THE U.S. CRAFT BREW INDUSTRY

Jack Kleban, Barry University & Ingeborg Nickerson, Barry University

ABSTRACT

This paper examines competitive factors in the craft brewing industry in the U.S. It encompasses a description of what defines craft brewers, the different categories of craft breweries depending on size in the U.S. and the major competitors in the industry according to annual volume output of beer. Recent growth in the craft beer industry compared to the general U.S. beer industry is detailed. In addition to craft beer brewer characteristics, the paper outlines market structure, competition, and business strategies of craft breweries. Also considered are branding and social media marketing and social responsibility considerations, followed by distribution, and regulation and taxation of the craft brewing segment of the beer and beverage industry.

INTRODUCTION

Craft breweries' operations are small, and they are considered to be traditional and independent. Traditional in the sense that they produce a malt flagship or brew full bodied beers many of which are made from recipes taken from German or English brewing origins. The malt is high grade, the brewing process is relatively slow, and the production is small scale. The main differentiating factors of craft brewers are their unique styles of brewing which can lead to enhanced flavor and taste.

The craft brew industry in the U.S. is experiencing rapid growth. In 2008, craft breweries sold a combined 8.5 million barrels of beer, and in 2009 they sold over 9 million barrels. Although the general beer sales in the U.S. experienced a decline in sales by volume of 2.7% in the first half of 2010, and sales of imported beer were down by 9.8% in 2009, craft breweries were able to increase their sales by volume in the U.S. by 9%. In 2006, the reported number of craft breweries in the U.S. was 1370, and in 2010 1625 craft breweries were reported. This represents a growth of over 18% in less than five years, the highest growth rate in U.S. history since before the prohibition era.

As evidenced, craft beer production and its consumption in the U.S. is on the rise. This case provides an in-depth look at the industry and its potential for growth in the near future. We also provide information about the industry's market structure, including competition within the sector.

MARKET DEFINITION

Since 2006, the craft beer industry has been able to outperform the normal beer industry segment on both percentage margins and percentage growth because of their unique product characteristics, organizational structure and different marketing approach.

Craft breweries tend be small in size, typically producing less than 6 million barrels of beer (BBL) per year. They are independent, as less than 25% of the brewery is owned or controlled by an alcoholic beverage industry member that is not themselves a craft brewer, and finally, traditional, as at least 50% of its volume is in either all malt beers or utilizes enhancers in order to create full-flavored beers.

Craft brewers focus on differentiation. Their value derives from utilizing both traditional styles, such as using malted barley, combined with their own unique formulas by adding nontraditional ingredients, hence developing new styles that have no precedent.

Craft brewers tend to be local not only on the supply side, but as well very involved with the communities they serve. They are involved in a number of corporate social responsibility programs such as product donations, volunteerism, sustainable development, sponsorships, and other philanthropic endeavors.

Craft breweries are horizontally differentiated and have a limited number of substitutes. The main differentiating factor between the craft beers and other normal beers is the brewing styles and distinctive flavors. Craft beers have their unique taste and likeness, which come from the traditional slow brewing styles and recipes that have been perfected over the years. This is why craft beers differentiate themselves horizontally based on the taste and quality.

Craft type of beers appeal to consumers who are seeking a "taste revolution." For this particular consumer group, the increase in product features increases their economic benefit, thus giving them more satisfaction. Due to this unique feature, the price elasticity of demand for craft beers is much lower than the normal beers. Because of the economic benefit provided by craft beers, they can demand higher prices, thereby capturing higher margins. The craft brewers are also geographically differentiated. A particular geographical area boasts a unique type of craft brew (i.e. Boston Beer Company, located in Boston, Massachusetts). The success of the craft brew industry and its appeal to the general population is based on two main reasons: the higher perceived economic value consumers get and the very experience of drinking craft beer.

SCOPE OF CRAFT BREWERIES

Craft breweries can be separated into different categories according to production output in barrels of beer (BBL) per year. (Where 1 BBL = 339 12 oz bottles of beer or 235 half-liter bottles of beer.) Craft beer production for all categories can range anywhere between less than 30 BBL and up to 6 million BBL per year. It is within this range of volume output that craft breweries get their name categorization.

Nanobreweries: Nanobreweries operate at a slower rate than traditional microbreweries, with a volume output of less than 30 barrels of beer per year. They are not a good choice for long-term setup as the effort/profit ratio is very narrow.

Microbreweries: Microbreweries produce less than 15 thousand barrels of beer per year. More than 75% of its beer production is sold outside the brewery.

Brewpub: Brewpubs are restaurant-based breweries where more than 25% of beer is sold on the same floor. Restaurants maintain these breweries and beer is dispensed from the storage tanks. Many laws and regulations have to be taken into consideration for these brewpubs; and, if allowed by law, it is possible sell beer to offsite places or offer "beer to go." The majority of restaurants that operate a Brewpub are located in the northeast sector of the U.S. This is due to the fact that the local population in the northeast demands locally brewed beers.

Contract Brewing Company: They comprise brewing companies that outsource their production to other already established breweries. The main brewery provides the exact specifications for brewing the beer. The contract brewing company is responsible for the marketing, distribution and selling aspects of the business, while the brewery provides the space, apparatus and infrastructure for brewing. Some examples of these breweries include Pete's Brewing Co, Boston Beer Co., and others. Boston Beer Co. is the largest brewery with its flagship products: Samuel Adams (SA) Boston Lager, Boston Ale, SA Octoberfest, SA Wheat, and SA Winter Lager, etc.

Regional Craft Brewery: Regional craft breweries produce anywhere between 15 thousand and 2 million barrels of beer per year, and over 50% or more of their volume production focuses on all-malt beers, and/or their malt flagship. Regional craft breweries are typically known for adding flavor-enhancers in order to produce strong-tasting beers. Examples include Sierra Nevada Brewing Co., Red Hook Ale Brewery and Anchor Brewing Co.

Large Brewery: These breweries have an annual production capacity of over 2 million barrels of beer. The only craft brewery that comes close to this definition is the Boston Beer Company with annual production of 1,841,348 barrels per year.

THE U.S. BEER MARKET AND ITS PERFORMANCE COMPARED TO CRAFT BEER

The U.S. beer sales market has experienced a downturn in recent years. Beer sales by volume were down an estimated 2.2% in 2009 and 2.7% in the first half of 2010. Imported beers have also experienced a downturn in sales of 9.8% in 2009 (equivalent to 2.8M barrels).

Conversely, the craft beer brewing industry has experienced sales growth in recent years. Craft beer sales by volume in 2009 were 7.2%, and 10.3% by dollars compared to growth in 2008 of 5.9% by volume and 10.1% by dollars. This transfers into a 4.3% by volume and 6.9% by dollars of craft brewing sales share as of 2009.

Craft brewers sold an estimated 9,115,635 barrels of beer in 2009, up from 8,501,713 in 2008. Craft brewer retail dollar value in 2009 was an estimated $6.98 billion, up from $6.32 billion in 2008.

MARKET STRUCTURE AND COMPETITION

Because craft breweries differentiate themselves from the regular beer producers by focusing on quality, their organizational structure is consequently different. Furthermore, craft breweries cannot compete with large breweries with price due to their advantages with higher economies of scale.

Competition within the domestic craft beer segment and other high quality beer categories is based on product quality, consistency, freshness and taste. Craft breweries must also be keen in their ability to differentiate products by utilizing a variety of methods, mainly: promotional tactics, customer satisfaction programs, distribution costs and price. In order for craft breweries to maintain their identity, they must follow their differentiation strategy (by using a combination of the methods mentioned). Otherwise, they would be considered as part of a regular beer product category, and hence would compete with beer, wines, spirits and other flavored alcohol beverages.

The craft beer segment has become highly competitive in recent years due to easy availability of funds to finance the startup operations, which has led to the explosive growth in the number of craft breweries operating in US market. Competition varies with the regional markets, depending upon the local market preferences and distribution techniques.

Within the craft brewing industry, microbreweries experience the most competition. This is due to the fact that there are many of them and their market shares are noticeably small. Due to their wider distribution zones, national craft brewers have the financial backing necessary to support their products with expensive promotions. On the other hand, microbreweries possess the competitive advantages of being even more unique than national craft breweries and highly appealing to local consumers.

Craft brewers also compete with imported craft brews such as Dark Ales, Pale Ales, Lagers and other alcoholic segment products from Belgium, France, Germany, and other countries. The imported beer segment has relatively high percentage of market share in US and is economically stronger than most of the local craft brewers. However, due to the growth in the craft brew market in the U.S., this segment has lost some market share. Craft brewers are taking advantage of several factors, such as lower transportation costs, quality and flavor of beers, proximity and familiarity with local consumers, federal and state tax incentives, higher degree of product freshness and crispness, etc.

Competition for craft beers is also present from the wine and spirits segment. The regular beer segment has lost about 1% of their market share to wine and spirits segment every year since 2003. However, this trend is declining due to the recent economic downturn. As the numbers indicate, the craft beers segment has shown growth despite the economic crisis, indicating a bright future and potential for further growth in this industry. The Pacific Northwest and California are said to be the most competitive craft beer markets in the U.S. in both number of breweries and consumer awareness. The market is currently healthy and competitive, but specialists believe that soon this competition will be based on price, leading to a drastic decline in the quality and integrity of the products. This in turn can potentially damage the industry as the industry is primarily based on differentiation via quality of product(s). Craft brewers attempting to capture more market share are focusing on consumer awareness, redesigning their brands, aligning their product lines, and practicing sustainable development

As consumers shift more toward exclusively purchasing craft beer varieties, what benefits are seen by the local producers?

According to the case study, how does the craft beer industry differentiate their product from other beer producers?