Craft beer is still growing as a segment of the total beer industry. Like wineries, there is a craft beer brewery in all 50 states. Craft brewing, as a category in the alcohol beverages industry, has only been around for approximately four decades; however, there is no specific event to delineate an official genesis of the industry. In 1859 the Anchor Brewing Company in San Francisco started brewing operations. Unfortunately, until 1965 the company had a sordid history of financial failures in making fine beer. However, since 1965 it has a stellar record of success and is now recognized as America’s first craft beer brewer.

Despite the growth in breweries, the craft beer industry is experiencing significant issues. For example: constantly changing consumer trends; rapid industry expansion; growth in product offerings (this includes new products such as hard cider); distribution restrictions; response to market trends; and, imports. However, in December the new tax law took effect and should free up capital to fund expansion and marketing programs without incurring debt. “CMBTRA (Craft Beverage Modernization and Tax Reform Act-2017) as part of the new tax bill is cutting the excise tax bill in half for the nations small brewers,” reports Bart Watson-Chief Economist for the Brewers Association. That’s a decent chunk of capital for reinvestment. “There are benefits for wine/spirits producers as well.”

Per capita beer consumption in the U.S. has been flat for about a decade. However, and this is a major point, “craft beer” appears to be up approximately 5% in 2017. The major concern in the “here-and-now” is the loss in shipments that occurred in 2017 for the industry in total. Beer Institute economist Michael Uhrich notes, “the 2.2 percent decline in shipments (through November 2017) is the largest percentage decrease in annual domestic beer shipment volume since 1954.” This begs the question: Does this signal changes in the industry? Beer sales are reported by barrels shipped; the 2017 numbers indicate 3.8 million fewer barrels shipped. In 2017 U.S. brewers produced 170 million barrels; each barrel representing 248 glasses of beer. A barrel of beer is 30 gallons versus wine’s 60 gallons barrels. As an aside, the craft spirits industry realized a 4% increase and wine is expecting to report a 2% increase in production.

Mr. Bart Watson, attributes the decrease in domestic shipments in 2017 to consumers trading their domestic lager and light lager domestic brand preferences for imported brands. Further, issues with marketing/branding, distribution, demographics shifts, etc. are impacting the industry also. “I would expect this trend to continue for the medium term,” Watson writes. “In addition, wine and spirits growth in market penetration are two other reasons.” Craft brewers are leading the way in addressing new niches such as in style and marketing.

U.S. households who consume wine, beer and spirits (26 percent of households and 55 percent of sales dollars for adult beverage) now outnumber those that consume only one or two of those, according to Nielsen Homescan figures. A Harris Poll conducted Jan. 16-18, 2017 found that 39 percent reach for beer first, while 29 percent go for wine, 27 for spirits and 4 percent for hard cider. That’s up for wine from 21 percent who said it was their choice a decade ago but down for beer from 45 percent and for spirits from 32 percent. This reflects a shift toward wine as the millennials get older.

Younger consumers aren’t drinking wine as often as older consumers, according to Nielsen Scarborough and Wine Market Council.

It is important to realize the craft beer industry is producing more than 400 styles of beer; many are targeted at regional drinker preferences. A craft beer consumer demographic is:

· 44% have a Household income of $100,000+ (90% of the Household comprise 2 or more persons)

· 80% of craft beer drinkers are white

· 57% of market is male ages 25-54

· 22% of the market is female ages 25-54

· 50% have college and post graduate degrees

· 81% have some college, college degrees or graduate degrees

· 55% of the craft beer markets are West Coast and Atlantic

One of many things that have fostered growth and interest in craft beer is the hobby of home brewing. My first experience in home brewing was in 1976 when I had my first taste of home brewed beer-it was exciting. Even in wine, there is a cottage industry of people who produce some of their own wines. This includes people who buy vines and have their own mini-vineyard.

Simply, beer and wine have had the benefit of being able to be nurtured as a small batch hobby. This has allowed people to experiment with new beverage products. It is interesting to note that Fritz Maytag, who saved Anchor Brewing from one more bankruptcy in 1965, has also entered the craft distilling arena in 1993 with Anchor Distillery. Anchor Distillery is now recognized as the first craft distillery in America.

Craft distilling will not be a threat to brewers initiated by hobby distillers! Corie Brown writing for “Entrepreneur Magazine” makes an important point: “Distilling at home stills remain illegal, a law that appears to be carved in stone as much because of the fear of exploding stills and accidental poisonings as an aversion to “demon” spirits. So, the movement has grown far more slowly. There are no firm numbers on the size or value of the craft spirits sector.”

As of 2017, there were 8,800 (licensed) breweries in the U.S.; 1,100 being in California: many are not fully operational however. A more realistic number is closer to 6,100 active. On average there are approximately 150 craft beer brewers that close the doors. (That is a percentage failure rate below that of restaurants.) Of all breweries approximately 2,000 are considered brewpubs. Still, craft beer breweries do not numerically compare to the nearly 10,000 wineries in the U.S. But the one thing beer and wine have in common; California represents approximately 50% of the beer and wine companies.

What are the attributes of beer that is driving the craft brewing industry?

· Beer is refreshing

· There can be some distinct aroma’s

· Numerous profiles/styles of beers

· Affordability

· Taste options can be easily achieved

· Accessibility of the product

Somewhat unique to craft beer is the need to understand demographics of the customer and market. Interestingly, new beer styles can appear from a brewer in a relatively short time whether it be a seasonal brew, event oriented or changes in consumer preferences.

Craft beer branding isn’t unique to anyone in the alcohol beverage industry, but it is intense due to the immediacy of the market. Branding is dictated by market(s), customer base, budgets, competition, capabilities of the distributor, cross-state laws, and long-term strategies.

In conversations with more than 20 craft breweries, all state that local tasting and sales rooms are critical to establish the brand and credibility of the product; it is important to create an experience around the craft product. Coronado Brewing Company in Coronado, CA have been effective in building a perceived experience between the consumer and the company.

Distribution in the alcohol beverage industry is fraught with issues in building a relationship with the customer. At the end of prohibition (in December 1933), the Three Tier Distribution system was initiated; basically, producers discount the product to their sole distributor who then sells that product to the retailer. However, over time each state has refined their approach to beer distribution. California is one of those states that allow self-distribution and brewpubs. Again, every state has a slightly different approach to regulations on distribution.

The problem for a small brewer, should they deem distributors best fit their needs, distributors are only interested in selling craft beers that can produce volume. Further, this system means a small producer is at the mercy of a limited number (due to consolidation) of distributors, even if they may also be working with a competitor.

In discussions with consumers at a large brewer in the Sacramento area, I ask how many craft breweries had they visited in the past year? The average was 6. The next question was, do they have a favorite? The answer surprised me because, yes, they have favorites, but not because of the brand but rather the quality of the beer. Price was not the consideration quality was the determinant. As would be expected, bad beer is the death knell of a brand.

Looking forward the craft beer industry faces four significant challenges:

· Bigness. Aggregators who generate market share (control) by gobbling up independent producers will put pressure on small producer that lack access to capital or distribution.

· Over time the cachet of “craft”, “estate” or “Select” can be diminished and that will impact a lot of existing brands.

· Cost of distribution will impact craft beer brands, customer exposure, margins and the value of the enterprise; whatever the channel employed.

· Ability to recognize market changes and respond effectively. There are several prominent universities that have expanded programs to address the craft brewing marketplace. UC Davis and Sonoma State in Rohnert Park, CA have recognized the importance of the beer category and have classes in beer fermentation, marketing, and ingredients; all to help the industry anticipate and respond to change. They also offer outstanding research in all things beer.

Like all industries, they experience business cycles. Success is dependent on financials, product and messaging, responsive to competition and trends and a healthy dose of luck. The question remains: Is the craft beer industry over heated and heading for a retraction? Probably, is the best answer. Craft brewing is a business and therefore must be managed within all the accepted disciplines pertaining to a business-Finance, Marketing, Operations, Legal, Sales, Distribution and Internal Controls.