Craft beer brings diversification as mergers gulp down the market
The state of the industry is one of both rapid growth and consolidation
The global beer landscape faced an announcement Wednesday that would forever change the industry: the merger of Anheuser-Busch InBev and SABMiller, the world’s two leading beer producers, received final approval from both companies’ shareholders. With this deal now officially moving forward, the combined company will sell about a third of the beer in the world.
But while consolidation is happening at the top, there is an explosion of small and independent craft breweries, which reached a record number at the end of last year. Major manufacturers may be merging and acquiring high-performing brands, but the U.S. beer industry is more diversified than ever.
Craft beer continues its climb
Craft beer sales and the number of breweries making it have soared over the past decade. In 2015, craft brewers increased volume by 13% and retail dollar value by 16%, according to data from the Brewers Association, a trade association representing craft brewers. Consumers have embraced a more localized and diversified breed of brews that has permanently disrupted the U.S. beer landscape.
At the end of the first half of 2016, the U.S. had 4,656 small and independent breweries in operation, 917 more than at the same time last year, according to Bob Pease, CEO of the Brewers Association. But it’s uncertain whether that high level of growth is sustainable long term.
“Breweries are still opening at a pretty tremendous rate, but it's clearly getting tougher in the marketplace,” Pease told Food Dive. “Shelf space is getting harder to come by, tap handles are getting harder to come by. It's emblematic of the maturation of an industry.”
“There's going be a point where the growth in terms of number of breweries is going to have to slow down,” Michael McCullough, beer economics researcher and associate professor at California Polytechnic State University told Food Dive. “But I don't think that it's going to really drop off or we're going to see a drastic fall in the number of breweries.”
Even if the number of craft breweries slows, craft beer isn’t going anywhere. Craft is now a permanent fixture in global beer production, if only because that’s what consumers demand.
“It's the beer drinker that continues to demand innovation, authenticity, exploration, flavor and quality from the breweries,” said Pease.
A dilemma many craft brewers face as they move to scale their operations is how to fund the expansion, obtain ingredients and reduce their costs to be more profitable. For some craft breweries, this means partnering or even merging with another craft brewery, while staying under the barrel limit to be considered “craft” under the Brewers Association’s definition.
“That's a way for those companies to retain their independence, but also to garner some economies of scale to put them at a better position in the marketplace to compete,” said Pease.
Others may consider selling themselves to a larger manufacturer. But both brewers and consumers have concerns about whether craft brewers can stay true to their roots and original product after being acquired.
“There's definitely this economy of scale when you're talking about an artisan product,” said McCullough. “Quality control is just much, much harder on a product that's had this many inputs and this many variables going into it. It's very difficult to keep that quality the same.”
“There is a distinct difference between breweries that sell and the 99% of the breweries that are small and independent,” said Pease. “They're just different business models once you sell to a global, multi-national corporation.”
“The two biggest differences become distribution, which is critical to the lifeblood of most breweries that choose to package, and then access to raw materials,” Pease continued. “When you sell to a large global multi-national, you have those inherent advantages that come with that sale. It doesn't make you better, it doesn't make you worse, but it makes you different.”
Consolidation vs. diversification
Craft beer’s meteoric growth is only half of the story. The beer industry faces a dichotomy of growth and diversification among smaller producers and consolidation among major producers, particularly the upcoming merger of Anheuser-Busch InBev and SABMiller.
That consolidation has both those in the beer industry and consumers concerned about the impact on the the U.S. beer landscape, especially the level of choice and quality of beer produced and distributed domestically.
“When the global No. 1 purchases the global No. 2, there's no way that's going to be good for the beer drinker,” Pease said. “The global multi-nationals are able to present what we call an illusion of choice or a façade of choice. You go into a restaurant or bar, and it looks like you have all these great choices. But all those beers are owned by one brewery, and they're on the tap because of that brewery's distribution muscle. We want to fight hard to prevent that.”
Another concern with this merger is how it could impact distribution for craft brewers. If it becomes consolidated under a few major brewers, the larger companies could push out craft brewers, or incentivize distributors and retailers to give them more shelf space. When approving the AB InBev-SABMiller merger, the Department of Justice handed down restrictions for the combined company to prevent monopolization of U.S. distribution. But some in the industry weren’t satisfied.
“We definitely don't feel it went far enough,” said Pease. “The elimination of the voluntary incentive program and capping ABI distribution at 10% through their wholly-owned distributors was a victory for small brewers. But we would like to have seen a moratorium on ABI acquiring any more independent craft breweries.”
Major beer producers are also contributing to consolidation in the beer industry by acquiring craft brewers to add variety to their own portfolios. These acquisitions worry some consumers and industry experts, but Pease isn’t fazed.
“The number of acquisitions is still very, very small,” Pease said. “They're high profile, but … overall, that's a handful compared to 4,656 small and independent breweries that are operating.”
“Our concern with ABI or MillerCoors buying more independent craft breweries is not the sale of the brewery, but how it influences the distribution landscape,” Pease said. “We want to make sure that the beer drinker, which in our minds has been the engine that's driven this craft beer revolution, still gets the choice they are demanding.”
AB InBev announced a string of craft acquisitions over the past few years, including a handful back to back in late 2015, and another spree this summer. MillerCoors also recently announced a few acquisitions of its own. But experts don’t believe the acquisition trend will continue at this pace indefinitely.
“I really don't see (major brewers) being very aggressive 10 years down in the future,” said McCullough. “The acquisitions are going to start to tail off when you start seeing more of that spread.”
As the beer industry continues to evolve, ultimately consumer preferences will drive sales one way or another. Both craft and major brewers will need to keep up with shifts in beer trends, or introduce the innovations that will disrupt the category next.
“There's a lot of room for growth, but that's all on the consumer's side and being open to something different,” said McCullough. “If you're going to open a small brewery now, you really have to be niche, and just making the generic pale ale, IPA and stout — going forward it’s going to be a lot more difficult to do because there are so many people doing that.”