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Analysis of craft brewing reveals shifts in industry

At Luna Capital, a Santa Fe-based brokerage and real estate firm with a specialty in brokering funding for craft brewing businesses, we frequently analyze specific markets to properly advise our clients. We’ve noticed a recent shift in craft brewing while looking at categories that are critical to understanding what the future holds for this popular industry.

The Brewers Association divides the industry in two main categories: Microbreweries, which produce less than 15,000 barrels annually, and regional breweries, which produce between 15,000 and 6,000,000 barrels (one barrel of beer equates to 31 U.S. gallons).

According to the Brewers Association, industry growth peaked at 18 percent between 2010 and 2014 and has since slowed. For 2017, growth has been estimated at 5 percent.

As markets mature, competition increases with more entrants and as consumers or end-market users typically stagnate. Only a certain percentage of the population consumes beer, and that market is not growing at the rate that new breweries are entering the segment. And while craft consumers support the sector, many beer drinkers still consume brands produced by large international producers.

The national trends are evident in New Mexico, which has nearly 70 breweries serving a population base of just over 2 million. We have strong established brands producing quality craft beer, with strong distribution channels and appealing taprooms. The larger well-established craft breweries here continue to see strong growth, both in off-premise and on-premise consumption. It is likely that this growth comes at the expense of large international brands.

Regional brewers find themselves competing for market share with microbreweries and larger competitors that have far greater resources for marketing and advertising. As such, regional breweries have two distinct sets of competitors with different strategies, while microbreweries are not a threat to larger national/international competitors given the innocuous volumes.

Leading local brands are continuing to register meaningful year-over-year growth – as much as 15 percent 40 percent. The top tier of local brands, by volume, are getting the lion’s share of that growth, which is unlike the national trend. We attribute this to the top local brands producing quality craft beer that is competitive nationally, creating tap-room ambiances that are desirous, and generating consumer brand loyalty. As is the case in other industries, as the industry matures, weaker enterprises (poor craft quality, fragile consumer following) will be the first to close.

We anticipate strong brands that produce quality craft, stay abreast of craft trends and consumer preferences, have proper cost structures and clean balance sheets, will continue realizing growth. Those who do not meet most of these characteristics and are looking to scale will struggle.

As new breweries come online, per-brewery growth has slowed significantly in the last few years, leaving many microbreweries well below their projected growth numbers.

Other shifts in the market include:

  • On-premise consumption – brewpubs and tasting rooms – is increasing as total beer volume growth declines.
  • A shift toward cans and away from bottles.
  • A shift toward pilsners and lagers and away from beers with high bitterness or ABV (alcohol by volume) levels. This trend is seen within the IPA (India pale ale) category, too.
  • Top breweries will continue to open “satellite” locations as they look to focus on quality and create experiences for patrons.

 

Luna Capital is a commercial lending adviser providing capital resources and real estate expertise to businesses in the Southwest and nationally. More information is available at www.luna.capital.

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