Despite a decade of success, I STILL getting calls asking if the current crafting growth is a bubble. Since apparently no number of “bubble-free” posts can dispel this notion, for this post I decided to go a more aggressive route. I’ll start by saying that the United States actually doesn’t have as many breweries as one would expect given the current level of craft sales.
This concept may sound crazy (and is admittedly intentionally provocative) in a market that has seen breweries open at a rate of around 2/day for the past few years, but I think it may be the only way to make it clear that the growth of breweries makes sense considering how many the current market demand could support.
That last sentence is critical, because the whole argument for why craft isn’t a bubble hinges on beer-lover demand. A bubble is the opposite of demand-led growth – it is a level of investment or increase in asset prices that is not fundamentally tied to demand. In case you forgot the economic wreck that was the housing bubble, that is exactly what happened.
This table ticks all the boxes you would expect to see in a bubble. Real house prices (thereby controlling price increases of everything else) have continued to rise for years, despite strong increase of supply (measured as new construction divided by the total number of American households, so that controls for any population growth) and the fact that American workers weren’t making any more money (for my favorite view of the rest of the financial mess that brings down the world economy, I recommend this video). It was pure speculative behavior at its best – and at some point it had to burst. Also notice what happened to new construction after the fact: it didn’t just go downhill, it hit its lowest point since the government started tracking construction (again, controlling population). people had built way past the point that could be supported by demand and we are still not back to the levels of construction per household of the 1990s.
Now, for breweries, a bubble would be when investment – either in the number of breweries or in their capacity – accelerates far beyond the point that market demand can sustain. Probably the best measure of market demand is sales. So what do the numbers for breweries look like compared to craft sales? Here’s a chart that shows an index of craft production (a good indicator of total sales) versus an index of TTB brewery licenses (which went from 250 in 1990 to 6,080 in 2015). In production, I monitored changes to the dataset to provide a more consistent measurement of demand. I chose to use permits rather than the active brewery number, as we expect permits to respond more readily to current sales than breweries, which would delay depending on scheduling time. For both, I set 1990 levels equal to 100 to make the growth easier to compare.
What we see is that since 1990 production has increased faster than the total number of breweries. The one time that wasn’t true – in the late 1990s and early 2000s, when the permit index caught up with the production index – we were shaken. It is exactly what you would expect. In the late 1990s, people were entering based on speculation that the market would continue to grow, not based on actual demand, and so there wasn’t enough market share to support all the breweries. Today we have a very different situation – the brewery index has risen largely at the same rate as the sales index.
Now, to be perfectly clear, none of the above should be misconstrued as asserting any of the following:
- Opening a brewery now or in the future is a bet you can’t miss – it just isn’t. Leaving aside the fact that starting a small business is always risky and difficult, where a brewery is located matters more than ever, and a national chart hides tons of local variation. Second, the growth index stalls in 2015, and all signs point to a slowdown in craft sales growth, so we could see those lines catch up in the near future.
- All breweries will thrive equally in today’s market. Like location, business model matters. Market demand doesn’t mean your brewery can capture that growth. That’s true in a growing market – and even more critical in a slow-growing market. Retail channels clog, competitors maneuver, and different models simply require different levels of growth than others.
In point #2, here’s the incremental volume gain (comparable bases) divided by the number of breweries producing since 1990 (I’d say brewery demand is a whole other beast, so I’ve excluded both their volume and their number).
Notice again the late 1990s/early 2000s, the last period with a high percentage of closures. The growth was not enough to spread to all models. As incremental growth slows, it becomes more likely that to increase volume, you would have to take it from someone else. During periods of rapid growth, total growth means there can be opportunities for everyone. It’s pretty clear what the market looked like from 2005 to 2015 (and the ratio for 2015 fell well below the previous 5 years). 2016? We’ll see, but early reports are more mixed. With more breweries than ever and slowing growth, this additional growth/brewery number is sure to drop. It won’t be the levels of the late 90s, but it is the trend. That won’t be a problem for breweries that don’t need a lot of growth (that’s probably the majority of breweries and many other micros adapting their models in that direction), but if you need growth every year to your business model is working, it’s probably time to re-evaluate. In this article, I focused more on the number of breweries than on the overall market share. It should be remembered that although these are related, they are not the same thing.
So, to sum up, market growth, both in terms of sales and the corresponding number of breweries, has recently been built on solid fundamentals: growing demand which translates into higher sales. That doesn’t mean growth will last forever, and all signs point to a future with slower demand growth. A downturn is not a bursting bubble and what we won’t see is a growing number of brews (the corresponding dive to the construction crash in the first chart).
Hopefully the more than 2,000 breweries in the planning will pay attention to history and be realistic about the challenge of opening in a crowded market. While there are still opportunities in many markets or sub-segments, a slower growth environment means more challenges. This means that entrants will need to focus more than ever on quality, innovation and differentiation in order to realize these opportunities.
For more comparisons between the late 1990s downturn and today, check out my upcoming September/October New Brewer column: “This Time It’s Different.”