Global hop marketA local alternative to mass beer suggested by independent brewers has been successful and is now altering the global market. Beer is becoming more diversified, so transnational companies have to accept the new game rules and to switch focus to young and fast growing markets. All these processes increased the demand for aroma and bitter hop as well as their acreage expansion on two continents. However now there appeared a downward trend of alcohol consumption in the world, so even special sorts can soon turn to be sufficient. In this connection the dynamic American hop market is already facing some problems. EU hop producers have become more cautious, they are not racing to exceed the demand and look forward with more confidence, judging by the contract terms.
Hop Market in RussiaGermany still dominates the Russian market, yet over the recent two years one has been able observe a continuous success of Czech hop suppliers. Their expansion and growing popularity of hops from the United States became the drivers of supplies growth in 2016 despite the preceding modest harvest crop in the EU, as well as the factor of relative stability in 2017. In this connection, in 2017, the ratio of the varieties continued to shift towards the aroma ones, and the supplies of Magnum hop and other alpha varieties were reduced. However, the import of bitter hop pellets is partially replaced by extracts, especially from the major beer manufacturers. Total volumes of alpha acid supplies, according to our estimation, decreased by approximately 5% and returned to the level of 2015. Barth Haas Group continues dominating the hop products market; HVG also increased its weight. At the same time, Morris Hanbury significantly reduced the supplies in 2017.
10+1 trends of Russian beer market 2015-2017Despite of the moderately negative prognoses for 2017, the beer market can be stabilized soon. Yet the years of the negative dynamics have resulted in marketing being limited just to “optimization” and the art of balancing between price and volumes. Bigger supermarkets share means stronger trade marketing. These processes are connected to the majority of the described trends. At the same time, the federal brands inflation leads to searching for new tastes, sales channels and contact formats that expand the product range and diversify the beer market, but do not imply a substantial volume increase. Let us enumerate and further discuss the ten trends of the beer market we can see in 2015-2017 as well as the major event of 2017.
Beer market of Ukraine 2017In the first half of 2017, the Ukrainian beer market goes on decreasing slowly. Yet, the companies manage to compensate their lost volumes by raising prices and improving the sales structures. This results in the mid price market segment reduction while the sales of premium brands are rising. These processes are connected to position strengthening of companies Carlsberg Group and Oasis and the market share reduction of Obolon. Most of the novelties by the market leaders belong to craft or hard lemon categories.
Beer market of Russia 2016: PET goes to draftThe beer market of Russia was warmed up by the hot summer, but the preparation for large volume PET prohibition has already impacted it negatively. The year was successful for Efes, MBC and regional producers; Carlsberg’s positions were virtually stable but AB InBev and Heineken lost a part of market share having focused on the sales profitability. The dynamics of big brands was determined by how much the companies were willing to keep the prices down or by their promotional activity. In this context the economy segment of the beer market and sales of inexpensive draft beer were increasing. The premium segment started shrinking due to license brands migrating to the mainstream segment.
American Craft Beer
Not a very long time ago the USA had a beer market completely dominated by large companies. Small brewers’ efforts were not even considered as commercial projects and existed only thanks to their enthusiasm. Their development was organic – the microbreweries saw a period of boom, the awkward age crisis and now it is experiencing a new curve of growth. The economic recession has only slowed down the dynamics of the craft beer sales, but it did not stop the craft breweries from taking a small share away from the large companies.
Matthew Brynildson, of Firestone Walker Brewing Company, – one of the well-known “enthusiastic brewers” of the first wave is sharing his analysis of the development of the microbreweries and craft beer market in the USA. We got the impression that the processes the USA apply for our area as well.
Could you give us some facts on the craft beer development in the United States?
In the United States there was an interesting phenomenon - in 1965, so quite some time ago, Fritz Maytag purchased Anchor Brewing Company in San Francisco. We consider him to be like a godfather of craft brewing. Anchor Brewing was the only craft beer company for a very long period of time. Then starting in the 1980s more breweries started popping up. So in my mind it started in the 1980s. There was another brewery called New Albion in the 1970s also in California. But if you look at the progression 1980 to 1985 was really when it all started. Then until 1997 we saw a very positive growth and in the mid-nineties a very American thing happened. As soon as the investors started to see something which was successful a whole bunch of public money was invested into this business.
Were they networks or independent breweries?
Originally they were completely independent. Moreover, they were people who started making beer at home and they were very passionate about beer and were very interested more in beer making than business. So it was very much a passion. And naturally this passion grew into business and attracted investors who knew nothing about beer. And what happened is that there were a number of market players who came in not knowing anything about beer, they did not even own a brewery but they created a label and they contracted with the brewers to make the beer and did not concentrate on its quality.
Who were those investors?
Predominantly they were venture capitalists who would invest in anything where they could see an opportunity. But mind you at the same time those original passionate brewers were also continuing to have good business. This success of craft beer led to an increase in the number of the craft beer producers - from one or two to a hundred. And it came to a head in 1997 and we had what I call a falling out. There were too many non-passionate people and brewers that might have had a couple of bad beers, so the interest waned and we saw a little bit of stagnation. As a result of this falling out, companies with lower quality products or less stable business plans - they went away. However, those same passionate brewers (and Sierra Nevada Brewing Company is a very good example) stayed strong and continued growing. After that the market slowly took off again.
What were the reasons for this market growth?
Well, I think again the same original very passionate brewers became not only expert brewers they figured out their labels and marketing, they figured out how to be businessmen and started running their breweries more like real business not like home beer shops. And it really took root and more importantly their customers, their fan-base became very loyal and the word of mouth spread because these people don't have marketing dollars. So it is very organic and natural process.
Besides in the United States there is a new fascination - I call them foodies they are people who are very interested in cooking at home, in better wine, better spirits, better foods and craft beer fits perfectly into this. And I feel that there is a whole generation of people who having started drinking craft beer will never go back to domestic lagers, they will drink craft beer. And I think, with a very high level of certainty, it is going to happen in Russia too.
Did craft beer commercial production start as a restaurant business?
Even now, of the 15 or 16 hundred breweries one thousand are still restaurant breweries, so I believe that it was a huge part of the process. And there are a couple of important things about that. That is, if you are a consumer, if you go to a restaurant you are captive audience. The second thing, which is very positive, is the brewer can control the quality 100% and so the customer gets the best possible beer. The beer did not get put in a glass bottle or in a PET bottle and warm shipped somewhere.
What are some others distribution channels beside restaurant breweries?
The licensing in the United States is typically one of three different things. Every state in the United States has slightly different rules but in general you can be a brew pub or a restaurant and you sell 100% of your beer right there. Some have an option to do both - they can sell it at the restaurant or package it in something else, they can sell it outside. And there is a whole group of micro-breweries that only produce for either keg or bottle, everything they sell is sold outside of the brewery with the exception that they typically have a tasting room for tourists or someone who is interested in the brewing but they don't usually sell large quantities of beer there. Thus I think the brew pub was at the center of the revolution, it really did a lot to promote craft beer.
What are the main trends of craft beer industry now?
There seems to be more and more restaurant breweries opening up every year, there is also a considerable amount of these micro-breweries opening up, and then I have seen a lot of businesses who were originally just production breweries now also opening up restaurants, because their owners see the advantage in being able to pair food with their beer, to bring in new customers and to showcase their products. Besides now there is beer tourism. People will fly to Portland, for instance where there are forty breweries and the spend a week just going from brewery to brewery, so the breweries find they have to some kind of hospitality or a tasting room to allow the tourists to come. It is great for business.
Are there any national brands of craft beer?
As the industry grows, predominantly breweries are regional about 90%. There are a couple of chains like Tinkoff, which are in multiple cities. Then there are one hundred micro-breweries or so of what we call regional specialties which are now starting to distribute to other states. My brewery is a good example of regional specialty, we are in about four or five state, so every year we take on a little bit more distribution. However, I think we are all wise enough to understand that it is live beer, it is very perishable and we should be very careful with how far we ship. And of course there are other regional breweries out there who have a very passionate fan-base and the last thing we want to do there is just sit there and rot. So we are very cautious to grow.
And one more thing: since the Prohibition in the United States we have what we call three-tier system, so there is the brewery, the distributor and the retailer. And in most cases we have to use a distributor to get our beer to the retailer because of the law in many states. It was a post-Prohibition thing to try to maintain separation to prevent monopolizing retail. This separation is a problem for a brewer because you don't know how your beer is being presented. It is very expensive to present it properly. This it is just another reason for us to be cautious.
Can your brewery with its successful distribution to 5 states be used as a typical example of development or is it a unique story of success?
Yes, it is fairy typical. Though Firestone had been in the wine business for forty years before going to the beer business. So at some level it had an advantage, as they were already involved in the fermentation science, they were already involved in distribution and packaging - so they had good roots and that was a huge help. But it is typical that for the first 10 years they only distributed in California and 75-80% of that was sold in three counties, which was only one hundred mile radius of the brewery. And we spread slowly because we could not afford marketing, so it is very organic growth. So, I would say it is typical.
The only thing that I fear is what will happen to the brewery after this generation of passionate brewers is retired. Will it be sold to a big brewery? Will new owners take things so seriously? You never know. So I always say we have at least one generation of very positive growth and then it is unknown - unfortunately.
You've mentioned foodies, people interested in better foods and drinks who are the target audience for craft beer. How many are they?
I know that the number of people preferring craft beer is growing. I would just use the statistics - in 1999 there were 250 million barrels of beer sold in the United States and 2% was craft beer and in 2009, which are the latest statistics, over 4% of all beer sold is craft beer. So the fan base has doubled in the last ten years and you can approximate that it is about 5% of beer consumers in the United States. Our goal, the goal of Brewers' Association, is 10%. Five years ago that seemed crazy, today it seems quite possible.
What about the demographics of your consumers?
For the most part we believe them to be typically college educated, which leads to a higher economic demographic - they are not necessarily rich but the education seems to be the key. And we hope that we tap younger consumers because many of the breweries are in college towns, so mostly they are young adults from late twenties to forties.
How does a person become a fan of craft beer? Do you do anything to popularize your beer and familiarize consumers with it?
First of all I think people tend to be drawn to the things that are regional or the things that belong to their community. One of the reasons for the success of craft beer in the Unites States is beer festivals where all the breweries come together and pour for public and it draws a lot of people and exposes them to new breweries, it's been very successful. For example The Great American Beer Festival where there is friendly competition almost 100,000 people come to Denver and get exposed to 450 breweries from around the country pouring. And it is one-to-one situation, you actually interface with the customer, they decide they like you, may be they go and tell one or two people, so it is very slow, it is not putting an ad on TV convincing people you have the best beer in the world. Instead our brewery sponsors a lot of non-profit activities, we donate beer to a cause and they might have gathering of people together and our beer is a part of the gathering. Sometimes people go home with the idea that they like our beer. So it is very organic.
You've mentioned an untypical for Russia phenomenon, namely purchasing of small breweries by large breweries. Could you go in some details on this process?
In the United States, of the total 250 million barrels of beer, 50% is produced by one brewery, Anheuser-Bush, another third is produced by Miller. There is trend of consolidation and certainly there is stagnation for the domestic lager breweries. They see the craft brewery growth, so they inevitably try to buy in. Anheuser-Bush has been successful in buying about five craft breweries. So that is just inter-brewery consolidation and there is a tendency for investing money, of course with the economy downturn there is not as much, but still larger companies are trying to get into the obviously growing market.
What happens to a micro-brewery after the purchasing?
With most of the successful ones - for instance when Anheuser-Bush bought in Red Hook Brewing Company or Goose Island Beer Company, there is a couple others - they typically just buy 50% of the shares of the company and they typically have hands-off approach, that is they allow the brewery to run as it did which is very good because the quality maintains and the same people are making the beer and they offer their distribution which allows the brewery to really expand.
Do they still have regional brands?
Most of them still have this appearance, but the distribution makes them much larger than regional players in most cases. But to be honest it is still a minority, most of the craft breweries are still operated independently.
And there is another phenomenon of collaboration when, say, two or three breweries don't have the finances for a bottle line so they join forces and three of them might operate out of one production facility. But no other entity owns them, they just pull money together.
Do they produce any brands together?
There is a phenomenon right now and it is almost a trend among craft breweries when two or three breweries get together and they create a recipe, they take one person's brewery and they sell under a collaboration label. It seems that United States craft beer drinkers are really into this collaboration concept.
Besides that there have been some neat collaborations between European breweries and US breweries. Our brewery also had an overseas collaboration with Marston's Beer Company in Great Britain because Marston's is the last Burton Union system brewery in the world and we also brew in oak barrels, so the two breweries had a common theme together and made a beer together, which is a great story, and a great opportunity to see each other's breweries. This is another thing that I like about craft beer movement; is that there is not a lot of competition. We coexist and there plenty of tap handles and there isn't much in fighting. And I think it's always a sign if you see any breweries going against each other like the big breweries do, it is a sign of when it is going to fail, because in my opinion when there is fierce competition the brewery falls apart.
You've mentioned an association coordinating the activities of brewers. What is it?
Yes, there is BA or the Brewers Association. Most craft breweries enter this association and pay dues. The association has full time employees that help out breweries in a variety of ways. They organize the Great American Beer Festival, they sponsor a number of different events, plus they have a web presence, they publish a magazine and they do as much as they can for non-profit organizations. Everything they do, all their money goes to promote craft beer. Apart from promotion they are also engaged in education, they do a lot of publishing.
Please, tell us about your brewery...
Firestone Walker Brewing Company was born due to an original idea of fermenting beer in oak barrels; so every week we ferment 20% of our flagship product, pale ale, in brand new American oak. We have this very unique after-fermentation program and I think that separates us from other breweries. Besides I believe that the use of the unique hop is a significant thing that sets American Craft beers apart from their European counter parts. American hops are gaining favor around the world with Craft Brewers and I really think that this is a trend that will continue. Our dry hopped American Style pale ales are some of the fastest growing brands here in the USA. It's one thing that I think not only ours but all American craft beer brewers have done well is creating something to differentiate them one - from mainstream brewing and two - from other craft brewers. So one brewery may be focused on sour beers, one might be focused on hoppy aggressive beers, our brewery tend to focus on this wood fermentation program. This gives beer drinkers something to cling to. I can't speak for the Russian craft brewing but I have seen both in Germany and England the craft brewers tend to produce the exact same beer styles that the big brewers brew. They might make it more flavorful and slightly differentiate it but the consumer thinks: "Well this beer is better but it tastes a lot like the usual one and I can get them for less." Well, I think American craft brewers have almost gone over the top in creating really zingy beer styles that may or not beer terribly drinkable, but certainly they differentiate.
If I were to give advice to new craft brewers I would say that differentiation at some level is super important. It is really difficult because if you are in business you need to produce a beer that people will actually drink and at the same time you are trying to create something which is new and interesting and you have to take risks. And sometimes you take a risk and it pays off and sometimes not. I think it is important to have the standard beer that you know people will drink and one or two beers that are different that you can ease people into.
In Russia there are medium-sized national breweries which produce inexpensive beer with non-standard tastes. Do you have this type of breweries in the USA?
Yes, this sounds almost exactly as it is in the USA. There are large breweries that have the taste of the country, there are regional breweries that were around even before craft beers, and they are still strong and have very fierce fan base.
Are there any craft beer shops in America?
There are some specialty stores that specialize in better beers, they might sell just craft beer. There are a few of those but they are not very typical.
So is most of the beer still sold at pubs?
There are a lot of pubs and restaurants but most of the beer is sold in grocery stores. Unfortunately the pub culture in the United States is decreasing because of drinking, and driving laws.
How did the financial recession affect craft beer industry?
It didn't seem to affect it. The craft beer segment still grew, and the domestic breweries stayed relatively firm. But in looking back after we have seen a little bit of recovery, the Brewers Association assumption was that the sales probably would have grown even more. So, for a while we were thinking we were recession-proof and now we think we are just slightly recession resistant.
What impressions do you have after your visit to Russia?
My expectations were exceeded by what I saw in Russia. When I was going to Russia I was not sure that I would see a craft beer movement, but there are some wonderful small breweries. It is very encouraging to see, if there is a world trend then we are all moving in the right direction. I think it would be excellent for Russian brewers to visit United States because there is a lot to be learned not only by interfacing with specialists but by looking what is happening on market. And Russia and Ukrainian brewers should know that US brewers are just as hungry to talk and to give information, so there shouldn't be any hesitation to approach US brewers for information. We are one happy family, trying to grow together.
Facts of USA craft brewing:
• Growth of the craft brewing industry in 2009 was 7.2% by volume and 10.3% by dollars compared to growth in 2008 of 5.9% by volume and 10.1% by dollars.
• Craft brewers sold an estimated 10.69 million hl of beer in 2009, up from 9.97 in 2008.
• Craft brewer retail dollar value in 2009 was an estimated $6.98 billion, up from $6.32 billion in 2008.
• Overall, US beer sales were down 2.2% in 2009.
• Imported beer sales were down 9.8% in 2009, equating to a loss of 3.28 million hl.
• The craft brewing sales share in 2009 was 4.3% by volume and 6.9% by dollars.
• 1,595 breweries operated for some or all of 2009, the highest total since before Prohibition.
Source: Brewers Association