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Tuesday, December 31, 2019

Memories of a Tumultuous Year

It's been a tumultuous year in beer. There's a chance it was a transitional year, as well, but we'll have to wait and see how what happened in 2019 plays out. The world of craft beer is considerably changed from what it was just a few years ago.

Stressed Market
Although we continued to see brewery openings throughout the land, the market has become overcrowded and stressed. Everyone is trying to figure out how to stay relevant in a saturated market.

The strategy they've come up with is brewing beers that are somehow unique...the idea being to keep consumers interested and engaged. That theme will surely carry on in 2020, with breweries chasing wild approaches and recipes, hoping something will stick, even if only briefly.

Beer quality was and is a casualty. I'm amazed at how many poorly executed beers I tasted in 2019. To me, that's the consequence of brewers being more focused on experimental recipes than quality. Plenty of those beers should have been sewered. How embarrassing.

Shifting Tastes
Demographics and lifestyle changes have altered the beer and alcoholic beverage landscape before. We watched it happening again in 2019, as some of the people who drove the growth of craft beer in recent years started looking for lighter choices, craft beer not generally being a light choice.

The most ominous sign of that shift may be White Claw and other hard seltzers. The volume growth of this stuff was off-the-hook last year and it will probably continue on that path. It isn't just millennials guzzling seltzer, though they were and surely are the primary marks for this junk.

Craft brewers responded to shifting tastes by offering lower ABV beers, even their own seltzers. On my travels through the year, I regularly came across lower ABV offerings. Some were memorable, some not. But the fact that they existed was a revelation.

The rise of craft lagers was surely related to the shift, though there may be more at work here. There are some fine lagers being produced by craft brewers, as if to prove that you can make a light-colored beer with aroma, flavor and character. A great trend and one that will likely continue.

Of course, lagers won't get craft beer out of the funk it's currently in. Why? Because those beers are more likely to be purchased and consumed by hardcore beer fans than by mainstream consumers who don't know or understand why these beers are special.

If craft lagers ever get as popular as IPAs, big beer will saturate the mainstream market (grocery and c-stores) with well-made industrial lagers selling for less than what good craft lagers sell for. They've already done that with most craft styles and would surely do it with lagers.

Stratification and Danger
One of the more serious developments I see in craft beer is the stratification that's occurring. It involves smaller, typically newer brewers and larger, typically older ones, as well as the crafty stuff produced by big beer. The picture continued to morph last year, and not for the better.

The little guys, of course, are catering primarily to the demand for local beer in pubs, taprooms and beer bars. They account for most of the growth that's happening across the industry, partially driven by the unending number of new openings. Beer fans love new breweries.

That trend led to saturation, hypercompetition (see above) and closures...we saw a lot of them in 2019. Closures aren't always related strictly to beer quality, but I expect we'll see more of them in the coming year, as poorly run or highly leveraged operations are forced out.

Larger (mostly regional) craft brewers can't really compete with the little guys in the local channel. They aren't as nimble or creative. They rose to dominant positions by making a few basic styles well and packaging them for retail distribution. That strategy is becoming increasingly problematic.

What's happening is that the regional breweries are being gradually squeezed out of that space by big beer, which has acquired enough craft breweries to achieve a dominant position in that channel. It's a tough time to be a regional brewer, which is partly why more of them sold in 2019.

Big names, like Colorado's New Belgium and Oregon's Craft Brew Alliance sold, the latter for a price that was significantly below what shareholders hoped. Even moderately-sized Laurelwood sold out. Instability in the market is the primary reason in each case.

This is a worrisome situation. Regional craft breweries formed the backbone of the industry for most of the last 30 years. They are now being assaulted from above and below, the result being declining sales and financial catastrophe. Big beer is the big winner.

I don't expect this situation to moderate much in 2020. We'll see more closures on the small brewery front and further financial distress among larger craft breweries, probably leading to more consolidation and additional power for big beer. Not ideal.

My Year
For the record, I'm glad 2019 is in the books. I gained a new knee (part of one, actually), but also lost a beloved dog. I'm not yet recovered from either of those events, but I'm hoping the year ahead is a good one. Hope is what keeps us going, I suppose.

Happy New Year!

Wednesday, December 4, 2019

All the King's Horses...

It's selloff season. Earlier this week, Ballast Point, purchased by Constellation Brands four years ago for a billion dollars, was sold to tiny Chicagoland Brewer Kings & Convicts. We don't know the terms of that deal, but we know the sale price was substantially less than a billion bucks.

That follows the sale of Portland-based Craft Brew Alliance, which sold out to Anheuser-Busch for significantly less than a contract stipulated after AB simply let that contract expire and paid what it wanted. Then there's Colorado-based New Belgium, which recently sold to Little Lion/Kirin.

If you're an objective observer, you might conclude that the craft beer bubble is bursting. The problem, of course, is that interested parties typically fail to perceive the existence of a speculative industry or bubble until it's too late. Only in retrospect is reality plain to see.

There are plenty of examples of bursting bubbles out there, the most recent being the U.S. housing bubble that collapsed in 2008, leading to massive destruction of global wealth. By early 2009, the 12 largest financial institutions in the world had lost half of their value. Not great.

The craft beer industry isn't on the level of the housing collapse. However, I have characterized craft beer as a bubble industry more than once in these pages. It's a concept that is not generally well-received among industry-connected folks. But never mind. What do we know about bubbles?

Hyman Minsky (1919-1996) was an American economist whose research attempted to provide an understanding of the characteristics of financial crises, which he attributed to swings in a fragile financial system. Minsky identified five stages in a typical credit cycle or bubble:

Displacement: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or product, at a time when interest rates (or the cost of market entry) are historically low.

Boom: Prices rise slowly at first, following a displacement, then gain momentum as more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be an once-in-a-lifetime opportunity spurs more speculation, drawing even more participants into the fold.

Euphoria: During this phase, caution is thrown to the wind, as asset prices skyrocket. The "greater fool" theory plays out everywhere. Valuations reach extreme levels during this phase. New valuation measures and metrics are touted to justify the relentless rise in asset prices.

Profit Taking: By this time, the smart money – heeding warning signs – is generally selling out positions and taking profits. But estimating when a bubble will collapse can be difficult because, as John Maynard Keynes put it, "markets can stay irrational longer than you can stay solvent."

Panic: In the panic stage, asset prices reverse course and descend as rapidly as they ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate at any price. As supply overwhelms demand, asset prices slide sharply.

I'm not sure where the various pieces of the craft beer industry belong in the five stages. Newer breweries probably belong in the Boom or Euphoric stage. They're fresh and see the sky as the limit. Profit Taking will come soon enough. But it's clear that elements of the established industry have entered the Panic stage, a point at which they will sell for any reasonable price to avoid the realities of a flat market that is overcrowded and intensely competitive.

Keep in mind that a bursting bubble isn't strictly defined by a selling spree. The flipside of that is the places who have nothing to sell and simply close. We've seen that here at home with the likes of Alameda, Lompoc and others. The Laurelwood version of the story differs because some of its brands have a regional following and could be sold.

One thing to note about a bubble: Once it is punctured and losing gas, it's unlikely to inflate again. If what's happening in craft beer is a bursting bubble, all the king's horses and all the king's men won't be able to change that.