Small but Mighty
Despite obstacles, craft brewers are beating the odds.
The brewery industry, like the rest of the food industry, is not immune to today's tough economic times. Seemingly insurmountable fuel and distribution costs, skyrocketing grain prices, and the availability (or lack thereof) of ingredients are familiar food industry-wide woes.
Economic struggles in any industry inevitably result in consolidation. As smaller companies in the food industry shrink in numbers, industry giants are gobbling up more of the market share. By the late seventies, the American beer industry had been consolidated down to just 44 brewing companies and further consolidation seemed inevitable. At the same time -whether one attributes it to the rise of homebrewing, changing consumer palates or the desire to keep traditions alive - the craft brewing industry emerged.
Today, the U.S. beer landscape includes 1,449 breweries, with 1,420 of them qualifying as craft brewers. As recent media attention focuses on talk of possible mergers amongst the brewery industry's major players (Anheuser-Busch, Miller, Coors), the industry's smaller brewers appear to be dodging consolidation and doing more than just fine on their own.
An American craft brewer is defined as small, independent and traditional. Small, meaning they produce less than two million barrels of beer per year. Independent, meaning no more than 25 percent of the brewery is owned by a non-craft brewer. And traditional, meaning the beer is produced using traditional practices, with malt as the primary fermentable.
The craft beer industry controls $5.74 billion of the $97 billion beer market. The Brewers Association, which exists to protect and promote the interests of U.S. craft brewers, reported that in 2007, the craft beer industry showed an amazing 16 percent growth in dollars and 12 percent growth by volume. What's more impressive is that for two years in a row (2006-2007) 47 of the U.S.'s 50 largest craft breweries reported growth.
Larger breweries have distinct advantages over craft breweries. Larger brewers have purchasing power, access to the market and distribution networks acting in their favor. And yet, craft breweries continue to persist in what can only be described as anomalous success.
Building local loyalty
The Brewers Association notes that the average American lives with 10 miles of a brewery. American consumers have proven to be immensely loyal to their local brews. An area's craft beers become a reflection of local flavor and style, as well as a product the area can be proud of. Loyalty is also a two-way street, as Julia Herz, Craft Beer Program Director at the association, points out. "People tend to support their local brewery and local breweries in turn tend to support their backyard community. It's a very symbiotic relationship. Craft brewers are amazing community citizens, donating over $20 million collectively in 2007 towards charitable organizations, local events and sponsorships."
For many, staying local is also economically strategic. Flying Fish Brewery, a craft brewer located in Cherry Hill, NJ, keeps its distribution within 100 miles of the brewery. This location affords them ideal access to prime markets in Philadelphia, Southern Jersey and Northern Delaware. Gene Muller, founder and general manager of Flying Fish, stresses his desire to "saturate the home market first" rather than paying the high diesel costs of shipping beer, which averages a heavy 32 lbs per case, around the country.
Filling a market need
Distinguishing between market needs and market trends isn't always easy in the food industry. The early American beer market was characterized by mass-produced, light-adjunct lagers. Homebrewers recognized the need for more flavorful, traditional tasting beers, and responded by creating the craft beer niche. Craft beers are brewed to have character and individualized tastes, while at the same time being highly pairable with food. Flying Fish, for example, prides itself in beers that are "full-flavored, yet highly drinkable" with flavors that "harmonize, rather than compete."
In fact, the present day Great American Beer festival boasts 75 different categories (with subcategories) of beer.
Craft beer has staying power because it filled an actual void in the beverage industry, rather than simply exploiting a passing market trend.
Cooperation is not a word heard too often in the food industry, where competition amongst companies can be brutal. A common industry lament is that of smaller companies, who are quickly being forced out of business due to loss of market and price manipulations that they attribute to industry giants.
While the brewing industry is not without its share of squabbles, including legal battles over competitive bashing in ad campaigns and defacing stickers placed on competitor's products, there is an open stream of knowledge, communication and even, comraderie amongst brewers large and small.
"A rising tide floats all boats," according to Herz, is a popular saying in the brewery industry. It is not uncommon, especially amongst craft brewers, to witness a sharing of everything from spare parts to hops. The Brewers Association hosts a private, online forum for its 1000+ members, on which Herz witnesses daily communication and advice between competing brewers.
Perhaps it has to do with recognizing the educational benefits of sharing information, or perhaps even the unrivaled companionship born from sipping beers amongst friends - whatever the reason, craft breweries have capitalized on the open environment.
Adjusting to adversity
Craft brewers are at a disadvantage when it comes to both ingredient prices and availability. Adding to their smaller size and smaller purchasing power, is the fact that craft beer requires a higher percent of hop and malt ingredients.Whereas larger breweries have longstanding contracts with distributors for ingredients - guaranteeing them a certain amount at a certain price - many craft brewers buy ingredients on the open market, and thus literally pay the price when supplies are low.
Muller echoes the concerns of many craft brewers, as he points out how just five years ago, Flying Fish was paying a little more than $1 per pound of Cascade Hops. Recently, they paid $30 per pound for them.
Hops have suffered a similar fate to wheat, losing acreage as farmers choose to plant crops that are in greater demand, like corn.
But craft brewers have found several ways to cope. Some brewers have followed the lead of larger breweries and begun contracting ingredients in advance. Others have adjusted their hops usage and started using more readily available types of hops. In some instances, this has led to a more careful choice in terms of what flavor beers are brewed, or altering the timing of certain beer offerings. In addition, the Brewers Association notes instances where craft brewers have even offered to share hops with each other, making purchased hops available to other brewers at cost.
While it is true that larger breweries can afford to sell their beer at lower price points, beer may be a rare example of a case where price isn't everything. Even if craft brewers pass their rising ingredient costs on to consumers, the average American will still be able to walk into a liquor store and buy a six-pack of "the good stuff" for around $10. "Craft beer is an incredible, affordable, luxury," notes Herz. Whereas a Kobe steak or high- end bottle of wine can cost you upwards of $200, "the average American adult can afford to buy some of the best beer in the world," adds Herz.
How do you know it's "the best?" The craft brewery explosion led to many failed brewery endeavors in the early 90's, and this shakeout may have helped the quality of craft beer. "Maybe people who weren't schooled in making beer got into the business and couldn't survive past a few years. As a consequence - the survivors - the beers you see taking up valuable shelf today - are of extreme quality," says Herz.
While the craft brewing industry provides a noteworthy example of how smaller companies can succeed despite the obstacles that often beset the "little guys" in the food industry, craft brewers may face tougher roads ahead now that they are no longer hiding in the shadows. As Herz points out, "the major leagues are paying attention to what the minor leagues are doing." But on a positive note, the success of craft brewing presents new opportunities and avenues for the brewery industry, and the food industry as a whole.