“Look back twice as far as you look forward,” Paul Saffo on Forecasting
Forecasting anything to do with Craft Beer is a process of interpreting historical and current data to project ahead. Now we are looking at it as consumers to understand why there are hits and misses in the forecasting process.
With 9,500 craft brewers in America and more on the way, the economic footprint of the craft industry is significant. It will stay relevant because the sector is agile and responds to “change” quickly. However, not that long ago, headlines such as “The Craft Beer Industry’s Buzz is Wearing Off” appeared in The Washington Post on April 10th, 2018. Similar articles suggested a waning craft beer industry. Here is another example, “The days of eye-popping growth numbers for the craft beer industry seem to be over,” Fortune, March 2018.
Even after a pandemic and economic turmoil, don’t bet against craft beer. In 1897, a newspaper reporter asked Mark Twain if he was dead. The fortuitous reply has some applicability to Craft Beer circa 2023. The gist of Twain’s famous response was, “The reports of my death are greatly exaggerated.” Today, prior reports of a diminished craft beer industry are “greatly exaggerated” too. Do not ask if Craft Beer is dead or even dying. It is resilient, as exhibited by its packaging, branding, and product creativity. One recent projection forecasted craft beer to be a $92 billion industry by 2025, up from $76 billion in 2021.
In recent years, the owners of macro breweries have acquired craft breweries, albeit with mixed results. It appears that these forays have highlighted the fact that micro-operations have a unique set of challenges. For example, by owning their large barley and hops farming operations, some macro brewers have ensured themselves supplies of critical raw materials. Craft brewers, who focus on specific varietals of hops and barley for their recipes, are stressed by supply chain issues.
Change forms insights, and insights are part of forecasts. There is value in craft brewers having insight.
Bart Watson is Chief Economist at the Brewers Association. He touches on one of the difficulties in developing yearly and long-range forecasts, “Change is constant in the beverage alcohol industry. Properly addressing Change is an art and science with the goal to anticipate trends that help craft brewers minimize future risk yet facilitate out-year planning. Nothing is 100% sure, and the vagaries of disparate market segments are challenging to deal with.”
“Companies need to think about how they can still be relevant in a market where we are going to see thousands of new breweries open,” Watson said. “This is a trend. It is not going away.”
Here are some issues breweries deal with daily that most beer consumers often overlook. For example, how to get store shelf space, political issues, taxes, supplies, financing, and labor shortage. Newer issues are labor and supply chain. Despite all the disruption, “in 2022 there were 550+ new brewery operations added to the industry and approximately 250 closings,” says Watson. “In spite of that last fact, a substantial number of people still feel craft beer is a good endeavor despite all the changes.”
According to Watson, what issues don’t seem to be resolved in the short term?
- Brewery openings will be the lowest in over a decade.
- Distributed craft volume will not grow significantly.
- The supply chain will remain rocky, but collectively average prices will come down from their 2022 peaks.
- Total brewery employment will still grow, partly relieving recruiting challenges.
Most craft breweries focus on local distribution problems; every market has distinct characteristics. Because of that, branding will be front and center in building loyalty, maintaining and holding market share, and creating new markets with new category products (seltzers and RTD).
Looking forward to the next couple of years, there is no lack of prognostications about the craft beer industry’s future. Anything beyond a 3-year analysis is probably a waste of time. Here is one immediate example, even economists can’t agree on if or when a recession will be in the U.S., this indecision has been going on for two years. The best course of action for brewers is trusting intuition, insight, historical data, experience, and synthesizing data from vendors and suppliers.
The following is a collection of top-line thoughts from people who have contributed insight on craft beer forecasts.
Brewers are still moving toward traditional styles and impetus on lower alcohol and calories.
The IPA is still king, with approximately 35% of the craft market, but it is not with the force it once exhibited. “Many brewers are putting renewed focus on craft lagers, with their own regional specializations and/or recipe twists, in addition to highlighting lower calories for health-conscious craft drinkers,” reports Jessica Jacobsen in Beverage Industry.
The craft beer supply chain has many moving parts-ingredients, packaging, and distribution.
The supply chain “starts with the raw ingredients needed for production and packaging and stops when the beer is delivered to the end user (retail or direct-to-consumer). This could be home delivery from an online order or when the barman pours a pint for a pub patron,” noted an article by Unleashed Software updated in January 2023.
Raw materials are continuing to experience supply issues. Hops are scarce due to fires, draughts, and environmental issues. Barley is becoming an issue due to the war in Ukraine, drought, pest, and sustainable crop issues. As an aside, many barley crops worldwide are for animal feed, not just beer. The latter point means that competition for barley does impact pricing and availability.
Often overlooked are the issues of packaging availability. It was not that long ago that aluminum was and continues to be in short supply. “The increase in demand for craft beer has led to a corresponding growth in the beer packaging market. Beer packaging is the part of the beer supply chain that involves the bottling and labelling of bottles, PETs, cases, and kegs,” notes the article by Unleased Software.
The supply chain impacts everything from planting seeds that must be delivered via the supply-chain, harvesting, distribution to maltsters, distribution to brewers, needed labor availability/cost, packaging availability, changes in customer allotments, consumer trends, e-commerce, consumer direct, and distribution to retailers. Even the glass bottles from overseas suppliers may be tied up on docks for weeks. Further, all issues considered supply chain related are impacted by inflation and timing, which adds to costs.
Now we come to the cost consideration of our favorite craft beer concoction. The question becomes, how ‘inelastic’ craft beer pricing impacts consumption? Economists say craft beer demand is inelastic relative to pricing. They say a price increase of a craft beer will not affect the overall consumer demand for their favorite beer.
Forecasting craft beer sales may not be solely looking at an inelastic marketplace.
Note: This is really saying-Inelastic demand in craft beer is really saying “demand for good craft beer” doesn’t change much whether the prices goes up or down.
Costs to the consumer in premium beers will constantly need to be evaluated. For a relatively long time, most economists said that millennials (25+-year-olds) were committed to craft beer no matter the price. Now with general inflation and increased costs in raw materials impacting craft beer pricing, will the consumer opt for cheaper beer brands? Such options would be the consumer reverting to the ‘pedestrian go-to beer brands’ produced by macro brewers versus craftsman ‘made’ beer. Pundits still feel in a preference stand-off, mass-produced versus craft beers; these are two different products and not an either-or comparison. Therefore, craft beer pricing still makes for an inelastic product.
Some top-of-mind issues to consider in a brewer forecasting anything to do with their brand/products: drought, fires, supply chain issues, raw material availability (such as barley) impacted by war in Ukraine, competition from the macro brewers, inflation, industry acquisitions, recession, pandemics, cost of money, property, and facilities, and changes in laws. Would anyone have considered a total shutdown of the World’s largest economy three or four years ago due to a virus? No taprooms, eating on street curbs in make-shift sheds, limited employee availability, masks only, etc. No planning person would have ever considered such insane issues in planning for the future of their craft brewing business.
Still about elasticity. “The issue of cost of craft beer to consumers is important. However, a large portion of these issues are supply-chain related. All along the production process the events that impact price and even craft beer availability are endemic to supply chain issues,” says Watson.
“Climate change and persisting supply and ingredient disruptions and shortages continued to plague brewers throughout the year.” Brewers Association
The consumer still votes for quality and value.
The most challenging macro issues to anticipate in craft beer decision-making are the evolving changes in consumer preferences relative to beer taste, general market conditions, and the impact of the overall economy on personal finances. Do quality, handcrafting, and the umami factor in craft beer make it a staple of a blessed life? Yes!
Whatever the scale of a brewery operation, craft beer is still a premium product, and people who appreciate quality will always splurge on those beer products. Beer is a lifestyle product; whether consistently or occasionally, people recognize and appreciate quality.
If you are fascinated with craft beer as an industry, you already know it is complex, with many moving parts. There are highly educated people helping to guide the sector through changes that will ultimately present the craft beer consumer with high-quality product options. Hanging out at your favorite taproom, you are experiencing how successful brewers respond to forecasting; you see it in their new styles, branding, packaging, and consumer products.
Here are some changes that will probably become noticeable in 2023 and 2024 coming from craft brewers:
- Low-calorie and low-alcohol beer–lighter, with malt flavors forward.
- More effort spent on branding.
- Taprooms are coming back strong and adding a feel for the community and brand loyalty.
- Inflation/materials pricing, along with supply-chain-oriented shortages, will be noticeable.
- RTD (ready-to-drink) products will need to be addressed as brewers deal with seltzer products.
- In some states, the limiting factor to growth for craft beer lies in product distribution. The macro brewers control distribution (a Three-Tier-System), the macro brewers have contracts with large distributors who basically control the sale and delivery of beer. 78.6% of distribution is controlled by the big 4 macro brewers and their distributors take care of the largest first. A distribution system needs to be developed by state governments that can level the playing field for the small craft beer producers.
- Branding is at the forefront relative to how craft beer responds to the younger generation, as older consumers buy less.
Consumers have opinions too!
Cheers! Exploration builds insights.