Drunken Speculation

Session #80 – Is Craft Beer a Bubble?

sessionsTime once again to tackle the Session, a.k.a. Beer Blogging Friday: a monthly opportunity for beer bloggers from around the world to get together and write from their unique perspective on the same topic. Each month, a different beer blogger hosts The Session, chooses a topic, and creates a round-up that lists all of the participants.

This month’s topic, hosted by Derek Harrison at It’s Not Just the Alcohol Talking with the topic “Is Craft Beer a Bubble?”

Derek phrases the question thusly:

It’s a good time to be in the craft beer industry. The big brewers are watching their market share get chipped away by the purveyors of well-made lagers and ales. Craft breweries are popping up like weeds.

This growth begs the question: is craft beer a bubble? Many in the industry are starting to wonder when, and more importantly how, the growth is going to stop. Is craft beer going to reach equilibrium and stabilize, or is the bubble just going to keep growing until it bursts?

This going to take a while, so strap yourself in.

Pedantry

Craft beer is not a bubble. Bubbles refer to unsustainable price increase in assets driven by speculative mania. Craft beer is a concept, not an asset, therefore there can be no bubble.

For example, if there was an exchange where you were one of many bidding to buy a barrel of Sierra Nevada that won’t be brewed for another three months, at prices completely divorced from the fundamental economic return a barrel of beer presents, in the hope that you could sell the barrel to a greater fool, then yes that would be a craft beer bubble. But to my knowledge, the CME doesn’t trade craft beer futures.

What is happening is a boom. There’s an increase in demand for a given widget, supply increases in response and prices oscillate around as supply and demand tend towards an equilibrium that only exists in economics textbooks. It’s a perfectly natural aspect of capitalism. As is the inevitable bust that follows all booms.

Food for thought: Wikipedia, Tulip mania

Supply and demand (and leverage)

If one blogger trots out this chart…

brewery chart

…during this Session, I’ll get repetitive strain injury from rolling eyes so much. I cannot stress how completely irrelevant the number of breweries is to the debate. It’s a question of supply versus demand. One brewery bringing on line 1000hL of capacity is a very different proposition to 10 brewpubs bringing 100L kits online but the distinction is rarely made. And that ignores the fact that the number of breweries in 1887 was 2,011 when the population was a touch under 63 million and is now 2,403 with a population of 316 million. You do the per capita math.

The salient questions are:

  • How much beer is being made?
  • How much beer will people drink?
  • How much money has to change hands for the former to meet the latter?

These are simple questions that have difficult and dynamic answers. Answers which are beyond my ability to provide (the Brewers Association has two whole data points) but underpin the boom-bust cycle.

A still more difficult question to answer is how much money has been borrowed to fund the boom. A brewery that has a high equity to debt ratio is much more vulnerable than a debt-free operation. If sales dropped 10% tomorrow and it turned out every craft brewer everywhere only had 10% net equity in their operation, then yes, we could be facing the end of craft beer tomorrow. Does anyone have a decent dataset of the debt levels of breweries?

Food for thought: Brookston Beer Bulletin, American Beer Sales Continue To Climb: BA Releases Mid-Year Numbers

Triggers for growth

An aspect of the boom that is rarely examined is what might cause people to buy more craft beer or, alternatively, what causes them to buy less than they might otherwise.

In my view, craft beer is a highly discretionary item. Not only do you not need it to live, there are much cheaper, albeit lower quality, substitutes available on the market. It would follow then that discretionary consumer spending – the amount of money that a person has available to spend on non-essentials – might be a driver for growth.

For example, as I’ve suggested previously, Australia is facing an economic cliff, after which money is not going to be easy to come by, so people are not as likely to spend $11 on a single imperial stout. In contrast, if the US economy continues to sputter along, it’s consumer spending will likely rise and you would expect that some of that growth may spill into beer. Indeed, the peak of the boom coincides with an uplift in US consumer spending.

To take a different tack, craft beer’s rise into the mainstream consciousness could be said to have ridden on the back of very self-aware, young, urban people with a penchant for irony (yes, the h-word). When they go the way of previous, loathed subcultures, will their contributions to the zeitgeist follow or will craft beer transition successfully into the mainstream?

These are issues which need to be considered on a market-by-market basis. There are places that I would never have heard of otherwise – e.g. Bend, Oregon or Missoula, Montata – which are craft beer hubs. Places where you can’t walk down the street without tripping over a brewery. These places are farther along the craft beer development path, for want of a better term, than the Yukon or the Pilbara. The drivers in each market will be different and will impact the timing for the bust’s arrival. It won’t happen uniformly, but over a period of time at different rates in different places.

Food for thought: Ramblings of a Beer Runner, Are we headed towards a craft beer bubble? Back of the envelope calculations are troubling

The Bust

The phrase “craft beer bubble” is used almost exclusively in an American context, though I am aware of growing concern in the UK and in Australia. The use of the term in the States comes in the aftermath of the GFC, an enormous housing bust and the crash of the NASDAQ in the early ’00s, which I feel has given the blogosphere’s analysis an unnecessary level of pessimism. The use of the term “bubble” in this context reflects an ongoing distrust in the American (and global) psyche that anything that has double digit growth must necessarily be built on bullshit and ready to crash and burn in the next six months. While what goes up almost always comes down, it rarely comes down with the severity of a house in Vegas.

When the bust comes, breweries will close. There will be more brewing capacity than demand for beer, whether that drop in demand be driven by fewer dollars or a lack of interest. Without growth, brewery balance sheets will start to look less healthy as consumers become both more quality discerning and more price driven. The brewers who cannot match on either quality or price will be consigned to the dust bin of history. Those who are clever or skillful will make it through, though they will perhaps wish they hadn’t invested so much in stainless steel and kept a bit in the bank for a rainy day. Contract brewing with the extra capacity won’t be an option as the current flood of new entrants will dry up.

Consolidation will start to take place as the new economic reality sets in. The pendulum will swing the other way: instead of the massive influx of new options on limited shelf space, your local bottleshop’s shelving will start to look less chaotic and will be easier to navigate. It will remain this way until some enterprising people sense the bottom of the market and start to sniff around for investment opportunities.

Personally, I couldn’t care less if bad breweries go out of business. Welcome to financial risk. However, I will not look forward to the consolidation phase: the part of the fun of craft beer is finding something new and less diversity takes away some of those opportunities. On the upside, I believe that good beer that wasn’t readily available a few years ago will still be around.

Food for thought: Boak & Bailey, Habits of Successful Breweries

Timing

Economic predictions are rarely made with any kind of temporal accuracy. You know the shit is about to hit the fan but you can’t quite profit from the demise because, as ever, the market can stay irrational longer than you can stay solvent.

I think a bust is an inevitability. It may not take the form described above but the growth rate of craft beer will eventually slow, go to zero and turn negative. Whether that happens today, tomorrow, next year or next millennium is what I think this Session will (should?) really be about.

In my opinion, the craft beer boom, even in hot markets like Oregon, has a while to run yet. While it’s been noted that IPAs are now one in four of beers consumed in that state, is there really a reason why it couldn’t be three in four? That would be a three-fold increase in consumption, which will take years to build. I don’t think craft beer will kill the majors in the long run, but that doesn’t mean that golden adjunct lager can’t be displaced as the beer style of choice, as it previously displaced ale in the Anglosphere in the early twentieth century.

As a final food for thought, read this oddly formatted but entirely reasonable quote from Seen Through a Glass:

Now, the second thing… “Will it fall?” Yes, most definitely. Allow me to explain, though it should be obvious. Back in April, I visited the Glenlivet distillery, and walked around it with their “Guardian of Malt,” the wonderfully affable Ian Logan. We talked about the boom in Scotch whisky.

“The last downturn was in the mid-1980s,” he said. “[Glenlivet's parent company] Chivas just kept turning out spirit, right through the downturn, and now Glenlivet is set with ample supplies of aged whisky.” Unlike most of their competitors, he was too kind to add.

“It will turn down again,” he then added, matter-of-factly. “It always does. These things are all cyclical, and there are limiting factors on how big it can get.”

9 comments

  1. Pingback: The Sessions #80 – the craft beer bubble? | beer is your friend

  2. Pingback: Is craft beer a bubble? (The Session no.80) | beer bar band

  3. Great post.

    I am guilty of using that chart, but in reference to what you’re talking about – saturation or rapid increase in breweries would be more dependent on specific locales, and the areas where rapid growth has taken place has proven (and continues to do so) at handling it: http://bit.ly/151CNRx

    Cheers!

    • I guess my real exception to that chart is that people use it as conclusive proof that the end of the boom is nigh, whereas it only conclusively shows that there’s been a boom, which is why it worked in your post earlier in the week.

      Agreed on the local differences. Unfortunately, I left my run at that point until the end when I was getting a bit sick of writing about the topic, so it got a bit chopped.

  4. Pingback: Session #80 Round-Up: the Yeas | It's Not Just the Alcohol Talking

  5. Hello Liam,

    Excellently put together. Thanks for the multitude of links to follow.

    I too wonder to what degree the “faddism” of craft beer is buoying up the market at the moment. Like slow food and the locavore movement I imagine it will hang on in enclaves while, to some degree at least, people move on to the next big thing.

    Consolidation is, perhaps, more worrisome to me. I’d like to believe that the craft beer movement is, in the long run, about the ingredients and the process. In the beginning I’m sure it was for the majority – now, I’m not so sure. Seems like this is a fairly good bandwagon to jump upon. When the biggies come around with deep pockets I wonder who will stand on principle and who will believe they can make a deal and still steer the ship.

    Interesting times for sure.

    Cheers,
    Alex

    • The degree of “fadddism” is an interesting question to which I don’t have an answer. Certainly, there are anecdotal examples in my life of people who I wouldn’t expect to be drinking craft, or craft-like, beer but are doing so but whether they are attached to the concept or just trying something different remains to be seen.

      The other point you raise is interesting because there is widespread dispute, even within the beer enthusiast community, as to whether it’s the ingredients, quality, diversity or locality that drives the enthusiasm. Consolidation is interesting because we may end up with regional or national level breweries with high quality beers over diverse styles which still doesn’t satiate the craft beer enthusiast’s ideal and ends up failing.

      As for the biggies, you may want to take a look at http://wp.me/p32ziF-mB for some more thoughts along those lines. Certainly, in Australia, the biggest “craft” brewers are owned by macro producers (except for Coopers).

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