As the craft brewing industry grows in Michigan and beyond, it has been met with a continual skepticism about whether the market can support even more producers. Every industry hiccup stirs talk of a craft beer bubble that’s on the verge of bursting. In separate interviews, MiBiz brought that discussion to three professional advisers to get their take on the state of the industry.
- The Analyst: Brandon Finnie, managing director at Grand Rapids-based Hungerford Valuations
- The Accountant: Ryan Behringer, manager at Plante Moran in Southfield and a member of the firm’s food and beverage team
- The Attorney: Joe Infante, principal at Miller, Canfield, Paddock and Stone PLC in Grand Rapids and head of the firm’s alcoholic beverage regulation team
Here’s what they had to say.
As the number of craft brewers continues to grow, the average size of producers is getting smaller. What does that shift to smaller neighborhood breweries portend for the future of the industry? Is that a more sustainable model?
FINNIE: At this point, with the number of options that are out there, being a small neighborhood pub is a safe bet. … But you still have to have a good product and atmosphere to succeed. If they start to trend more that way of just another local watering hole for people to go to, offering still very unique products, (the challenge will be) finding ways to differentiate themselves from other bars. We’re seeing with bars that they’re getting more and more tap handles and they’re trying to carry more labels. That’s almost another competitive factor as well.
BEHRINGER: Most of breweries that we’ve talked to and are opening up are all around the 3-, 5- and 10-barrel (systems). There’s not a lot going over that because of the cost. … I feel like ultimately, (more smaller breweries) is what we would love to see. If you think about it, these are the owners and brewers that are opening a small place in their community. It’s getting back to what it used to be about, versus there’s almost been a gold rush of trying to be the next Bell’s or Founders, push as much into distribution, scale, scale, scale.
INFANTE: Pretty much, the breweries that I’ve helped open in the last four or five years have all been your small, local taproom that fills a need in a city or in a neighborhood. … That’s a very sustainable model. Even here in Grand Rapids, because the population is high enough, you can go to the neighborhoods, still. People always like to drink local. People like to drink close to their home if they can. That’s the most sustainable model.
Across the country last year, 97 breweries closed their doors, including several in Michigan. Already this year, one brewery in West Michigan has closed and plans to sell. Does this signal any trouble in the marketplace or is it more a factor of the normal business cycle?
FINNIE: We’re over 5,000 breweries now. Just the sheer size of the market is going to result in more closing. I think it’s more of a general economic cycle than it is any saturation in the market. Craft beer as an overall market has growth potential still. I don’t think it’s a bad time to start a brewery, it’s just certainly more challenging getting into the game later than some of the other players.
BEHRINGER: When you have 97 that closed in 2016, but you had (more than) 700 that were added to the mix, that seems like a pretty healthy number. It isn’t anything indicative of any sort of bubble. The ones that aren’t focusing on the quality, telling their story and getting out in the community — and that are possibly making bad business decisions — are the ones that are going to end up folding.
INFANTE: There’s no bubble right now given that the sale of craft beer keeps growing and consumers are shifting more toward the local breweries. There’s a bubble for bad business and there will always be a bubble for bad beer. … Some of those places are going to close because not every business works. Not every person should own a business. Not everybody makes good beer. If you see two or three breweries close in Michigan every year, it says nothing about the strength of the industry because craft beer sales are still growing.
Given the level of competition to get on store shelves, does it make sense for craft breweries to pursue distribution? What’s the smart retail strategy these days?
FINNIE: (Distributing your beers) certainly helps (with advertising) if you’re trying to be more of a destination and attract people from outside your local neighborhood patrons. Getting on tap handles helps spread that awareness easier and more effectively than canning and getting on Meijer shelves. … At the end of the day, (deciding to distribute) comes down to the common valuation principles of cash flow and risk. If you’re a high-producing on-premise pub, that has its own value. If distribution increases your cash flow, that increases value. If you’re tapped out on what you can sell through your pub, the distribution model — even though it’s a lower margin — it’s still a volume game. More sales — even if it is at a lower margin — it’s still profit.
BEHRINGER: I feel like everybody wants to push as much beer out into distribution but there’s only a handful of people who get it. Distribution is really only for your excess capacity. You’re taking a hit when you’re selling that into distribution versus if you can sell it out of your pub or out of your tasting room. You need to take the hit a little bit to get it into some bars and build that awareness, but you really need to manage that and make sure you’re not spreading yourself too thin and that you are slowly scaling up.
INFANTE: You’ve got to have a distribution strategy, and the strategy may be to have no distribution. The startup brewery right now, they should look at building a taproom and building a brand, but then getting the beer out there and getting fans. From there, move on to self-distribution to serve your local market and then grow organically. New breweries should not be signing on with a distributor the month after they open. One, they can’t produce enough beer to spread the beer out like that. And two, you’re putting your brand out and nobody knows who you are. And you’re losing money: Why turn that money over to the distributor when you could do it yourself?