The craft beer industry's market share has increased in comparison to mainstream beers, going from 3.6% in 2006 to 12.3% in 2016. Growing consumer interest in artisanal items, a more favorable regulatory environment, mediocre regional and national beer brands, relatively low production costs, and the ability to brew on a small scale are all factors contributing to this expansion.
Millennial consumption trends indicate a strong preference for a combination of ""premiumization"" and inexpensive luxury. Following the need to make what is reachable for high-income consumers now available to the general public for a few extra dollars increased the number of people who took craft beer. In addition, the growing need for local and artisanal brands that are of higher quality with more sophisticated production to deliver distinct flavors further pushed the market share of national beer brands down.
Secondly, the regulatory and legal framework over the years lowered the entry barriers for new breweries such as the need for three-tier distribution system had been done away with. In the past, breweries were required to follow the producer-distributor-retailer hierarchy of doing business, which allowed the large incumbents to use their market power in curtailing opportunities against newcomers thereby denying them space in retail shelves. The legalization of non-commercial home brewing by President Jimmy Carter in 1978 was the beginning of a new era and the effects are being experienced in the 2010s. Moreover, the required ingredients to brew are now accessible and cheap, the equipment easier to affordable and easier to operate, and the brewing time has been reduced to weeks from years and months which was the process decades ago.
The increasing competition among craft brewers has brought about extreme challenges in the industry even as more brewers entering the market to have a piece of the current market share. In the past, men had limited beer options. In the 2000s, more women are drinking beer and men are exposed to a wider scope of brands. However, more people are now falling for wines and spirits as opposed to beer. Nonetheless, the goodwill and lower entry barriers realized a fragmented market that is continuously making it harder for craft brewers to grow their brand and stand out amongst their peers. On the other side, consumers are now making decisions on which beer to purchase based on their locality, label design and name. As a result, beer consumers are growing a loyalty trend to the craft beer industry as opposed to a particular brand.
Early in the craft revolution, distributors realized that retailers loved promising new brands. As such, the distributors offered the latest hip brew which also made it easier for that brand to find its ways to the bar. However, the current saturated market cautions retailers against taking more than enough stock because that concept carries a risk in that the consumers may no longer be interested in the latest hip brew. Many popular craft beers are easily considered to be mainstream beers because consumers are more into unique and distinct flavors rather than what is popular in the market.
The craft beer industry is undergoing a market contraction which means the growth will soon stagnate when the curve hits maturation stage and start to recede. In response to the consumer trends that showed consumer preference to craft beers over mainstream beer, companies such as AB InBev have been on the spree of acquiring craft breweries which further dampens the craft beer business. As such, independent craft spirits and beers face a threat, the big brands, that are fighting to keep their current market share.
Figure 1: Highlighting the increase in market share between craft beer and craft spirits
Source: Brewers Association, American Craft Spirits Association
Economic Theory and Analysis
The Real Business Cycle theory is based on a macroeconomic model that looks into the business-cycle fluctuations in contrast with what is experienced with nominal shocks. The theory also considered the national output against the maximum expected utility, which leads to the question of long-run structural policies and fiscal policies changes to businesses. In a nutshell, RBC theory compares the value of goods produced versus the consumption of those goods. As such, RBC theory relates to the four phases that any business goes through as affected by the slump and periodic boom off economic activities such as employment, total production, prices, wages and bank credits. The baseline formula for a company’s production function on RBC theory is represented by:
Yt = Kαt (AtLt)1−α
Where;
perfectly-competitive firms choose capital “K” and labor “L” to maximize profits
household units are granted one unit of time that is divided between leisure (1 −ℓ) and labor ℓ, and
a fraction of the existing capital stock, δ, depreciates with each period.
There are four phases in any business cycle, including expansion, peak, contraction and trough. Taking into consideration the case of the craft beer industry, it can be classified to be in the contraction phase. At this stage, it shows that the industry is no longer growing and instead reaches a point of maturation where the GDP starts falling by 2%. This linkage between output growth and unemployment is summarized by Okun’s Law:
%ΔGDP = k − cΔU
Where;
k is the long-run growth rate of real GDP (assumed at 3%)
c measures the correlation between unemployment and the growth rate of real GDP (about 2%), and
U is the unemployment rate
%ΔGDP = 3− 2ΔU
As a result, the companies in the craft beer industry started experiencing lower sales as compared to similar periods in the previous years. According to the article, the effervescent growth began going flat in 2016 when the volumes only went up half as quickly in 2016 as opposed to 2015. The article also highlighted that the 13 weeks preceding June 17th saw craft-beer sales go down by 1.5% and 0.7% respectively.
As for the distributors, they realize there is no market for the craft beers and so begin stocking alternatives like spirits and wines even as the market trends change. For retailers, they take note, not to stock excess products which might end up not selling since consumers now relate better with alternative products. At this point, retailers begin stocking more of the alternative products that their consumers demand. Olivier Nicolai reported in the article “Craft Beer in America Goes Flat”, that retailers and distributors had their worried regarding the high number of brands and so took caution on the brands they stocked to avoid spoilt products before being sold. He gave an example of Sales of Saison, a brand that saw increased sales by 28% in 2015 only to experience a dip in 2016.
Figure 2: Showing the change in sales volume of craft beer in the United States
Source: BMI; Sanford C. Bernstein
Whereas the craft beer industry is experiencing dropped sales, the wines and spirits industry is growing its sales. However, the drop in the craft beer industry does increase the market share of mainstream beer such as AB InBev products. Actually, the latter experienced even lower sales which depict alternatives, including wines and spirits, are taking over the industry and building on their market share. An example of mainstream products having lower sales is in the case of AB InBev’s American branch, Anheuser-Busch that has seen sales volume go down by at least 8% since 2009. As such, it is clear that once a craft beer brand gains its popularity. However, it is a matter of time before that brand loses that popularity because its competitive advantage was based on the brand coming in as a new distinct entrant which turns local with time. An interesting example is that of Samuel Adams trajectory that shows the significant difference in some of the bestselling craft beers such as “Rebel IPA,” “Nitro Coffee Stout,” and “Coney Island Brewery” that he launched in the U.S.
Figure 3: Showing the change in sales volumes of Samuel Adams craft beer brands
Source: The Nielsen Company, Goldman Sachs Global Investment Research
Since mainstream breweries have learned their lessons in the U.S. market, there have been aggressive approaches to acquire new craft competitors in similar Africa, Latin America, Asia and Europe markets. In addition, the breweries have been working on their craft beers in these markets to ensure they have a greater market share. In the U.S. market, AB InBev has already shown interest in acquiring more small brands having downed at least nine American craft brewers within a span of three years. This move to expand their portfolio of beer makers has realized lesser competition in the market. Furthermore, the company has introduced a new seal to find uniqueness and help consumers relate with the newly acquired “independent” brewers.
Conclusion
The craft beer industry is a competitive front that requires creativity and innovation. However, the challenges posed by mainstream breweries threaten the growth of craft breweries even as the two face of a fierce battle on controlling the market share. Whereas the craft beer industry is hitting the maturation phase of its business cycle, the mainstream breweries are drawing lessons from their reduced market share. These mainstream breweries are on the spree of acquiring distinct craft breweries both locally and abroad to ensure they remain abreast and keep their market share in the beer industry.
