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« Coca-Cola rethinking their US distribution plan | Main | Craft Brewers and the Prettiest Girl at the Dance-Syndrome »

Random Thoughts on Craft Brewing

Craft beer… the prettiest girl at the dance.  Harry, Benj, Modern Brewery Age, Beverage World, Beverage Industry and everyone else and his dog have written extensively about where it is and where it is going.  As usual, let me help clarify why. ;-)

First we need to understand that words are abstractions, they don’t necessarily exist in the real world.  Thus the craft beer industry doesn’t really exist.  Craft brewers yes… an “industry” not so much.  So all this concern about where the industry is going is somewhat off the mark.

Each and every one of these craft brewers will do what they perceive is in their self-interest.  That’s exactly what they should do.  So for example when folks are wringing their hands over the explosion of craft brewing capacity they are talking about something over which no one has any control.

As a mental exercise, let’s take a stroll and see what the Tragedy of the Commons can teach us.  Haven’t heard of that phrase before?  It comes from an article titled "The Tragedy of the Commons" by ecologist Garrett Hardin. 

Hardin used an example involving medieval land use in Europe.  The Commons was a “public” area where herder’s could graze their livestock.  Since it was “owned” by all, no individual or group existed to look out for the best interests of the Commons.  Thus it was in each herder's individual interest to let as many of their livestock as possible graze there.

Of course this will ensure the Commons is sooner or later overgrazed and damaged for all.  But for the individual herders, for at least a while they receive all of the benefits from the additional livestock grazing, while the damage to the Commons is shared by the entire group.  If all herders make this individually rational economic decision, the Commons will be depleted or even destroyed, to the detriment of all.

Now the craft beer business is not a limited resource like the Commons but the realities they face are similar in many ways.  One can look at the landscape of craft brewers and see a very likely train-wreck regarding over-capacity.  But who is going to pull back their expansion plans for the good of the “industry”?  I can answer that… no one.

Much has been written about the issue of old craft beer and the damage it might do to the “industry”.  Guess what, folks have discovered the wonders of pipe-line fill.  It can make a business look incredibly successful (for at least a while), whether this is reality or not.  All those warehouses and all that retail space adds up to quite a bit of beer… this is something the big boys discovered long ago.  And if the beer gets old?... perhaps that’s not a worry of an individual craft brewer.  And the damage it does to the “industry”… what “industry” is that? ;-)

KNOW WHO YOU ARE

Long ago in my MBA finance class we had a case study on a quickly expanding grocery/mass merchandise chain, a hypermarket.   The case study was to analyze the financial-driven growth of this company… and the solution/discovery was that their growth was the only thing funding their operations… and once the growth slowed or ended, the company was not financially sustainable and would fail.   Obviously rapid growth sooner or later hits a wall and down the company fell.

So my prediction on the craft capacity front is that a number of things will most likely happen to individual craft brewers…

·         Some will hit the wall at high speed and meet an unfortunate end....fail to plan then plan to fail.

·         Some will hit the wall at slow speed and will survive the experience if they get some well needed strategic and tactical help.

·         Some will power through the whole episode and come out stronger and more profitable – these will be considered the smartest guys in the room – but remember as I’ve noted before, nothing wrong with a little luck to go along with their skill.  However, if you can only have one, give me luck any day!

·         Some might be able to cash out before the wall and possibly laugh all the way to the bank if they have value and brand equity.

And of course too many trade publication view things from a static perspective, but the tsunami is inevitable.  Keeping up with change and paradigms shifts are critical… so the entire issue of what is a craft brewer is an ever changing one.  Consumers don’t care if this or that company fits into this or that category.  That’s not the way they think – and why should they?

Most importantly, one has to contend with a wide range of strategic and tactical options. Perhaps Company A wants to some day become the biggest brewer in the land. Perhaps Company B wants to ramp up as quickly as is possible (can you say fill that pipe-line) and get out while the getting’s good.  Either choice is acceptable (as are hundreds in between) but your success is more likely when you know the exact path you hope to travel.  Not that there won’t be surprises and adjustments as you walk that path, you just have to have the knowledge and flexibility to deal these too.

All you craft brewers out there… need some business development support?  We can link where you want to go with how you will get there!  Steve and I are now working with craft brewers to explore their options based on their unique situations.  Give us a call and let’s talk about diving a little deeper.

ABOUT RETAILING

Perhaps one perceives themselves as a brewer, not a retailer.  The next sees the craft beer-thing simply as the draw to fill their on-premise establishment (kind of like the strippers at a “gentleman’s club”).  Note this doesn’t imply the retail-vision will produce lower quality craft beers, just that their strategic vision is different than those with a desire to be a brewer first and foremost. 

And it can be quite a retail draw.  A retail-focused craft brewer just opened up in my neck-of-the-woods and their business is incredible.  They are only open limited days and times… but every time they are open, they seem to be packed.  Anyone in this business knows that you can make a heck of a lot of money in a short period of time with a hot on-premise establishment. 

In fact in many places in the country a push-back is starting from regular on-premise accounts from what they consider the unfair advantage the craft brewers enjoy via their tap rooms.  The craft brewers (being the prettiest girl at the dance) often get special treatment for their tap rooms… most to their advantage.  And of course since they make everything they sell, their retail profitability is dang high!

How long will it last?  How high will it go?  Heck if I know.  But there is no indication it is slowing nor do I think things will ever go back to “normal”.  This is a permanent change in the landscape.  Lots of moving pieces and I’d guess there will be surprising winners and losers.

Some pricing changes are already occurring… in several places in the country major craft brewers are priced at parity with Bud/MC 6 pack bottles.  Perhaps those $12 four-packs are going to find some pricing pressure?  And of course volumes remain soft for the big boys (and quite a few others)… everyone is asking themselves if this will be the summer when serious price competition fires up. 

What’s going to happen to those high prices and sweet margins the craft brewers (and their distributors) presently enjoy?  From a distributor perspective, in MANY situations, those craft beer gross profit dollars are what is keeping you healthy.  You might want to take an objective look at your business exposure.  Our valuation services do just that and much more.

Just some things to think about as we go about our Commons and our everyday business.

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