The Myth of the "Craft Beer Bubble"

[JulianB1]

Okay I know what you're all thinking "Awww, not this stupid topic from the BA Beer Talk section!" And I agree with you, which is why I hope this will be the one and only time that the so-called "craft beer bubble" comes up on here. The point of this thread is to explain why no such thing exists and every reference to it is just someone trying to sound smart by using big economics words they heard on TV with regards to housing or internet companies or what have you. I'm going to reference quite a bit from the following blog post:

http://growlerfills.blogspot.com/2013/10/the-session-no-80-is-craft-beer-bubble.html

The short version: fast growth/expansion is NOT the same thing as a "bubble".

Longer version: Let's start with the Brewers Association's definition of a bubble as provided by their Staff Economist, Bart Watson (degrees from Stanford and UC-Berkeley, postdoc at the University of Iowa).

http://www.brewersassociation.org/pages/community/ba-blog/show?title=the-craft-beer-non-bubble

First, let’s define a bubble. A bubble is a period of overinvestment where asset prices aren’t aligned with reality. In other words, people are betting on a future that won’t exist.

Of course, a bunch of online beer bloggers (and probably posters on BA, but I'm not going to bother checking) with no economic credentials objected to this definition, presumably because it debunks their "craft beer bubble" fear-mongering.

[Disclaimer: I don't have any bona fide economic credentials myself, but I am a mathematician with some working knowledge of both statistics and economics (learned through osmosis from my ex-wife and her friends while they were graduate students in economics at Oregon), which is probably more than most beer people who comment on this sort of thing.]

So Alan McCormick at the linked blog above asked his sister (a professor of economics, but who is unfortunately unidentified and thus I cannot verify her credentials) whether or not this was a fair definition. Her response:

Decent definition. Bubbles occur when some investors enter the market largely on the expectation that there are other investors who will enter after them. Asset prices are rising not because of underlying consumer demand for the product but because investors believe they can get a quick return on the increase in asset value. Not sure if craft beer is a product that would really fit into the bubble frame work. Looks to me like standard model of competition might possibly fit: profits attract entry of new firms until profit opportunities are eliminated.

The bolded part is the most pertinent to the bubble discussion. Bubbles such as housing and dot-com involved incredibly fast market growth (one measure of this is that P/E ratios were far above long-term averages; a good general reading introduction to much of this is Nate Silver's book "The Signal and the Noise" which I highly recommend). Craft beer is growing not because individuals are getting into the craft beer industry under the belief that others entering later will increase the value of their own investments, but because they see a profit opportunity in a potentially undersaturated market (or they simply enjoy making beer and want to turn their hobby into the life's work - hopefully such people have a solid business partner to work out the financial end of things).

Yes, there are craft breweries that are going to fail, no question. And at some point, either growth will slow down, or it will be tempered by a higher rate of failure than what we see now. But this does not mean there was a "bubble".

Rant over.

 

[evilc]

words....words..... wait wat

 

[ilovermont]

Okay I know what you're all thinking "Awww, not this stupid topic from the BA Beer Talk section!"

sorry, you lost me there.

 

[Minnesotaryan]

I think craft beer is becoming more appealing to the masses. not everyone is gonna give a **** in the way we do, but they will drink craft beer. I don't think that is going to go away anytime soon.

 

[Steve2]

 

[Lizard King]

Great breweries will thrive. Sub par breweries will either evolve or go out of business.

 

[CrushedVol]

I think what existed before was a sever under saturation of craft beer in the market. Demand far outpaced supply, which is catching up rapidly, it is entirely plausible (and i think probably likley) that supply will outpace demand for a time. As you mentioned above this does not mean "bubble".

However as with any other industry that is appropriately saturated you will see breweries start to close, profit margins decrease etc. While i would imagine the barrier to entry is much less than it was a decade ago, there are also far more choices and competition. Over the next decade i would expect to see many start ups go under, and even a few bigger craft beer breweries slowly lose market share on their way to failure. This isn't because of a "bubble" but just what happens when a market is appropriately saturated.

 

[mcaulifww]

Craft beer is growing not because individuals are getting into the craft beer industry under the belief that others entering later will increase the value of their own investments, but because they see a profit opportunity in a potentially undersaturated market (or they simply enjoy making beer and want to turn their hobby into the life's work - hopefully such people have a solid business partner to work out the financial end of things).

Yes, there are craft breweries that are going to fail, no question. And at some point, either growth will slow down, or it will be tempered by a higher rate of failure than what we see now. But this does not mean there was a "bubble".

Rant over.

I agree that the bubble isn't the right term here. I do think that when someone looks to invest in a brewery(either by starting their own, etc.) they do need to be acutely aware of the market saturation. I used to live in Rchmond VA and 2 years ago I could thik of 2 breweries (legend and Hardywood, I'm sure there was a 3rd or 4th) now there have to be upwards of 15. I think that is the most important thing. the micro not macro. when starting out are you setting yourself up for success or failure within your region

 

[user 306237]

I can only speak for what's going on in Chicago (and even then, only barely) but even if we don't have a bubble around here, we're getting to the point where... I don't know, I think a lot of the newer breweries are going to go out of business. For the most part, the new breweries we're seeing here follow the Pipeworks model -- release $10 bombers via retail, no taproom/bottle shop & hard to find on draft (if ever). Pipeworks has the huge benefit of being the first to market with this concept (sure, FFF was charging $10-12 for a bomber before it was cool but they also sell six-packs so it's not like a bomber is the only way to try them out). Spiteful, thankfully, bought a canning line -- I might be willing to buy some once or twice (but $9 for a bomber of a run-of-the-mill coffee stout? when my Jewel underprices FBS for $10? please).

So, broadly speaking, the companies that can hit the ground running with sufficient capital to make/package beer at an affordable price will do well -- "nanobreweries" who are started by homebrewers with little/no professional training and who hope to live off of $10 bombers? I have my doubts.

This article might be relevant, too:
http://www.chicagoreader.com/chicag...-jess-straka-metropolitan/Content?oid=8985499

 

[Minnesotaryan]

I can only speak for what's going on in Chicago (and even then, only barely) but even if we don't have a bubble around here, we're getting to the point where... I don't know, I think a lot of the newer breweries are going to go out of business. For the most part, the new breweries we're seeing here follow the Pipeworks model -- release $10 bombers via retail, no taproom/bottle shop & hard to find on draft (if ever). Pipeworks has the huge benefit of being the first to market with this concept (sure, FFF was charging $10-12 for a bomber before it was cool but they also sell six-packs so it's not like a bomber is the only way to try them out). Spiteful, thankfully, bought a canning line -- I might be willing to buy some once or twice (but $9 for a bomber of a run-of-the-mill coffee stout? when my Jewel underprices FBS for $10? please).

So, broadly speaking, the companies that can hit the ground running with sufficient capital to make/package beer at an affordable price will do well -- "nanobreweries" who are started by homebrewers with little/no professional training and who hope to live off of $10 bombers? I have my doubts.

This article might be relevant, too:
http://www.chicagoreader.com/chicag...-jess-straka-metropolitan/Content?oid=8985499

one can hope that these breweries will all invest in canning or 12 oz bottle lines. Steel toe in MN is just bombers, but it has been mainly 1 or 2 people and I would guess it is hard to do all the different things with just a couple guys.

 

[user 306237]

one can hope that these breweries will all invest in canning or 12 oz bottle lines. Steel toe in MN is just bombers, but it has been mainly 1 or 2 people and I would guess it is hard to do all the different things with just a couple guys.

I don't even necessarily mind bombers -- but when a brewery only releases $10 bombers, I get antsy. Pipeworks opened with 2 full-time employees and a 3rd part-timer and, I get it -- capital is hard to come by (I watch Shark Tank so I can speak about these things). But starting/running a business is hard and expensive (again, Shark tank viewer). Buying a packaging system because it's the only one you can afford (ie. a hand-made bomber filler) and then passing the increased expense on to consumers (time spent filling those bombers + increased packaging cost) is annoying -- especially when there are 6 other companies doing the same damn thing.

 

[stupac2]

I could have lived with never seeing this thread again, even though I do agree with you.

 

[cosmicevan]

lots of words, but if you want to call it a bubble or not...the strong will eventually weed out the weak.

when i think of my own micro local beer scene...more and more people are getting into it and trying the locals. the locals are ok...some real highlights, but for the most part, lots of mediocre beer. as these new-to-craft drinkers start to explore, they will eventually stumble across the greats. As the greats grow and expand into new markets, choices will become overwhelming and great stuff will sell and mediocre stuff will get stale on shelves.

heady topper comes to NY and is gone the minute it shows up (when it shows up). if alchemist could meet the demand and supply the masses with regular fresh heady, i couldn't imagine anyone local buying a different IPA. bell's is on the way to NY too...this is not good for the little guys, but great for the beer drinker.

may not be soon since there is so much available market, but eventually this will level off and all these breweries that are popping up will be pushed out by people who make better beer.

 

[stupac2]

lots of words, but if you want to call it a bubble or not...the strong will eventually weed out the weak.

The point is that that's not a bubble, that's called "the market operating normally".

 

[Bill2]

 

[cosmicevan]

The point is that that's not a bubble, that's called "the market operating normally".

i prefer to call it george.

 

[Minnesotaryan]

I want everyone to make good beer and put them in convenient cost effective vessels

 

[beerindex]

The one concept that keeps getting mentioned here is that the best breweries will survive, and the worst ones will fail. But I don't know that it is necessarily true. Certain breweries build local identities and put out inoffensive enough beers to do major volume, and will thus outlast some better breweries whose pricing and market share leaves them weaker to begin with.

 

[JulianB1]

The one concept that keeps getting mentioned here is that the best breweries will survive, and the worst ones will fail. But I don't know that it is necessarily true. Certain breweries build local identities and put out inoffensive enough beers to do major volume, and will thus outlast some better breweries whose pricing and market share leaves them weaker to begin with.

Indeed. In this context, "best" and "worst" should probably be referring to their business plans rather than the taste of their beer.

This probably also helps explain how Indian Wells is still in business.

 

[StarRaptor1]

When I open my brewery in 2018 we'll see what the market will look like. Overall I agree with the comments good brewers (Noble) will survive bad ones (Old Orange) will trickle out.

The concern I do have is not how many new breweries the consumer market can bare but how many different breweries the current raw ingredients supply chain can handle. For instance, Craft Beer makes up only 6% of US beer sales yet accounts for 15% of all malt consumed. Hop shortages had occurred and have had a noticeable impact on the craft beer segment when they had. Both of these have the potential to get worse the more breweries that open.

 

[stupac2]

When I open my brewery in 2018 we'll see what the market will look like. Overall I agree with the comments good brewers (Noble) will survive bad ones (Old Orange) will trickle out.

Are you serious about that? If so, that's awesome!

The concern I do have is not how many new breweries the consumer market can bare but how many different breweries the current raw ingredients supply chain can handle. For instance, Craft Beer makes up only 6% of US beer sales yet accounts for 15% of all malt consumed. Hop shortages had occurred and have had a noticeable impact on the craft beer segment when they had. Both of these have the potential to get worse the more breweries that open.

The market will adjust. If farmers can make money planting hops and barley, and if there's demand for malting etc, it'll get met. There will be some lags, but it's not like these people in the supply chain are all little Vinnies, content with where they are. Enough of them want to grow that it'll happen.

But you're right that it could make life difficult for new entrants.

 

[StarRaptor1]

Are you serious about that? If so, that's awesome!

For the first time I feel confident enough to start saying it publicly. It's one of the main drivers for leaving my current job and joining a start up

 

[StarRaptor1]

The market will adjust. If farmers can make money planting hops and barley, and if there's demand for malting etc, it'll get met. There will be some lags, but it's not like these people in the supply chain are all little Vinnies, content with where they are. Enough of them want to grow that it'll happen.

But can they? the acreage is a finite resource and hop crops take years to establish reliable yields. Competition on what to plant can be fierce

 

[stupac2]

But can they? the acreage is a finite resource and hop crops take years to establish reliable yields. Competition on what to plant can be fierce

I believe so. I mean, there are always acts of god, but right now hop acreage is increasing, but it lags demand by a bit. Also some of the sexier varietals just don't have enough rhizomes. But it'll pick up.

I'm less familiar with the issues with malt, since those don't make much news, but doesn't barley like cold weather? I think there's plenty of space in the middle of the US that's about right for it.

 

[StarRaptor1]

I believe so. I mean, there are always acts of god, but right now hop acreage is increasing, but it lags demand by a bit. Also some of the sexier varietals just don't have enough rhizomes. But it'll pick up.

I'm less familiar with the issues with malt, since those don't make much news, but doesn't barley like cold weather? I think there's plenty of space in the middle of the US that's about right for it.

I hope you're more right than I am pessimistic

 

[cosmicevan]

I want everyone to make good beer and put them in convenient cost effective vessels

please run for president.


...or at least tell me how i can subscribe to your newsletter. finally someone who is making sense.