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Saturday, 26 May 2018 14:26

Craft brewers continue to eke out growth despite increased volatility

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Cedar Springs Brewing co-founder David Ringler signed a distribution agreement with West Side Beer to service accounts in Kent County. The success of retail sales will help Ringler decide whether to add production capacity at the brewery, which makes traditional Bavarian-style beers. Cedar Springs Brewing co-founder David Ringler signed a distribution agreement with West Side Beer to service accounts in Kent County. The success of retail sales will help Ringler decide whether to add production capacity at the brewery, which makes traditional Bavarian-style beers. PHOTO: KATY BATDORFF

Michigan beer reaches 10% market share on home turf 

Muskegon’s Pigeon Hill Brewing Co. is embarking on ambitious expansion plans as the company wrestles with how best to compete in the highly volatile industry.

The 4-year-old craft brewery, known for brands including Oatmeal Creme Pie, Shifting Sands IPA and Walter Blondale, grew nearly 48 percent last year, selling about 2,875 barrels of beer just within Michigan.

While co-founder Michael Brower remains bullish on the company’s prospects ahead of building a new 15,000-square-foot production facility off Shoreline Drive in Muskegon, he acknowledges the industry has become much harder to predict. In part, he attributes that volatility to the “haze craze” — the explosion last summer of the New England IPA style and the race to market for breweries to fill that wildly popular product niche that emerged seemingly overnight.

“The summer of 2017, we saw a trend unlike any other. It almost threw the industry on its side,” he said of the NEIPA style. “In-house, we’re just trying to figure out if that’s going to be our new norm. We don’t want to be trend chasing all the time. But at the same time, if the industry is going to start becoming waves of trends more than at least some semblance of stability, then it’s definitely something that we’ve got to consider as we look at our future product lines, and research and development.”

Those are important considerations for Pigeon Hill, Brower said, noting that the challenges to secure retail shelf space have been exacerbated with the recent proliferation of lower-priced canning equipment. The intense competition has forced the brewery to tailor which brands it tries to get into individual retail accounts.

“At the end of the day, we can still sell a good volume, we may even sell just as much, but it’s going to be a little more tailored to that market,” he said.

Last year, Michigan’s craft brewers sold 603,736 barrels of beer within the state, an increase of 9.9 percent, according to Michigan Liquor Control Commission data analyzed by MiBiz. The growth came as overall beer sales in the state continued a slow decline last year, dipping about 2 percent. As well, Michigan-made beer accounted for 10 percent of all in-state beer sales in 2017, a 1-percent gain in market share and the first time the industry cracked into double digits.

Nationally, craft beer garnered a 12.7-percent volume share of the beer market and accounted for 23.4 percent of retail dollars in 2017, according to data from the Brewers Association, which only tracks small and independent breweries.

The $26 billion craft beer industry grew by 5 percent last year, or 1.2 million barrels, marking the third consecutive year of a deceleration in sales growth, and the slowest pace of expansion in the last decade.

“While it might be disappointing after years of 18 percent growth, I think this is more realistic as a longterm growth rate and something we should all come to expect,” Dr. Bart Watson, economist for the Brewers Association, said during a presentation at the Craft Brewers Conference this month in Nashville.

However, the Brewers Association data does not include craft beer brands like the fast-growing Grand Rapids-based Founders Brewing Co. because the company does not meet the trade group’s definition for independence, which sets a 25-percent threshold for outside, non-craft ownership. (Founders sold a 30-percent stake to Spanish brewer Mahou San Miguel Group in 2014.)

As well, the definition also excludes craft breweries that were acquired by international conglomerates like Anheuser-Busch InBev NV, MillerCoors and Constellation Brands.

The market share “would be much higher if it were not for acquisitions, which have pulled a lot of volume out of the craft data set,” Watson said.

MORE COMPETITION

beersalesSince 2012, the number of breweries in the U.S. has more than doubled. Last year, breweries operating at least some point during the year numbered 6,372, up 16 percent on a year-over-year basis.

The Brewers Association tracked 997 new brewery openings for 2017, with more on the way. According to Watson, the U.S. averages more than 1,200 new federal brewery permits per year.

The industry’s growth means more competition among craft breweries, particularly for regional breweries whose business model hinges on distributing products outside of their home turf.

Regional breweries grew just 1 percent in 2017, Watson said.

“It’s certainly a challenging environment. These are the breweries who are no longer the new kids on the block,” he said.

Continuing the narrative of the last several years, the regional breweries are facing stiff competition from the international brewing conglomerates and their craft beer brands, as well as from local producers, which have strong consumer demand at the retail level, according to executives interviewed for this report and those speaking at the Craft Brewers Conference.

The more locally-focused microbreweries are “now clearly the growth engine of craft,” posting gains of 17 percent last year, or 5.7 million barrels, Watson said.

“The future and the numbers are always going to be on a lot of little, small neighborhood places. The regionals are fighting a different battle,” said David Ringler, founder of Cedar Springs Brewing Co., which specializes in traditional Bavarian-style beers.

“I certainly do think there’s room for more,” he said. “There are neighborhoods that haven’t been touched. I think that’s what a lot of (the growth) is going to be: small places that are serving their neighborhood or their small community. It’s going to be hard and expensive for anybody to go big and make a leap.”

To date, Cedar Springs Brewing has focused on serving beer in its taproom, with limited self-distribution to beer bars around the state. However, the company just signed a distribution contract with West Side Beer Distributing to service accounts in Kent County.

With the brewery now fully built out in its production capacity, the success of distribution will help Ringler decide what the next steps are for the three-year-old company.

“We’re starting just in Kent County. If Kent County does what we think it can do … that can serve as a platform and give a track record for that next step, which gets in to making a decision over what you do with capacity,” Ringler said. “It’s possible that we’re looking at a project, and it’s also possible that we just stay right where we are.

“We’re going to have to make the decision here. Maybe the market makes it for us. If we start putting beer out there and it isn’t selling, it’s an easy call. What I know right now is that, if our beer doesn’t sell in the market, we’re fine here (at the taproom).”

GROWING IMPACT

Despite the highly competitive nature of the craft brewing industry, the number of new entrants continues to grow.

According to data from the MLCC, 375 locations had one of the state’s three types of brewing licenses in 2017, up from 327 the prior year. (The number includes all licenses, some of which are inactive. Additionally, some breweries hold multiple licenses for off-site production facilities or satellite taprooms.) Approximately 16 breweries opened across West Michigan last year, on par with the prior year, according to an analysis of the data by MiBiz.

These days, the new growth appears to be aimed at filling white space across the state, even down to the neighborhood level, said Joe Infante, a Grand Rapids-based attorney and head of the alcoholic beverage regulation team at Miller, Canfield, Paddock and Stone PLC. He estimates the market in Southeast Michigan, particularly in and around Detroit, perhaps could support the most new locally-focused entrants.

“There are still communities that don’t have a brewery, and every town could use a brewery,” Infante said. “It’s still a question of how do you run your business. As a brewery, if you focus on the local market, you’ll be fine.”

The industry’s growth also comes with a larger economic impact. According to a report the Brewers Association released last year, the state ranked ninth nationally with $2.09 billion in total economic impact for the craft beer sector in 2016, up 13 percent from 2014. Overall, Michigan craft brewers paid out more than $662 million in wages and employed the equivalent of 14,440 full-time workers, according to the data.

The data set offers only a partial snapshot of the overall economic impact of Michigan’s beer industry because it excludes contributions from Founders Brewing — the 15th largest brewery in the country — because it does not meet the Brewers Association’s definition for an independent craft brewery.

SCALE MATTERS

As much as the industry has become dominated by small players both in Michigan and nationally, the state’s two largest breweries have continued to grow at rapid clip in their home market.

Founders Brewing Co. and Bell’s Brewery Inc. — which also includes the Escanaba-based Upper Hand Brewery brand — sold 16.6 percent more beer in 2017 than the previous year. Their total sales output last year was 2,253 barrels more than all the remaining licensed microbreweries in the state combined.

Bell’s alone accounted for 30.8 percent of all Michigan-made beer sold in the state last year, according to MLCC data.

To Michigan Brewers Guild President Scott Graham, the data suggest Michigan breweries’ sales growth last year came largely through retailers, bars and restaurants.

“I think there is some growth in breweries selling at their premises, in their own taprooms,” Graham said. “But if you look at the growth overall, overwhelmingly it is a beer that is flowing through the distribution channels and being sold at retail. Even the microbreweries that were kind of at the top of the list for growth, I don’t think it’s beer being sold on premise at their taprooms that’s making up the volume number.

“There’s no doubt in 2017 in Michigan that was the case.”

FOCUSING ON LOCAL

Although Michigan breweries out-performed national craft beer growth rates in their home market, about three in 10 experienced in-state sales declines in 2017, including 10 breweries in the top 25 by sales volume, according to the MLCC data.

Graham acknowledged that the industry’s growth will slow on a percentage basis as it gains in overall volume, “but if overall growth is in the single digits, name an industry where that’s not considered good.”

Even so, the industry’s growth will likely come more from local microbreweries serving beer in their local markets, as opposed to focusing on widespread distribution, he said.

“I do think it’s going to be harder and harder for somebody to just achieve large barrelage growth in a single year if they’re really small,” Graham said. “It takes a long time to work on it. If you look at where Bell’s or Founders or New Holland or Atwater or Short’s are, for the most part it’s taken a long time and continuous work to develop those brands.

“It probably is harder now than it was 15 years ago to do that, but I think the opportunity still exists. The learning curve is a lot steeper, too. I don’t think there’s an opportunity to learn along the way as much as there used to be. You have to bring some expertise and experience or knowledge or really quick learning to the table.”

Read 3104 times Last modified on Sunday, 27 May 2018 21:14

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