Pioneers of the craft brewing industry face a steep challenge from the growing market they helped establish.
The top 20 craft breweries like Founders Brewing Co. and Bell’s Brewery Inc. certainly face stiff competition in national markets from well-capitalized multinational breweries, but they’re also feeling the squeeze on store shelves and on tap handles from smaller local players.
While Anheuser Busch-InBev, MillerCoors and Heineken have the resources and economies of scale to pressure the larger craft brewers from above, small breweries have also started get their jabs in, especially because they offer retailers an “authentic” option for a growing generation of consumers.
On-premise retailers have reacted by placing less value on core brands and embracing a strategy of constantly offering customers new craft beer options, whether that’s special releases, the latest styles, or the hot new flavor profile of the minute.
It’s a trend that could upend the business model for many regional or national craft breweries.
“We call it rotation nation at Bell’s,” said Laura Bell, vice president at Bell’s Brewery, which was started by her father, Larry Bell, more than 30 years ago. “We’ve been around for a while and have had the opportunity to grow core brands like Two Hearted, Oberon and Amber. The drive from the smaller breweries is to always be constantly different. How does someone who’s established core brands play in that rotation nation market?
“We made over 100 different beers last year, but our flexibility of saying one week we have this and the next week we have something different, it’s more challenging.”
The market evolution has proven to be particularly difficult for the “mid-level” or top 50 craft brewers that compete regionally and nationally, especially as companies like Anheuser Busch-InBev scoop up craft brands to develop their own portfolios, said Ryan Buckley, managing director at Livingstone Partners, a Chicago-based M&A and investment banking firm.
“The majors are going to exercise their influence, and the local guys are just relevant,” he said. “These mid-level guys are now having to revamp their business model a bit and hire more resources in different pockets of the country to support those brands a bit more.”
In an industry that’s used to fending off attacks from Big Beer, many of the craft brewers with national or “super-regional” name recognition find themselves in the precarious position of battling the approximately 4,400 local breweries for sales in each market they do business.
Indeed, more than 53 percent of millennials said they value supporting a local producer when it comes to making their beer purchases, according to data from the National Beer Wholesalers Association.
In a presentation at the Brewers Association’s Craft Brewers Conference in Philadelphia in early May, Beer Business Daily Executive Editor Jennifer Litz-Kirk cited her publication’s recent survey of the top 50 craft breweries in which 65 percent of respondents said that they had lost business to local craft breweries in the past year.
“I’m surprised it’s not dramatically higher,” Buckley said. “I don’t think that there’s a mid-level craft guy that we’ve spoken to that doesn’t comment on the local brand competition. That is certainly a competitive challenge for any … top 50 brewer.”
Founders Brewing Co. President Mike Stevens agreed, noting that only about 25 percent of sales for the Grand Rapids brewery now come from on-premise retailers, where it had been split evenly before.
“We’re seeing a lot more competition, especially on premise,” Stevens said. “There’s a lot more breweries that are local. The trend to drink local makes sense. We get it. … It’s just getting harder and harder to pull handles now.”
That competition could heat up further as on-premise retailers like bars and restaurants begin to rethink their tap strategy around craft beers.
Ten years ago, a Buffalo Wild Wings restaurant may have had 20 to 24 taps, but that’s since ballooned to upwards of 40 different beers for a typical store, said Patrick Kirk, the director of beverage innovation for the sports bar chain.
“Now we’re at a point where we’re seeing there’s no evidence that having 30 to 40 (taps) drives any more volume or sales for us,” Kirk told attendees of a retail panel discussion at the Craft Brewers Conference. “We’re actually starting to retract the number of handles we have to be more efficient and be smarter about what we’re putting on tap. … We’re in a tough spot. We’ve really tried to embrace that growth in craft and add as many tap handles as possible to satisfy our guests, but the reality is they’re pretty satisfied with 24 to 30.”
While rotation causes challenges for brewers, it’s also creates difficulty for retailers.
“Given all those choices with the limited number of taps, we are seeing over-rotation of beers,” Kirk said. “It hardly gives the staff the opportunity to know how to even speak about those beers that come on and off in the flash of a pan.”
‘LET THE CUSTOMER SPEAK’
Even within the realm of off-premise sales, national and regional brewers are finding competition from local producers as the stores look to stock products that give them a better connection to their surrounding communities.
Walker-based Meijer Inc., for example, wants to stock craft beer from producers within a five- to 10-mile radius of each store, said Rich O’Keefe, senior beer buyer for the supercenter retailer.
But in an era when multiple craft breweries often sprout up within that footprint, “we’ll never be able to carry them all,” he said during a retail panel discussion at the Craft Brewers Conference. The ability to offer a mix of local, regional and national brands “has changed the scope of what customers are looking for.”
In recent years, Meijer has expanded its craft beer selection to a 32-foot cold case that typically stocks upwards of 250 brands, O’Keefe said.
“We’ve got some local and also some national brewers across our footprint, so it’s not all about local,” O’Keefe said. “We’ve got to have the right balance between local, regional and national. That could be a game changer for us, and the question is how long do you hold them and how much do you rotate out. I think time will tell.”
For now, O’Keefe said Meijer pays close attention to consumer demand in its decision-making process.
“If there’s already a demand for the product, then it’s really not important whether I like it or not. If there’s a demand, then I’ll go ahead and put it on the shelf and let the customer speak, and they will speak with their wallet,” he said. “When I start thinking about quality is when there is no demand and I’m getting behind it and getting excited about it.”
That’s not necessarily the kind of message established brewers want to hear after they’ve invested millions of dollars into top-of-the-line equipment and refined their processes in the pursuit of producing consistently high-quality beer.
“I think just because it’s local doesn’t mean it’s good,” Bell said. “And our consumers are getting smarter about what quality beer or quality cider or liquors are and they are going to choose as they learn more.”
But there is a silver lining for the breweries that are able to scale up to a regional presence: Meijer made a commitment in February to carry products from six Michigan-based craft breweries — Bell’s, Founders, Short’s Brewing Co., New Holland Brewing Co., Atwater Brewery and Arcadia Brewing Co. — across its entire five-state footprint.
POINT OF CONFUSION?
For Founders, having a presence in chain stores like Meijer, Wal-Mart and Kroger is becoming an increasingly important part of the business, Stevens said.
“We’re actually still about 66 percent on independent channels, but the chain channel is our largest growth,” he said. “We expect within about three to five years, we’ll be there on the chain side. That’s where the rocket ship’s going right now.”
Still, Stevens said there’s a benefit to developing core brands to sell via that channel.
“If I’m looking out to the future, I actually see breweries realizing that less SKUs can be more powerful,” he said. “Hell, I’m in the industry and I go to Meijer and I scratch my head when I walk through the aisles. I don’t even know who’s who anymore. It’s becoming confusing, and I think we’re starting to get to the point where we’re confusing our consumer.”
Going back to a focus on those core brands could help all breweries hone in on their niches and work on quality, according to Stevens.
“We didn’t really see great success until we started focusing in on a handful of core brands, and that’s when we really started to take off,” he said. “But it’s the nature of the beast. When you’re a small brewery, you do throw a lot of stuff out there because that’s what the consumer and what the retailer gravitates towards.”
As the industry comes to grips with new competitive dynamics, it’s forcing the larger craft breweries to invest more than ever in sales and marketing, especially the further they move out of their home markets.
Adam Lambert, vice president of sales at Fennville-based Virtue Cider Co. and formerly of New Holland Brewing Co., said in a presentation at the Craft Brewers Conference that breweries need to account for that competition when it comes to budgeting and hiring sales and marketing staff, especially as producers look to grow.
“If you’re a local (brewery), you’re competing against maybe 11. If you’re regional, you’re competing against two or three thousand. If you’re national, you’re competing against 6,000,” he said, referring to the number of companies that have applied for or received brewing permits from the federal government. “Whatever that footprint is for you … (you need to have) an understanding of your identity, where you want to go, and what those volume objectives are to be in one of these categories.
“It costs a lot more to sell beer today than it did in the past.”
Buckley of Livingstone Partners believes this current environment serves as a driving force behind many of the private equity deals among the top 50 craft brewers. The idea is that sharing back office infrastructure and potentially cross brewing beers at a network of breweries across the country will allow these companies to better support their brands and present more value for distributors.
“When you go to a distributor, you can go with broader range of product. We think that market will likely continue,” he said. “Unless they plan to contract, they need to support those brands. Otherwise, they’re going to have trouble staying on the shelves in markets away from their (headquarters) that they can’t support.”