In December of 2012, three members of the Brewers Association penned an editorial for the St Louis Dispatch bluntly criticizing large breweries such as A-B InBev and MillerCoors for what they termed “faux-craft” offerings. The Brewers Association was and is concerned by large breweries able to make their products indistinguishable from the offerings of smaller competitors; the canonical example of which is Blue Moon, which most beer drinkers are not aware is manufactured by MillerCoors. The association’s primary weapon in their defense is the definition of “craft beer,” which they can and have manipulated to include or exclude parties depending on need.
In the wake of this trend, and the Brewers Association’s response to it, we are left with two questions. Most obviously, is the Brewers Association right to be concerned about “faux-craft” offerings. Second, what role does the definition of craft beer play?
To address the first question, we need to examine the actual evidence. On paper, the answer is inarguably yes: faux-craft is a clear and present danger to smaller brewers.
As a $167 billion dollar company, A-B InBev can be expected to enjoy economies of scale typical to most manufacturing-style industries. The company can buy higher quality ingredients at a lower cost than can their smaller competitors, simply by buying more of it. Such is their purchasing power, in fact, that by manipulating suppliers A-B InBev can in many cases effectively dictate terms to them, as documented by BusinessWeek. And if it’s not enough that they have the ability to manufacture the same product at a lower cost, they are also able to distribute it more efficiently and cheaply having mastered the byzantine distribution regulation years ago. Steve Hindy, a founder of Brooklyn Brewery, discusses this at length in an op-ed for the New York Times.
Based on just these facts, the logical conclusion is that small craft brewers are doomed. But when we look for evidence of the impact of these handicaps, it is surprisingly difficult to find.
In spite of the acknowledged disadvantages, the craft beer category has enjoyed robust growth. According to the Brewers Association, craft beer was up 20% in 2013, capping five years of consecutive growth. The chart below depicts the trade association’s numbers by year from 2009 to 2012.
For those skeptical of a trade association’s numbers, the Demeter Group (an investment bank) estimated attached a 13.9% CAGR to the craft beer category from 2009 to 2011. Over that same span, Demeter projected the sub-premium brands as having declined 3.9%.
Which means that in spite of their handicaps relative to larger competition, craft brewers to date have shown essentially no impact from larger rivals or their faux-craft offerings. From a market perspective then, the risks remain largely theoretical. It is certainly possible that hybrid blends of macro/micro capabilities such as AC Golden could leverage their advantages to emerge as dominant players, but in the short term the market appears to fragmenting at an accelerating, even unsustainable rate, which is not an environment favoring “faux-craft” breweries. Nor do “buy local” movements – increasingly common – advantage the offshoots of larger breweries.
The answer to our first question, then, is a qualified “no.” Over time faux-craft may become a legitimate threat to craft brewers, but there is little evidence at present to suggest that it’s inhibiting growth at the moment. Quite the contrary, in fact.
As for the definition of craft beer, the evidence suggests that it is in fact highly strategic, but perhaps not strictly for the defensive reasons outlined in the original editorial. The Brewers Association specifically uses the definition as a means of differentiating its offerings from macro-produced competitors, and clearly there it is utility in distinguishing Blue Moon, for example, from Allagash White. But the definition of craft beer may be more important to members of the Brewers Association than to larger competition.
Consider the case of Boston Beer Company. As is well known, the Brewers Association modified their definition of craft beer in 2011 to increase the production ceiling for breweries seeking to qualify as a “craft brewery.” Formerly capped at two million barrels per year, the Brewers Association tripled that to 6 million barrels per year. On the one hand, change was arguably overdue because the cap had been in place for thirty years. But the timing was notable; the Boston Beer Company was potentially on pace to exceed the threshold in 2010.
But is the craft beer designation that important to the Boston Beer Company? Given its size – the company is worth of three billion dollars on $739 million in 2013 revenue – hasn’t it outgrown the label? Perhaps. But if you’re the Boston Beer Company or the Brewers Association, of which Sam Adams is a member, the following chart might give you pause. This is a normalized plot of the Google search trends for “craft beer” and Sam Adams share price over the same span.
It is dangerous, of course, to read too much into share price, but the tight correlation of craft beer as a search term and the market valuation of the Boston Beer Company certainly suggests a relationship between the two. Which in turn implies that the definition of craft beer is, in fact, material to Boston Beer Co’s business. The makers of Sam Adams like to claim that they’re still the little guy, and it’s true that A-B InBev, for one, is worth 56 times what the Boston Beer Company is today. But as a company that sold three quarters of a billion dollars worth of beer last year, they certainly enjoy substantial market advantages over their smaller craft beer brethren.
An interesting subject for future consideration, then, is whether the real competition for craft brewers on a going forward basis will in fact be the A-B InBev’s of the world or rather other, larger craft brewers. In the meantime, remember that while the definition of craft beer is important, it might not be for the reasons you think.