American beer has undergone a metamorphosis since the 1970s. Three decades ago the only choice available to consumers was what the Brewers Association terms a “mass-produced commodity with little or no character, tradition or culture worth mentioning.”
While the traditional pale lager has not disappeared from breweries or grocery store shelves, commercial-style beer no longer dominates the industry. Through innovation, narrower margins, and changing American tastes, small-scale, tradition-inspired breweries have grown; in the first half of 2012, craft beer sales represented 6 percent of all beer sold in the United States.
After a long period of dormancy, the craft beer brewing tradition has reasserted itself. Prohibition devastated the local and regional brewery business, which up until that point had been thriving. Once prohibition was lifted in 1933, the Great Depression and the Second World War prevented small, independent breweries, which had previously characterized the American brewing landscape, from taking root. Instead, the breweries that had begun to crop up after the 18th Amendment was repealed were consolidated. Now, the four largest beer companies, Anheuser-Busch InBev (NYSE:BUD), SABMiller (SBMRY.PK), Heineken (HINKY.PK), and Carlsberg, command a 55 percent share of the global market, according the consultancy Marakon.
But as the Wall Street Journal reported on October 1, commercial brewers “face a consumer-led backlash in favor of niche craft beers and microbrewers,” and industry executives fear that the beer business will become like the wine industry, dominated by local producers.
When the 1970s came to a close, there were only 44 brewing companies in the United States, and at the time industry experts predicted that the number would decrease to 5. But craft brewing intervened. According to the Brewers Association, the “renaissance of American craft brewing” came in 1976, with the founding of The New Albion Brewery in Sonoma, California. While its doors were open for only six years, hundreds of home-brewers took inspiration and started breweries of their own in the early 1980s.
Despite the difficult market conditions these small brewers faced entering an industry dominated by brands like Budweiser and Coors (NYSE:TAP), the number of craft breweries in the United States has grown significantly. In 1980, there were only 8 craft brewers, by 1994 there 537, and today’s figure is close to 2,000. Sales of craft beer have grown proportionately as well. In the first half of 2012, craft beer sales rose 12 percent, compared to 13 percent in 2011.
To be considered craft brewer, a company must meet several criteria: the brewery must be small, independent, and traditional. Specifically, this means that the company must brew less than 6 million barrels of beer per year, less than 25 percent of the company can be owned by an alcoholic beverage industry member, and its flagship beer must be an all malt brew or 50 percent of the total volume the company brews must be malt.
These determinants, which are essential to the tradition of craft beer brewing, have made competition with larger, commercial beer companies difficult. However, the breweries’ small size is not only an essential characteristic, it is the factor that has allowed for craft beer to compete successfully against commercial-sized operations.
California is home to more breweries and produces more craft beer than any other state in the U.S., according to statistics provided by the California Craft Brewers Association, a non-profit trade association. When the craft industry reemerged in the 1980s, the movement was centered in the state, and now 1 in 5 bottles of craft beer made in the U.S. is brewed in California. According to the association, “California’s craft brewers have been the drivers of innovation in the beer industry,” because as small and often independently owned businesses, they have the ability to respond quickly to market demands and experiment with new techniques.
San Francisco’s Anchor Brewing Company is the nation’s oldest craft brewing company; founded in 1896, the brewery has long been at the forefront of innovation. “Anchor started it all,” said David Edgar of the Institute of Brewing Studies in 1991. “It’s the granddaddy of the microbreweries.” To combat the difficult market conditions, Anchor pioneered a new brewing method. Rather than using ice, the company began its craft by producing steam beer, a process developed during the Gold Rush to save money.
Russian River Brewery, founded more than a century later, has become a leader in sustainable production. In 2010, the company installed a 110 kilowatt solar energy system that provides 70 to 80 percent of its energy needs. “Our success is the ability to innovate and quickly introduce products to respond to our consumers,” said Russian River’s co-founder Natalie Cilurzo regarding the brewery’s business strategy. And the company has innovated; the list of beers scrawled across a dusty chalkboard at the company’s brewpub lists colorfully named brews ranging from Damnation to Salvation.
The company’s stance is not an unusual one in this industry. Fort Collins, Colorado-based New Belgium Brewing Company, known for its Fat Tire beer brand, pioneered the abbey-style Belgian ales of which American beer drinkers have become fond. Now, instead of expanding further, the company is scaling back its operations, hoping to delve deeper into the brewing process.
Despite New Belgium’s size, the company remains focused on aggressively managing costs in order remain competitive with the commercial brewers. For example, to keep distribution costs in check, the company only sends out and receives full truck loads to maximize fuel efficiency. “We also allow and encourage pooled loads from our distribution center so small distributors will team up and put up to 5 distributors on one truck which will drop at each location as it heads across the country,” said Mason Lathrop, the company’s Order Management Liaison, by e-mail.
However, as the executive director of the California Craft Brewers Association Tom McCormick said, “craft beer by its very nature is produced, somewhat humorously, very inefficiently.” The primary inefficiency, he noted, is that of labor. According to a joint study between the association and the Goldman School of Public Policy at The University of California, Berkeley, for every one hundred barrels of beer produced in the state, one job is created.
But the breweries make up for labor costs by being very “innovative and nimble,” said McCormick. Even though the companies’ margins are much narrower, costs do not translate to the consumer. For a six-pack of beer at Bay Area drugstore, the price difference between a commercial domestic beer, such as Budweiser, and a craft beer is approximately $1.50 for certain brands, although it can be more. Rather than charge more expensive prices, craft brewers cut back on marketing. While commercial companies spend a large percentage of revenue on advertising, he said, craft breweries rely on communities to promote their products at the grassroots level.
The strategy has paid off. As the Wall Street Journal reported, big brewers must now respond to the success of the craft breweries in order to minimize their loss of market share. The publication highlighted several options: commercial brewers can buy craft breweries, as AB InBev did with Shock Top, or they can develop variations of their mainstream beers as the company has tried to do with Bud Light Platinum.
Regardless of the method chosen, “In the future, major brewers may need to support a portfolio of up to 35 brands in the U.S., compared with 15 now, reckons one senior industry executive,” according to the Journal. Furthermore, both options will entail additional marketing and distribution costs that will negatively affect operating margins.