Why craft breweries may not survive the economic downturn
Smaller brewers produce brilliant beers. But is product enough to get them through a challenging market?
It’s been a while. It’s probably no surprise that this Dispash edition has been finished while I’m laid a little low with Covid.
This one has been a long time coming. Craft brewing is a fascinating sector to examine through the lens of a recession. Hopefully the wait has been worth it.
Either that, or it’ll make you thirsty.
Onwards.
Drinking in a downturn
Some Dispash readers may be familiar with The Lipstick Effect. It’s a theory that during an economic downturn or recession consumers trade down from expensive luxuries such as perfume for cheaper ‘treats’ such as lipstick.
While data doesn’t exactly support the effect, the theory makes a lot of sense. Even when finances are tight and the world is more uncertain than usual, people still search out ways to treat themselves.
Fashion brands have long known this - the demographics that make a brand cool aren’t always flushed with cash. It’s why musicals dominated at the box office during the Great Depression and World War II due to a need for escapism.
And it’s why that, during my late teenage years and early 20s, I drank Reef alcopops for £1 in Wetherspoons. Sure, I’d have loved to go to a nicer bar and drink something a little less sugary, but I also wanted to enjoy myself when cash was tight. People always find ways to entertain themselves on a budget.
Lipstick on your pint glass
Both my dreadful teenage drinking habits and the lipstick effect have come to mind frequently this year whenever I’ve read a news story about the beer industry.
Breweries are closing their doors as the economy worsens. Steve Dunkley from Beer Nouveau tracks brewery closures in the UK and estimates over 80 shuttered their doors in 2022, including stalwarts such as Skinners and Caledonian, with another 40 closed or insolvent this year.
In Australia, it’s a similar story. Coopers, who sit towards the craft-ish end of the mainstream market have noticed a rise in home brewing kits and a drop in people buying crates at the bottle-o. Tribe, one of the country's biggest craft brewers filed for insolvency earlier this year.
Is this an unexpected trend, given that craft beer could fall into the "little luxuries" camp: the drink equivalent of a lipstick purpose? Or is it a surprise that the craft brewery industry hasn't seen more insolvencies?
The more you dig into answers to these questions, the more it touches on assorted marketing theories such as the 4Ps, market orientation, and the work of Ehrenberg-Bass. It's a fascinating microcosm of so many marketing challenges across multiple industries today.
There’s around 353 craft breweries in Australia and were 1828 in the UK at the start of this year. That’s a lot of beers and a lot of choice.
That’s good for the consumer. But is far more problematic for the brewery itself, especially when disposable income is tight.
And while I like craft beer, I’m not the target market for these brands to grow. I’m already convinced by the product (albeit not a heavy buyer). My tastes are not shared by the majority of the market and not everybody is willing to spend money on a beer they may not like, just like I’m very discerning in my cinema visits due to the cost of tickets and food.
Regardless of the quality of the product and the shift in market preferences, the mass market beers still significantly outsell their craft competitors. Brewdog in the UK* is the only beer that could be described as craft and has sizeable volume. In Australia, the best selling brands are still Great Northern, Carlton Dry, and XXXX Gold.
Beer marketing theory in practice
For fans of applied marketing theory, the craft beer sector has it all. The double jeopardy rule is alive and well: heavy buyers of one brand are light buyers elsewhere; big brands will take heavy and light buyers of smaller brands, which has a much bigger effect on these brands than craft brewers taking light and heavy buyers of bigger brands. The pool of dedicated craft beer drinkers is much smaller than the buyer pool of all beer drinkers.
Category Entry Points also come up frequently. Non-alcoholic alternatives grow in popularity as people look for a refreshing drink for a social situation that doesn’t leave them feeling rotten for work and the school run the next day. Alternatively, a stronger craft beer may comes to mind when they’re meeting a group of friends for a limited evening of drinking. While a beer for a barbecue at their house that the majority of guests will look looks different as well.
An example: the last beer I purchased was a crate of White Bay Crusher for a party as I knew it was a low strength beer that tasted good most guests would be comfortable drinking even if they didn’t know the beer.
I didn’t have it in mind when I entered the store, but the combination of the beer taking a prominent place as the local beer (and a brand and product I knew) and the fact it was discount influenced my purchase.
The discount helped, but the fact I knew the product and it was reasonably priced pre-discount also made it likely it would have moved high up on my consideration list once I entered the store, as opposed to a brand or beer I didn’t know.
It’s easy to see how craft beers cannibalise each other in these situations or don’t even lend themselves to these situations. Mental availability also plays a part.
If somebody says they’ll bring some beer over and ask what I like, I’ll say Four Pines or Balter, as those easily come to mind and I know they’re readily available at my bottle shops. I won’t mention my favourite beer - Lord Nelson Three Sheets - as it’s very rarely found in stores and I often forget about it. The same goes for other beers that I like but are from smaller breweries. Again, the remaining 3Ps - price, place, and promotion sit alongside product here.
Market trends x marketing trends
Even before a squeeze on disposable income, the craft sector had a lot of challenges. A small customer base with light loyalty being the main one.
Then there’s the rise of modern drinking trends. Seltzers, for one. Non-alcoholic beers and spirits, for another. Bigger brands doubling down on marketing spend as well. VB, Carlton and XXXX Gold need to remind drinkers they exist; craft beers need to tell drinkers they exist.
So, we have a category (alcoholic beer) in decline, a product that already sits at the more expensive end of the market, an incredibly crowded marketplace, and a disproportionate share of mental availability even before an economic downturn comes into play.
Industry research group the ISWR had already noted during Covid that craft breweries were disproportionately hit during the 2008 GFC, and would take an additional hit during Covid, due to a reliance on cellar door and on-premise sales.
The ISWR also noted that while home consumption of alcohol tended to increase during economic downturns, wine rather than beer tends to be the chief beneficiary.
None of this is particularly good news, particular those who are reliant on in-trade purchases. A consumer base who are cutting back on non-essential spending are less likely to commit an afternoon to sampling beers at a cellar door or take part in impromptu pub visits.
It’s also an issue for the brewers who don’t have a strong staple or specialise in lines such as sour beers or 8% dark beers called Thunderbastard. They may well be a passion project that the brewers and some loyalists love, but these are more niche, expensive products, which means either pricing has to be high enough not to lose money or the volumes sold need to be large enough not to lose money. Both are challenging, especially without foot trade.
Is this the end for craft?
All this paints a gloomy picture for the craft beer industry. “… these factors spell a difficult time looming for the majority of craft producers, unless they already have size,” ISWR CEO Mark Meek commented in 2021.
It’s clear that there will be casualties. How many and how bad it gets is hard to tell.
Is there any cause for optimism? Possibly. Larger craft brewers with strong distribution networks may have enough size in the market to survive, although need to offset the churn in customers that will always affect smaller brands. Their margins need to be strong enough to go into a downturn and not get tempted into discounting. Easier said than done.
Conversely some smaller brewers who are already profitable may also emerge in a good or stronger position, especially those in a regional area who are embedded in the community and have fewer natural competitors for footfall.
The advantage of a strong brand
The third element is a strong brand, especially for those who sit in the mid-size brewers are are assaulted by threats from all directions.
Yes, a brand manager writing about brands concludes brand is a solution. There’s a shock.
But when you break down what the breweries are offering, it’s often not that different. In Australia, most brewers produce a session lager, a pale ale and an XPA, plus a few other more unique brews.
Drinkers will have their individual preference. But apart from potentially their regular beer of choice, I suspect any beer drinker may struggle to identify the beers through blind taste alone. Most taste good and that’s enough.
But if money is limited then the heavy buyers may buy less but light buyers may not buy at all. This is where brand advantage comes in, especially if a quick, unthinking decision is needed.
An example. At the pub I sometimes head to before or after watching football, I almost always end up drinking Grifter. The pub has Grifter signage outside and I know it stocks a range of Grifter’s beers on tap. It also has other craft beers, but if the pub is busy - which is usually is - I struggle to make out the logos or names, so it’s easier for me to order a Grifter, which I know I enjoy and my friends also enjoy.
It’s a similar decision at my local bar. I know they have Philter XPA on tap, which I like, so I rarely think about ordering a different beer. I’m also more likely to gravitate towards these beers than unknown ones with uncertain or higher alcohol volumes.
Both Philter and Grifter have quite distinctive packing as well and, in the case of Grifter, have a lot of signage around Sydney. It’s easier for me to spot their beers on-premise or in a bottle shop than others who adhere to category norms of colourful cans with lovely artwork but indistinct logos.
The brand also helps with their margins. Craft beers tend to be more expensive options. An unknown brand priced at the same level as, say, Philter has less of the cues to the customer that this will be a good purchase that they would enjoy drinking. The customer is choosing between the familiar and unfamiliar.
Of course the unknown brand could reduce their prices, but that brings them closer to a wider category where there is more choice at the lower price, plus discounting reduces margins.
This unknown brand could put their prices up but they have to convince customers who may have seen them at a lower price to pay more. And they may also be competing with expensive craft beers like the better known Balter. It’s a tough call.
When quality is not enough
The issues above are by no means exclusive to craft beer. Other industries with smaller artisan producers needing to stay afloat will have similar issues. And stronger brands or better marketing application won’t be the solution to every problem. But it may be able to mitigate some of them.
A few excellent brewers will, sadly, inevitably go under. A few better known but less excellent brewers will stay in business. Product quality alone is not enough to keep the lights on.
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Thanks for making it this far. Hopefully the wait has been worth it. Playing us out this week: The Cure - The 13th. A vastly underrated song from the hit and miss Wild Mood Swings album. Oddly, a few friends with teenage children have all remarked that their kids are listening to The Cure.