I had a couple (too many) beers with a publican the other night. We were discussing general economic conditions and, as those of you in any non-mining related job will know, it’s pretty tough out there.
The discussion has led me to ponder the rise of craft beer and where it’s headed. While I’d quite like to get financially involved in the industry, if I had any money that is, I’m starting to think that there’s too many participants for that to be a sound investment. There’s literally a new brewer popping up every three weeks.
In short, is the demand for, and the growth in demand for, craft beer big enough to keep all the suppliers in business?
I have two hypotheses. None of this is backed by what you might call “facts” (it is called “drunken speculation” for a reason), just a qualitative analysis of what I’m seeing. Feel free to correct me if I’m wrong.
Hypothesis #1 – It’s a Fad
There’s been significant growth in interest in craft beers across Australia over the last few years. I shouldn’t need to link to anything because this blog is proof enough of that. There’s been penetration (significant) into major retailers and (less significant) into suburban pubs.
At the moment, much of the growth in interest in craft beer is being driven by association with hipsters, with wannabe hipsters like yours truly along for the ride. If you think I’m wrong, go to your favourite bar, look at the person serving you up and down and sigh, because I was so fucking right. Therefore, the craft beer fad’s success is inexorably tied to the continuing fashionability of a particular subculture.
Anyone remember emos? Yeah, I thought so. When the hipster goes the way of the emo, so craft beer will go into the metaphorical toilet. Poor economic conditions will result in discretionary purchases being scaled back, taking any schmucks out of the market who missed the memo about the toilet beer.
As craft beers becomes so 2012, profitability (if there ever was any) will decline and the equity built up by microbreweries around the land will be worth less than the stainless steel fermenters.
This will lead to a period of consolidation. This blog will probably disappear (not much point writing when you get negative visitors) along with your favourite craft beer joint and many brewers. The survivors will be some of those who cosied up to major brewers (I’m thinking Malt Shovel and Matilda Bay), and even then at reduced budgets, but most will fall by the wayside because the business case no longer stacks up.
It will be harsh and no one will notice when Starbucks buys up the bars, re-brands them and starts selling coffee.
Hypothesis #2 – It’s Permanent
The biggest problem is that the growing interest in craft beer in Australia has coincided with the GFC and, while Australia has technically avoided a recession, many people are still nervous. If Fairfax/JPMorgan are to be believed, the volume of beer sold in Australia is declining but the actual money shelled out for beer is about the same. Basically, people are willing to spend more for better quality but the growth hasn’t been as explosive as it could be. Why try an $11 beer when you’ve got two kids and an overpriced mortgage?
This change in taste, however, is permanent. It’s disruptive innovation: the small guys have been nimble enough to take advantage of the consumer’s general exhaustion with the business-as-usual approach of the multinats. Meanwhile, Lion and Fosters are scratching themselves, wondering what they’re going to do about it. In the long run, it will benefit them as well, as the craft beer enthusiast’s propensity to spend more means higher margins. We all win.
A program of better marketing – a rarely used Facebook page and a crappy Flash website should not be the cornerstone of your brand – combined with rising incomes will ensure the continued growth of the industry, allowing more people to pile in. We’re just waiting to get a bit more cash so we can, more or less literally, piss it away.
In summary, I suspect the truth will lie someone in between and be driven by what banks are willing to consider a financially solvent enterprise. It is likely that the market for beer will continue to stagnate but with a growing portion coming from the higher margin craft beers. Tougher local economic conditions are going to cause brewers and retailers to struggle and not all suppliers will survive the next couple of years but with a growing fanbase of normal, non-hipster people getting stuck in, the pie will be big enough to keep enough afloat that we will still have a bit of diversity to enjoy.