Brewers Association (BA) chief economist Bart Watson continues to tease early data from the BA’s annual production survey, and the numbers aren’t getting any better.
The latest update came today at the California Craft Beer Summit, hosted by the California Craft Brewers Association (CCBA) in Sacramento. About 4,700 production entries – both brewery submissions and state reports – have been analyzed by the BA so far, with Watson calculating a +0.3% increase in volume, he shared during the general session.
The numbers are already below the +0.6% increase Watson shared earlier this month at the New England Craft Brewers Summit. It’s also significantly below the +5% increase Watson projected for 2022 at the end of 2021. He now expects there to be “static craft volume” between 2021 and 2022.
California is “running a little bit more negative than the national numbers.” While the data is also incomplete – about 279 breweries have submitted responses so far – the state is currently reporting a -1% decline in volume for 2022. The “biggest reason” for the steeper decline in the Golden State is draft sales, which haven’t recovered in California “quite as strong as nationally,” so breweries “didn’t get as much on that upside,” Watson said.
Broken out by brewery type, California regionals contributed significantly to the state’s production decline (-3%), while microbreweries increased volume +13%. Taprooms (+17%) also posted growth, while brewpubs were flat. The “gap” between taprooms and brewpubs is also mirrored in national trends, but is “even bigger” in California.
Watson credited three possible reasons for the trend: Business age, with taprooms skewing about three years younger than brewpubs; location, with taprooms possibly being in more “favorable” locations; and business model, with brewpubs tackling the added challenge of running full kitchen, which could result in “fewer hours” or “fewer days.”
The taproom growth is positive news for craft, as at-the-brewery sales continue to be “a bright spot” for craft breweries.
“There’s some doom and gloom around the industry right now and we shouldn’t take for granted that the business model that 90+% of breweries rely on, which is selling beer directly at your brewery, is actually still doing OK,” Watson said. “It’s in positive territory this year and I think will continue to be for the near future.”
That said, Watson acknowledged that brewery taprooms are a “very different business than a production distribution brewery,” and are “hard to scale.” While there is “something special” about the way breweries can connect with consumers at taprooms, at-the-brewery sales are “not going to be 75% of the draft beer in the country,” Watson said.
“I think there should be open questions we should all be thinking about how long it’ll continue,” Watson said. “I’m an optimist, I think there’s growth, but we’ll see how long we’ll continue.”
At-the-brewery sales also face the possibility of conflict with other tiers, with states limiting liquor license caps. Watson pointed to states such as New Jersey, where “it’s a million dollars to get a liquor license,” as bars and restaurants express concerns over breweries taking some of their capital.
“There’s going to be conflict if this grows,” Watson said. “We’re going to need to continue to avenge taproom and brewpub breweries.”
If at-the-brewery sales are the bright spot for craft, distributed craft is “the dark spot,” Watson said. The situation is only expected to get worse as competition from other bev-alc segments is resulting in craft getting “pared back” in favor of “more, new shiny flavors.”
“There’s lower draft volume [and] package volume is struggling to cycle and this is going to create more pressure in the medium and in the short term,” Watson said. “If you’re a distributor and a retailer, you have one category that’s lagging and other categories that are growing, you’re going to shift your allocation of resources and that’s what we’re seeing with craft losing five or 10% of its space nationally in spring resets.”
California is “in the middle” in terms of package sales compared to other states, doing “a little bit better” than others, which Watson credited to the state’s lower draft sales.
Watson’s 2023 Predictions
- Distributed Craft Volume Won’t Grow: There will continue to be rationalization by wholesalers and retailers, which will cut down on distributed craft volume. While some craft breweries will grow, they will have to do so by creating new incremental opportunities, or by taking share from another craft brewery.
- Brewery Growth Will Continue to Slow: While there will continue to be brewery growth in 2023, the gap in brewery openings and closings is getting smaller and smaller, and is expected to eventually reach an equilibrium point, likely by early 2024. However, “this is normal” and part of a “usual market” where openings and closings are in balance.
- Customers Will Change: While a bit of a “gimme” prediction, consumers are aging, and with changing consumer demographics come changing consumer spending habits. California specifically is expected to have “huge growth” in its 70+ population, which is typically when bev-alc spending declines, signally to breweries that should start finding ways to bring in new, younger consumers. Should traditional spending habits stay consistent across age groups, bev-alc is expected to see a -2% decline in real spend over the next decade.
- Craft Growth Will Be in Pockets: Any growth for craft breweries will come at “the intersection of competing consumer preferences and new opportunities.” Those spaces are “very challenging to capitalize on,” so “only a few players” will be able to record growth. Opportunity spaces right now include the convenience channel, double IPAs (typically fruit-forward) and non-alc beer.
- The Economy Will Weaken: The federal government has to find the “tricky balance” of trying to slow down the economy, but “not too much.” As a result, rates are expected to continue to rise in 2023, but that may matter “less than you expect” for craft breweries. Craft consumers typically skew higher income and more educated, indicating inflationary pressures won’t impact craft sales as much as other consumer products. Additionally, Watson doesn’t see any significant relationship between higher beer prices and lower performance, or lower beer price and higher performance.