Brewers Association (BA) chief economist Bart Watson reported last week that indicators halfway through 2022 point to growth between 4% and 5% for craft beer by the year’s end.
That estimate is in line with the projection Watson made at the end of 2021, when the industry grew 8% as the on-premise channel began to reopen.
“Generally, I think we’re on line for what we were expecting – a little bit elevated from the long-term growth rate that’s probably going to fall into a more 2% to 4% range as we still recover from the pandemic, but down below what we were seeing last year, where obviously there was still strong growth bouncing back from those pandemic losses,” he said.
However, Watson cautioned the industry is throwing “mixed signs” and performance will vary by brewery size, business model and channel strategy. In a report last month, Watson detailed craft’s “somewhere in between expected and alarming” performance in scan data. At the time, craft’s off-premise dollar sales had declined -7.7% year-to-date through June 12 at multi-outlet food and convenience stores, according to market research firm IRI. Craft dollar sales have improved slightly since then (-7.1% year-to-date through July 10.)
During last week’s webinar, Watson combined findings from that report and the BA’s mid-year survey, which garnered responses from 200 craft brewers in 44 states. Combined, the survey respondents produced 7.2 million barrels of beer last year, which indicates that regional brewers – the BA’s member class for the largest craft brewers who produce more than 15,000 barrels sold primarily through distribution – are “overrepresented” in the data, Watson said.
Below are takeaways from Watson’s webinar.
Volume Growth Varies by Brewery Size
Regional brewers are the only segment to see volume decline in the first half of 2022 compared to 2021. Volume from brewers producing 200,000 barrels or more has declined -1.7%, according to the survey. Watson attributed this to those breweries’ reliance on distributed packaged beer sales.
“The larger you get, the more that distributed package is typically going to be part of your business model,” he said. “As you’re smaller, on-site is going to be very, very critical and in between you still see a much higher percentage of distributed draft and that’s playing out here where smaller breweries on average were growing much, much faster.”
Breweries with annual output between 60,000 and 200,000 barrels reported +5% growth compared to last year; those between 15,000 and 60,000 barrels reported +7.5% growth. Breweries producing between 5,000 and 15,000 barrels reported +9.6% growth. Those with output between 1,000 and 5,000 barrels reported +14.7% growth, while breweries producing fewer than 1,000 barrels reported +16.5% growth.
Volume Growth Doesn’t Reflect Market Conditions
Although most craft breweries appear to be growing, “volume only tells one piece of the story,” Watson cautioned.
“Saying that a brewery is up 5% or 10%, I think tells us less about that brewery’s health and their position in the marketplace than it used to,” he said.
Inflationary pressures and a stressed supply chain are challenging brewers like never before, as evidenced by a comment one survey respondent wrote:
“Although the numbers are trending up, we’re getting hammered by inflation,” the respondent said. “Two examples: Malt is up 45% per batch, monthly fuel costs for delivery have risen by 266%. Input costs have risen across the board. It’s become a struggle to keep the doors open.”
Other issues facing breweries include a dwindling supply of carbon dioxide (CO2) in some parts of the country. Last week, Everett, Massachusetts-based Night Shift Brewing said its CO2 supplier canceled a planned delivery that rendered large-scale production impossible in its home brewery. As a result, Night Shift informed its 12 production employees there may not be enough work for them, but guaranteed their paychecks through October 1 and will offer severance packages if on-site product cannot resume.
Distributed Draft +32% with Several Caveats
Overall, survey respondents reported that distributed draft sales have grown compared to last year, but on-premise conditions vary by market.
“There are some brewers who, even with that gaudy draft number, are seeing their draft numbers struggle, maybe parts of the country where things had already returned in the first half of last year, and we’ve seen some slowing of that growth,” Watson said.
One survey respondent reported their half-barrel volume increased +8% over 2021, but 12 oz. packaged beer volume declined nearly the same amount (-7%) in the same period.
OpenTable reservations, one metric Watson uses to track on-premise health, are slightly above where they were at this point in 2019. July 2021 reservations were more than 10% lower than July 2019.
Seasonally adjusted sales at food service and drinking places during the first half of 2022 showed improvement compared to the first half of 2021, although January ’22 sales started from a lower baseline than where July ’22 sales left off, according to U.S. Census Bureau monthly retail trade data Watson analyzed and shared.
Off-Premise Volume Mostly Lags Behind 2019 Levels
Due to the closures and restrictions of the on-premise channel that began in 2020 and continued into 2021 in some states, consumers shifted their beverage-alcohol spending to the off-premise, which resulted in elevated dollar sales in that channel.
Now that bars, breweries and restaurants are able to operate similarly to pre-pandemic days, off-premise sales may be normalizing, but it remains more appropriate to compare 2022 data to 2019 data. Off-premise volume sales for the first half of 2022 so far lag the same period in 2019 for BA-defined craft brewers (those making fewer than 6 million barrels annually and not more than 25% owned by an alcohol producer that is not also a craft brewer).
“Independent craft – BA craft – sales haven’t really grown since 2019, so that suggests some bigger demand issues with the category,” Watson said. “We’re going to break that apart, how much of that might be the economy and inflation, how much of that might be other factors. But that was true, really, in the first part of 2022, before we saw these inflation issues pop up, so I think points to longer term, maybe not issues but questions that should be soul-searching for brewers that plan to sell in these channels going forward.”
At-the-Brewery Sales Remain a ‘Bright Spot’
The mid-year survey respondents that reported the strongest levels of growth – those who make fewer than 5,000 barrels of beer annually – are likely selling their beer primarily in their own taprooms, which “are clearly still generally very strong,” Watson said.
“In many ways, this is a very different business,” he said. “This is a service, this is a hospitality business where that experiential piece is very important. The demand is gonna have multiple components that aren’t just related to the beer, but it’s one that’s still growing.”
However, Watson pointed out potential challenges and threats to the taproom model, including that it’s difficult to scale.
“We’ve seen efforts to scale this at some point generally run into real trouble for various reasons, but we’re still seeing breweries try to build that out,” he said.
Earlier this year, San Diego-headquartered Modern Times Beer was forced to close half of its eight taprooms, which it announced several months before revealing the company was forced into a court-ordered receivership which is expected to end in a sale to Maui Brewing for $15.3 million.
Larger craft brewers aren’t immune from the business challenges of the hospitality industry, as Sierra Nevada found out when it announced the closure of its Berkeley, California-based Torpedo Room due to a lack of staff.
Regulatory and legislative challenges also threaten taprooms in some markets, such as New Jersey, where the state Division of Alcoholic Beverage Control last month began enforcing its restrictive policy that bans taprooms’ ability to serve food or coordinate with food trucks and limits them to 25 public on-site events per year.
“Those are some of the open questions that I’m thinking about, but shouldn’t take away from the positivity here,” Watson said. “This is still a growing channel. It’s one consumers love and it’s one that’s driving a lot of breweries’ business models since amongst the long tail, this is how they make the most of their money.”
Shifting Consumer Preferences Driving Marketplace Changes
Consumers may be starting to feel burned out from the vast selection of bev-alc SKUs on shelves; 39% of weekly craft beer drinkers reported thinking “there is too much/more than enough selection,” compared to 17% who said there was “not at all enough/not nearly enough,” in the BA’s annual consumer poll, which Watson will present later this month.
Wholesalers and retailers are acting accordingly, as beer continues to lose share to the spirits category, which continues to roll out ready-to-drink canned cocktails (RTD) that can encroach on beer’s traditional retail territory in many states.
“Broadly, we’re seeing distributors cut back on brands, and we’re seeing retailers cut off shelf space – not hugely yet, but it’s starting to happen, Watson said. “One data point why this is happening, in addition to the kind of cost and logistics piece, is that there are a lot of craft drinkers who now think they have enough choice out there.
“If you’re fighting to get another tap handle or another place in a shelf set, you’re gonna have to work harder than ever before to convince those retailers or distributors that you need to be in their portfolio,” he continued.