There’s a shift in the U.S. beer landscape and a new tier of large domestic breweries has emerged.
While America’s beer industry is still largely dominated by Anheuser-Busch InBev and MillerCoors – two international brewing conglomerates that collectively owned about 74 percent of the U.S. volume share in 2012 – a group of six craft breweries and a pair of strengthening premium players are poised to form a new tier of high-volume beer companies.
The continued declines for the “big two” are five years in the making. Beer volumes reached a peak in 2008, when domestic suppliers collectively shipped more than 184 million barrels. By 2012, the number had dipped to 180 million and, through last November, industry-wide shipment volumes were down another 2.6 million barrels.
But a rapidly evolving craft beer category continues to capture additional market share: off-premise sales are up 19 percent, according to IRI, a Chicago-based supplier of brand sales insights.
As those sales have grown, a fast-growing group of “new domestic” breweries that focuses their efforts in the craft segment is continuing to soak up a new generation of beer drinkers. Meanwhile, Pabst and D.G. Yuengling & Son, a pair of brands with deep domestic roots, have also been riding a hot streak through the decade, fueled by the trend among some drinkers to look anywhere but at the big two for their source of libation.
“80 percent of the beer in this country being sold by two companies is a bubble, not the other way around,” said Lagunitas founder Tony Magee. “A market of 250 million requires more than just two suppliers for just about any product.”
So say hello to a selection of eight breweries that BevNET Magazine has identified as the new tier: not as big as Bud or MillerCoors, but plenty potent nonetheless. In addition to Pabst and Yuengling, there’s a sixer of craft brewers, including Boston Beer Company, The Gambrinus Company, Sierra Nevada Brewing, New Belgium Brewing, Craft Brew Alliance, and Lagunitas Brewing on the menu.
What do they have in common? A belief that the shift to craft and the thirst for change in beer consumers hasn’t yet played out – but that they’ve built the resources and market share to be significant entities for the long term. But even if they’ve got our confidence, the road’s not an easy one.
“Some of us would describe our situation as being caught between bigger brewers who have very large budgets and the ear of the distribution channels and very small brewers who are able to play that local card very skillfully,” said Kim Jordan, the co-founder of New Belgium. “The local movement has changed the face of the on-premise landscape pretty significantly.”
Jordan provided a glimpse into her vision for the future of the group, which, yes, might include some consolidation.
“I would imagine there will be at least a couple that are either part of a larger organization or will have aggregated some breweries underneath of them,” she said. “I would guess that there will be some who have done an amazing job of continuing to be relevant and will be significantly bigger than they are today. And, perhaps one out of them will not be the brand it used to be, but that is the law of the bell curve, right?”
Off-premise volumes for Gambrinus were up 9 percent last year thanks to increasing sales and expanded distribution of the company’s lead brand, Shiner Bock – dollar sales for which approached $75 million.
While Gambrinus has a strong lead horse in Shiner – the fourth best-selling craft brand in the country – it also offers retailers a well-differentiated portfolio of brands, including Bridgeport Brewing, Trumer Pils and Italy’s Tappeto Volante. And, if history proves to be an accurate measuring stick, Gambrinus could be on the lookout for potential acquisitions. Gambrinus purchased the Spoetzl Brewery (makers of Shiner) in 1989, Bridgeport in 1995 and the now defunct Pete’s Brewing Company in 1998.
Boston Beer volumes grew upwards of 20 percent in 2013 thanks to strong performances from the company’s Samuel Adams, Angry Orchard and Twisted Tea brands. Through the first nine months of the year, the company had sold nearly 2.5 million barrels with full-year projections slated to surpass 3 million barrels.
The company’s 2014 capital spending is estimated to be between $140 and $180 million, most of which will continue to address improvements and capacity additions at its brewing facilities in Ohio and Pennsylvania.
While the Samuel Adams flagship, Boston Lager, enjoyed a healthy 11 percent dollar sales growth in MULC last year, Boston Beer will look to expand its presence in an India Pale Ale category that outsold every other craft style in 2013, according to IRI. The company began rolling out its Rebel IPA in January and plans to make selling efforts on the new beer a “primary focus” in 2014.
Despite production volume actually declining 68,000 barrels in 2013, to about 2.7 million barrels, Yuengling is still one of America’s largest breweries with plenty of room to grow. Its beers are currently only sold in 14 states and the company will enter Massachusetts this March, an important test case in its ability to take new territory.
Yuengling COO Dave Casinnelli said the brewery has plans to capture at least a five share of the Bay State’s beer market during its first nine months of distribution.
“Not since Coors or Corona has a brand come along that will have as much impact as Yuengling will in Massachusetts,” he said. “If we were below a five share, I would tell you that we’d be very disappointed and didn’t do a good enough job of executing our rollout.”
If Yuengling does execute a successful rollout in Mass., Casinnelli said the company will look to expand into other New England territories within the next three years. But Yuengling – which was founded in 1829 – isn’t eager to broaden its reach into all 50 states quite yet.
“The timing is not right to take that risk from our perspective,” he said. “We are okay with what we control but it’s what we can’t control that makes those types of decisions very risky. Beer volumes are not growing; there is consolidation in the middle tier and a ton of new breweries continue to enter the marketplace. We need to see how things shake out.”
Sierra Nevada is one of the craft breweries soaking up some of ABI and MillerCoors’ lost barrels. Since 2008, Sierra has added more than 300,000 barrels and a second production facility, in North Carolina, could be functional before the end of the quarter.
As Sierra has matured – it now has more than 600 employees – so have its business habits. Founder Ken Grossman said the company continues to put additional focus into supporting its industry partners.
“We are always looking at our business practices and getting outside groups to pay attention to our brands throughout the whole supply and distribution chain,” he said.
Grossman is bullish on craft’s growth. He envisions the country’s more than 2,700 craft brewers capturing upwards of 20 percent market share in the next five years. And while he admitted that breweries in the group of six stand to benefit the most from A-B InBev and MillerCoors losses, he was quick to point out that collectively, they are still smaller than one of ABI’s production facilities.
Like Grossman, New Belgium’s Kim Jordan is also bullish on craft beer’s potential to continue capturing additional market share.
“The one thing that I feel pretty certain of is that craft and variety as a mindset that is here to stay,” she said.
With 14 states left untapped, New Belgium certainly has room to grow, but there are challenges. One of Jordan’s worries is her ability to compete against smaller, local operations that are capturing the attention of many bar and restaurant owners. But not all of those companies will stay in business.
“I suspect there will be a rationalizing at some point,” she said. “For us bigger brewers, we have enough infrastructure, practice wisdom and size to be able to weather some amount of uncertainty.”
The Pabst revival continues, with the brand selling nearly $500 million off-premise last year and a steady presence in bars. After a few hiccups under new owner Dean Metropoulos, who bought the brewery from a nonprofit trust in 2010, PBR sales grew about 10 percent last year, the fifth year in a row that its sales growth has far outpaced the core brands of the big two.
Yes, the brand is brewed under contract with MillerCoors – but with High Life, Lite, and Natural Light all in sharp decline, having a solid contract customer probably isn’t a bad business move for the big guys. And with a deep bench of legacy brands under license – including Old Style, Olympia, Schlitz and Rainier – the company has the potential to make what’s old new again, over and over.
One company that has benefited from a surge in demand for craft beer is Craft Brew Alliance (CBA), which is actually 32.2 percent owned by A-B InBev and has access to its national distribution network.
CBA – which makes and markets the Widmer Brothers, Kona, and Redhook primarily – rolled out 724,000 barrels in 2012 and, through the third quarter of 2013, depletions were up 11 percent. Andy Thomas, the company’s CEO, believes CBA’s occasion-based approach to the segment has helped it capture the attention of many crossover drinkers.
But in order for CBA to capture more occasions and take additional share, Thomas said it will need to continue to improve its customer service.
“If we are trying to compete with them (ABI and MillerCoors) for their space, we have to be able to call on accounts with as much professionalism and success as they can,” he said. “We restructured our management team to make sure we are suited for any potential market change. We are going to try to make sure that our marketing is as good as it can be and that that our supply chain and brewing footprint gets more efficient.”
Lagunitas is hot: Production volumes grew by 70 percent in 2014, to over 400,000 barrels, with more than half of that volume cames from the brewery’s flagship IPA. While a flood of new category entrants – many of whom produce their own versions of the popular hop-forward IPA style – threaten to erode Lagunitas’ dominance in the category, Tony Magee is trying his best to allow the brand to ride its hot hand: Lagunitas will produce the first batch of beer at its secondary brewing facility in Chicago later this month, in a 300,000 sq. ft., $20-million space that will eventually be capable of producing more than 1 million barrels of its own.
To Magee, it’s a glimpse of the future. He envisions a category with more evenly distributed market share and “maybe a dozen” craft breweries each be producing more than a million barrels annually. Hey, that leaves room for four more.
“The train has left the station,” he said. “It is far to early to predict, but the people that seem to be in the catbird seat are the ones driving the industry forward.”