“How you interpret the numbers this year is really a matter of perspective,” Bart Watson, chief economist for the Brewers Association (BA), said in his state of the industry address today during Day One of the Craft Brewers Conference (CBC) in Minneapolis.
The interpretation of how the beer industry performed in 2021, and the future of craft beer, comes down to whether you are a “pint half full or half empty” person, Watson said.
Craft production volume grew +8% year-over-year (YOY) in 2021, which Watson described as more of a “rebound as much as true growth,” following a -10.1% decline in volume in 2020. Watson’s presentation was sourced by the BA’s 2021 annual survey, which he said included responses from more than 3,000 breweries.
About half of the breweries who responded to the BA’s 2018, 2020 and 2021 surveys were at or above 2019 production levels in 2021. As Watson noted, that also means about half of those breweries “haven’t seen real growth in several years.”
Shipments (sales to wholesalers) of overall core beer increased +1% in 2021, the “strongest for beer in a decade,” Watson said. If flavored malt beverages (FMBs) or hard seltzer, which are taxed as beer, are included in the beer category, overall beer shipments increased +2% in the year. However, “some of that growth is an illusion,” as distributors stocked up in 2021 to “get ahead of price increases that were coming in 2022,” Watson said.
Watson also noted that, from a pint-half-empty perspective, “if 1% growth is your best in a decade, the industry has growth challenges.”
When analyzing 2021 data, Watson encouraged brewers to keep in mind three caveats:
- Category growth numbers “get skewed by changing the number of breweries,” so as the number of breweries in the U.S. increases, overall category growth will be pulled more positive. Additionally, category growth is not average brewery growth;
- Category averages get pulled by outliers, such as the fastest growing breweries;
- 2021 numbers are dependent on 2020 performance, thus the variation in numbers in 2021 will reflect 2020 trends. “Those that experienced the most channel shifts last year are gonna get the most bounce back this year,” Watson said.
Evaluating own-premise segments, Watson noted that taprooms (breweries that sell the bulk of their volume within their own four walls but do not operate restaurants) had the largest sales volume increase in 2021, +21% YOY. The number of taprooms in the U.S. increased +6.2% last year, “so you need to subtract that out when you’re thinking about this on a per capita basis,” Watson added.
“One open question that we should all be asking about craft brewing going forward is how long can at-the-brewery sales be a driver of growth for everyone?” Watson said. “Certainly, this has been something that has helped everyone in this room, we’ve been growing the pie of at-the-brewery sales in recent years. We’ve also been growing the number of slices, and at some point we have to question whether that pie can grow as fast as the slices.”
Sales volume at brewpubs (breweries that sell the bulk of their volume within their own four walls and operate restaurants) increased +19% in 2021, with geographic variation. Volume for microbreweries (breweries that sell through distribution but make fewer than 15,000 barrels of beer annually) increased +12% YOY. The segment had the highest share of bev-alc production that wasn’t beer, Watson added.
Regional craft breweries (breweries that sell through distribution and make between 15,000-6 million barrels of beer annually), +5% YOY, recorded the smallest growth in 2021. The segment still accounted for 40% of total craft growth, due to its higher production volume. More than three-quarters of regional breweries surveyed (76%) grew in 2021. When limited to the smaller breweries within that segment – those producing between 15,000-30,000 barrels annually – the number of breweries with YOY growth increased to 80%.
2022 To Be a ‘Make or Break’ Year
The number of BA-defined craft breweries increased to 9,247 in 2021. Brewery growth is beginning to flatten, due in part to a decline in brewery openings – 646 recorded in 2021 – compared to “1,200 a few years ago.”
“There are going to be brewery openings every year going forward,” Watson said. “But we’re gonna see a lower realistic number in an industry that is maturing, where borrowing costs are rising and where frankly there’s probably greater enthusiasm in other parts of beverage and beverage alcohol, right now.”
An estimated 181 breweries closed in 2021 – an average of 1 in 50 breweries operating in the last year – although that number may rise as more data comes in, Watson said. Compare that to the 86 closings the BA tracked for March 2020 alone, the month COVID-19 pandemic shutdowns began. The change is indicative of the effect government aid had on businesses in the months following, Watson said.
“One thing we can’t see is how many breweries have made it through the pandemic, but wounded,” Watson said. “That they’re in a financial state that’s very difficult to operate going forward.
“I think 2022 is going to be a make or break year for a lot of small businesses,” he continued, noting that without further government relief, such as the replenishment of the Restaurant Revitalization Fund (RRF), some breweries may not be able to “stand on their own.”
While 2022 could see an increase in closings, Watson emphasized that it “isn’t a bubble bursting,” and that “nothing” in the numbers he is seeing “suggests demand for craft beer is waning.”
“What we’re starting to see is we’re reaching a phase where demand for the segment, the whole, does not guarantee demand for individual businesses,” Watson said.
Craft Challenges Going Forward
Craft beer “isn’t the new kid on the block anymore,” and breweries hoping to survive in a market of new entrants in bev-alc and “lots of niches” seeking to claim market share, may have to “reinvent themselves” and “refresh” in order to “stay relevant,” Watson said.
Looking ahead, the U.S. Census Bureau predicts that in 2030, there will be as many Gen Z legal-drinking-age (LDA) consumers as baby boomer drinkers. That same year, there will be “15 million more millennials than either of those generations,” as the millennial generation turns 50.
More immediate challenges for craft going forward include:
- Supply chain constraints and rising costs, as the last six months saw a “perfect storm” for supply chain disruption, with off-premise demand (i.e. can supply needs), supply price increases, climate impacts on crops – with North American barley crop down about a third in 2021 – and the effects of the Russia’s invasion of Ukraine, which produces a significant amount of barley;
- Pricing dilemmas, as breweries who have not taken price yet need to have a “gut check moment” and evaluate why. The average price in the beer category overall increased +5% YOY in the last four weeks, Watson said, citing IRI data. However, BA-defined craft was the slowest growing subsegment in price, increasing +2.3% YOY in that period. Watson said brewers need to evaluate how they can get to a place where they are “confident raising price and not losing volume”;
- Increases in 4th category competition, as segments such as hard seltzers and “The Darling” ready-to-drink canned cocktails (RTDs) continue to compete with beer for consumers and shelf space. Spirits producers are also pushing for legislative changes to better compete, including the equalization of excise tax on RTDs with a similar ABV to beer.
Innovation and Brand Strength to Define Craft Growth
An opportunity for breweries and the overall beer category to grow moving forward will come at the meeting of brand strength and innovation, Watson said.
Watson pointed to the trend of non-alcoholic and lower-ABV beers, which are still small “niche” segments, but continue to grow, dominated by a “few clear market leaders.” Lots of different niches in bev-alc are creating “lots of different consumer needs,” which Watson said breweries can capitalize on in a similar fashion.
“We’re gonna need to find more niches, more places to grow, because the 9,100 brewers maturing in a fractured market are going to need to find new customers, new preferences and new places,” Watson said. “The same growth that got us here is not going to be the growth that gets us out of that maturing market and finds the next increase in our market share.”
The correlation with style growth and brewery growth is also “starting to weaken,” Watson said, noting that “brand is trumping style.” He encouraged breweries to focus growth plans on “what’s gonna make your brand grow,” in order to grow the craft segment overall.
“The IPA, or really any style, is not going to be enough to grow craft moving forward,” Watson said.