Craft Beer Bubble, What Bubble?

IMG_2405There is a good argument that Americans are living in a craft beer Renaissance. We lucky citizens have access to a time when the market appears to be over-saturated with beers from all over the country, from all over the world, of different styles, tastes, strengths, ingredients, and nuances.

We began the podcast in a futile attempt to help orient a fledgling drinker in the world of craft beer but the sheer number of new styles, breweries, ingredients, and beers makes it an impossible task to perfectly educate an ever-growing market of people who are delving into a world of craft beer.

With any large expansion of a growing market detractors are quick to suggest that the pinnacle of the craft beer world has not only been met but has been surpassed creating a craft beer bubble. There is no way this explosive growth of breweries, brewpubs, bottle shops, and beers can continue. We must be living in a craft beer bubble that is destined to shortly burst as market saturation kills many of these new businesses that have overextended assuming their customer based to be ever-expanding if not consistent.

Are we in a craft beer bubble? Will the popularity of craft beer go the way of grunge a fad of the early 2000s that become retro in forty years?

I have long suspected that craft beer is only getting started and that despite Budweiser, Miller, and other mass market breweries it is here to stay. While I could never really articulate eloquently why I felt this to be the case Dan Shapiro of Inebriate Inquirer has a wonderfully worded dismissal of the craft beer bubble.

Dan rightly jumps straight to the number which strongly support his claim that we are nowhere near the summit of craft beer growth in America. He writes:

The biggest and most obvious growth over the course of the craft beer movement has been in the amount of breweries. In 1978, there were a mere 89 breweries in the United States. That’s 1 brewery for every 2.5 million people. Last year, there were 2,538. Is this a boom? Perhaps, but it’s equally likely that this is a return to normalcy — especially when you consider that in 1887, there were 2011 breweries. In 126 years, we’ve gone from 1 brewery per 30,000 people to 1 per 126,000 people. In those terms, we’re practically in a recession.

The brewery count figure is perhaps the biggest fuel for the bubble-belief fire. But it should be noted that although the number of breweries is increasing rapidly, the total beer volume is a bit steadier. Which means that these breweries are probably stealing market share away from the big guys rather than making beer that will not be drunk. The vast majority of those breweries are brewpubs that don’t even compete with each other, so what we’re seeing is not really a market expanding – just subdividing.

Dan’s two objections are perfectly illustrated by these numbers. America isn’t producing more beer overall. Collectively we aren’t really drinking more beer we are drinking different beer than the traditional light lagers. More and more drinkers are putting down the Bud Light in favor of Sierra Nevada or Dogfish Head or their local brewpubs. This is strongly supported by the fact that quarter after quarter the mass market breweries are showing a decrease in market share while craft beer production is up for almost everyone; from your local nano-brew to the Boston Beer Company to Yuengling.

Dan’s point about us being no where close to the number of breweries before 1890 is also significant. The post-Prohibition consolidation in America led to really terrible beer availability in the United States. Older drinkers will remember a time where every bar only had mass market domestic lagers on tap or in bottles and perhaps an import or two like Guinness. This was neither an ideal nor natural state for beer in America despite what AB InBev and MillerCoors may think.

My only hesitation with making this point without reservation is that Prohibition was a success politically because many thought that alcohol consumption in America was out of control. The tavern/bar was as much a central pillar to life in the late 1800s early 1900s as was the church. The temperance movement had legitimate complaints.

The good news is that while breweries and beers are expanding the general alcohol consumption by Americans isn’t growing in leaps in bounds. Craft beer isn’t turning social drinkers into alcoholics. Craft beer is turning Bud Light loyalists into craft beer polygamists. Craft beer is turning football tailgaters from Keystone Light drinkers into craft beer drinkers.

Dan’s point about the fact that craft beer is diversifying beer in America (thank god) rather than creating more of a product that is already at capacity is compelling. Yet Dan isn’t content to stop there. He goes on to explain that by the very definition of bubble theory craft beer satisfies neither condition of the definition laid out by Nobel Prize winner Robert Shiller.

There are two important components of that definition: one, that prices are increasing, and two, that people are communicating that increase in a way that gets people to buy in a speculative way.

And this is where the craft beer bubble theory fails – there really is no meaningful speculation taking place in the industry. Sure, rich guys with plenty of money to burn are entering the industry with little hopes of actually succeeding, and many are probably doing so because they’ve heard stories of others finding great success in the field. In a crowded industry, they might not be able to find a market to sell their beer – that is, if they even can navigate the process to get the beer created in the first place. But unless they are starting their business just to turn it over quickly to a greater fool, they are not technically speculating. Technically, they are making a shitty investment.

So with little opportunity to flip breweries, the only other real option to speculate in this industry is on the stock market. Except for the glaring reality that there are only two publicly traded craft beer companies in the United States. Boston Beer Company, which makes Sam Adams, and Craft Brew Alliance, which consists of Redhook, Widmer Brothers, Kona, and Omission. Both have done well, with SAM increasing five-fold in the last five years, and BREW increasing three-fold. Neither, however, seem to be overinflated.

Yes, yes, and yes! This isn’t the same as currency or oil speculation. No one is rushing to buy a local brewpub in order to temporarily inflate the business’ worth to sell it to an unsuspecting sap. Most brewery, brewpub, and bottle shop owners are sinking their own capital into a business they want to own, to work with, to make successful for years. Craft beer is currently run by people who are in it for the love of beer. Even the industries greatest success stories like Jim Koch who is a billionaire clearly loves his own product. The billions are a nice addition to making something he is proud of and cares about as are the brewers that work for him.

I’m on board with Dan that when it comes to craft beer we haven’t hit the upper limits of what the market has to offer. I strongly believe that there will eventually be diversification from the big breweries as their smaller counterparts start stealing market share from them but that this contraction of the huge craft brewers will not be do to a collapsing bubble but a readjustment as craft beer brand loyalty is replaced by a love of local favorites.

So drink a variety of beer because you want to experience a wide array of what craft beer can offer and don’t worry that in the next 20 years we will all be back to choosing between Bud Light and Coors Light. Craft beer isn’t going anywhere but your stomach.