war on the rocks

What Craft Beer Revolution?

August 7, 2015

Over the last two decades, the American beer market has undergone some major changes. American consumers, especially those between the ages of 21 and 35, have started to prefer a wider variety of beer styles made from higher quality ingredients and by small, independent producers. In other words — craft beer. This rise in popularity is not without cost however. The rise of craft beer has come at the expense of mass-market, mass-appeal beer makers like Anheuser-Busch. The growing number and success of craft breweries has led some in the industry to declare that American beer is experiencing nothing less than a revolution.

The number of brands and styles available at even the most pedestrian corner store has exploded over the last 10 years. While no one wants to go back to the old days, when there were only a handful of domestic brands to choose from, there’s reason to believe that the current freedom of choice available in today’s beer market won’t be around forever.

As Randy Mosher writes in Tasting Beer, “There are more styles, more choices, and more beers bursting with flavor and personality here [the U.S.] than anywhere else.” Mosher attributes this to the innovation that sprung up in the brewing and drinking culture vacuum left by Prohibition. “The lack of a living beer tradition worth preserving left us free to build a new beer culture from scratch.” Unlike German, Belgian, and English brewers, American brewers are not bound by reverence for long-standing national traditions or embedded consumer expectations.

This lack of brewing tradition encourages innovation: imperial pumpkin beers, coffee IPAs, and barrel-aged chocolate stouts, to name a few of the more irreverent American styles. Innovation in brewing has spilled over into other industries, too. Dramatic growth in the demand for hops, a key ingredient in beer, has sparked innovation in hop growing and breeding and triggered an explosion of new hop varietals.

These changes have happened relatively quickly. As recently as a decade ago, craft breweries weren’t all that ubiquitous. But big beer producers have now started to feel the impact of new craft brewery market entrants. By 2013, craft beer was outselling Budweiser. At around 16.1 million barrels sold, craft beer represents almost 8 percent of the American beer market. That’s still a far cry from the 38 million barrels sold by Budweiser’s, younger, fitter little brother, Bud Light, which controls about 18 percent of the market. However, it’s indisputable that craft breweries are making enough of a dent in the sales of big beer brands to elicit a response.

The strategies employed by big multinational beer corporations, such as Anheuser-Busch InBev (AB InBev), to maintain market share are largely unavailable to craft breweries. Take advertising, for example. Budweiser recently ran a widely mocked ad, replete with foolish looking mustachioed hipsters, branding itself as the anti-craft beer. A craft brewery in Oregon, Ninkasi Brewing Company, responded with a parody of the Budweiser commercial. Of course, the Ninkasi parody ad was posted on YouTube — not exactly Super Bowl halftime. The fact that Ninkasi produced an ad at all was an exception that proves the rule: Craft breweries have carved out market share largely without the help of advertising.

AB InBev and other big beer companies have more than just big advertising budgets. Contracts with major sporting arenas give the brands exclusive access to prime beer-consuming markets. This kind of access doesn’t come cheap. AB InBev’s current contract with the NFL is worth $1.2 billion. While total craft beer sales might rival and even supplant the big breweries in the medium term, it’s almost impossible that any single craft brewery will ever have the market power to employ these kinds of strategies to increase its market share.

In and of itself, this doesn’t spell doom for the craft beer revolution. In fact, craft beer has succeeded in spite of these obstacles. The rapid proliferation of innovation and new market entrants in an industry is a trend not without precedent. Experts might argue that the beer industry is no different from the technology or telecommunication industries. Nonetheless, the question of whether the craft beer revolution is threatened by consolidation of major companies is worth asking.

AB InBev, MillerCoors and others have been steadily cracking into the craft beer market in more ways than one. First, they produce so-called “crafty” beers — brands that were invented and branded by marketing execs at companies like AB InBev specifically to appeal to craft beer consumers. “Crafty” beers include Blue Moon, Shock Top, Magic Hat, and Leinenkugel’s.

Second, macrobreweries are buying minority or even controlling stakes in craft breweries. Take a look at this list of AB InBev brands. It includes a few “crafty” brands, but also genuine craft beers such as Goose Island, and Fordham and Dominion. These craft beers share the illustrious company of other brands in AB InBev’s portfolio such as King Cobra Malt Liquor. The aforementioned AB InBev list alleges that King Cobra won a World Beer Cup Silver Medal in 2004, which is the approximate year that your author drank “Cobra” for the last time — out of a pair of 40s duct-taped to each hand, naturally. This of course raises the question: What is Goose Island doing on a list of brands that are mostly used by college kids to binge drink?

Brands like Goose Island started as small, independent breweries producing innovative craft beers for local markets. Goose Island still produces some fairly cutting edge beers: Bourbon County Stout, Sofie and, one of the best and most affordable Trappiste Orval clones on the American market, Matilda.

Goose Island attracted AB InBev’s attention when it established its own market share in Chicago and beyond. AB InBev was especially interested in acquiring Goose Island’s flagship 312 brand (312 is an enclave area code for most of downtown Chicago) because AB InBev’s marketing people saw potential in marketing a parochial, area code-branded beer to local consumers in other markets. Just change the area code on the label, and sell the same beer as a “local craft.” Crafty indeed.

If its portfolio is any indication, Goose Island’s partnership with AB InBev hasn’t affected its creativity or quality. The brewery still produces great beer, and the business arrangement with AB InBev has given Goose Island access to AB InBev’s vast distribution network so that its beer is ultimately sold in more markets.

It’s hard to imagine myriad small, new craft breweries maintaining their independence indefinitely. Competition is undoubtedly increasing, and big multinational beer companies, with lots of accompanying market power, are already reacting with a “can’t beat ‘em, join ‘em” strategy. Multinational corporations will put pressure on new acquisitions to run their businesses with an eye towards the bottom line. This drive for maximum profitability may come at the cost of the very innovation in brewing that has made the American craft beer market so appealing. Goose Island shows us that’s not necessarily the case, but let’s hope it’s the rule and not the exception.

 

Frank Swigonski is a recovering bartender. He is originally from Arizona but currently lives in Washington, DC where he works on energy policy.