In one sense, there’s never been a better time to be producing craft beer. The market for handcrafted, often locally-made brew is reaching historic highs and shows no signs of slowing down. The big guys are running scared — either merging and basically consolidating the whole damn industry, or buying up midsize producers in order to stay relevant and cut into craft beer’s own market share.
From a job-growth and taxation standpoint, a booming craft beer industry is great news for local economies, and the small- to mid-sized farmers who supply a vast amount of the industry’s raw ingredients. According to the Brewers Association, the craft brewing industry accounted for 424,000 American jobs in 2014, and contributed $55 billion to the economy that year. But that demand comes with its own concerns, including land and water usage rights and speculative buying that requires growers to satisfy large contracts with major breweries based on expectations of future yields. With unpredictable weather and increasing demand, things are already starting to get tricky.
As a result, today’s craft beer market is perhaps more uncertain than at any other time in history. Local and state laws have created a confusing and sometimes arbitrary set of rules that makes scaling up feel impossible, while smaller operators may find themselves locked out of important back-room access for the key ingredients — water among them — that are vital to the brewing process. It’s a wild, wonderful, and scary time for the craft beer industry, and here are three of the biggest reasons why.
California, Oregon, Washington, and Colorado are among America’s most beer-thirsty states, and have become beacons for the market as a whole. With hubs of craft beer activity in places like San Diego, the Bay Area, Denver, Seattle, and Portland, those states are increasingly being seen as models for what craft beer can be, in terms of total brewery output and per capita buying habits.
They’re also in a world of hurt right now, from an environmental perspective. California’s historic drought has been an obvious source of hand-wringing for many, but even Oregon, Washington, and Colorado have been experiencing unpredictable and often overly dry seasons of late. That’s not just bad for the final brewing process, which relies on cheap access to fresh water, it’s also troublesome for the growers who supply breweries with the raw ingredients needed to make their beers in the first place.
“The biggest issue is definitely water. It was really scary at the beginning of the year.”
“The biggest issue is definitely water,” says Coronado Brewing head brewer Ryan Brooks. The mid-sized San Diego-based brewery has mostly managed to stay above the fray, thanks to great working relationships with hop farmers and the local community, but fears of drought and crop shortages remain. “It was really scary at the beginning of the year, but the County of San Diego has been telling (local brewers) that we’re not really in bad shape compared to the pharmaceutical companies in the area, or the local farms nearby. But we’ve still definitely put in processes and equipment to help us be smarter about our water usage.”
Saving where they can is certainly the name of the game these days. Bone-dry states like California — where craft beer production accounts for more than 500 million gallons of water usage annually — have been in the midst of severe cutbacks for the better part of a year already, with more likely on the way. What natural local water those can’t access will need to be shipped in from elsewhere, at cost, along with the necessary raw ingredients like hops, which themselves are water-intensive and often grown in areas (Washington, Oregon, Idaho) facing similarly dry conditions.
Thankfully, both the overall Brewers Association and more local, state-level organizations are pushing for brewery sustainability across the board. Bigger names like California’s Sierra Nevada, Colorado’s New Belgium, and Michigan-based Bell’s Brewery are leading the charge by overhauling their processes and retrofitting their equipment. That might include the use of sustainable wind or solar energy powering packaging facilities, or, in the case of water, utilizing recovery tanks, sub-meters for monitoring usage, and enhanced wastewater treatment systems.
Not every homebrewer-turned-brewmaster can afford to shave off their meager earnings in order to achieve sustainability in their first year. But as an industry, the move toward dry farming and water management could mean decades of further growth — or the rise of resource costs that put lots of small breweries out of business.
At the annual Great American Beer Fest in Denver, some 750 breweries from across the country gathered for a weekend-long party meant to foster goodwill among brew teams large and small. The public is invited, but really, GABF is a brewers’ party. But for the little guys like Phoenixville, Pennsylvania’s Stable 12 Brewing, there’s more to the four-day festival than just shaking hands and sipping beers. Many are actively angling for better access to raw ingredient suppliers and distributors.
The craft beer market wouldn’t amount to much without its agricultural backbone and distribution arms. Shaky reports of hop shortages, particularly within boutique varieties, have been whispered about for the better part of a decade, even as total hop growth acreage has increased. Many of the craft industry’s highest-use hop varietals are keeping up with explosive demand (simcoe is now the second-largest hop crop grown in the United States, even though it didn’t even register on market data sheets a decade ago), but as brewers continue to try to innovate and explore the market, pockets of scarcity will remain. Barley production is thankfully much more global (it’s the fourth-largest grain crop currently produced), but is not without its own set of costs and logistics.
“My access to grain is easy,” says Stable 12 CEO Richard Wolf. “I can basically get whatever I need. But for hops, we’re extremely limited. A lot of the better hops, like amarillo and mosaic, are sometimes contracted out for the next two or three years.” All that’s left is the waiting game. “Some of these contracts don’t expire until 2018,” Wolf says. “I don’t even know if I’ll be in business in 2018.”
Mid-sized and large scale breweries control much of the market for ingredients, getting early access to growers based solely on their scale. For most of the industry — a full 98 percent of which brews at or below 15,000 barrels of beer annually — that kind of blanket access is out of the question. They’re either left to fend for themselves with whatever remaining stock a hop farmer might have on hand, or they’re forced to consolidate forces in hopes of earning more leverage in the marketplace.
“It hasn’t limited any of our current beers, but we maybe haven’t been able to put into production some of the stuff we’d like to.”
Usually, small breweries are forced into what’s called the spot market, an impromptu buying ground for breweries to swap excess amounts of raw ingredients — for a price. “I’ve had to buy hops from other breweries who’ve maybe over-contracted,” says Wolf. “And I know they paid $10 per pound, but on the open market it’s $25. That makes things really tricky.”
The process can sometimes leave even well-known breweries scrambling for answers when a certain hop isn’t available: either find a way to use a different varietal, or stop making that beer altogether. “We haven’t had to tweak any recipes yet,” says Coronado’s Brooks. “But we’re definitely aware of the market. And we have to tell our sales team to be aware, too, and let them know we have to work together to push certain stuff over others. It hasn’t limited any of our current beers, but we maybe haven’t been able to put into production some of the stuff we’d like to.”
Without consistent access to long-term deals and bulk rate pricing, smaller breweries can find themselves forced to innovate where they can and rely on the goodwill of others when they can’t. Still others may choose to keep their beers within the same rough ingredient tree, keeping in mind the availability of a small amount of necessary dry ingredients for each of their beers.
In addition to ingredient access, consolidation at the top of the craft beer market — say, when ABInBev buys up a mid-sized brewery like Golden Road in Los Angeles — also poses its own unique set of distribution problems for smaller breweries. Massive beer conglomerates control 89 percent of the U.S. beer market, as well as many common distribution channels for getting beer to store shelves.
Think of it like a grocery store shelf: The placement of that niche box of cereal really matters to the small company that made it, and to the average consumer walking by. That’s even more true when you realize that there are many, many more cereal boxes that can’t get access to the shelf at all — because Kellogg’s needs all the room it can get, and it’s willing to pay its way in. That’s perhaps not an issue for the smallest breweries, who are often hand-delivering kegs and cans to their local accounts, but for mid-sized breweries or anyone on that cusp, the ability to grow relies on simply getting product in front of a consumer’s face.
To complicate things further, many states exist within a three-tier distribution system, which includes the brewery, distributors, and retailers — this separates breweries from selling direct to consumers by forcing the use of a distribution middleman. When breweries reach a certain size, state law may force them into contracts with large conglomerate distributors that are usually much more beholden to big beer manufacturers, who command much of the market. Sometimes, those laws give breweries limited ability to negotiate contracts on their own behalf; in many instances, small-time breweries looking for distribution rights are forced to put a large degree of faith in the distributors and wholesalers themselves.
The best hope for a reprieve from the distribution squeeze is often legislative breathing room. In Florida, brewers once faced pushback from Tallahassee about things like distribution and barrel limits: Breweries with a front-facing brewpub were capped at producing 5,000 barrels annually, while anything bigger was labeled pure manufacture and would be subject to the state’s mandatory three-tier beverage distribution system. But Law SB 186, signed by Governor Rick Scott earlier this year, helps to clarify much of Florida’s murky situation, allowing a wider expansion of purchases direct from the breweries, while also limiting total taproom licenses for larger operators. That’s the good news.
In states like Texas, the fight is ongoing. Anyone of any size that’s manufacturing craft beer without a brewpub’s license must agree to sell its distribution rights (for free), effectively taking control of their own market share out of the brewery’s hands. To-go beer sales are also limited for anyone with a brewpub or retailer’s license, which is similarly capped at 10,000 barrels per year. So if you’re, say, Live Oak Brewing Company in Austin, you can sell beer directly to consumers on-premises, but cannot let someone walk in, pick up a six-pack to take home, and walk back out. You don’t even really control who sells your beer (distributors and wholesalers do that), and you certainly can’t manage the cost for the end consumer. It’s scary stuff for first-time operators already working with perilously thin margins.
By 2015, America will have more craft breweries than at any time during its history. What we need to do now is protect them.
Ultimately, the path to craft beer dominance will likely remain in the hands of the consumer, who wields enormous buying power every time they head to a grocery store or liquor store for a six-pack. At just 11 percent of the total U.S. beer market, there’s obviously plenty of room for growth, and distributors and local governments alike could learn the benefits of selling a higher volume of quality craft beer — and its accompanying increased profit margins — to a demanding audience.
Other issues, like ongoing environmental impact and market consolidation, are not so easy to ignore or to fix. But much is being done, at the individual and local level, and through national initiatives pushed by groups like the Brewers Association. By the end of 2015, America will almost certainly have more craft breweries than at any other time in its history. What we need to do now is help protect them.