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Tuesday, April 30, 2019

OBF Becomes a Chameleon at 32

The 2019 Oregon Brewers Festival is three months away. Once upon a time, that reality would have generated considerable interest. Once upon a time, there weren't a gazillion beer festivals crammed onto the annual calendar.

This will be the OBF's 32nd year and they've gone chameleon in an effort to reverse the declining attendance of recent years. There was a time when this event could do whatever it pleased. A lot of harebrained ideas were tried over the years. But things are different now. They've got to sharpen their game.

One of the big changes this year is that all the beers will be from Oregon. Yup. They'll be serving 101 products from 93 breweries and eight cideries. I'm guessing you'd have to go back to the very early days to find a year in which all the beers came from Oregon. This to me is a smart move. It is, after all, the Oregon Brewers Festival.

These will mostly be one-off and experimental beers made for the event, according to a press release. That's in keeping with the current rage for small batch stuff, a strategy that's in place at most successful festivals and similar events. Of course, the quality of experimental beers can be all over the place. But it hardly matters. Festival goers demand unique beers. The list is here.

Event organizers, responding to declining attendance, cut the event to four days last year...dropping Wednesday. That seemed a little odd because stats showed Sunday was the dead day. They've adjusted appropriately for 2019. Wednesday is back; Sunday is gone, gone, gone.

The popular Brewers Brunch that kicks off the festival moves to Ecliptic Brewing this year. Brunch tickets go on sale on the OBF website Wednesday morning (May 1) and cost $49. That includes brunch, two beers, a souvenir T-shirt and an OBF tasting mug.

Brunches have historically been held reasonably close to Waterfront Park. Not this year, as Ecliptic is located a good distance from the Park. That becomes an issue for the Oregon Brewers Parade, which departs Ecliptic following the brunch at 11 a.m. and hoofs it to the Waterfront. Anyone can walk in the parade, by the way. That will be interesting. It's a long walk.

Another change related to making the event more user-friendly involves comfort. One of the best spots in the Park on hot days is under the shade trees at the south end, an area typically occupied by beer trailers. Not this year. The trailers will move to the river side, leaving the shade for mingling and drinking. (The map on the website hadn't been updated when this post went live.)

You may remember that the printed program was dropped last year. They were evidently not being picked up by patrons (who don't read, anyway) and thousands wound up being recycled. Organizers launched what seemed to me to be a pretty decent smartphone app in 2018. Surprise...the printed program is back this year. No word on the app. Bizarre.

New and old features for this year include a Meet the Brewer Tent, a Brewer Dunk Tank, games, food vendors, homebrewing demonstrations, plus the Crater Lake Soda Garden offering complimentary craft soda to designated drivers and minors. Sadly, surprisingly, live music is gone, to be replaced by DJs in different parts of the park. That sounds like a hoot.

I've always argued that the Oregon Brewers Festival is a pretty good value. You enter the venue for free. To drink beer, you buy a mug and tokens. It's four tokens for a full mug of beer or cider, one token for a taste. No big, upfront charge to enjoy a few beers. The changed beer lineup might actually make this year's event more appealing to some.

But the strategies don't all mesh. The press release says attendees must purchase a $20 tasting package this year. The package includes a mug and 10 tokens, which means you're paying $10 for a throwaway plastic mug. That's not the worst deal in a city saturated with overpriced festivals and beer dinners, but it seems vaguely at odds with the goal of boosting attendance.

Some of my older friends who haven't attended OBF recently say declining attendance might get them interested again. But the biggest changes outlined for this year suggest organizers are targeting younger patrons, which makes good sense, actually. We'll see how that works out for them.

Visit the OBF website here for a rundown of festival dates, times, etc.

Monday, April 22, 2019

Constellation's Billion Dollar Boondoggle

A lot of eyebrows were raised in 2015, when Constellation Brands ponied up a $1 billion to buy Ballast Point. The price amounted to $3,500 per finished barrel, about $2,000 per barrel more than other buyouts of that era.

Still, the craft beer world had a heady mindset in 2015. Volume had grown steadily from 6 percent in 2008 to 18 percent in 2014. The industry was on a roll with no apparent end in sight. Ballast Point had itself been growing nicely and expected more of the same.

The thinking at Constellation was that craft beer's 11 percent share of the overall beer market would expand further as mass market lagers lost market share. They wanted a piece of the craft market, feared not having one, in fact. Ballast Point, which possessed a broad portfolio, was distributed in more than 30 states and had a small number of pubs, looked like a perfect partner.

Of course, we now know it was all a big miscalculation. Constellation last week announced that it will close two Ballast Point facilities in Southern California and drop a plan to open a brewpub in San Francisco's Mission Bay neighborhood, where the Golden State Warriors will soon have a venue. Sales positions in the South and Midwest will be eliminated, apparently.

In fact, things had been going poorly for a while. Production (which was approximately 280,000 barrels when Ballast Point was sold in 2015) peaked at about 403,000 barrels in 2016, then dropped to 377,000 in 2017. Off-premise sales declined 3.4 percent in 2018, according to IRI data published in Brewbound.

There's more. Constellation recorded an $87 million impairment charge to the Ballast Point brand in June 2017, effectively admitting it overpaid. It recorded an additional $108 million impairment charge just two weeks ago, more evidence that the Ballast Point purchase price was a major boner.

Never say never, but there appears to be little possibility that the Ballast Point experiment will ever pan out, though Constellation continues to push forward. Craft beer volume growth slowed to 12 percent in 2015 and has continued a downward slide since. Growth dipped to 4 percent in 2017 and 2018, representing the lowest rate in 20 years.

Where that growth is occurring is a major harbinger of concern for the likes of Ballast Point. The Brewers Association recently reported that more than 50 percent of craft volume growth in 2018 belonged to breweries that opened within the last three years. Breweries that opened in 2014 or earlier (Ballast Point dates to 1996) accounted for less than 1 percent of growth. Yikes.

The operative question, given the obvious realities, is this: How did Constellation, a successful organization that markets Corona, Modelo and Pacifico, flub so badly in the case of Ballast Point?

The answer, it seems to me, is they assumed large craft breweries would be the main beneficiary of the collapse of mass market lagers. They wanted to be positioned to take advantage of that scenario. Half of what they expected to happen actually has happened...mass market lagers have continued their decline.

What they did not predict, what has been a thorn in the side of Ballast Point and virtually every big craft brand, is the extent to which several thousand new, small, local breweries would attain a position of power in the market. But that's what happened. Craft beer, to a large degree, has become a local commodity, as opposed to a regional or national one.

Plenty of people will happily tell you they knew Constellation overpaid for Ballast Point. Fine. But I wonder how many of those folks believed the explosion of small, local breweries would wind up being a crucial factor. Few saw that coming, I think.

Monday, April 15, 2019

Wrapping Up the Can Phenomenon

Several years ago, I met with the owner of an established local brewery to discuss the trajectory of that brewery. It had struggled to stay relevant in a market increasingly packed with shiny new breweries. This was and is a serious issue among older breweries in craft heavy areas.

A recent wrapped can
Brewery consulting isn't something I do. I'm much more an observer of this industry than a part of it. I met with this guy because I knew him and had a mostly cordial relationship with him. I'm sure he consulted others. There was no compensation involved, other than a beer or two.

At the time, we were entering a period in which tried and true brands were struggling. This brewery had several well-known brands that previously had a solid following in retail, pubs and specialty shops. They were declining in popularity and he wondered what they should do about it.

This brewery didn't have any beer in cans at the time. Just 22 oz bombers and six-packs. It was just beginning to become apparent that cans were going to be a thing going forward. One of my suggestions was that they start canning some of their standards. Easy enough.

But there was more to it than that. Another challenge established places have grappled with dating back several years is the flood of small batch, new stuff. They were accustomed to fielding a few standards, which were getting stale and lost in the sea of rotating beers offered by newer places trying to make a name.

That trend had not yet reached the crushing crescendo it has attained today. I suggested they start playing around with creative new names for existing brands and slightly modified versions of those brands. In short, create buzz mainly via the use of fresh new names. My feeling was that the beers themselves probably didn't need to change that much, that altered naming would be enough.

They eventually started canning. More recently, they began to build a portfolio that includes standards, one-offs and rotating seasonals in cans. I don't know how many, but they are, in effect, emulating what many newcomers are doing. There's surely still a relevance issue due to the "establishment" history, but at least they're working a plan.

I have to admit I did not anticipate the latest craze: the wrapped can. It somehow signifies the nearly complete insanity that has engulfed craft beer. You know what I'm talking about. These are the cans that often feature catchy artwork on labels affixed to (typically) 16 oz cans that sell for (typically) $20 (or more) per four-pack or $5 to $7 per can. The beers may be one-offs or rare species from nearby or outside the area. They create automatic interest, intrigue and sales.

But wrapped cans didn't originate as part of a profit motive. They started out as a way for small breweries to get their beer into cans without having to order a semi load of pre-printed cans. Instead, they buy blanks and use limited run label wraps. Along the way, wrapped cans morphed into a sort of code for rare and special among craft beer fans. I suspect that was accidental; I could be wrong.

My experience is that wrapped can beers aren't always great. In fact, they often aren't very good at all. But the artwork and the custom label convey the illusion of something special, in much the same way that wax dipped bottles create the impression of quality and value. As someone may have once said, when you resort to selling packaging, you've entered a new dimension.

No matter. Imitation being what it is in craft beer, the wrapped can phenomenon is spreading like a virus. Seeing consumers willing to spend megabucks on packaging that creates an aura of rarity and value, large and small breweries everywhere are anxious to enter the fray. That's why we see constant wrapped can brand churn in bottleshops and specialty stores.

When will this nutty fad run out of gas? Possibly when consumers become skeptical of packaging gimmicks and overpriced beer. Or maybe when the frenzy swirling around craft beer subsides or collapses. Which happens first? We shall see.

Thursday, April 4, 2019

The 2018 Craft Beer Stats and the Road Ahead

On cue with the start of next week's Craft Brewers Conference, the Brewers Association released its 2018 industry growth report. There are some intriguing and also somewhat troubling stats contained in that report, if you read between the lines.

Volume Share
Craft volume growth slowed down again last year, dropping to 4 percent from 5 percent in 2017. Growth has declined steadily in recent years after peaking at 18 percent in 2013 and 2014. Nonetheless, BA-defined craft increased its share of category volume to just over 13 percent.

Look, it will be virtually impossible to return to the growth numbers of 2013/2014. For one, it's harder to achieve huge increases once you reach a certain size. Keep in mind that craft is competing with a growing list of other options, like spirits, cannabis and hard seltzers, and that the beer category itself is slowly shrinking (down 1 percent by volume last year).

Dollar Share
The good news is that craft dollar share rose to an estimated $27.6 billion last year, representing a 24 percent market share and 7 percent increase over 2017. It's a little scary, though, because it appears small, fast-growing breweries are responsible for almost all of that. Think four-packs of hazy IPA in wrapped cans selling for $20 direct to consumers or in specialty stores.

Indeed, with so much growth coming from up-and-comers, many of the big regionals continue to suffer. Harpoon, Boston Beer, New Belgium, Deschutes and Brooklyn Brewing, among others, were all down. That trend began a decade ago and shows no signs of abating. The share of craft volume produced by the largest 39 breweries in the country declined from around two-thirds in 2008 to half in 2018. Virtually all 2018 volume gains came from the other 7,200 beer makers (source).

The small brewery phenomenon is clearly causing significant disruption. In fact, the independent regionals are stuck in the middle, struggling to get traction with the crowd that seeks speciality beers in taprooms and being knocked around in retail by the Baby Buds, many of which showed big growth last year. This scenario is going to create further instability moving forward.

One of the most-often touted Brewers Association stats is the brewery count. We ended 2018 with a record 7,346 breweries (brewpubs, micros and regional breweries). The number has continued to creep upward over the last decade. The overall count grew by 1,049 last year, a slight increase over the 951 that opened in 2017. How many is too many? No idea.

Closures are a less popular stat at the Brewers Association. There were 219 closures in 2018, an increase from 165 in 2017. Openings are still happening at significantly higher rates than closures, though it pays to watch the latter number. As the landscape gets more crowded, we should expect to see the closure rate ramp upward as a percentage of openings.

There are still parts of the country that are woefully underserved, typically in the suburbs and rural areas. There's decent potential in those places. Craft heavy areas, like Portland, are so overcrowded that the closure rate is likely to increase there. It's hard to know exactly what that looks like, but the closures of Bridgeport, Burnside, Alameda, and the Widmer and Portland Brewing pubs, may be instructive.

Don't expect openings to drop off significantly anytime soon. Craft beer's cult of personality means there's an almost endless number of optimistic souls who want to open their own brewery. Whether these folks open in underserved or overcrowded areas, their success will depend on their ability to do a lot things well. The era of the successful amateur owner/brewer is over and out.

The Road Ahead
Looking at the landscape, true craft appears to be decentralizing. Its current strength is coming primarily from smaller breweries that sell directly to consumers and in specialty stores and bars. If you're a regional brewer, you're mostly locked out of any meaningful place in that scene, while also being squeezed out of mainstream distribution. It's not a pretty picture for most of the big guys.

An obvious result of the current situation is spectacular brand churn. Smaller locals have built their following around revolving new brands that often come and go within weeks or months. Consumers want something new every time they drink or shop. Established, long running brands have no future in that scenario, a big problem for awkward regionals. It's beyond ironic that iconic brands like Sierra Nevada Pale Ale built the foundation for what we have today. Oh well.

A less-appreciated result of industry decentralization is the evolving demolition of traditional beer media. The small breweries driving growth have embraced social media as a means of reaching consumers and creating buzz. Larger breweries that once supported traditional media are struggling and backing away, producing a significant shift from a few years ago when it was fashionable to support print publications.

It's not at all clear that this shift matters. Reading has become such a lost art that the loss of BeerAdvocate, the Oregon Beer Growler and similar publications may not matter so much. Beer consumers are apparently comfortable getting small snippets of information from social media on their mobile devices, as opposed to more detailed presentations. We'll have to wait and see how that pans out. A lack of quasi-objective content may not be an issue. Or it will be.

All in all, these are fairly volatile times in craft beer. The sky isn't necessarily falling, but there's significant uncertainty on the road ahead.