Last Call?

Jim Koch, who founded Boston Beer Company in 1984, is an iconic figure within the world of craft beer.  Forbes Magazine refers to Koch as a “founding father of the American craft brewery movement”. There can be little argument that the entire craft beer community, brewers and consumers, owe Jim Koch a huge debt of gratitude. Pioneer, innovator, entrepreneur – and so many more adjectives – can all be used to describe Jim Koch. So when Jim Koch speaks people listen. His opinion carries weight, as it should.

So earlier this month, when Koch wrote an editorial that was published in the New York Times I read it with interest. It was titled Is it Last Call for Craft Beer? and was published, appropriately enough, on April 7, National Beer Day. I am not sure who came up with the title of the editorial (whether it was Koch himself or someone at the Times) but it is highly provocative. In it Koch outlines what he sees as some of the major challenges facing the craft segment of the American beer industry. According to Koch, as a result of “slack government antitrust oversight” the American craft brewing industry is in for some very tough times ahead. Koch bemoans the recent (October 2016) acquisition  of SABMiller by AB InBev. This, he noted, resulted in a six percent increase in beer prices and the loss of 5,000 American jobs as the merged company engaged in cost-cutting and other efficiency actions. The control and influence that the mega-brewers have over distributors is also of great concern to Koch; a situation that will make it increasingly difficult for craft brewers to acquire increasingly precious shelf-space for their products.  In his final salvo against Big Beer and government regulators Koch notes that the acquisition of American craft breweries, by AB InBev, MolsonCoors, and Heineken, has created a situation where the beer drinker is being duped into buying beer that appears to be craft, but is really brewed by subsidiaries of the mega-brewers. Overall, Koch paints a bleak picture of the potential future impact of current trends in the American beer industry. This editorial was followed by an interview on CNN.  In the interview Koch focuses on the fact that when a consumer picks up a beer that is brewed by a former craft brewery (that is now owned by a mega-brewer such as AB InBev) there is no indication on the labeling that the brewery that produces the beer is owned by a mega-brewer. Koch suggests that disclosure of ownership should exist, as this would allow the beer drinker to look at a beer label and thus be easily able to discern who owns the brewery that brews their beer.

Not surprisingly Koch’s editorial has provoked a number of responses from those who follow the beer industry. Rich Durpey, writing for The Motley Fool, notes the irony of Koch’s displeasure at federal regulators doing little or nothing to halt the acquisition frenzy. It is ironic, Durpey points out, because the whole craft beer industry was “born out of deregulation” when President Jimmy Carter signed legislation in 1979 that legalized home brewing. Durpey makes a number of other points in his commentary which you can read here.

While I appreciate and value Jim Koch’s perspective, I find his prognosis overly pessimistic.  I see a much rosier future for America’s craft brewers than the one implied by Koch. Back in May of 2015 I penned a piece in which I shared some of my thoughts on the future of craft beer in America. And the two years that have passed since I wrote that blog entry have not dampened my optimism. So let me touch on a couple of points raised by Koch.

Lagunitas Brewing Company – a former craft brewery that is now partly owned (50%) by Heineken

Yes, mega-brewers have bought their way into the craft segment by purchasing craft breweries. So, for example, Chicago’s Goose Island Beer Company and New York’s (actually Patchogue’s) Blue Point Brewing Company are both now owned by AB InBev, while Terrapin Beer Company in Athens, GA is owned by MolsonCoors. But there are over 5,000 craft breweries in the United States. AB InBev or MolsonCoors or Heineken can’t buy them all. Heck, it is unlikely that they could purchase all of the 186 regional craft breweries (these are craft breweries producing between fifteen thousand and six million barrels of beer per year) that exist in the United States. Yes the mega-brewers will continue to make strategic acquisitions of craft breweries. Most, if not all, of these will be acquisitions of larger craft breweries. AB InBev are not going to acquire a small brewery producing a couple of hundred barrels of beer per year. These acquisitions will continue to have a negative impact on the craft segment’s market share of the overall beer market. However, the vast majority of America’s breweries will remain independent. And the vast majority of those that remain independent will be small-scale producers. According to data collected by the Alcohol and Tobacco Tax and Trade Bureau seventy percent of US breweries in 2015 produced a thousand barrels or less of beer per year. So the craft beer drinker has nothing to fear. Even after acquisitions occur, there will still be thousands of craft breweries producing dozens of different styles of beer. And this beer will be brewed by highly creative brew masters for whom experimentation and innovation is embedded within their DNA.

Small distributors like Cavalier Distributing focus on the craft beer segment

Another issue raised by Koch is his concern that the mega-brewers will, because of their size, have an unhealthy control and influence over distributors. This is a very legitimate concern, especially for craft breweries that are looking to expand the geographic footprint of their market. In practical terms market expansion for a brewery means getting its six-packs and kegs onto retail shelves and into bars which are at a greater and greater distance from where their brewery is located. For craft breweries who feel that they may not be treated fairly by large distributors one option worth considering is to contract with one or more of the growing number of smaller craft-beer-focused distributors that are popping up across the country – distributors like Cavalier Distributing (who focus on Florida, Indiana, and Ohio), Phoenix-based Arizona Beer and Cider Company, and Weigand Family Distribution who are located in Los Angeles and serve the Southern California region. As noted by John Verive, writing in Beer & Brewing Magazine, “the independent beer wholesalers provide access to the market for small breweries, they develop the marketplace for craft beer, and they have a big influence on beer culture.”  I fully admit to being no expert when it comes to the distribution side of the industry. It is a surprisingly complex piece of the beer industry puzzle. And the fact that each state has its own regulations regarding the distribution of beer, only increases this complexity. Indeed, as I write this, there is a distribution battle going on in North Carolina over the minimum production threshold after which a brewery can no longer self-distribute and must use a distributor.

Breweries, like the Vice District Brewing Company in Chicago, IL, focus on serving local markets

The need to work with a distributor is greater for breweries looking to expand their market reach. Indeed, one of the key strategic business decisions facing a brewery owner concerns the desired scale of production and geographic extent of his or her brewery’s market. Research by Tom Wesson and Joao Neiva de Figueiredo suggests that breweries that focus on serving a smaller geographic market perform better than those serving geographically more extensive markets. Focusing on more restricted geographic markets allows breweries to allocate scarce marketing resources more effectively, while establishing more authentic relationships with distributors, retailers, and customers. At the same time a local focus allows a brewery to leverage their beer’s locally-made attributes, while delivering it to the customer in prime condition. I raise the findings of Wesson and Neiva de Figueiredo because it does suggest that staying small and focusing on local markets can be a winning strategy for craft breweries.

The craft beer drinker is a smart and savvy consumer

Finally, to Koch’s point about disclosure of ownership. In his CNN interview Koch suggests that beer drinkers are being duped by mega-breweries into thinking that they are drinking a beer made by a small-scale, independent, brewery when, in fact, the beer is produced in a brewery owned by a mega-brewer. While some people may be unaware that Goose Island Brewing Company is owned but AB InBev or that Terrapin Beer Company is owned by MolsonCoors my experience is that many people who drink craft beer on a frequent and regular basis are well aware of which craft breweries have been acquired by which mega-brewers; especially if ownership is an issue for them. And if, while browsing the beer aisle, they are uncertain about brewery ownership the World Wide Web is only a smart phone away.

Tom Acitelli’s “The Audacity of Hops”

At the end of the day I have a tremendous amount of faith in the power of the consumer. It was the craft beer consumer, turned brewer, who created the craft beer industry. If you ever have the time, read Tom Acitelli’s book The Audacity of Hops. It tells the story of the America’s craft beer revolution. When I first read Acitelli’s highly readable and informative book (and I have read it several times) I was struck by the importance of the individual in the industry’s emergence and growth. Individuals (including Jim Koch) who did not accept the beer that the mega-brewers were selling to them; who knew better beer was possible. These early pioneers in the industry had vision, tenacity,  and passion to not only not accept the status quo, but to do something about it. In my eyes the craft beer consumer is no fool; he or she is at least as smart as the smart phones that they carry in their pockets. If ownership is important the craft beer drinker will seek out a beer that meets their ownership criteria. If being locally-made is important to them (and it’s important to about half of craft beer drinkers) they will drink predominantly locally-brewed beer. The future of craft beer will not be decided in the boardrooms of AB InBev, MolsonCoors, or Heineken. Rather, it will be decided by people like you and me and the answer we give when a bartender asks us “What will you have”?

Further Reading:

Acitelli, Tom. 2013. The Audacity of Hops: The History of America’s Craft Beer Revolution. Chicago Review Press: Chicago.

Wesson, Tom and Joao Neiva de Figueiredo. 2001. The importance of focus to market entrants: A study of microbrewery performance. Journal of Business Venturing, Volume 16, Issue 4, Pages 377-403.

Leave a Reply

Your email address will not be published. Required fields are marked *