Bar Brawl: Tap Rooms, Brewpubs, and the Coming Clash of Craft

Craft brewers come across as a surprisingly cooperative lot.  Stories abound in and around the industry of breweries working collaboratively, sharing hard-to-find ingredients, even providing start-up loans to new breweries (which seems a little bonkers, from a capitalist perspective).  Likewise, having known my share of craft beer bar owners and operators, you'll often see close relationships between breweries (not just distributors) and the bars that stock their products.

Call me cynical, but it seems to me like the camaraderie is starting to wear a little thin, and for a very simple reason: markets evolve, the negative space is starting to fill in to a significant degree, and changes in the law are incentivizing different behaviors.  Big breweries, craft breweries, and bars are all starting to bump into each other, and there are only so many customers out there.

We may be in a Prisoner's Dilemma situation, too.  It's entirely possible that collaboration and cooperation could continue to be viable avenues for success among craft brewers, but that individual defections will limit the probability of it.

For sure, though, it's a dynamic situation.

Brewpubs, Taprooms, Beer Bars, Oh My...

Take in, if you will, this mind-blowing statistic: 60% of new restaurants close within their first three years, but for brewpubs that number drops to 46%...over 35 years.  It isn't hard to understand why.  Brewing and selling on the same premises creates incredible cost savings (no packaging, no delivery) and you're selling to a basically captive audience (once they're in the door, they're buying your beer).

"So what?," you might ask.  "There aren't huge new chains of brewpubs in the market."  That's true.  If you look at the Brewers Association's statistics on brewery openings, the ratio of brewpubs to microbreweries/regional breweries hasn't increased.  However, recent changes in state laws and market approaches have seen production breweries opening tap rooms, or tasting rooms, or sales locations that are brewpubs in all but name.  They're pouring pints, filling growlers, and even the ones that don't serve food often bring in food trucks or cut deals with local delivery restaurants.  They're brewpubs in all but name (and sometimes in name, too).  This creates tensions between breweries, distributors, and craft beer bars, and we're already seeing pushback.  

Then there's the actual incentivizing of brewery establishment.  Cost of a basic commercial brewing system has come down dramatically; the push to service the equipment demands of more-radical homebrewers has blurred the line, and a functioning professional brewery now might have a smaller system than a particularly-geeky homebrew club (mine, the Stoney Creek Homebrewers, owns and operates what is essentially a 2bbl system.  I'm pretty sure we've accidentally created the 25th-largest brewery in the state).  Moreover, in many states (I'd say most, but had trouble verifying cost in all states) a brewery license is significantly cheaper than most liquor licenses, sometimes dramatically so (in PA a brewery license can be had for $1,425, whereas liquor licenses sell at auctions for anywhere from $5,000 to $400,000), and once brewing, you can often sell directly.

Add that all together and you create unavoidable conflict.

"Split Up!"

Then there's the fact that this is all happening at a time when it makes perfect sense to split up and "go local" as a survival strategy.

For years, craft brewers could afford to cooperate because they weren't actually competing with each other: they were competing with macro breweries and carving out chunks of their market share (small chunks as a percentage of what the big breweries sold, but of sufficient size to sustain and grow the micros).  One successful microbrewery buoyed the reputation of craft beer, thereby helping the others, so why not help out if you're a "competing" brewery?  Everybody wins.

Once "big beer" started to sit up, take notice, and fight back, the calculus changed.

Macros start buying up craft breweries, driving down the price of craft beer and directly challenging the business model of the remaining craft breweries.  The logical response is for craft breweries to turn into the skid and target local communities in lots of locations rather than relying on a traditional centralized production/distribution model.  Big beer will always be able to undercut price on the shelf, but over the bar a small brewery selling for itself has a relative advantage, especially if they can lean on "drink local" sentiment (which they can).  

This "scatter" effect is a great way to create more targets than big beer can smash, but also puts breweries-with-brewpubs in much more direct competition with each other, and with the bars that were their direct customers.

The Wars to Come?

It's not universally held, but it is commonly speculated, that there's an impending "correction" coming in the craft beer market.  Too many breweries chasing not enough customers with the giants stomping around gobbling up "real" craft breweries and driving down profit margins (plus some quality concerns) will mean a "big crunch" in the craft brewing universe.

Maybe so.  Craft brewing's share of the market is still growing, but that rate of growth has slowed significantly.  Still, it's not realistic to think that we'll ever end up back in the bad old days of huge national breweries and no craft options.

What seems most logical to me is that the small brewpubs will survive - after all, they have that built-in "brewpub advantage" we discussed earlier.  I also tend to think that the larger craft breweries will survive, leveraging their economies of scale to a sufficient degree to remain profitable even in direct competition with the macros.

No, what worries me is what happens to those caught in the middle: the highly-successful but not-quite-national craft breweries.  Where do they go?  Private capital can't be relied on if the market actually starts to contract.  Macros will only buy up so many craft breweries.  Maybe the Victory Brewing Co./Southern Tier "merger" model will be workable for others.  Maybe mid-sized breweries will be able to use brewery-owned brewpubs to float their production operations.

I suspect, though, that what we'll see is that the total number of breweries will remain fairly static, but that some significant number of medium-sized breweries will take the hit for the rest.  

Here's hoping your favorite survives.

Keep it simple.

JJW

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