Economics

Who’s Getting Hurt by Flat Sales?

Data compiled by the Brewers Association show that the bigger craft breweries bore the brunt of last year’s slump.

Twenty-five of the top 50 craft breweries, as defined by the BA, didn’t grow in 2016; and more then one-third of BA-defined regional breweries had either flat or declining sales. The damage was heaviest at the top of the standings: four of the five biggest crafts—D.G. Yuengling & Sons, Boston Beer Company, Sierra Nevada Brewing Company, and Gambrinus Company—suffered a sales decline. The top five’s only gainer was New Belgium Brewing Company.

According to the BA’s Bart Watson, the regionals are getting squeezed by both ends of the industry. Anheuser-Busch Companies, whose acquisition of craft brands has stirred up controversy, is snapping up retail space at the expense of the regionals. Meanwhile, many retailers are focused on getting the products of small local breweries on their shelves, again to the regionals’ detriment.

There were some bright spots, however. Regionals that upped production in 2016 include Bell’s Brewery, Firestone Walker Brewing Company, and Rheingeist Brewery. Several others that no longer meet the BA’s definition of “craft”, such as Founders Brewing Company and Lagunitas Brewing Company, also posted gains for the year.

Why Is A-B Buying Craft Breweries?

hris Herron, the CEO of Creature Comforts Brewing Company, has an explanation for why Anheuser-Busch is acquiring craft breweries.

Herron, who worked in finance in the beverage industry, starts by explaining that goodwill—the value of a brand above its physical assets—makes up more than 50 percent of A-B’s assets, $136.5 billion to be exact. However, if A-B’s flagship brands, Budweiser and Bud Light, continue to lose market share, A-B will have to take an “impairment charge” to reflect the brands’ loss of value. That charge would amount to tens of billions of dollars, which would clobber the company’s stock price.

Impairment charges are looming because A-B positioned Bud and Bud Light as “premium” brands, which commanded a higher price and were perceived as superior to competing brands. However, with the growth of the craft beer sector, Bud and Bud Light are no longer considered “premium”. Nor can A-B restore those brands to premium status by raising prices, because doing so would cause them to lose even more market share, this time to Miller and Coors.

Back to the craft brewery acquisitions. Herron believes that A-B bought them for two reasons. The first is to capture some of craft beer’s growth and, at the same time, slow it down. The acquisitions help capture growth; meanwhile, A-B’s sheer size allows gives it an advantage over independent craft breweries. It can use its buying power to secure raw materials, push its craft brands through its distribution network, and spend heavily to market those brands. A-B’s second objective is to regain the goodwill associated with the Bud and Bud Light brands. Aggressive competition by A-B’s craft breweries will force independent craft brewers to cut prices; that, in turn, would narrow the price gap between craft and A-B’s brands, and diminish the perception that those brands are no longer premium.

Herron sums up A-B’s strategy:

The impairment charges AB InBev could face are worth billions more than any craft brand they have purchased, and those purchases would be a small price to pay to save a legacy brand. These craft brands, whether they realize it or not, may just be pawns in the AB InBev game of chess. AB InBev is not a collaborator, they are a competitor, and a damn smart one. If one of these craft brands they buy is a successful long-term brand, great, but more important to AB InBev, is the vital role they play in the short-term of ensuring that their premium brands retain long-term value.

The Friday Mash (Carnegie Hall Edition)

On this day in 1891, Music Hall in New York City—later known as Carnegie Hall—staged its grand opening and first public performance. The guest conductor that day was none other than Peter Ilyich Tchaikovsky.

And now (cue up the music)…The Mash!

We begin in Bozeman, Montana, where Amy Henkle’s Happy Dog Beer Company is brewing “beers” for dogs. They don’t contain alcohol or hops; instead they’re a supplement to be poured on top of regular dog food.

Thirty-five years ago, Knoxville hosted a World’s Fair. Several city residents have teamed up to brew a beer celebrating the fair. It will be available through October, when the fair closed.

Sacramento Bee correspondent Blair Anthony Robertson wonders why new breweries price their beer at world-class levels. High prices result in disappointed customers and ruins the brewery’s goodwill.

If you hold bottled beer by its base, you’re holding it wrong. You should hold it by the neck to prevent the beer from getting warm—just as you should hold a wine glass by the stem.

When a Finnish brewery released a 100-pack of its beer, rival brewery Nokian Panimo one-upped it with a 1,000-pack of Kaiseri beer. To buy one, you need 2,160 euros ($2,350)—and a truck.

Researchers in the UK have found that beer is a more effective pain reliever than generic Tylenol. Having three or four beers—resulting in a BAC of .08—reduces pain by up to 25 percent.

Finally, today is Cinco de Mayo. The Chicago Tribune’s Josh Noel prepared for it by drinking Mexican beers in an effort to find out why they’ve become so popular. The answer is a “complex mix of demographics, marketing, history and nostalgia”.

Jim Koch Sounds the Alarm

Boston Beer Company jump-started America’s craft beer movement and made its founder, Jim Koch, a billionaire. But in a recent op-ed in the New York Times, Koch warns craft’s run might be coming to an end.

Koch calls industry consolidation the number-one culprit. In 2008, federal antitrust regulators not only approved the MillerCoors joint venture, but they also gave the green light to InBev’s acquisition of Anheuser-Busch. That left two brewing giants in control of 90 percent of America’s domestic beer protection. Making matters worse, the federal government allowed the big brewers to buy craft breweries—and then fail to disclose that they were the new owners.

Those mega-mergers resulted in higher beer prices and pink slips for American workers, as well as consolidation among distributors. Today, in most markets, more than 90 percent of all beer is controlled by distributors who depend on either A-B InBev or MillerCoors for most of their volume. Those distributors have considerable power regarding promotion, shelf space, and marketing support for the brands they handle—and they have an incentive to give preferential treatment to craft brands the big brewers now own.

According to Koch, the key to saving American craft beer is stricter antitrust enforcement. He names China and South Africa as countries whose regulators imposed strict conditions on big brewery mergers to protect their domestic economies.

Are Grocery Stores Abandoning Craft?

Portland, Oregon-based writer Jeff Alworth reports on a disturbing trend in beer retailing. Fred Meyer, his state’s dominant grocery store chain, is scaling back the craft beer selection and giving more shelf space to macro brews and “crafty” beers, the latter being craft labels acquired by big breweries.

On the surface, Fred Meyer’s decision doesn’t make sense. The chain stands to lose business to competing stores that offer a wide selection of local craft products. However, there are fewer alternatives outside Oregon’s larger cities. Alworth adds that Fred Meyer’s parent, Kroger Company, can improve its profit margin by using its buying power to negotiate low prices and cutting costs by paring its beer inventory.

Alworth warns that in localities where the big grocery chains dominate and the public isn’t as attuned to craft beer, “crafty” beers such as Goose Island—or even the big national brands—will become customers’ default choice. That’s bad news for small breweries, especially the newer ones.

The Friday Mash (”Happy Birthday, Internet” Edition)

On this day in 1969, the Internet Engineering Task Force and the Internet Society issued their first Request for Comments. The publication of RFC-1 is considered the Internet’s unofficial birthday.

And now…The Mash!

We begin in Newport, Oregon, the home of Rogue Ales and its famous 40-foot-tall red silo. Opinions differ as how the silo got there, but everyone agrees that the town fathers thought it was an eyesore.

In Kentucky, you can enjoy local craft beer or bourbon at most of the state’s resort parks. The state plans to offer adult beverages in all state parks which have restaurants and where alcohol is legal.

Michelob Ultra sales have risen by 27 percent over three years. Jeff Alworth puts the brand’s success in context: light beer still dominates the market, and Michelob Ultra is considered trendy.

Yes, it’s possible to grow hops in Brazil. Grower Rodrigo Veraldi has been experimenting with the plants, and one of his varieties thrives in the hot, rainy climate near Sao Paolo.

Bad news for Baltimoreans: National Bohemian is no longer available at Oriole Park at Camden Yards. “Natty Boh” enjoyed a brief reprieve last season, but fell off the menu after the first homestand.

IBU is an important quality-control number for brewers, but it’s not very helpful for beer drinkers. Malt content has a big effect on perceived bitterness, and the average drinker can’t perceive IBUs beyond the 100-120 range.

Finally, the University of North Dakota’s “Beer Grandma” has passed away. Beth Delano, who has attended UND men’s hockey games since 1947, became famous when the scoreboard video caught her quaffing a beer during a break in the action.

The Friday Mash (“Long Live the King” Edition)

On this day in 1603, James VI of Scotland becomes James I of England and Ireland upon the death of Queen Elizabeth I. The kingdoms of Scotland and England remained sovereign states, with their own parliaments, but both were ruled by James in personal union.

And now….The Mash!

We begin in Vancouver where last week, the Railtown Pub advertised its St. Patrick’s Day celebration with a Guinness glass filled to the brim and literally losing its head. That caught the attention of the Irish Independent newspaper, which called the pour “sacrilegious”.

Now that the Chicago White Sox’s partnership with MillerCoors has expired, the ballclub has formed a new partnership with Constellation Brands, which will open “Casa Modelo” at the ballpark.

While on spring break in The Bahamas, a frat boy used the teeth of a beached shark to puncture a beer can so he could “shotgun” it. His video of the stunt prompted a swift—and angry—backlash on social media.

Portland, Oregon, is about to get a beer bar devoted to session beers. Its name, naturally enough, is Sessionable. The bar will pour 30 beers, all with ABVs ranging from 2.5 to 5 percent.

Neil Patrick Harris, who the spokesperson for Heineken beer, says that he has a Heineken Light tap in his bar at home. He adds that unlimited beer at home “is as awesome as it sounds”.

According to a recent survey, one out of four beer drinkers said they would switch to marijuana if it became legal in their state. If they do switch, brewers will suffer $2 billion per year in lost sales.

Finally, MLive.com asked eight brewery owners in the Grand Rapids, Michigan, area whether the craft beer industry is in a bubble. They don’t think so, but some admit that the market is getting tougher for new entries.

The Friday Mash (“Sell High” Edition)

On this day in 2000, the Nasdaq Composite stock market index peaked at 5132.52, thanks to investors who bid up dot.com shares to astronomically high prices. Those who didn’t take profits got a nasty surprise: the Nasdaq fell by more than 50 percent by year’s end.

And now….The Mash!

Fittingly, we begin on Wall Street, where big breweries’ stocks haven’t been doing well. According to SeekingAlpha.com, the only company whose shares are trading near their 52-week high is Kirin Holdings Company.

Congress is considering a bill that would cut taxes for small brewers. The bill’s supporters contend that lower taxes would enable breweries to expand production, add jobs, and attract more visitors.

Session IPA is popular, but opinions vary as to its definition. Draft magazine has published a scale which shows how much these IPAs vary in alcoholic strength and, especially, perceived bitterness.

A few years ago, Emily Hengstebeck and her friends partied together at beer festivals. Now employed by a brewery, she found herself on the other side of the table. She describes what it’s like.

More than 7,000 CraftBeer.com readers filled out a survey asking them what was their state’s favorite beer bar, and why they liked it. Without further ado, here are the winners in each state.

It’s still “Miller Time” in Chicago. According to BevSpot, Miller has a more than 8-percent market share in the Windy City, more than twice the brand’s market share nationwide.

Finally, a Virginia brewery will release a beer honoring Secretariat, the 1973 Triple Crown winner, at a birthday celebration this month. The horse was nicknamed “Big Red”; the beer is an imperial red India pale ale.

The Friday Mash (Red Cross Edition)

On this day in 1863, a group of citizens of Geneva, Switzerland, founded an organization called the International Committee for Relief to the Wounded–now known as the International Committee of the Red Cross.

And now….The Mash!

We begin in England, where festival organizers in two of the country’s most famous beer cities, Norwich and Sheffield, are joining forces to promote their local products and attract beer tourists.

The Norwegian supermarket chain Rema 1000 is feeling the backlash after it took several local breweries’ products off the shelves. Some Rema customers switched to competitors’ stores.

Are you a DIYer who loves craft beer? You might like the Kinkajou Bottle Cutting and Candle Making Kit. You can give the candles to friends—and show off your collection to them.

“Pepper”, a robot from Japan’s SoftBank, has his first job: greeter at the Pyramid Taproom in Oakland International Airport. When not posing for selfies, he’s working on his speech-recognition skills.

A faith ministry in Nebraska has started a fund-raising campaign to buy out four stores that sell millions of cans of beer in a tiny village next to the alcoholism-plagued Pine Ridge Indian Reservation.

Heroica, a brewery in Brazil, is flavoring its Kuromatsu Kamikaze IPA with branches of bonsai trees, brought over by a Japanese family more than a century ago. Some bonsai trees are worth $20,000.

Finally, Bart Watson, the Brewers Association’s chief economist, told a gathering of brewing professionals that it’s still possible for a microbrewery to grow to regional status, but very few will succeed in doing so.

Forecast for 2017: Craft Beer Turf Wars

The number of craft breweries continues to grow rapidly, while the growth of the craft sector is slowing. Which means something has to give.

Jason Notte of Marketwatch.com predicts that 2017 will be the year of the turf war; there will be less mergers-and-acquisitions activity and more competition among breweries to claim shelf space.

This could be the year that craft breweries lay off workers and make other cuts in an effort to trim costs. Industry leader Boston Beer Company has been hit hard by shrinking sales of Samuel Adams Boston Lager; the company’s shares have tumbled 50 percent from their 2015 high.

We’re also likely to see more breweries bring in private-equity firms. Already this year, Victory Brewing Company and Southern Tier Brewing Company have formed such partnerships with such firms.

And we’re likely to see smaller brewers focus on taproom traffic and food sales and avoid the battle to get their products on store shelves and on bar and restaurant menus.

Notte believes that Oskar Blues is the brewery to watch because it has been the craft sector’s trend-setter for years. The brewery was the first to can its beers and the first to build a second facility in the eastern United States. Two years ago, it kicked off the private-equity trend when it sold a majority interest to Fireman Capital. It then used some of that money to acquire craft breweries in Michigan, Florida, and Texas; the latter two states are considered underserved beer markets. Oskar Blues also borrowed from the big national brewers’ playbook. It rolled out more mainstream beers, sponsored sporting events, and put an emphasis on brand recognition.

Notte concludes, “Whether drinkers benefit from [this] turf war or become victims of it remains to be seen.”

Powered by WordPress