Competition In The Craft Beer Industry In 2018

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Competition in the Craft

Beer Industry in 2018

John D. Varlaro

Johnson & Wales University

John E. Gamble

Texas A&M University–Corpus Christi

Locally produced or regional craft beers caused a

seismic shift in the U.S. beer industry during the

early 2010s with the gains of the small, regional

newcomers coming at the expense of such well-known

brands as Budweiser, Miller, Coors, and Bud Light.

Craft breweries, which by definition sold fewer than

6 million barrels (bbls) per year, expanded rapidly

with the deregulation of intrastate alcohol distribution

and retail laws and a change in consumer preferences

toward unique and high-quality beers. The growing

popularity of craft beers led to an approximate 5 per–

cent sales volume increase in craft beer in 2017.1

Yet, the overall beer industry had remained flat

in 2017 with total beer sales dropping by 1.2 percent

in the United States.2 The craft beer industry, too,

had begun to show signs of a slowdown going into

2018. While volume sales had increased by 5 percent

in 2017 and annual growth had averaged 13.6 percent

from 2012 to 2017, projections had slowed dramati-

cally to 1.3 percent from 2017 to 2022.3 Yet there did

not seem to be a slowdown in the number of new

craft brewers entering the market. Industry com-

petition was increasing as grain price fluctuations

affected cost structures and growing consolidation

within the beer industry—led most notably by AB

InBev’s acquisition of several craft breweries, Grupo

Modelo, and its acquisition of SABMiller—and cre-

ated a battle for market share. While the market

for specialty beer was expected to gradually plateau

by 2020, it appeared that the slowing growth had

arrived by 2017. Nevertheless, craft breweries and

microbreweries were expected to expand in number

and in terms of market share as consumers sought

out new pale ales, stouts, wheat beers, pilsners, and

lagers with regional or local flairs.

THE BEER MARKET

The total economic impact of the beer market was

estimated to be 2.0 percent of total U.S. GDP in

2016 when variables such as jobs within beer pro–

duction, sales and distribution were included.4 Total

revenue for the craft beer industry was estimated at

$6 billion.5 Exhibit 1 presents annual per produc–

tion statistics for the United States between 2006

and 2017.

Although U.S. production had declined since

2008, consumption was increasing elsewhere in the

world, resulting in a forecasted global market of over

$700 billion in sales by 2022.6 Global growth seemed

to be fueled by the introduction of differing styles of

beer to regions where consumers had not previously

had access and the expansion of demographics not

normally known for consuming beer. Thus, exported

beer to both developed and developing regions

helped drive future growth. As an example, China

recently saw a number of domestic craft breweries

producing beer as well as experimenting with locally

and regionally known flavors, enticing the domestic

palette with flavors such as green tea.

The Brewers Association, a trade association

for brewers, suppliers and others within the indus-

try, designated a brewery as a craft brewer when

output was less than 6 million barrels annually and

the ownership was more than 75 percentindepen-

dent of another non-craft beer producer or entity.

The rapid increase in popularity for local beers led

to the number of U.S. brewers to reach over 6,000

CASE 5

reserved.

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C-42 PART 2 Cases in Crafting and Executing Strategy

EXHIBIT 1 Barrels of Beer Produced in

the United States, 2006–2017

(millions of barrels)

Year Barrels produced (in millions)*

2006 198

2007 200

2008 200

2009 197

2010 195

2011 193

2012 196

2013 192

2014 193

2015 191

2016 190

2017 186

*Rounded to the nearest million.

Source: Alcohol and Tobacco Tax and Trade Bureau website

EXHIBIT 2 Top 10 U.S. Breweries in 2017

Rank Brewery

1Anheuser-Busch, Inc

2MillerCoors

3Constellation

4Heineken

5Pabst Brewing Company

6D.G. Yuengling and Son, Inc

7North American Breweries

8Diageo

9Boston Beer Company

10 Sierra Nevada Brewing Company

Source: Brewers Association.

EXHIBIT 3 Top 10 Global Beer

Producers by Volume,

2014–2016 (millions of

barrels)*

Rank Producer 2014 2015 2016

1 Ab InBev** 351 353 435

2 Heineken 180 186 195

3 Carlsberg 110 107 102

4 CR Snow*** N/A N/A 100

5 Molson Coors

Brewing Company

54 54 82

6 Tsingtao (Group) 78 72 67

7 Asahi 26 24 60

8 Beijing Yanjing 45 41 38

9 Castel BGI 26 26 26

10 Kirin 36 35 24

* Originally reported as hectoliters. Computed using 1 hL = .852

barrel for comparison; to nearest million bbl.

** Now includes SABMiller; previous volumes for SABMiller in years

2014 and 2015 prior to acquisition were 249 and 353, respec –

tively, ranking it as second for both years.

*** Was not in top 10 for 2014 and 2015.

N/A: Not available.

Source: AB InBev 20-F SEC Document, 2015, 2016, 2017.

in 2017—nearly triple the number in 2012. Of these

breweries, 99 percent were identified as craft brewer-

ies with distribution ranging from local to national.

While large global breweries occupied the top posi-

tions among the largest U.S. breweries, three craft

breweries were ranked among the top-10 largest U.S.

brewers in 2017—see Exhibit 2. Exhibit 3 shows the

production volume of the 10 largest beer producers

worldwide from 2014 to 2016. The number of craft

breweries in each U.S. state in 2015 and 2017 are

presented in Exhibit 4.

THE BEER PRODUCTION

PROCESS

The beer production process involves the fermenta-

tion of grains. The cereal grain barley is the most

common grain used in the production of beer. Before

fermentation, however, barley must be malted and

milled. Malting allows the barley to germinate and

produce the sugars that would be fermented by the

yeast, yielding the sweetness of beer. By soaking the

barley in water, the barley germinates, or grows, as it

would when planted in the ground. This process is

halted through the introduction of hot air and drying

after germination began.

After malting, the barley is milled to break open

the husk while also cracking the inner seed that has

begun to germinate. Once milled, the barley is mashed,

or added to hot water. The addition of the hot water

produces sugar from the grain. This mixture is then

filtered, resulting in the wort. The wort is then boiled,

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CASE 5 Competition in the Craft Beer Industry in 2018 C-43

which sterilizes the beer. It is at this stage that hops

are added. The taste and aroma of beer depend on the

variety of hops and when the hops were added.

After boiling, the wort is cooled and then poured

into the fermentor where yeast is added. The sugar

created in the previous stages is broken down by

the yeast through fermentation. The different styles

of beer depend on the type of yeast used, typically

either an ale or lager yeast. The time for this process

could take a couple of weeks to a couple of months.

After fermentation, the yeast is removed. The pro-

cess is completed after carbon dioxide is added and

EXHIBIT 4 Number of Craft Brewers

by State, 2015 and 2017

State 2015 2017

Alabama 24 34

Alaska 27 36

Arizona 78 96

Arkansas 26 35

California 518 764

Colorado 284 348

Connecticut 35 60

Delaware 15 21

Florida 151 243

Georgia 45 69

Hawaii 13 18

Idaho 50 54

Illinois 157 200

Indiana 115 137

Iowa 58 76

Kansas 26 36

Kentucky 24 52

Louisiana 20 33

Maine 59 99

State 2015 2017

Texas 189 251

Utah 22 30

Vermont 44 55

Virginia 124 190

Washington 305 369

West Virginia 12 23

Wisconsin 121 160

Wyoming 23 24

Source: Brewers Association.

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