 19% increase, and the Craft Brew Alliance a 9% increase. Ironically, the Craft Brew Alliance is one the “big guys.” It was Anheuser-Busch InBev who put together a group of craft breweries, including Red Hook, Widmer, Omission, and Kona. By quietly working behind the scenes, they have joined the craft brewing industry.
Looking at the next 30 brewers, in terms of production numbers, is even more enlightening! The growth that they have enjoyed has been even more spectacular. On average, the top 30 craft brewers grew by 72% in 2009, and this represented 11.2 million barrels of beer. The rest represented 7.8 million barrels, and they have increased 170% since 2009.
Clearly, something has been happening. In recent years, there have been staggering prices paid for some of these breweries. The Lagunitas Brewing Company (founded in 1993 in California) had one of the fastest-growing beer brands in the world, with a barrel capacity of just over 100,000 in 2010. Heineken purchased a 50% stake in 2015 for an estimated company value US$1 billion. According to the company, its compound annual growth rate in revenue from 2012 to 2014 was 58%, and it sold more than 800,000 barrels in 2015.
The Dogfish Head Brewery, which today produces 250,000 barrels of beer in Milton, Delaware, was founded by Sam Calagione in 1995, and it invited an investor to join them for a purchase price of 15% of the company’s value. Although the price has not been disclosed, it was surely a multiple of earnings!
The Ballast Point Brewing & Spirits Company, which opened in 1996 in San Diego, was expected to brew 290,000 barrels in 2015. It was bought by the Constellation Group for US$1 billion that same year. Ballast Point, with their premium beers, had averaged an 80% annual growth over the previous two years.
22.6 IS THIS PHENOMENON OCCURRING ONLY IN THE UNITED STATES?
No, it is not. For the past seven years, the craft beer industry in the United Kingdom has continued its explosive growth. The total number of craft breweries in the United Kingdom rose by 8% in the past year to more than 1,700, the highest number since the 1930s.
What is happening? Why and what can they hope to gain in return? It is clear that craft beer is the growth engine of the beer industry. Why? The answer is quite simple: It is about taste, the savoring of a beer, being different, and not having to worry about producing a lower beer volume. The values of the breweries are remarkably similar as discussed in the following.
The Sierra Nevada Brewery in Chico, California, has recently been producing in excess of one million barrels of beer. Comparing this to their values, they say that they have respect for the artisan way of living, innovation in old and new ways, passion for the simple pleasure of drinking beer, and consistency that keeps the customer coming back. Their founder, Rob Burton, said, “The most important draw of Sierra Nevada will be quality.”
The New Belgium Brewery, founded in Fort Collins, Colorado, reflected on the same opportunity. Their values are very similar. Their objective was to produce something that was made from a wide variety of raw materials and not just the German Purity Law way. Indeed, the name said it all: New Belgium. Under the German Beer Purity Law, the Reinheitsgebot, a beer could only be made from four ingredients: malt, hops, yeast, and water (details in Chapter 1). Be that as it may, it is selling beer that is important. New Belgium sold in excess of 900,000 barrels in 2015 and then built a second brewery in Asheville, North Carolina. Sales have increased by 19%. What are their values? They say “to follow your folly, have fun, but at the same time still bring quality and consistency.”
The Dogfish Head Brewery, which now produces 250,000 barrels of beer annually, has sales that are up 11%. The founder, Sam Calagione, said that their objectives are to produce “Off-centered beer for off-centered people.” The key is that the beers they produce always have quality and consistency. At the same time, the craft brewers want their consumers to have as much passion about their beer(s) as they have!
The “granddaddy” of all U.S. craft brewers, the Boston Beer Company, was founded in Boston in 1984. They produced more than 2.5 million barrels of core products in 2015. This company has similar ambitions. Their founder, Jim Koch, states “to take pride in your beer, have good corporate governance, be rooted in patriotism and, at the same time, have quality and consistency.” The Boston Beer Company differed a little from the traditional craft brewers, who tend to have a lot of emphasis on hops. They promoted a lager, not an ale. In some cases, they “farmed out” production—but never their quality. This company also became a public enterprise in 1995. The stock at the original public offering was US$15 a share; it now trades for more than US$200 a share.
22.7 WHAT CRAFT STYLES ARE THE MOST POPULAR?
The top three craft beer styles in 2015 were Seasonals, Indian Pale Ales (IPA), and Pale Ales. In 2016, IPA surpassed Seasonals as the top selling craft beer. After the top three in sales, one finds—in order of popularity in North America—Variety Packs, American Ales, American Lagers, and Wheat beers. Limited Edition beers are becoming popular as they can be marketed with “mystique and intrigue.”
From our company’s (Alltech’s) experience, when we first brewed a Seasonal, we did it at the time of Thanksgiving in the United States. Although the beer had to be brewed and available far before that time, we were astonished that it sold out so quickly within a two- to three-week period; but thereafter, the demand disappeared. However, the demand for the most popular category, IPA beers, is not seasonal.
22.8 AN EXAMPLE FROM WITHIN OUR OWN COMPANY
Within Alltech, we endeavor to be different. We admire our brewing tradition, the background of the founder, and also the tradition and background of the founder’s relatives and ancestors. They were coopers and barrel makers in Ireland. The founder had been a brewer and distiller, and so it seemed natural to condense the two cultures (the barrel from the distilling side and the beer from the brewing side) together. What emerged was the iconic Kentucky Bourbon Barrel Ale. The beer was unique in that the Kentucky brewery was adjacent to the bourbon distillers in the area, and it was possible to always obtain freshly dumped “wet” barrels within a matter of hours. The brewery’s flagship at the time was Kentucky Ale, a well-rounded beer that is a mixture of both an English Ale and an Irish Red Ale. By taking that beer and moving it into a selection of barrels, we built upon the taste that we know as bourbon, as well as the taste of beer. It was so successful that Oprah Winfrey had our Kentucky Bourbon Barrel Ale on her “50 Things That Will Make You Say ‘WOW!’” list. Indeed, she went so far as to say that it was the beer that had converted her wine-drinking colleagues into beer connoisseurs!
The brewing industry is growing, and it will continue to grow. What are the challenges? What are the requirements for this growth to occur for our brewery? We are addressing some of these growth challenges and have ordered no less than three brewhouses from Krones, all destined for the Commonwealth of Kentucky. Among the three, our brewing capacity will be in excess of 200,000 barrels and will meet the ever-increasing demand, particularly for Kentucky Bourbon Barrel Ale. As a consequence, we are undoubtedly the largest producer of a bourbon barrel ale. Although we do have some brands that only remain up to one and two weeks in the barrel, our mainstream product remains a six-week duration and maturation in the barrel. This special, unique product continues to grow in market share (Figure 22.1).
Figure 22.1 Kentucky Bourbon Ale requires six weeks of aging in the bourbon barrel.
22.9 OPPORTUNITIES IN THE OVERALL CRAFT MARKET
The industry as a whole must also address the health risks associated with excessive alcoholic consumption. It is a sad reflection that 62.8% of college students have participated in binge drinking more than once! However, craft brewing does not lend itself to binge drinking as its beer is expensive, and people are attracted to it because of its fresh, flavorful taste and overall quality—not its price.
Currently, there is increasing interest, especially among millennials, in healthy living and pure food and beverage products. Organic beers and gluten-free beers hold great attraction in this market. Organic product sales of foods and beverages are becoming mainstream in the United States, with sales increases averaging 11.5% per year from 2010 to 2015. In 2015, organic sales advanced by 25% to US$525 million. Within the organic beverage category, organic beer is exhibiting the fastest growth.9
There is also a large consumer desire for “green products” that have a reduced carbon footprint. A number of craft brewers, such as New Belgium Brewing and the Alaskan Brewing Company, are “going green” by using alternative power sources such as solar energy and spent grains for steam production. Among craft brewers, there are many more examples of where “going green” in various ways is their priority.
Craft beer sold in cans has also been a growing market. Sales in cans have tripled during the past year (11.5% of total craft sales in 2015). Crowlers (a 32-oz. can, created on-site, that is fully recyclable) is another innovation attracting attention as a take-home option for consumers.
In the brewing industry, during the past year, more than 3,900 new beers have been launched, and 75% were craft beers! There is currently no lack of innovation and imagination in the craft beer industry.
22.10 FINAL THOUGHTS
As we move forward within the craft brewing industry, we have to consider what beer consumers have said about their own beer. To us, working for Alltech, brewing and business is “life condensed.” The craft brewing industry is a way of enjoying life!
Selling is a transfer of emotion. All craft brewers, like us, wish to stay in this business. They have no desire to work for somebody else. This is very often the reason why brewers have moved into craft brewing in the first place. Most, at some point, have worked for somebody else. However, it is unlikely they would want to sell their business as this would probably involve working for someone else!
What are the take-home messages for the future craft brewer? When people say there is no way you can do this that is where you bring your creativity into play. You have to find a compelling reason and the power of purpose. Victor Frankl once said, “Those who have a why to live, can bear with almost any how.” Frankl survived the concentration camps of Auschwitz. Every day he sought the why, and he wanted to see his wife and that is how he survived!
The craft brewing industry is about survival. It is about being what you really want to be. It is about a passion for life and enjoying life. We are always reminded of a quote from a Buddhist monk, who said: “The master in the art of living makes little distinction between his work and his play, his labor and his leisure, his mind and his body, his education and his recreation, his love and his religion. He hardly knows which is which. He simply pursues his vision of excellence in whatever he does, leaving others to decide whether he is working or playing. To him, he is always doing both.” It is about fun. It is about passion. It is about speed. It is NOT solely about money!
REFERENCES
1. Brewers Association, Statistics—Number of breweries. Historical U.S. brewery count, 2017. Available from: https://www.brewersassociation.org/statistics/number-of-breweries/ (accessed August 3, 2017).
2. Sundale Report, State of the industry: Craft beer in the U.S., 2016. Available from: http://sundaleresearch.com/foods-and-beverages/state-of-the-industry-craft-beer-in-the-u-s/ (accessed August 3, 2017).
3. Brewers Association, Statistics—Insights and analysis, 2017. Available from: https://www.brewersassociation.org/ (accessed August 3, 2017).
4. Beer Canada, Industry Trends, 2016. Available from: https://industry.beercanada.com/statistics (accessed August 3, 2017).
5. Kell, J., What you didn’t know about the boom in craft beer. Fortune/Retail, 2016. Available from: http://fortune.com/2016/03/22/craft-beer-sales-rise-2015/ (accessed August 3, 2017).
6. Statista, Dossier—Craft beer in the US, 2016. Available from: https://www.statista.com/study/20232/craft-beer-in-the-us-statista-dossier/ (accessed August 3, 2017).
7. Noote, J., These 11 brewers make over 90% of all U.S. beer, Marketwatch, 2015. Available from: http://www.marketwatch.com/story/these-11-brewers-make-over-90-of-all-us-beer-2015-07-27 (accessed August 3, 2017).
8. Brewers Association, Brewers Association Lists Top 50 Breweries of 2015. Brewers Association Press, Boulder, CO, 2016.
9. Grand View Research, Organic Food & Beverage Market Size Worth $320.5 Billion By 2025, 2017. Available from: http://www.grandviewresearch.com/industry-analysis/organic-foods-beveragesmarket (accessed August 3, 2017).