"There is no way to control all of this proliferation," Tenth and Blake ceo Tom Cardella offered as part of provocative keynote at SCOL Conference in Denver. As a result of continued proliferation, beer SKUs will roughly double to 20K, Tom included in series of "prognostications" for what the beer biz might look like in 2025, with caveat that at least half of predictions will be wrong.  "Local trumps national," he said, so continued growth of small locally-focused breweries will lead to a brewery count around 10K. Most will sell a majority of production on-site, which will include production brewery taprooms. But he pegged brewpubs as a bigger part of the count at around 8000 ten years from now, or 3-5% of all US on-premise accounts. That could be "conservative," in Tom's view.  (A different article on Tom’s presentation appeared on our INSIGHTS Express.) 

That's as the number of production breweries "will peak sometime over the next ten years at three-thousand," Tom predicted, before starting to drop again by the time 2025 rolls around. "Barriers to entry are really getting to be a challenge at retail and distribution," he noted. So along with a "multitude of small, local" breweries, Tom sees 20-25 "really large craft breweries," (tho no telling how "large" that is). He expects 7-10 "contract brew sites" will produce "at least half a million barrels." Between 15-20% of craft will be exported, or about 8 mil bbls if total craft hits 20-share, or 40 mil bbls of a 200-mil bbl industry. He also thinks 3 mil homebrewers will produce the equivalent of 15% of craft production, or about 6 mil bbls. Additionally, Tom thinks it's possible that half of brewers also distill, which presents a "tax equalization" concern for Tom. Beer needs to "keep that distinction as the moderate beverage," he believes, noting the huge "cost to our industry, if we lose that status," and its associated tax benefits.

As it grows, "craft will become less independent," Tom believes. "Craft breweries will have to consolidate," he said, and "the goliaths," or large brewers like AB and MC, "will own 30% of the craft volume," in 2025, he predicted. Another quarter of breweries will be at least partially owned by a private equity firm. The same will be true of private equity's interest in the distributor tier. Big distribs will get bigger while smaller entities will find unique niche ways to run profitable bizzes, Tom believes. Retail will change as a result of "mass customization" through data. Distribs may find themselves "merchandising the right stores by day part." He also thinks there will be "more collaboration" between small brewers in category management. Ten years will see "shelf-sets dominated by style," Tom thinks, which will "negatively impact the focus of the supplier and of the distributor." But a focus on "face, place and story" will make it "so we don't turn into the wine industry." In-store breweries, growler stations and/or homebrew supplies will be in 40%+ of high-end non-convenience channels. Inside of that changing landscape, Tom predicts "three-times the number of supplier reps."

In 2025, both craft and imports will have 20 share of beer, Tom thinks. FMBs and ciders will represent another 10 share, putting above-premium brands at half the industry. But he also sees a "stabilization" or "even a resurgence" of "American style lagers." Those won't necessarily all be "light," but "old brands that really represent some real core authentic values," like Coors Banquet or Miller High Life, seem poised for more growth, in his view. The far-ranging talk, presenting Tom's (not MC's) view of a beer industry ten years out, built on many data points, research from multiple sources and conversations with at least a dozen veteran industry members. It wrangled in observations about changing demographic landscapes (again the big 3: millennials, Hispanics and women), comparisons to specialty food and coffee (including some parallels Tom shared at the Ill & Mich wholesaler meeting, see Jun 27 issue of CBN) and much more.

"People say it's SKU proliferation that's the problem. It's actually the shifting consumer preference," and "that's outside of your control," Leslie LeMair of Rehrig Pacific Co said succinctly during presentation at Tamarron Consulting's Supply Chain and Operations Leadership (SCOL) Conference in Denver this week.  Presenters repeatedly referred to the growing number of SKUs across most conference presentations. During 8-person panel tasked with discussing the future of the beer industry, panelists dug in: "The consumer's asking for that," New Belgium's Nate Turner echoed, and "we do what the consumer wants us to do." While "we're a long way from being able to solve that problem," that is, managing the level of variety that consumers demand, breweries need to "assist the wholesaler and try to manage all that." Suppliers and wholesalers "need to talk about what happens to that product," John Glick of Craft Brew Alliance said, when an order runs long or what to do if it's short. In the meantime, "aged beer is going to get out of hand," with plenty of "dusty" bottles already, CBA ceo Andy Thomas noted.

The increasing prevalence of "rotating draft lines," Fred Dufour of Monarch Beverages said, means "forecasting is going to be a focus." But moderator Tom Fox questioned rotating lines from a retailer perspective: "is it a good idea to do that?" A resounding yes came from Chris Steffanci of Columbia Distributing in Washington. "Forty percent of draft lines in Seattle rotate," he noted, and "I think it's good for retail." Many rotator bars use technology already to help customers, posting live draft lists online and how many pints are left in a keg on an electronic board above the bar. "Technology is going to continue to play an important role," Chris said. Indeed, Seattle, with craft around 36 share, "if you're not bringing variety, you're not going to survive."

"Whether it's rational or not is hard to say," Nate said of constant rotation. If bars focus there without worrying about diligent line-cleaning, the "beers going to taste like crap and that's going to hurt us all." The trend also makes it tough for larger brands: NBB is now being told its Ranger IPA is "too mainstream." The co's long "heard that about Fat Tire," of course: "it sells too well, we don't want to have that on tap," Nate said, jokingly paraphrasing some bar owners. He was echoing a comment made earlier by Tenth and Blake ceo Tom Cardella, who was told by Terrapin's Spike Bukowski on a recent visit to its Athens, GA home mkt that "none of our retailers wanna take our Hopsecutioner," Terrapin's flagship IPA, as "it’s too mainstream." Chris also echoed Tom, noting that some craft consumers find new brands by style while others seek out new brands from favorite breweries. "While handles are still rotating, there is still allegiance to breweries," Chris said. So "you're brand is more the brewery now than the flagship," Nate added.

Speaking to Chris, Andy noted that "your normal is this complexity," and "it's coming," to more markets. "There needs to be a sense of urgency" to address complexities that come with this "new normal," in his view. Chris jumped in that "we think it's going to get to a 50 share" in Pac NW and "I actually think we're underdeveloped in craft." He believes "the up-side is enormous," but "all these complexities are gonna come and you've got to be ready for it."

But Andy warned against playing too hard in the rotating space, asserting that "if a majority of your business" is in "having the hottest thing that's going to rotate every time," then "you're just not going to be able to make money." CBA is working to "link that rotating handle back to something," releasing a Widmer Hefe Shandy next summer, "trying to halo back on to Hefe." Andy also offered that suppliers need to consider distrib margins while trying to differentiate their brands from others. "We're going to be on the short end of the stick if we're not competing on the margin side," he said, which has "got to come from efficiency someplace." Nate concurred that focus is important, because "if you've got 24 initiatives, that's really hard to align," particularly with wholesaler staff. "You have to pick those battles," he said, as distribs "can't build twenty-thousand brands at the same time" and should "fall back on brewers to support that." At the same time, distribs "also need to evolve your sales organization," Chris said. Columbia has "segmented our on-premise sales team" into "three completely different kinds of salespeople," each calling on different kinds of accounts.

Andy Wonders: Will PE Squeeze Craft? Andy Thomas also wondered aloud about what the "unintended consequence" could be of growing involvement of private equity in craft. "I don't think any of us are ready for the pressure that's going to create," he said. "Competition is intensifying" and "shareholders or PE partners are going to look for more and more return, quicker and quicker," he believes. "I think we're getting squeezed." And folks in the craft space will need to "navigate water that none of us have ever sailed through" as more PE money comes in.

We are entering uncharted waters that will substantially alter the craft scene in coming months.  Already this year is record-breaking: five of the top 50 BA-defined craft brewers have done transactions to sell part, most or all of their companies, including 3 selling stakes to private equity firms or family offices.  And there’s more to come.  The 5 so far are Harpoon, where founder Rich Doyle sold stake to ESOP, Uinta, Sweetwater and Southern Tier, which all sold stakes to private equity and Blue Point, which sold outright to AB.  Now comes news that at least 3 more of the top 50 are engaged in extensive discussions to sell part or all of their biz.  There are formal deal books on at least two of those companies, multiple sources have told us.  But even still, we don’t know for sure what kind of transaction if any, these cos will complete, so we’re not disclosing names.  Plus there may well be more.  Our point: there are a lot of craft transactions in the works.

“There’s a big wave coming,” said one savvy source, well-versed in this space.  Craft brewers have become “open to private equity which I never would have expected.”  He added there’s “wide range” of investors looking to do craft deals.  A brewer source agreed, noting it’s a mix of “strategic, private equity and foreign” brewers that are looking closely at various available craft assets. “BA is gonna have one helluva time making heads or tails” of who is a craft brewer and who isn’t, he added.  Indeed, definitions will likely get blurred beyond all distinction during the next phase. 

Key driver of these decisions, say multiple sources, are the massive expenses some brewers face with their next rounds of expansion.  That’s causing some to reconsider the capital outlays and more seriously contemplate taking some or all of the money at risk off the table.  Others may think it’s time to get out while the getting is good.  Even as craft continues to grow dramatically, it is becoming increasingly crowded and competitive. 

Whatever the reasons, there will likely be several significant craft transactions in the coming months.  It’s the “auctioning off of the Craft Revolution,” said Brooklyn co-founder Steve Hindy, whose book earlier this yr was called “The Craft Beer Revolution.”  (Steve actually sold his own stake some yrs back, while staying on).  One could argue that coming cash outs are inconsistent with the revolutionary drive and ethos that has sparked the craft movement for decades.  Then again, arguably that was the purpose for many entrepreneurs all along and there ain’t nothin’ wrong with that.  Will it matter in terms of how the movement is perceived?  Hard to know at this early stage, but big changes are afoot. 

Since the Beer Industry of Florida released its no-strings growler-bill support video, the move has gotten plenty of local press in the Sunshine State. And much of it has been just as negative towards wholesalers as press during the height of the legislative session earlier in the year. Regardless of the org’s support (which, recall, dates to well before the appearance of this video), there was no disentangling BIF from “Big Beer” in the minds of Fla reporters. Further, many of those writers took the oppy to scoff at the video’s suggestion that deregulation could lead to “deep discounts” and “overconsumption,” leaving one particularly ill-informed writer to call the video “laughable on its face” in the Orlando Sentinel and another to describe the notion as “absurdly alarmist” in the Daytona Beach News-Journal.  The benefit that wholesalers may provide to public health seems to be a piece of their story that doesn’t resonate, and is viewed in media as somehow funny: what we called “consumer-friendly,” the Sentinel termed a “silly cartoon.” What now?

It’s been a little while since private grumblings about pay-to-play exploded into a more public debate, but so it went yesterday after a series of tweets from Pretty Things Beer and Ale Project in the wee-hours of Tuesday morning. Unusually, it began with naming names: @PrettyBeer pointed to a pair of Boston bars from the same ownership group that don’t serve Pretty Things beer, allegedly because the beer co won’t pay for tap space. It went on from there, stretching across a couple of hours, easiest to read here. By morning, a Beer Advocate forum thread was growing quickly. By afternoon, the usage of the #dirtylines hashtag Pretty Things urged others to use to call out the practice picked up steam, the story attracted Esquire, which in turn tipped Eater. The owners of the pair of bars responded. Brewers from across the country joined in support of Pretty Things, including Stone’s Greg Koch, who has long been outspoken on this topic. This morning, BostonInno and other sources piled on. But the problem, as is always the case in these matters, is proof. Regardless of how many bartenders tell sales reps that their taps are for sale (or not), state alcohol beverage commissions rarely take action.

Some interesting things to point out from this iteration of a familiar eruption: first, allegations were not limited to the “big guys,” indicating another version of craft on craft, small on small battles. But the focus here, as the hashtag indicates, was on the bars and restaurants that ask for and expect these types of payments. Other recent comments from elsewhere point to how commonplace the practice is and how nonchalantly some retailers think about it. Second, many beer drinkers expressed surprise and disgust at the practice. Multiple tweets shared users’ shock that such a thing could be limiting their draft beer options and some got fired up, directly asking their favorite bars if they engaged in pay-to-play. Meanwhile, others thought it was no big deal: it’s just capitalism, right? And what’s the difference with grocery store slotting fees, hairstylists renting chairs and renting space at a flea market, as some Beer Advocate users pointed out. The difference, of course, is its illegality. But these comments point to a lack of interest in or concern for the kinds of three-tier regulations upon which the current system was built.

New “Mayor’s Local Brewery Workgroup” in Louisville, Ky issued intriguing first report this week. The five-fold proposal splits focus between regulatory changes and promotional activities the partnership between private bizzes and public servants plans to push. Besides giving a glimpse at what folks in Ky are thinking about (when they’re not thinking about AB’s bid to add distrib branch in Owensboro, that is), the document provides yet another look at how supportive of brewers local governments have become. The report introduces 5 major points of focus: 1) work with tourism board to promote local brewers with a beer trail/map; 2) amend state liquor board regulations to ease process of opening and running a small brewery; 3) “bring down the walls that have blocked local breweries” from sales at “city events, functions and venues”; 4) build on local bourbon attraction with big barrel-aged beer fest; and 5) remind locals of brewing roots with focus on Kentucky Common style and heritage regional brands.

Changing Up Beer in “City-Sponsored Events,” “City-Owned Venues”; Easing Regulations Citing “the critical importance of the local economy in a sustainable future” and local breweries “as exemplars of this new economy,” the group seeks to make headway on putting local beer on tap at city-owned venues like Slugger Field and city-sponsored events like Hike, Bike and Paddle by next spring/summer. While “customary concessions practices in venues for sports and music have evolved from the three-tier...system” and “reflect private commercial matters between concessionaires and wholesalers,” the report notes, “there is nothing fundamentally ‘Louisville’” about that. So local government “should seek to be a positive force in requiring or strongly encouraging their venues to serve local beers as part of their concessions.” Indeed, the mayor’s office and other group members support “the creation of branded, destination concessions areas unique to the venues its taxpayers have financed” and looks “to educate concessionaires” about the benefits of such choices, “safe in the knowledge that profit margins for handcrafted beers can be equal to or greater than those for products supplied by multinational breweries.” The report doesn’t say so, but recall that a certain “multinational brewery” operates the largest distrib in Ky in Louisville, about 30% of AB’s volume in state.

That’s as the same parties examine “local building codes” as well as “state statutes governing malt beverage manufacturing and sale” currently seen to be “hindering the local craft beer industry.” The group specifically seeks to expand sampling opportunities, which Metro Louisville Government believes “have a civic benefit.” So it’ll work to improve relations between local breweries and state regulators and legislators “to further educate all parties on the civic and economic value of craft beer.” Lookout Frankfort.

Playing Up Bourbon, Retro Brands and Bikes  The group’s plans for establishing a Louisville beer trail, sponsored both by city’s tourism agency and breweries, is most developed: signs and maps should begin to appear this month. The group also looks to cater to bicyclists, as making a more bike-friendly Louisville is a broader focus for the city. Perhaps most exciting to the beer geeks out there is prospect of another large barrel-aged beer festival Louisville wants to debut in early 2015. The first fest will bring in mostly local, regional breweries. Future iterations will broaden to a national focus. The group hopes to get the Kentucky Distillers Assn involved and improve relationships between state brewers and distillers too. Finally, the workgroup wants to “revive beer gardens” in the city as well as “Bock Day” celebrations. It also hopes to promote the Kentucky Common style, which originated in the area, and educate locals about Louisville’s “‘big three’ brands,” Fehr, Oertel and Falls City. Events and exhibits will celebrate local beer history.

Another aspect of Brew Hub’s partner brewing biz will include its own line of brews dubbed the “Craft Collection”; “our home brand strategy,” ceo of Brew Hub, Tim Schoen told NY distribs at NYSBWA mtg last week.  Already “several” are being developed and “the idea is to do them Brew Hub by Brew Hub.”  So Fla Brew Hub will be “more Florida themed” brands, whereas other Brew Hub locations, “same kind of thing would evolve” with “some sort of regional theme, perhaps local, or even state-wide” brands.  Could have up to 5 or 6 Craft Collection brews a year.

First brand in the “collection,” Keybilly, is “really symbolic, more than anything, of what’s out there and what the possibilities are,” for Brew Hub concept, said Tim.  Keybilly is a Key-lime infused beer that was originally homebrewed by a local Floridian home-brewer named Pat Kennedy, who’s a real “character” as Tim put it.  He’s an “eclectic art-seller in the Keys,” as well as a guitarist in the local bar scene, who came up with this beer recipe with a friend and ended up sending it to Brew Hub brewmaster, Paul Farnsworth.  “It looked like a mess, the label was terrible, but our brewmaster said, ‘you know what though, it’s pretty good beer.’”  So “long story short” Brew Hub ended up cutting a deal with Pat, and now “our whole team basically took that brand on our shoulders,” including brewing, production, signage, pricing, graphics, PR etc.  Packaging has already been developed, and could “possibly be in Publix” within next 3 mos.  “That’s what we’ll do for small brands like that,” said Tim.  

NY state beer wholesalers meeting last week had very much of a craft theme and IRI foodstores data clearly showed why.  It’s all the growth in the state.  While total NY beer mkt volume down 0.6%, craft up 14.6% yr-to-date thru Sep 7 in foodstores. Craft $$ sales up $6.7 mil, 16.4%, while total beer $$ up $5.6 mil, 1.9%, mostly because of trading up.  Cider also showed strong growth: $$ sales up $2.5 mil, 61% and got 2.3 share of $$ in mkt. 

Three of the top 5 craft brewers in NY are NY-based: FX Matt, Brooklyn and Southern Tier.  But Boston Beer by far the biggest craft player and also got strongest growth of any major supplier, craft or otherwise, this yr in NY.  Its $$ sales up $3.7 mil, 22.5%, led by Angry Orchard Crisp Apple (up 91%) and Rebel IPA intro.  Those 2 brands accounted for 62% of Boston growth.  Boston gained 1.15 share of $$ to 6.74 of total mkt.  Passed Heineken USA in NY foodstores.  Looks like it had over 25 share of craft in NY supers in IRI too. 

FX Matt $$ sales up 3.6% yr-to-date and it had over 10 share of craft beer in NY and fully 1.75 share of total mkt in NY IRI. Sierra Nevada having strong yr in NY, up 17%.  Jumped to 1.3 share.  Brooklyn up 8.5% and 0.85 share.  But Southern Tier up 30% and gained 0.14 share to 0.63.  Next 5 craft brewers that gained the most share in NY supers, after Boston: Bell’s, Sierra, Gambrinus, Southern Tier and Lagunitas.  Those 5 gained 0.8 share. 

“In less than four years” the number of alcohol manufacturers in NY have “more than doubled,” declared chairman of NY State Liquor Authority, Dennis Rosen at NY State Beer Wholesaler Association mtg.   Number of NY breweries now over 200, as microbreweries jumped from 40 to 105 in 4 yrs.  There’re already 62 farm breweries in state after inventing farm brewery license in mid-Jan last yr, 7 larger scale breweries, up from 6, and 33 restaurant brewers, up from 10.  Then too, distillers have basically sextupled in same time, from 10 to 59, farm wineries up from 195 to 295, wineries from 52 to 80, and 8 farm cideries licensed to-date.  Dennis, in part, credited “explosive growth” in number of alc suppliers to better processes, “better technologies” to reduce licensing lead times, and improved SLA mission statement that adds a line about “additional goal of economic development.”  SLA is “one of the highest revenue raising agencies” at $63 mil: about $55 mil from licensing, about $8 mil from fines. 

Straight from 2d largest NY state craft brewer, biggest competition in NY craft market comin’ from “out of state guys,” Fred Matt of Saranac Brewing Co asserted at this yr’s NY State Beer Wholesaler Association mtg, on a panel also including Brooklyn Brewery’s Steve Hindy, Dave Katleski of Empire Brewing and Paul Leone from NY Brewers Assn, moderated by NYSBWA prexy Steve Harris. 

Notoriously “New York doesn’t love New York,” said Fred, so when out-of-state craft cos come in “it’s always the fair-headed child,” while “the guy that’s been around tends to be on the sidelines.”  When big brands like Bell’s and Shiner (both entered NY this yr) come into town, they’re “going to get [shelf] space.” And since FX Matt biz is more focused off-premise, Fred feels larger craft brewers from out-of-state have more impact on his biz than in-state brewers that are typically more focused on-premise.  “Bell’s came in 12 guns totally loaded,” and “flooded the market,” Dave added.  “Then it backs off.” And it’s “going to be the same when New Belgium comes into town.”  One reason “all those west coast breweries want to come to New York” (and east coast in general) is because of “much healthier” pricing environment, said Steve Hindy.  That’s why you see “far more” west coast breweries gone east than the other way around.  Fred also worried about “advance fees” some brewers getting when they enter a new state, which in his mind are “tough” ’cause it instantly “puts a lot of focus on that brand,” and a “tough check to write” for distribs.  Instead, “when we roll out a [line] extension, why shouldn’t we get that advance payment on the extension?” he wondered. 

Meanwhile, Dave and Paul were beating “local drum.”  Dave pledged that distribs should “focus on selling New York State beer,” whether it’s his, Saranac, Brooklyn or otherwise, adding “key to growing our economy collectively” is to “allow New York State to have a greater market share” of craft.  Currently, NY Brewers Assn has “think NY, drink NY” campaign designed to “sell more New York State craft beer,” Paul noted.  Even NY Governor has made economic development thru local products a “key driving component,” Steve (Harris) acknowledged, and there’s been “big effort from the administrative side” regarding “incredible challenges” on supply side of beer with ingredients like barley and hops.  “I think barley could be…the next big bumper crop in New York State,” Dave added.  “Barley is a huge challenge,” and Governor has allotted $300,000 for barley studies going forward, tho likely “5 years out before we have any significant information.”  Currently there are 13 malting facilities (not all open), and 42 hop yards growing about 250 acres of hops in NY, which is not much but “that industry is growing incredibly,” said Paul.  Multiple folks thruout the day reminded that NY was once largest hops producer in the country during colonial times; pre-Prohibition there were 30,000 acres of hops in-state, noted Dave (almost as much as total US acreage in 2013), so “it’s doable” here too. 

More Breweries the Merrier, But “Be Careful What You Wish For”; Quality & Access to Mkt “Concerns” Several panelists voiced “quality concerns” for craft segment going forward.  It’s “a classic ‘be careful what you wish for’” scenario, said Dave, since “we have been fighting diligently to get brewers’ rights” in NY, but as more and more brewers come in, that in turn brings up “major challenges” about quality and about “access to market.”  A study from Brewers Assn chief economist, Bart Watson found the “actual threshold of breweries in NY state is 777, before there’s some massive fall out…. To me that sounds challenging,” Dave went on.  “I think right now we’re at the point where some of the small breweries that don’t have access to market that are self-distributing…are going to be faced with some major uphill battles.”

Yet “can America absorb 5000 breweries? Absolutely I think it can,” said Hindy. “I think the more the merrier.” There are “all different types of models” for craft whether its natl, international, “hyper-local,” regional, that continue to work.  Fred thought 20 mkt share for craft is entirely possible, and while “there might be some fallout” along the way, that “doesn’t mean it will slow down.”