What a difference a year makes. For several years, craft beers clipped along at an annual growth rate of more than 40%. But last year, the craft beer train slowed to a crawl, unable, in part, to carry the weight of literally hundreds of specialty brews introduced in the past five years, all of them hoping to ride to the top.
With growth rates declining so rapidly, the buzz on the street for some time has been about a category shake-out. And at least one of the many rumors has come to pass. At press time, The Gambrinus Company, the importer of Corona, has agreed to purchase Pete’s Brewing Co. for an estimated $68 million. This is a prime example of the coming consolidation industry watchers have been discussing for some time. But is the news all doom and gloom for the entire segment?
Not hardly. The category grew a respectable 5% in 1997, and several craft brewers had sales increases of more than 200,000 cases. Sierra Nevada, the segment’s fourth largest brewer, increased its volume by more than half a million 2.25-gallon cases. No doubt there are some craft brewers who are worried that their brands might not be able to weather increased competition. But most of the established players are optimistic and are adapting to new market conditions with changes in strategy.
“There’s confusion out there, and the press is potentially as confused as consumers,” said Jerome Chicvara, co-founder of Full Sail Brewing, Hood River, OR. “The word is out that craft beer is wounded, reeling, but it’s still one of the segment’s that is growing.”
“The category is very healthy, but you can’t expect dramatic growth to continue forever,” said Ron Christesson, vice president of marketing at Gambrinus Co. “Any time you have a product starting off a small base, it’s easy to get dramatic growth. The larger the base, the smaller the growth.”
While category growth appeared astounding from the early ’90s until last year, the reality is that it has been growing steadily for nearly 15 years. Those who point to the recent slowdown as a sign that craft beers are in decline may not recognize that they now account for more than 4% of industry volume.
“Craft beers have become a permanent part of the American beer landscape,” said Jim Koch, president of Boston Beer Co. “The good news is that they’re a fixture in the industry. The bad news is that they are starting to reflect the growth of the industry as a whole.”
The slowdown in craft beer’s growth is due to a number of factors. First, wholesaler consolidation has had an impact on the access brewers have to the market. Fewer wholesalers have meant fewer outlets for small brands to expand their distribution. And distributors have been evaluating their product lines more carefully, culling brands that aren’t moving or providing a good return.
Retailers, too, have been reassessing what they are willing to put on the shelves. For a few years when consumers were willing to try almost anything new, retailers could afford to put new products on the shelf and carry large inventories. Now they are taking a closer look at what sells and eliminating brands that don’t.
Craft brewers admit that they have been their own worst enemies in the past few years. Consumer interest in craft brews led to an incredible proliferation of brands, both from new players and line extensions from existing brewers. The array of new products has confused consumers and in many cases not met their expectations.
Too often, craft brewers have come out with new products or styles just to show they can. The profusion of products has made it difficult for consumers to know what to choose. Instead, they have been falling back on brands they know and trust.
Consumers themselves have changed, too. As they have become increasingly sophisticated about beer, they have both broadened their perspective and become more discriminating. They are both open to drinking a wider range of products, but recognize quality when they taste it and quickly reject products that aren’t up to snuff.
“There has been a shift in how consumers view the craft category in general,” said Scott Barnum, president of Pete’s Brewing Co. “They are buying across categories now, and you have to earn their respect so they know why they’re paying for that brand.”
“You have to look at what some people are calling the ‘better beer’ category,” Koch said. “You can’t just look at craft beer in a vacuum. There are times consumers want a regular beer and times they want a ‘better beer’ and that can depend on the occasion — a Corona at a party with friends; a pint of Sam Adams when having dinner out; or a Guinness in an Irish bar.”
Changes In Strategy
The segment’s rapid growth not only encouraged a lot of people to get into the business, but tempted brewers to try to expand their base of business without a clear marketing plan or an efficient distribution network.
The slowdown has caused a lot of brewers to rethink their strategies. In the early days of heady growth, it was all brewers could do to keep up with consumer demand. Now that capacity has surpassed demand, brewers are learning what it takes to stay in business and keep growing.
“The challenge used to be how to brew enough beer,” said George Hancock, president of Pyramid Breweries. “Now, it’s to sell enough beer. You have to be professional. The marketing strategy of a few years ago is no longer adequate. We can no longer be gifted amateurs.”
“I think people will have to step up and be good businesspeople, not just stay focused on production,” agreed Kurt Widmer, president of Widmer Brothers Brewing. “They will have to focus on their business plans.”
Brewers are concentrating on three areas to keep their businesses vital and growing: protecting their marketing area, establishing and reinforcing their identity and knowing their competition. They’re adjusting their strategies to accommodate changes in all three areas.
After a few years of wild experimentation, brewers are returning to their roots and refocusing their energy on building equity in core brands. Brewers known for a particular brand or style of beer stand the best chance of building an impression, and volume, with consumers.
Sierra Nevada, for example, has become almost synonymous with the American pale ale style, which has promoted sales of its other beers, including porter, stout and barleywine. The brewery has had no trouble selling all the beer it can brew, even after a significant brewery expansion last year. But president Ken Grossman is intent on expanding at his own pace and not overextending his resources.
Other brewers are just as well known for their own styles. Full Sail is known for its amber. Brewers such as Widmer and Pyramid made hefeweizen popular. And Redhook has always led with ESB.
“To some extent, the trouble some craft beers have had is that they don’t have a clear flagship,” Koch said. Boston Beer is stepping up its level of support for the Samuel Adams brand, and its flagship Boston Lager in particular. The brand’s summer July 4th promotion features Boston Lager, and a new round of creative is being prepared for television.
Pete’s Brewing spent the better part of the last year wrestling with the question of where to invest brand equity. The brewer has always led with its flagship, Pete’s Wicked Ale. But the brand ran into trouble when it diluted the brand’s equity. It launched a series of line extensions that confused consumers by putting the “Pete’s Wicked” name on everything. Then it turned founder and brand spokesman Pete Slosburg into a caricature of himself. Research showed that a large number of consumers thought he was an actor playing an invented character, not a real person.
Also, the brand’s flagship is an American brown ale. While popular, the brewer recognized the need for a product with broader appeal in order to grow.
“We’ve had a change in who’s really drinking Pete’s,” Barnum said. “There’s been a shift from beer ‘connoisseurs’ to beer ‘lovers’ who are buying across categories depending on the occasion. We’re competing in a broader category now.”
As a result, Pete’s has reinvented itself. A number of products were discontinued. All the beers are being packaged in “heritage” bottles instead of longnecks. The word “Wicked” is being downplayed on all products except Ale, and is gone from many products entirely. Pete himself is being promoted more heavily as a legitimate icon within the industry, and won’t be dressing up in togas and leprechaun suits again anytime soon. He also appears on packaging now. And the brewery launched Pete’s ESP Lager to buttress Pete’s Wicked Ale.
Craft brewers also are discovering that to retain favor with distributors, retailers and consumers they have to provide strong brand support. It’s not enough anymore to simply put out an interesting product, as even larger brewers like Pete’s have learned.
“It gets back to the brand,” Barnum said. “The stronger the brand, the clearer the differentiation, the better off you are.”
As the market has grown more competitive, big brewers and importers have spent aggressively, but small craft brewers don’t have the resources. Consumers faced with a choice between a craft beer they don’t know and a brand they know and trust have been asking themselves why they should spend that much money without knowing what they’ll get.
That consumer behavior, and the resulting growth in imported beer sales in the past few years, has awakened craft brewers to who their competition really is. Only a year ago, many were bemoaning the efforts of the major domestic brewers to get into the category and squeeze distribution and retail shelf space.
“We’re not competing with Anheuser-Busch and those guys,” said Chicvara. “They may give us distribution headaches, but on the shelf, we’re not competing with them. If you ask me if we’re doing anything differently than last year, definitely. We’re taking a page from what the imports are doing.”
As consumers have broadened their portfolio of accepted products, they have embraced both craft beers and imported beers as part of the “better beer” set that Koch and others talk about. And within that set, crafts and imports are becoming more interchangeable.
“There have been two megatrends in the past 25 years,” said Koch. “There were no light beers and no ‘better beers’ 25 years ago. Both now account for half the industry and they are the only categories that are growing. Craft beers are a significant part of the better beer category, but consumers are looking at it differently than you or I. Consumers will readily exchange a craft beer with an import.”
That means that craft brewers can no longer fly by the seat of their pants and still hold onto market share. Many are producing better, more professional POS, and imitating imports when it comes to programs. Like imports, they’re also trying to hold the line on pricing.
“Unfortunately, I think we’ll see more discounting, and that will hurt the category,” said Widmer. “Hopefully, consumers will be able to recognize beers of quality and integrity and will continue to pay premium prices for those. They’ll see that beers that continue to discount may not be very high quality. I think consumers are more interested in seeing a beer exceed their expectations than getting a buck off a six-pack.”
Casualties Of War
Despite the fact that the category continues to grow, albeit slowly, there have already been a number of casualties. It isn’t just small brands like Rhino Chasers that have thrown in the towel, either. Regional brewer Latrobe stopped brewing its line of craft beers to focus energy and resources on Rolling Rock. Stroh Brewery pulled the plug on Red River and has cut back the number of styles produced under the Augsburger label. The company’s Weinhard’s and McSorley’s brands both continue to do well with specialty beers, however.
Even giant Anheuser-Busch has seen its share of failed attempts to get into the category. Both Elk Mountain and American Originals lines have been discontinued. The company’s specialty brews are now being rolled out under the Michelob label.
“Our knowledge base has grown tremendously as a result of brands like Elk Mountain and American Originals,” said David English, vice president of the Michelob brand. “We know a lot more today about the category and where A-B fits. We’ve had a firm strategy in place now for a couple of years and will build off that base.”
Michelob’s specialty line now includes Amber Bock, Honey Lager, Pale Ale, Black & Tan and Hefeweizen in national distribution. A-B also uses regional products in strategic markets, like Michelob Porter in the Northwest, Pacific Ridge in California, and Ziegenbock in Texas.
Continued slow growth may force more of the smaller or weaker brands by the wayside. The category will certainly have trouble growing much faster until it rebuilds some credibility with consumers. That will only happen when it becomes clear which brands can provide consistent high quality and brand support.
“To grow, we have to have fewer participants,” said Paul Shipman, president of Redhook Ale Brewing, “but each brewer seems to feel they’re the one who should be surviving. The question becomes what’s going to break the logjam?”
Shipman speculated that continued softness in the industry could cause events that would lead to consolidation in the craft beer segment. So far, the few brands that haven’t made it have expired quietly, without fanfare. And the basic structure of the category likely won’t change much even if more brands shake out.
“I think two national players, several strong regionals and local heroes will be the construct at retail in any given market,” Barnum said.
With both money and distribution a lot tighter than they were even a year ago, small local brewers won’t be able to expand beyond their immediate area. Regionals, too, will have a harder time expanding without distribution alliances like Redhook and Widmer have with A-B, and Celis and Shipyard have with Miller Brewing. It isn’t likely that more are forthcoming — the major domestic brewers have turned their attention back to the multi-million-barrel brands that pay the bills and shareholder dividends.
What’s really happening in the category is that it’s beginning to mature.
“This is classic marketing, an example of product life cycles,” said Dick Leinenkugel, vice president of marketing at Leinenkugel Brewing, Chippewa Falls, WI. “In the ’60s and ’70s, there was a lot of camaraderie among regional brewers because they never competed with each other. In the late ’80s and early ’90s, with everybody entering the category, it became much more competitive. Those that don’t have things like a strong local following, 130 years of heritage, good beer, a recognizable brand and a good distribution network will drop out.”
Though some brands may not survive, the category is no flash in the pan. The shift in consumer attitudes about beer has ensured craft beer’s niche in the industry.
“Consumers’ underlying interest still remains,” English said. “It’s not going away, and it’s not a fad. Consumers continue to be interested in different beer styles. We expect the category to be around for some time, and we will participate.”
If competition does weed out some craft brewers, it can only help the category. Those that remain will have proved their worth to consumers.
Defending Their Turf
A number of brewers who had ambitious expansion plans a year ago now find themselves in pitched battles to defend themselves on their home turf. Stoudts Brewery, which has produced a number of award-winning beers, has downsized to concentrate on the local market in Pennsylvania. In the past year, seven breweries have opened within a one and-a-half-hour’s drive from Stoudts, making competition intense.
Pyramid went public last year to raise money to build new breweries. The brewer intended to break ground on a brewery in Boston when its Berkeley, CA, brewery was completed. Now, Pyramid doesn’t even have distribution in Boston, let alone plans to build. “Given the competitive nature of the business, the board decided to keep the money in the bank,” said George Hancock, Pyramid president. “We’ll wait and see how the competitive situation shakes out.”
Full Sail is sitting pat on the 13 states in which it has distribution even though he has received requests from distributors in other states.
Shiner, which is brewed by Gambrinus-owned Spoetzl Brewery, is in 20 states, but probably won’t expand beyond that. And BridgePort, also owned by Gambrinus, is sticking to the Northwest. “You have to work the market where your strengths are,” said Ron Christesson, Gambrinus vice president of marketing.
“The beer business is a local business,” said Scott Barnum, president of Pete’s Brewing. “Even the big guys understand that. We’re supporting the brand where our stronghold markets are across the country, and this year we’ll be more aggressive, which will help all the way down the line.”
Perhaps one of the few exceptions to the trend is Widmer Brothers Brewing. Widmer plans to expand into Colorado and several other states this year as a result of its distribution alliance with Anheuser-Busch.
The Beers Of Summer
Seasonal beers are still hot, and this summer brewers are producing a bumper crop. Seasonals give craft beers a leg up on other beers by offering something “new” to consumers three or four times a year. and they help retailers merchandise brands by adding an extra facing to brand families.
Brewers also are supporting summer brews with special p-o-s, ads and promotions. Here are just some of the summer’s offerings:
* Samuel Adams Summer Ale. Took number-one summer seasonal spot last year, but there is increased competition this year. Joined by the brand’s new
* Pete’s Summer Brew. Summer promotion offers consumers a chance to play Pete’s softball team (including Pete himself) in their own hometown.
* Pyramid Sun-Fest/Thomas Kemper Summer Brau. Both offer special point-of-sale materials.
* Sierra Nevada Summerfest. Traditional bottom-fermented lager re-released into selected markets this year.
* Full Sail IPA. The summer seasonal is supported with posters, banners and consumer recipe cards.
* Redhook Blonde Ale. In its second year, Blonde Ale gets its own p-o-s and outdoor advertising.
* Widmer Summerbrau. A new seasonal from Widmer.
* Shiner Summer Stock. Seasonals are new to Spoetzl.
* Leinenkugel Berry Weiss. Introduced a few years ago, it’s joined this year by Creamy Draft and draft-only Hefeweizen.
* Weinhard’s Blackberry Wheat. Brought back after a successful launch last year.
* Michelob Specialties. No summer beer, but the brand offered a sampler pack starting in June.
Most of this year’s crop hit store shelves in May, but it’s not too late to take advantage of the merchandising possibilities. Consumers will want to hang onto summer for as long as possible.