Craft Beer News: Are Craft Breweries Finally on the Decline?

Chris Rumpf

Founder and CEO, 15+ Years of Restaurant Technology Innovation

Craft Beer News: Are Craft Breweries Finally on the Decline?

The craft beer industry continues to grow and gain market share, but the type of breweries producing them is shifting. Small-scale ventures prioritizing on-site profits, through beer and food, may be the best model worth imitating.

In craft beer news, the industry has added more than 1,000 new craft breweries in the past 12 months, and overall craft production has grown five percent halfway through 2018. This comes amidst an all-time high in brewery turnover, according to a July survey published by the Brewers Association, a trade group for craft breweries.

“The data demonstrate that 2018 is on pace to have the highest number of brewery openings and closings to date. However, even as breweries close, openings continue to far outpace the number that shutter,” said Bart Watson, the Brewers Association’s chief economist. “New players looking to enter the space should be aware of the constructs of the current landscape, work to differentiate themselves and will need to make quality beer to succeed.”

These findings are in line with the 2017 annual numbers gathered by the association, which found that overall U.S. beer volume has dropped by 1 percent, while craft beer sales grew at a rate of 5 percent by volume.

Beyond the overall numbers for the craft brewing industry, the amount of brewery turnover may be a sign that smaller operations, like brewpubs, are most likely to be successful businesses.

Understanding market stories in craft beer news requires some context. Overall beer sales in the United States rarely budge more than 1 percent per year. It’s a rather static market that takes a hit when drinkers turn to spirits or wine. Within the overall market, however, is a slowly growing percentage of craft beer consumption which is now up to 12.7 percent of the beer market in 2017, from 12.4 percent in 2016.

These growth numbers continue to be in flux, taking two tiny steps forward and one step back, due to the absorption of craft brewers by mass brewers. This is because when major brewery corporations buy up large-scale craft breweries, that data is dropped from the craft beer trade reports.

Types of Craft Breweries

There are three segments within the craft beer industry, based mostly on its production volume: These are brewpubs, microbreweries, and regional brewers. Looking at the smaller two options, those most likely to include restaurant services will reveal some of the hurdles for growth and risks associated with each.

Breweries often start selling beers on-site through a taproom or restaurant and qualify as a brewpub. If they choose to distribute its beer, they become a microbrewery once they sell 75 percent of its beer off-site. They are considered a microbrewery until they produce more than 15,000 barrels, in which case they’ve become a regional brewery

These definitions are important for understanding the growth, or lack of growth, within segments of the craft beer industry. Most states have their own definitions, based on overall production output, and a brewpub can quickly find itself entering a state’s microbrewery status. For instance, Colorado caps brewpubs at 60,000 barrels, whereas Maryland caps brewpubs at 2,000 barrels, and microbreweries at 22,500 barrels. That means a brewpub in Colorado can sell nearly three times as much beer as a microbrewery in Maryland!

In most states, once a brewery exceeds its cap, they are no longer permitted to sell beer directly to its customers under a three-tier distribution system. That’s its own can of worms, but important for understanding why a successful brewpub may not wish to expand production and a reminder that any prospective brewers or restaurant partners should research their state’s laws.

Changing Laws Help Taprooms

Microbreweries are in the sweet spot between brewpubs and regional breweries. While some larger, regional craft brewers may have felt some pains, microbreweries continue to report the most production growth.

However, changes to state beer laws are altering the market and may explain the recent surge in new openings and closings among breweries. In some states, brewpubs are more restricted than larger breweries, and in other states the reverse is true. Some of the growth in smaller breweries can be attributed to the repeal of state laws that restricted selling beer directly to consumers. States like Minnesota and Mississippi lifted such restrictions in 2011 and 2017 respectively, so local markets are still filling in demand.

This means some breweries are looking to expand production and perhaps widen their distribution and profits on-site which will continue the growth and profits of craft beer. It may also represent opportunities for restaurant professionals to partner with brewpubs interested in adding food.

Seeing the economic boom and local job creation possible created by craft breweries, several states have increased the maximum brewing capacity that microbreweries and taprooms can serve on-site. (In the past, some breweries would get around direct sale laws by selling tour packages and handing out tickets for full pints instead of a traditional sample size.)

Brewpubs Relish High-Margin Sales

Brewpubs saw growth of 15 percent from 2016 to 2017, which is an indication that craft breweries are trending smaller, with consumers choosing to drink not just locally, but on-site. And by selling its own beer through its own taps, brewpubs enjoy maximum profits, roughly three times the profits of selling its beer through another bar’s taps.

In general, the further the distance between the taproom and the customer, the lower the profits. Cutting out delivery reduces the costs of a vehicle, insurance, salespeople and the hassle of juggling store accounts. Driving across town to deliver a few cases of beer brings back cents on the dollar, and for some brewers, it is partly an act of marketing to attract visitors to the taproom.

Years ago breweries opened with an eye on jumping into distribution right away. Then came a wave of regional brewers who were bought out or closed down due to cost overruns and competition from other, newer craft brewers. Now brewers are starting small, and intentionally staying small.

That philosophy closely resembles the one-location restaurant model, which may be why brewpubs and microbreweries often find early success by offering food on-site — or at least next door.

Pairing With Food

With a trend toward staying local, more brewers are learning that mixing food with alcohol sales is good for the bottom line. This means a small new brewery may register as a minor player in the overall beer production data, yet prove to be a successful, lucrative business.

Another option for brewpubs or taprooms is to outsource the restaurant option by inviting food trucks on a regular basis. In that mutually beneficial scenario, the brewery still gets visitors who can stay longer and consider it a destination for more than just beer. Since on-site beer sales net the largest profits, simply allowing outside food on the premises so guests stay longer can reward smaller breweries.

Breweries with a menu can offer unique experiences that most restaurants cannot; from offering a tasting menu to pair with its beers to utilizing some of the brewing ingredients into the food, like spent-grain pizzas.

Taprooms and brewpubs often have a cast of regulars who live nearby or stop in during their evening commute home, and offering food adds one more reason for a visit. In fact, offering food can help make a brewpub a gathering place for neighborhood meetings and community groups, especially if some of the brewery space can be opened up for events at night.

Peak Craft

The largest threat to the craft brewing industry overall is a disinterest in well-made products. Barring a considerable social or economic change, craft breweries should continue to slowly grow.

However, changes in the behavior of craft beer drinkers and the laws affecting distribution will continue to shake up the industry and create turnover. Breweries big and small will close, either from market saturation or fiscal overreach. With more than 6,000 independent breweries out there, and thousands more planned to open through 2019, we are still building toward peak craft beer.

Keep in mind, there are different ways to measure success. Market share and overall production are great for craft breweries to measure their combined influence on the overall beer market, yet each owner is likely more concerned with their own bottom line.

Anyone interested in opening a brewery, or partnering with a brewer, should be aware of the emerging trend toward smaller facilities with more profitable on-site sales and the potential for adding to those sales by offering food as well.