A Macro View on Micro Brew – Understanding the Craft Brewery Market
October, or shall I say Oktober, holds a special place in the hearts of beer aficionados everywhere as the popularity of international drinking festivities has created a Christmas in October for the US craft beer market.
Wait, Why is Quantive Interested in the Craft Brewery Market, Anyway?
We find researching market trends and key statistics for each of our business valuations to be very interesting (that is when we find time in between our Comicon Conventions and Death Star Petition writing). This especially holds true when engaged in a fun and emerging market such as craft beer. Through this research, we indicate key factors that may increase or detract from the value in assessing this niche sector.
The craft market itself is divided into four subgroups: brewpubs, microbreweries, regional craft breweries, and contract brewing companies. The Brewers Association defines each of these industry market segments as follows:
- Microbreweries – A brewery that produces less than 15,000 barrels of beer per year with more than 75% of its beer sold off-site.
- Brewpubs – A restaurant-brewery that sells 25% or more of its beer on site. Beer is brewed primarily for sale in the restaurant and bar.
- Regional Craft Breweries – An independent regional brewery with a majority of volume in “traditional” or “innovative” beers.
- Contract Brewing Companies – A business that hires another brewery to produce its beer.
David & Goliath
The beer industry has been feeling a little hung over lately with various research outlets indicating the decline in its overall market share in comparison to its wine and spirits counterparts. Interestingly enough, while beer consumption has slumped, there has been a notable shift in sales composition with craft brew capturing a larger portion of total revenue from the Big Beer giants such as Anheuser-Busch InBev and MillerCoors (who together represent 75% of the US beer industry).
In fact, craft beer is anticipated to represent nearly 15% of the entire beer industry’s sales by 2020. This movement includes current beer drinkers shifting from their traditional tap staples as well as wine and other spirit consumers trading over to the “affordable luxury” that is craft beer.
The Wall Street Journal reported, “Craft beer has grown despite attempts by big beer companies to advertise craft-like beer, emphasizing smaller batches and trying different flavors in an effort to win back customers. Their biggest inroads have been in light, wheat beers such as Blue Moon (MillerCoors) and Shock Top (Anheuser-Busch InBev).”
The beer consumer demographic has demonstrated a growing interest in the science of craft brewing. A sophistication is emerging (to which some have even coined the term “beer snob” for those uber enthusiasts) creating a demand for quality beer craftsmanship and interesting flavor palates. This interest has even trickled down to the college demographic who have traditionally been associated with the overconsumption of low price point beers from red solo cups. As of spring 2015, Paul Smith’s College, a private, four-year college located in the Adirondack Park in upstate New York, will officially offer a minor in “craft-beer studies.” Likewise, Central Michigan University created a program designed to train and certify students in “fermentation science.” Other universities joining the beer enthusiasts’ ranks include the University of California’s Davis and San Diego campuses, Oregon State, and Central Washington universities.
This main-streaming and up-scaling of beer- which has by all accounts historically been a bottom of the barrel beverage – shows the changing tastes of Americans. And changing market forces have valuation considerations.
Show Me the Barley
Overall, the beer market accounted for $100 billion in sales in 2013. Roughly $14.3 billion was craft beer, a significant increase from sales of $11.9 billion in 2012. While craft beer’s claim within the market is still just a sliver in the overall pie, craft sales have grown 17.2% in 2013 despite the beer markets overall fall of -1.9%. In 1998, the Brewers Association reported craft beer as contributing to 2.6% of the US beer market (with Imports accounting for 8.4% and Non-Craft beer the preponderance at 89%). Fast forward to 2013, and the Wall Street Journal’s recent report indicated that the craft movement is on the rise with a 7.8% market share (up from 6.5% the previous year). This trend is not expected to stop either. Sales projections for the craft brew industry over the next five years show an expected growth of another 32%, totaling $4.1 billion, by 2017 (Source: IbisWorld).
So Who are these Crafty Folks Anyway?
The Brewers Association defines American craft breweries as, “small — producing under 6 million barrels a year — and independently owned — they can’t have greater than 25% investment by a noncraft-beer alcohol company.” The craft movement has grown exponentially in the last few decades; the US now boasts more beer styles and brands than any other market in the world. And fun fact for all the craft enthusiasts: the average American lives within 10 miles of a brewery.
Some market movers and shakers who have made a name for themselves include:
- Boston Beer Co. (aka Sam Adams)
- Sierra Nevada Brewing Co.
- New Belgium Brewing Co.
- Lagunitas Brewing Co.
- Deschutes Brewery
- Bell’s Brewery, Inc.
- Duvel Moortgat USA
- Brooklyn Brewery
- Stone Brewing Co.
Boston Beer Co. accounted for approximately 16.5% of 2012 craft brewer sales (representing 2.215M barrels). Sierra Nevada’s market share drops off drastically at 7.5% followed by New Belgium with 5.9% and Gambrinus with 4.7%. No other market player contributed to more than 2% of total market share, so while the top four brewers accounted for 34.6% of total sales, the rest of the market is highly fragmented, highlighting the industry’s focus on servicing its local market versus infiltrating a nationwide platform.
How Beer is Shortening the Unemployment Line
Talk about job creation, the Census Bureau announced in July of this year that the number of breweries in the in the U.S. doubled in five years primarily due to the growth in craft beer. On average over the past two years, 1.2 craft breweries opened each day, contributing to a total of 15.6 million barrels of beer in 2013. Moreover, the number of operating breweries in the U.S. increased approximately 15% from 2012 to 2013 leading to a 1.7% growth in industry jobs. In 2013, breweries totaled 2,822, with 2,768 of those considered craft. Combined with already existing and established breweries and brewpubs, craft brewers provided 110,273 jobs, an increase of almost 2,000 from the previous year.
Get to it Already… So What’s All This Mean?
Below is a summary of our findings:
- Craft brewers face many challenges including access to market, availability and cost of raw materials, high regulations, and high tax rates within its market sector. Contracts with raw materials vendors are integral to production cost as well as production volume. Additionally, malt and hops are tied directly to the commodities market, and as such, experience spikes in cost in relation to similar commodities such as corn, wheat, and soybeans.
- Industry consolidation is taking off as many brewers find ways to maximize production to keep up with demand, while introducing product diversification with new beer types. Mergers and consolidation allow these smaller businesses the ability to benefit from economies of scale.
- There is significant market competition as illustrated by the number of brewers per state, and capturing a large market share is difficult with a niche product that offers distinct styles and flavors.
- Despite extensive market competition, the success rate of craft breweries is fairly high in comparison to other industries. The Brewer’s Association has stated that 51.5% of the brewpubs and 76.0% of the microbreweries that have opened in the modern era (since 1980) are still open today (representing only a 48.5% and 24.0% failure rate respectively).
- Size matters in this industry. Larger establishments are more likely to be targeted for acquisitions by larger market players and thusly are able to achieve higher multiples.
- There is a growing demographic of craft beer consumers as craft beer captures more and more of the beverage market. Women are an important target market and key growth area as craft steals women from the wine category.
- Consumers are less price sensitive when they feel as though they are getting a premium product. There is a growing market consciousness regarding what is being consumed, how it is made, and supporting local establishments. All of these items equate to paying a premium price; however, the value is thought to be worthwhile.
- As with most retail products within the food and beverage arena, shelf space is the hardest hurdle to jump. It is difficult to not only secure shelf space, but to also be placed in an optimal location without getting lost in a sea of worthy opponents.
Next Round is on Me – Investing in the Beer Movement
Big beer has been concentrating on expanding internationally and growing through acquisition versus organically. Why? The U.S. is a no-growth market. And from an acquisition perspective, Big Beer needs big acquisitions to achieve material growth that is accretive to earnings.
As global market consolidation continues overseas, domestic craft brewers continue to grow their current market reach and increase brand awareness, nurturing each entity into a business that will pique the interest of these beer giants within the near future. Until then, the focus remains on international dealings and as it happens, the US isn’t the only market seeing the potential within the craft movement. Kirin Beer, one of Japan’s top three beer producers, shocked the market with their expressed interest and later 30%+ stake in an emerging Japanese craft brewer, Yo-Ho Brewing. Kirin is expected to invest more than $9.2 million in Yo-Ho, buying shares from parent company Hoshino Resort and in a private placement. This acquisition marks the first major Japanese brewer to join forces with the country’s growing craft beer movement.
The following are additional industry acquisitions of merit:
- February 2014: Anheuser-Busch InBev, the company behind Budweiser and Corona beers, bought New York based Blue Point Brewing Company for a reported $24 million.
- December 2013: New Belgium Brewing Company’s employees acquired a 59% interest in their company.
- March 2013: Fireman Capital Partners purchases Utah Brewers Cooperative, LLC in a private placement for $35 million.
- December 2012: Cerveceria Costa Rica participated in a merger/acquisition of North American Breweries, Inc. for $388.4 million.
This small sample illustrates the diverse buyer groups interested in entering this lucrative and growing niche market. Buyers are willing to pay a premium for the profitability and growth trajectory demonstrated through market research and overall alcoholic beverage trends. Most acquisitions tend to be strategic efforts to gain market share in a new demographic (foreign or domestic) as well as add a new product line (beer style).
Making Dollars and “Sense” of it All
What does this mean for a craft brewery owner? How does it impact business valuation for brewers? You, my friends, are in a booming industry that is ripe for achieving premium market multiples and a wealth of interest from various qualified buyer pools. If you have successfully launched a craft beer brand generating a strong following and quality product, it should be time for you to entertain your options. Expansion is inevitable if you intend on emerging out of this area of fragmentation or would like to strengthen your financial position through economies of scale.
In order to obtain interest from the larger beer players within the Big Beer arena, a microbrewery needs to scale. Microbrew and brewpub valuations will remain moderated until you begin to achieve a larger revenue base and customer reach.
Ultimately, to achieve a big exit, you need to scale and demonstrate you can achieve national access, presence, and distribution.
And Let Us End on this Note…
We sincerely hope you enjoy the rest of Oktoberfest! Drink responsibly everyone.