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Smaller Batches, Big Business

For many years, craft beer has been a bright spot in an otherwise moribund beer industry, a sector with flat growth and aging consumers. But the industry is saturated with far too many choices, Millennials drink plenty of beer but prefer cocktails, and the sector actually peaked at 20% growth back in 2013 and has been falling rather rapidly ever since. It is now about as flat as the entire beer sector. What happened?

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Aside from the factors mentioned above, one of the problems has been the definition of "craft" beer itself and the lack of agreement as to what it should actually mean. The Brewers Association defines a craft brewery as "small, independent, and traditional" (rather broad), while a more specific definition accepted by many in the industry limits a craft brewery to 6 million barrels (which is a lot of beer).  Craft does not mean "local", nor does it mean "small batch" unless you consider Sierra Nevada, New Belgium, or Deschutes to be small. But small they are compared to the breweries that control the vast majority of the market.

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Boston Beer Co. makes Sam Adams and has a NYSE market cap of $2 billion while the Craft Brew Alliance, which sounds more like a political action committee than a brewer, makes Kona, Red Hook and a bunch of other formerly independent beers and trades on NASDAQ. Are these craft beers? Technically-speaking they are, but it sounds more like "crafty" marketing to this beer drinker. To most consumers, "craft" should mean "small".  No? We even used to call them "microbreweries", but I haven't heard that one since the war. And with big multi-nationals buying up more of the larger independent brewers, and antiquated laws that require breweries to use distributors instead of being able to sell direct-to-retail, it's getting tough fo r the little guy. Small breweries typically don't have the profit margins to cut in the wholesalers, especially when the larger breweries have so much supply chain power.  Thus, they are getting squeezed out of distribution.

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Not much can be done about the 1930's era legislation short of using the Brewer's Association and other interest groups to lobby Congress to change the laws. It's already happening, but good luck with thinking that a bunch of small fry can easily change a law like that. It will take a while if it happens at all. And so in June 2017, the Brewers Association launched a seal to put on bottles and cans that certifies a brewery as "independent craft". This is an excellent development. Thus far, over half of the nation's 5,500 plus independent breweries have signed up for this self-regulatory industry program, and there should be more participation when more breweries see the value in legitimizing their "craft" positioning. Lots of breweries will close in the near future if the market continues its 5-year slowdown. The seal could end up being a big deal.

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Of course none of this does anything to reduce the threshold of acceptable barrels from the hefty 6 million level, but that a brewery is "independent" has great importance for a sizable segment of beer drinkers. That a brewery is "local" has great importance for an even larger number of consumers. Many breweries will begin to eschew large-scale distribution for a more neighborhood-focused, "micro" marketing approach. You can bet on that. And this seal should help differentiate craft products from others and clear things up for confused craft beer drinker. It wouldn't be terribly surprising to see this same association begin to look at lowering acceptable volumes as well. Ask the beer drinkers what they want "craft beer" to mean, and then define it once and for all for the beer swilling masses. Indeed we shall see what happens when the foam clears.

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