The Firkin for August 2016

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Recently, I have noticed a spike in craft beer “bubble” talk again. It’s tempting to see growth numbers declining and make the speculative leap to a coming downturn. You can read THIS or THIS to get two perspectives on it. Compelling perspectives both.

In the past, I have pooh-poohed the talk and I still am bullish overall regarding the state of craft beer but it is probably time to start looking for the warning signs. But not where you may first think to look. Because no two downturns are the same.

For one, a replay of the great shakeout of the late ‘90’s will not happen. Because it is 2016. An analogy to clear this up. Mt. St. Helens blew it’s top dramatically in 1980. And it is a good candidate to blow again. BUT, due to the last explosion which lopped off a considerable chunk of the mountain, it probably won’t blow the same amount of debris in the same pattern. And it may not even be the next one to go volcanic. There is a range of mountains to choose from in the Pacific Range that could become “active”.

Bringing that analogy back to the topic at hand, Craft Beer in the 1990’s wasn’t even craft beer, it was microbrew and brewpubs and there were 1,100+ breweries then compared to the past 4K now. (See the trend lines of numbers HERE.) The “mountain” of craft beer is today is drastically different from the one that shook then.

Some of the same generic warning signs (tremors or too much old beer sitting on shelves) will occur in volcanos and beer economic bubbles but in general, the path of destruction changes. The Microbrew Shakeout came at a time when the market for craft beer was miniscule, when credit was non-existent, when brewing equipment was non-existent. In 2016, there is a market, there is money out there, new hops coming on the market and people are installing new fermenters all the time (at least according to my Facebook feed). In short, there is an infrastructure in place that wasn’t there before.

Breweries and brewpubs that went under before may not be in danger now. Back then, all breweries were still struggling and growing and most were still small. That is not the case now. You have bi-coastal breweries, breweries owned by the employees, breweries owned by venture capitalists, contract/gypsy breweries and many, many others.

If no two shakeouts are the same then where do we look? Take another example, watch the movie The Big Short. The movie comically and dramatically catches how people are looking one way for economic clarity but the problem of CDO’s (collaterized debt obligations) is actually just outside of their peripheral vision. Some people see the looming crisis but they can’t make the others believe that it is a problem.

If we choose to think differently and look out of the corner of our eye, problems like bad business sense and mediocre to poor beer are problems but may not be what kick off a shakeout. Number of breweries is talked about, as is market saturation and distribution. I emphasize that these are all valid reasons but they are all in clear view right now. The Brewer’s Association has been ramping up the quality debate, there are conferences and guilds aplenty where knowledge is passed around, the interwebs pass out instant grades on the quality of beer.

So if I don’t think that bad beer or a crowded market will be the trigger, what will?

Let’s start with distribution. It is a bear of a problem (SABInBev hostility, need for more independent distributors, where and how much to distribute) but it is not if you generate most of your money via your taproom or self-distribute. It might be the root cause of some failures but will skip over a chunk of breweries all together.

What about another Hop Shortage? That might well cause problems in a world where IPA’s are the sales leaders practically across the board. Prices would go up but so would creativity as brewers would have to re-formulate IPA’s into newer recipes. Plus there are a chunk of breweries that are simply not as reliant on hops.

High Finance is another major concern. What happens when Wall Street decides to up and sell? This is where some real hurt could come down. Kickstarter money and passion can only take you so far. If money tightens up, and the equity partners back out, where does the new money come from? Again, the variety and amount of different breweries blunts this problem.

Now that I have knocked down some straw men, I will give some of my warning signs and predictions.

Dusty beers – It happened last year with pumpkin beers and it is a growing problem. Stores that I normally would trust to stock fresh or fresh-adjacent beers now merit closer attention. I pass on many beers (especially IPA’s) that I know were seasonal or special releases from months back. I see too many beers not being pulled from shelves or taps. Unless you are selling Luponic Distortion 001 and 002 for comparison purposes, then why is 001 still out there? If this continues to a point where the average person can easily see it, then look out.

The High End – The fizzy yellow water folk have a really poor track record with craft. They have yet to show a grasp of what it means. Add in people who would sell to them and you get two sets of people with dubious records of making the right choice. If your town has a 10 Barrel outpost in the works, I sense failure in the winds. These aren’t market leaders, they are followers and it could mean that your town may have already crested the wave.

If failures don’t happen more – Yup, I said look out of the corner of your eye and I have mentioned volcanoes too. If the numbers for those breweries going under or suspending business doesn’t ramp up, then the pressure will keep building. But if we start to lose some of the dead weight that is clogging up shelf space, then a worthier beer can grab it and stay afloat. New blood with new ideas need to be circulated in.

Prediction wise (bookmark or copy paste if you want to shove it in my face later), I think that a rolling, random correction will take place in the next couple of years, with all economics being equal. If Trump wins, all bets are off.

No one place will be immune but most breweries that have embedded themselves to the community (not the Whalez Bro crowd) and can make a halfway decent beer with a little marketing push behind it will be OK. Even if you have two out of the three attributes above, you should/could pull through.

But I do feel that there are breweries that will start to close because they are only good at making good beer or only good at branding or only good at getting the immediate locals into their taproom. These closures will be a few in one city, a few in another but in no real discernible pattern. Some cities may see growth while others backtrack. This will lead to months where the recently closed number will be closer to and maybe even higher than, the new opening number and that will lead to the breweries in planning number to drop too as people get skittish about investing.

And in the end, I think everything will be just fine. We are not going back to a time of no beer choice. Maybe different beer choices, maybe less choice for a while in the worst case scenario but you will have choices.