Truth Squad Responds to "No Shakeout in Craft"

FILED DECEMBER 6, 2013

December 6, 2013


Dear Client:

Our readers are the smartest, no doubt. Some agreed, some disagreed, but lots of folks had an opinion on whether there's some sort of imminent shakeout in craft beer. Here are some of those remarks.

"Harry, I like the way you boldly take a stance and then sneak in key caveats at the end. That is Teflon writing at its best. Shakeout, market instability, change in our industry ....... Something is already happening. Craft is certainly here to stay and people's taste has changed, but our industry is nowhere near finished changing. 1. Over supply - There are too many brands and skus. Retailers are starting to realize. The market is over complicated - things will settle. 2. Economics - It cost more to get and hold a point of distribution than ever and through-put less. Also the breweries are in constant need of capital, which drive need for volume, which drives need for capital ..... until a certain scale is hit its an inefficient process. 3. Competition within craft - Shifting growth trends will create instability (i.e. The guys who were hot little crafts are being outdone by the newer, littler, more local guy ...... also, the big crafts are nervous about their flagships). The collegial lovefest will dry-up quickly when grow slows and pricing starts. 4. Big Suppliers - They have world class brewers, low cost production, wholesaler clout and a desire to stop market share loss. 5. Consumer - Rotation and lack of loyalty make it very tough to build a brand. Small brands get a false sense of volume potential. Like wine, consumers are starting to ask for beer be style, as in "what IPA do you have on today". My point is consumer preferences have indeed changed for the long-term. However there is an inflation because of the trendy nature of their current activity. As soon as they change, retailers will change. 6. Dilution of story .... Sure everyone like a good story, but even your stories tire after it been told 20 times. Its seems everyone now can make a great beer so the bloom is waining on "discovery" and lastly, there is only so many combinations of things .... Truly fresh ideas are lesser and lesser. 7. Wholesalers - Most are reducing inventory (harder to build brands if nothing in the pantry), propagating rotation (they are less concerned about brand building and more concerned about holding the line), many are turning down new brands, they are weary of new products and very conservative. Consolidation will also effect things in some way." -An. Importer

"Excess capacity combined with careless inexperience were the necessary ingredients in the late '90's. Sales departments were not terribly professional even in the bigger microbreweries then and chains 'suggested' unsustainable pricing scenes that crushed brand equity and inexperience led brewers to take the bait. Add to that a handful with bank accounts full of IPO money and a 'last man standing' mentality took over. Excess capacity today will yield different problems (like territory or SKU expansion) than pricing problems. If pricing does drop it will be because brewers can afford it and craft sits more comfortably in tiers now with pricing as a component, so pricing is a bit more isolated from the pricing of a neighboring craft tier." -A. Craft Brewer

"Having to try and consolidate both Red and Blue/Silver nationally will delay possible craft consolidation. The reason for the wholesale tier is independence from supplier and this is keeping Craft Beer moving. This may delay consolidation, but this drives growth of the category. I think that a reason for Craft to continue to grow is that the wholesaler network has been through this bubble before and we are reluctant to take on products that don't have a good plan. We have added over 80 craft suppliers in the past 8 years, but we have turned down almost as many due to poor "go to market strategy". I have not seen any "Bad Frog" beers being submitted this go around, but I still have the T-Shirt from 1995." -A. Distributor

"I think its all about locally produced products now, a trend that has been years in the making. A large Colorado craft brewer first introduced me to the Slow Food movement idea almost 10 years ago, and it is coming to fruition. We are now seeing butcher shops, local cheese shops, locally owned makers open up, plus the whole farm to table movement. We are seeing a proliferation the small, sell what you make breweries here in Denver and Colorado. I only see this segment growing." -An Industry Exec.

"The answer lies in what is the definition of a shakeout. Is it craft losing share or is it small breweries disappearing? If it's the latter I believe we will have a significant shakeout down the road (and not that long of a road- hard to pay bills with passion). The top 50 craft can sustain share and they are preparing to do it -although as you pointed it out it may be at the expense of equity. The cost of industry complexity (existing at all 3 tiers) will become very apparent as soon as pricing slips." -A. Distributor

"Finally! Thank you Harry. It's really no different than the market disruptions that have historically happened in other CPG categories aside from the fact that this one is much more personal to people. And it's that personal connection that drives the "need" for all the variety of brewery experiences. It's rock 'n roll it has a rhythm all its own." -A Craft Brewer

And Greg Owsley, formerly of New Belgium but now running a marketing outfit called the Storied Brand -- dedicated to building brands through stories -- has something to say about craft's storytelling and how it moves the needle:

"Stories in branding are far from emotional mush and a good story can make just about any brand a mountain mover. This is hardly limited to craft beer, but let's start there. Let's say there is this guy riding his bike through Belgium and Europe who becomes fascinated by beer, goes home, and he and his wife quit their regular jobs and start a brewery in their basement. Or a Harvard MBA, who instead of going the management consulting route, decides to resurrect his family's dormant brewing history. The craft beer cooler is so full of this story that the particulars are nearly interchangeable. It's the dominant theme - home brewer abandons regular career path with (harebrained) idea to make a living from their real passion - that is moving Craft Mountain.

"The irresistible draw of the craft beer brand is a collaboration of several deep-seated American identities: the story of the maker, the soulful craftsman making something real and authentic, not to mention immensely flavorful; the bootstrap entrepreneur narrative redefining what is means to be successful; and the closely related tale of the cavalier rejecting conventional corporate behavior. From the customer service rep to the accountant to the middle manager to the senior VP to, heck, really anybody stuck in a job where she feels her soul being slowly siphoned off, this brewed story makes already delicious craft beer just that much more seductive.

"Any brand that can provide a meaningful bridge between our idealized identities and cultural reality will be a marketplace success. We all want a life that is remarkable, but a only rare few do not feel short changed at least at some level. We then use stories to overcome life's contradictions. We sort things out with parables from religion, folklore, the arts, pop culture, sports, politics, and, yes, consumer brands. In beer, craft is only currently the most poignant storyteller. Bud did it for the working class in the 80s; Corona for the pager generation; Dos Equis for the male emerging adult (think 28 year old dude: I say I want to play Xbox all day and never grow up but I actually do).

"So how long can the craft story move its mountain? Well, because it's working with some rather timeless and deep cultural currents, the end is a long ways from sight. Each generation establishes its own unique set of identity criteria, but so far the Millennials are pretty native with craft. Don't forget they've never known a world without craft beer. And, for a generation where authenticity is paramount, relationships are the new status, and individualized choice is the new black, craft beer is solid."

As NBWA advocates for your businesses in Washington, D.C., and in the states, we have several updates that I want to share with you.

REPEAL DAY GENERATES 3-TIER PRESS FOR INDUSTRY

I hope everybody had a great Repeal Day yesterday. It's hard to believe it's been 80 years. What the 80th anniversary of Repeal did afford the industry was to allow for some stories to be pitched to the media about the value of the three-tier system that Repeal created. In a note to distributors, NBWA chief Craig Purser outlined some of the stories which were published yesterday.

1. The Capitol Hill newspaper Roll Call published a guest observer column, "Lessons Remain on 80th Anniversary of Prohibition's Repeal,"

2. The Daily Caller published "Raising a glass to the 21 st Amendment" in which NBWA's Rebecca Spicer explains, "Today, this system delivers commercial and economic value in communities around the country."

3. NBWA has placed a short video on the CBS big screen in Times Square in NYC. The video includes a celebratory message and bubbling brew covering 520 square feet of viewing space. It's positioned at 42nd Street between 7 th and 8th Avenues. The video will be running into the New Year and is available online.

4. NBWA is also running online and print advertisements in several D.C. publications including Roll Call, CQ Weekly and Washington Times. Additionally, NBWA is sponsoring the Politico Huddle email this week.

5. NBWA also sent a letter to all members of Congress yesterday making them aware of the anniversary and its significance saying, "Congress' wisdom in placing alcohol regulation at the state level remains an enduring legacy that provides numerous benefits today."

BEER BRIEFS:

A-B IS PUTTING $10 MILLION into its Williamsburg brewery. The investment will help expand the brewery's packaging operation and other production needs and is part of more than $39 million that has been invested into the facility since 2011.

Until tomorrow, Harry

"The meal is not over when I'm full. The meal is over when I hate myself."
-Louis C. K.

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This month last year ended on a: Mon
YTD sell days Over/Under: +0

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