Craft Beer Fizzing Out: Beers, Busch, Bubbles Bursting
The history of beer in the world is a long and significant tale. As early as 4300 B.C.E., recipes for beer existed on stone tablets from Babylonian times. Beer has been used by various cultures and civilizations as currency, medicine, and trading. The fact that beer is still consumed in extraordinary amounts by everybody from college students to retirees illustrates the enduring nature of the beverage.
Around 800 years ago, beer was formalized as a commercial enterprise in parts of Europe - royalty granted brewing rights to specific companies, brewers developed proprietary formulas for beers, and beer brewing guilds formed. Commercial brewing barreled its way into the Americas in the early 17th century. Over the next two centuries, such famous breweries as Samuel Adams, Anheuser-Busch, and Pabst opened their doors, unknowingly cementing their places as one of the human experience’s greatest sources of joy and recreation.
By 2016, the market for beer in the US exceeded $107 billion. Nearly 200 million barrels of domestic retail, import, and craft beer were brewed. According to the Brewers Association, the beer industry contributed over $55 billion to the US economy overall in 2014, supporting almost half a million jobs. The success of the industry is apparent, and the continued optimism and fervor with which Americans consume both domestic and foreign beers is reflected in the continued growth of the industry.
And yet, over the past few decades, an interesting dynamic began to unfold within the beer industry itself. Overall growth in the industry came not from retail beer mass-produced domestically by large, household-name brewers like Anheuser-Busch or MillerCoors, but from small, regional breweries known as craft beer breweries. The independent, grassroots homebrewers exploded onto the scene in the 70s, boasting of fuller-flavored beers rich in traditions and brewing quality that were better than the mass-produced, commoditized retail beers that were faceless and tasteless.
The public’s buy-in to homebrewers’ sales pitch manifested itself in several periods of high, though volatile growth for the craft brewing industry from the 70s until the present. As brewing quality increased and homebrewers’ reputation spread organically from within the brewers’ locales to towns and cities across the country, the craft beer industry experienced periods of growth as high as 58%. As the industry became more well-known and accepted by American consumers, growth stabilized, until it reached the 10-20% it has enjoyed over the past few years.
The continued rise of the craft beer industry seems immutable. However, as Princeton economics professor Burton Malkiel (grad school ‘64) would be quick to point out, past performance does not serve as an indicator of future direction. Just because the craft beer industry has experienced relatively stable growth of up to 20% year-over-year since the early 21st century does not mean the industry will continue to do so indefinitely, or even a year from now for sure.
In fact, slight declines in craft beer sales over the last couple years have inspired speculation about the decline of craft beer’s dominant growth. Growth has fallen into the single digits, with retail beer giants quickly regaining lost ground in growth. Part of the resurgence of retail beer was spurred on by two major mergers in the past decade: the consolidation of Anheuser-Busch and InBev to create AB InBev, and the merger of SABMiller and Molson Coors to form MillerCoors. Both mergers were approved by the federal government in 2008, effectively creating a duopoly in retail beer production that together accounted for about 90% of American beer production (SABMiller divested itself from Molson Coors last year and merged with AB InBev, but a duopoly still remains).
This effect of such a large duopoly on the craft beer industry was exacerbated by the simultaneous consolidation of the beer industry’s wholesale distributors - the retailers who actually purchase beer from the breweries and then sell them to consumers. Several decades ago, thousands of wholesalers distributed beer to consumers, creating more opportunities for craft beer distribution and likely responsible in part for the high, if volatile, growth the craft beer industry experienced through the end of the 20th century.
Today, less than two-thirds of those distributors remain, and the AB Inbev-MillerCoors duopoly, however, exercises overwhelming influence over the collection of distributors that remain. Many distributors’ primary suppliers are the two retail beer giants, resulting in a distributor squeeze for craft brewers. Competition for distribution outlets among craft brewers results in smaller margins and less growth overall for the industry.
Other speculations of craft beer’s decline base themselves on the growing trend of the giant beer conglomerates AB InBev and MillerCoors acquiring numerous independent brewers over the past few years. For example, many well-known craft beer labels like Goose Island or Terrapin are actually subsidiaries of the retail giants.
Stagnant craft beer sales volume and and drinkers show these trends. Several decades after the emergence of an industry that reflected the best of American innovation and entrepreneurship, corporate brewers have once again retaken the industry. Craft breweries are simply be unable to compete with the retail giants for distribution, sales, and recognition, and the bubble of craft beer will burst. It’s just a matter of time before craft beer goes flat.