The craft brewing industry has entered a “new normal” of slow to no growth, Brewers Association (BA) chief economist Bart Watson shared during the keynote speech of the 2023 Craft Brewers Conference in Nashville.
Volume for BA-defined craft breweries in 2022 was flat year-over-year (YoY). The flat growth rate in a more mature marketplace – on the heels of two disrupted years due to the COVID-19 pandemic – has left craft brewers in a space where they need to innovate and reach new consumers to find future growth.
Over the last six years (2017-2022), Watson noted that the average annual growth rate over that period is +1.2%, a stark decline from growth rates in the previous decade.
“Those years of double-digit growth are clearly well in the rearview mirror,” he said. “And unless something changes, I don’t think we’re going to see them again anytime soon.”
To get back to the double-digit growth rates of a decade ago, Watson suggested that craft brewers will need to develop “new strategies” and “new innovations,” connect with new consumers with different demographics, while also finding “new occasions.”
Watson offered a caveat though that “zero growth doesn’t mean no change,” and the industry is evolving with the convergence of non-alcoholic beverages with alcoholic beverages.
“All of the changes going on around us and beverage alcohol are one reason the craft industry growth is so slow, so we shouldn’t take this 0% number to mean that the industry is static,” he said.
The channel shift of consumers moving away from the on-premise channel during the pandemic to off-premise retailers to stock their fridges carried over into the early half 2022, but was largely gone by the back half of the year.
“The craft numbers, they’re not being explained by COVID,” he said. “That’s just the market we’re in.”
Economic factors are also at play with the way consumers are spending their money, Watson explained. He illustrated the point by sharing two graphs:
- The Real Non-Durable Good Orders comparing 2021 to 2022, which showed a -2% sales decline YoY for perishable goods;
- And the Real Personal Consumption Expenditure Services, comparing the same period, increased +4%, showing growth for restaurants, taprooms, brewpubs and other service industry related businesses.
“Some of that gap between hospitality and distribution breweries is based on general economic trends,” Watson said. Those trends, however, have stabilized and are carrying over into 2023.
Another theme Watson hit on was the need for an overall health of the beer industry. Craft brewers likely weren’t as concerned with the decline of the overall industry when craft was growing double digits.
“I think it’s time we wrestle with how much traditional beer has declined and the need to rebuild a stronger overall beer industry to build that infrastructure that we all need to sell more beer,” he said.
Distributed Breweries Struggle, Hospitality-Focused Grow
Watson broke down industry performance by business model, which revealed a growing gap between the growth in hospitality-focused breweries and the decline of distribution-focused breweries. Watson suggested that “the differences now are more structural than they have been in the past and that gap may be widening.”
Regional breweries, those producing between 15,000 and 6 million barrels, declined -2% YoY in 2022. The decline follows several years of slowed growth, with regionals growing 1% in 2017, 2018 and 2019.
Relief doesn’t appear to be on the way in 2022. “Based on the numbers that I’ve seen in the first quarter of 2023, these numbers aren’t gonna get better anytime soon,” Watson said
Microbreweries, those producing 15,000 barrels or fewer increased volume +1% in 2022, which Watson attributed to their draft portfolios. However, the growth has slowed considerably from the double-digit growth in two out of the three years between 2017 to 2019, marking an even more significant change than regionals, Watson said.
The challenge for microbreweries now is to “find that place where they’re not stuck in the middle,” Watson said.
“You don’t want to be too small with your distributors, with your retailers, with your raw material purchasing, but also too large or too far afield to be considered a small, new, local, cool, nimble brewery with craft beer drinkers,” Watson said.
This all adds up to a more challenging marketplace for distributing breweries of all sizes, especially as middle tier consolidation continues and the number of beverage alcohol producers continues to proliferate. The question becomes: How can you stand out? It comes down to “focus,” homing in on the brands and geographies where distributors are willing to co-invest.
“They need to zero in on those brands and markets where their brands can truly perform and meet retailer goals,” Watson said. “This is a painful process because it often means you have to come to grips with the fact that some of the places you’re selling beer, those brands probably aren’t as relevant as you’d like them to be. But I think that kind of refocusing, reexamining can set the stage for future growth and for scale over geography.
“Remember, it’s not the size of your brewery that matters or how much beer you sell, but how big you are relative to where you’re selling,” He continued. “Being a bigger player in a very small place, that actually sets you up for more success than being a small player spread across a lot of geographies.”
Another way forward is forming brewery groups or mergers and acquisitions – partnerships that are more focused on “internal operation consideration,” such as increasing capacity, shared distribution footprints, and raw materials scaling, Watson said.
Hospitality-focused breweries remained a bright spot, collectively growing +7%, with taproom breweries growing +9% and brewpubs up +4%. Watson noted that 57% of breweries surveyed said on-site sales increased in 2022 compared to 2021, while 68% said sales were at or above 2021 levels in 2022. Those are good indicators of brewery health, he added.
Watson stressed the importance of reinvention for hospitality businesses. Looking at taprooms and brewpubs that opened in 2018 or later, those companies posted +20% growth rates, he said. Those that opened before 2018 grew +2%.
“This before and after point highlights the need to reinvent,” he said. “Hospitality business concepts, which most of these businesses are, typically have a shelf life.”
Opportunities for Craft: New Channels, New Occasions and New Consumers
Watson stressed multiple times that the things that got craft beer to the level it is now, with more than 9,500 breweries and over a decade of record growth, are not the things that will allow the segment to regain growth and momentum.
“The ideas that have gotten craft where it is were wonderful, they were ingenious, they changed the beverage alcohol world,” he said. “But that’s not the same thing as saying the ideas that got us here are the ones that are going to take us to the next level. We’re going to need new ways of thinking.
“I wish I could stand here and tell you that I have all the answers – that I know where the new occasions are, the new customers – but frankly, I don’t,” he continued. “What I do know is the first two-thirds of this talk showed us that if we continue to do things the same way we’ve been doing them, that’s the recipe for slow growth and stagnation.”
Expand Where Beer is Being Sold
One of the first places breweries can look to gain incremental growth is where they are selling beer, Watson said. He encouraged beer producers to look at new channels where craft beer is growing, such as the convenience channels, to add to the overall beer category. Additionally, breweries may have to invigorate “old channels,” such as the on-premise, which have failed to return to the levels they were pre-pandemic.
Keg sales were down 2 to 2.5 million barrels in 2022 versus where they should have been, adjusting for already declining keg sales trends. That is equivalent to about 800,000 craft barrels “evaporating from the industry that we no longer have,” with the segment making up about 30% of draft sales, Watson said. And is not a matter of those sales being moved to the off-premise, but rather being completely eliminated from the beer market.
“We can’t solve labor shortages, or fewer opening days or hours for our retail partners, but I think we all need to collectively think about how we can bring some life back to the channel and help those partners,” Watson said.
Create New Beer Occasions
Beer also needs to look at capturing new occasions, including getting occasions back that have been taken by liquor. Watson pointed to the mission of the spirits industry over the last 10-20 years in inserting itself in traditionally beer-driven occasions such as sporting events and concerts. Beer needs to find a way to take those occasions back, and connect to new ones, creating more demand Watson said.
Watson pointed to non-alcoholic (NA) beer as an example of this, though he prefaced that he was not encouraging everyone to get into the “technically difficult” “small market” of NA. The segment, one of the few beer segments recording growth right now, has been able to add incremental growth to the category by putting NA beer in consumers hands in places it traditionally hasn’t been.
Think Differently About Style Trends
Watson approached the style trend portion of his presentation differently than past years and did not include a data slide on how each style was performing, noting that IPAs were still king. The reason Watson gave for the change is that beer needs to start thinking differently about style trends if it wants to return to growth.
One reason being is if everyone tries getting into a style trend, “it just gets sliced up more and more and more until there’s no growth,” Watson said. Additionally, growing styles aren’t always an indication of consumers looking for more of that beer style, but rather looking for particular brands producing that style, indicating company growth rather than true style growth.
“My challenge to people in this room today is to think about your opportunities to grow your brands, not in style terms, but in what you do better at what you offer,” Watson said.
The approach isn’t unfamiliar for craft, Watson pointed out. The segment was started by breweries creating beers that no one else had and focusing on what they could make the best. That strategy is what craft needs to get back to if it wants to grow again, Watson said.
“Craft has done this before,” he said. “We need to rise to these opportunities in new and different ways to get back to growth.”
Find the New Consumers
Bev-alc consumers are always changing, and craft has previously benefited from that, with new generations wanting to not drink “their dad’s beer” and shifting their support to craft brands, Watson said. However, those trends have changed.
“Unlike past generations that have moved into craft, we see the new generation of craft drinkers generally moving away from craft demographics,” Watson said.
The youngest legal drinking age (LDA) generation, Generation Z, is the most diverse generation to date. And craft typically fails to speak to some of those demographics, including women and people of color.
Out of all major bev-alc categories and segments, craft has the lowest percentage of female drinkers and Black, Indigenous and People of Color (BIPOC), Watson said. That has become a problem, as all of the growth in bev-alc consumers is from consumers within those demographics.
“We’re going to need new ideas collectively about how we can more broadly welcome people to the craft party,” Watson said. “It’s a wonderful party to be in.”