1) Bubbles occur when there's too much supply and not enough demand for all the supply to be sold profitably.
A bubble is a pretty loose term for large scale market failure. I've experience bubbles professionally in both fiber optics and solar panels, and in the United States, we all witnessed the "dot.com" bubble and the housing bubble. Lots of people describe bubbles using a bunch of big words and technical jargon that sound deep and insightful, but bubbles really aren't that complicated. Bubbles occur when too much supply is created in a market where there's not enough demand for all that supply to be sold profitably by most of the firms in the market. While craft beer is growing fast, many breweries are involved in major expansions and over a thousand new breweries are in the planning stages. Brewing requires large investments in equipment and material, so most breweries take out large loans to pay for start-up and expansion costs. If all these breweries have trouble finding distribution channels in an increasingly crowded market to sell their beer, or have to highly discount prices leaving them with little or no profit, they could find themselves unable to pay off the loans and may go out of business.
2) Everyone focuses on the new breweries but established breweries are about to bring at least an extra 4 million barrels of annual capacity online by 2015.
All the new breweries being formed draw most of the attention when a craft beer bubble is considered, but no one seems to pay too much the large expansions taking place within the industry. Simply counting from press releases and making reasonable and conservative estimates, I find at least an additional 4 million barrels of annual capacity is about to come on line. This includes Lagunitas, Anchor Brewing, Sierra Nevada, and New Belgium building second breweries and major expansions from breweries like Deschutes, Boulevard Brewing, Dogfish Head and Bell's. There are numerous monthly press releases from various smaller breweries breathlessly announcing expansion plans and major distribution deals.
So what? Well, according to the Brewer's Association, craft beer sales for the first half of 2013 were 7.3 million barrels. If we simply double that number, that means at least 14.3 million barrels of craft beer will be sold this year. If we compound that number for 2014 and 2015 at craft beer's currently astonishing growth rate at 15%, that means there will be an additional 4,700,000 million barrels sound in 2015 over 2013.
That means the current 1,605 breweries the Brewer's Association says are in the planning stages will be fighting over the sales of the remaining 700,000 barrels of beer, which works out to 436 barrels per brewery, or a little less than the size that a small brewpub. Which suggests if you plan to open a small brewpub, there will probably be a place for you. However, any brewery with ambitions of becoming a regional brewery pumping even smallish 1,000-3,000 barrels of beer each year is facing some very long odds.
It's also important to add I haven't included so-called crafty brewers like Goose Island or the Craft Brewers Alliance in this analysis, since they are not included in the statistics of the Brewer's Association. Needless to say, they make the situation for any aspiring craft brewer worse since Goose Island is in the midst of a nationwide rollout as Anheuser-Busch transitions their Budweiser facilities to produce more Goose Island. The Craft Brewer's Alliance recently announced a brewery expansion of nearly 150,000 barrels annually as well.
|Can this astonishing growth of breweries continue?|
3) If the Growth of Craft Beer Slows to 5% or even 10%, a lot of breweries are going to fail despite this high level of growth.
I have seen and heard numerous comments assuring everyone that craft beer won't experience a bubble because it will continue grow. While it certainly true that craft beer is growing and is currently humming along at a 15% a year pace, it's an open question if this high growth rate is sustainable for the next 2-3 years at least. Because if this 15% growth rate is not maintained, a lot of breweries are going to find themselves is seriously difficult position.
To understand this, consider various rates of growth of the craft beer industry from 5-15% over the next two years and how that will affect the demand over the next two years, assuming 14.6 million barrels of craft beer sold in 2013.
Growth rate in 2014 2015 Difference between 2013 and 2015 Sales
15% 15% 4,700,000
15% 10% 3,900,000
15% 5% 3,000,000
10% 10% 3,100,000
10% 5% 2,300,000
5% 5% 1,500,000
Based on at least 4,000,000 barrels of annual capacity coming online during this period from currently existing breweries, we see that only under 15%-15% scenario will this demand exceed what is already coming online by existing breweries. Under any other growth scenario, it becomes clear that way too many breweries will be producing too much craft beer that can be sold. Some breweries will muddle through this, others with strained fiances, questionable business strategies, or simply mediocre products will face tough times and likely fail. In addition, many new breweries are founded by smart, ambitious 20 and 30 somethings that may find eking out a living with a small brewery struggling in a saturated market is not what they signed up for and fold up their operations for greener pastures.
Yes, it is certainly possible that craft beer industry could grow by 20%. That would be an unprecedented growth rate for a mature product like craft beer, which has been around for decades, and craft beer has never experienced anything close to 20% growth in any year. It's just not likely to happen.
4) So what do I think will happen?
I see the craft brewing industry going through a similar pattern to bubbles past, with many new entrants and over expansion in a rapidly growing market to the point where it becomes over saturated and only the strongest firms can survive. But unlike the dot.com, fiber optic, or solar panel bubble I'm familiar with, I don't expect the majority of the businesses to fail. Established breweries like Stone Brewing, Sierra Nevada, or New Belgium should do fine. The current rate of failures in the craft brewing industry is currently absurdly low, around 40 a year, or 1-2%.
Talk to people in the craft brewing industry, and you'll find them conceding a shake-out or consolidation is on the horizon. In fact, what I've basically done is express in numbers the gut feeling many in the industry have. So it's pretty realistic to expect a few hundred breweries failing as the market reaches equilibrium. There is little doubt in my mind we are headed towards a market correction of this magnitude.