The Session No. 80: Is Craft Beer a Bubble?

This month’s Session* topic is hosted by Derek Harrison of Its Not Just the Alcohol Talking. Derek asks, “Is Craft Beer a Bubble?”  More specifically, Derek sets the stage this way:

It’s a good time to be in the craft beer industry. The big brewers are watching their market share get chipped away by the purveyors of well-made lagers and ales. Craft breweries are popping up like weeds.

This growth begs the question: is craft beer a bubble? Many in the industry are starting to wonder when, and more importantly how, the growth is going to stop. Is craft beer going to reach equilibrium and stabilize, or is the bubble just going to keep growing until it bursts?

According to numbers from the Brewers Association the United States added one brewery a day in 2012 (409 opened, 43 closed).  There were 1,759 breweries operating in 2010.  By June 1, 2013, there were 2,538 operating breweries according to the BA.  The BA also notes there are approximately 1,500 breweries in development.  This incredible growth is the reason a craft beer bubble story crosses my path seemingly once each week. 

Speaking of the Brewers Association, unbeknownst to Derek when he picked this topic, the BA answered this question in a press release from their Staff Economist on September 20.  Short answer: There is no bubble.

What is a bubble? The BA defined a bubble as “a period of overinvestment where asset prices aren’t aligned with reality.  In other words, people are betting on a future that won’t exist.”  Almost immediately, various bloggers chastised the BA for crafting a definition to specifically fit their need to disprove the idea of a bubble.

Fair criticism? I raise the question not to defend the BA’s position – I don’t understand economic analysis enough to provide a critique – but to try and understand what a bubble is.  It makes little sense to address Derek’s question if we’re not even sure what we’re talking about. Yet, not everyone has a spare economist hanging around waiting to answer questions.

Wait.  I do.

My sister is a professor of economics so I ran the BA’s description by her and asked “is this a valid definition?” Here’s her response:

Decent definition. Bubbles occur when some investors enter the market largely on the expectation that there are other investors who will enter after them. Asset prices are rising not because of underlying consumer demand for the product but because investors believe they can get a quick return on the increase in asset value. Not sure if craft beer is a product that would really fit into the bubble frame work. Looks to me like standard model of competition might possibly  fit: profits attract entry of new firms until profit opportunities are eliminated.

I’ll be honest. I’m not entirely sure I’m much closer to understanding what a bubble is (sorry, sis), but there is one part of this that sticks out: the principle that asset prices are rising not from underlying consumer demand, but because investors believe they can make a quick buck from rising asset values.

Is that what’s happening in craft beer?  I’m not familiar with the investment trends in the craft beer industry, but I do know this from talking to Montana brewers: breweries are not cheap to build, they take a significant amount of permitting that drags on and on, profits are slow to arrive and its damn hard work.

I also know this: consumer demand for the product is at an all time high.  Prices of craft beer bombers and unique/weird/faux-rare beers – are often very high, and increasing so, and, frankly, out of whack from a value perspective. Yet, for the most part even the expensive stuff isn’t sitting on the shelf.  New breweries are opening up because there is unmet demand for the product.

You know who is most concerned about a bubble?  Not craft beer fans. We’re swimming in so many choices we’re practically suffering from overload. (“Suffering” is a relative term.) No, the people seriously concerned about a bubble are those 1,500 breweries in development.*** Should they be?
I do not get the impression we’re experiencing a bubble.  I believe we’re seeing a period of explosive growth driven by pent up demand for a product that is as interesting and exciting as it is accessible.

That’s not to say the current level of growth is sustainable or even advisable.  Even the BA doesn’t think the growth will continue at this rate.  The more interesting questions for me is how we will continue to see the craft beer industry grow.

You’ve got to think there is much less room for the next Deschutes, Oskar Blues, or Green Flash, than there is for the next neighborhood brewery.  Those are different models with different expectations.  The large regional and national breweries are increasingly concerned about maintaining the traditional method of growing their individual segment of the pie: building brands. Boulevard Brewing Co. even chastised increasingly popular beer bars with frequently rotating taps as being bad for craft beer because it hurts craft beer’s (i.e. Boulevard’s) ability to grow flagship brands.**

If we’re going to say that’s the only future for craft beer – preserving the traditional model of building specific brands – we may indeed be in trouble. Those most successful at staking out shelf and tap space will win, variety will be greatly reduced, and we’ll all get bored and go back to home brewing as our source for innovation.

Fortunately, that is not the only model (and its not like shelf and tap space is remaining static, either).  For every new brewery with regional aspirations, it seems there are five, maybe ten, maybe more utilizing a different model, be it a brew pub brewing only for on premise consumption, or small breweries filling a neighborhood or small town niche.

Call that last one the Montana model.  Maybe there is not a lot of room left for the next Ninkasi and it’s meteoric rise with a gigantic advertising budget while making good, not great, beer. But Montana is proving there is plenty of room for those willing to stake out a smaller niche and put in the hard work to make it successful.****

Don’t forget the partnership aspects of craft beer either.  It isn’t just about the beer. Craft beer is driving tourism in leaps and bounds.  While you might not drive a couple of counties (or states) over just for a meal, you may very well make the trip to visit a brewery and combine it with a meal and other activities.  Yes, beer is trendy, but its also social, creating staying power for those trends to continue.  Look at wine.  Wine tourism has been growing for far longer than beer.

Let’s return to the Growler Fills Staff Economist (ha!) for a moment:

My hunch is still that breweries are responding to profit opportunities that have been created because beer is so trendy right now. In a standard competitive model, as more companies enter, the market supply increases and relative prices fall, reducing profits of those already in the business. You can get a see-saw (or really, cobweb) effect, with too many entrants causing an oversupply and losses, leading to exits and higher profits for those who remain, leading to more entrants…..

Craft beer fans know prices are not falling, but that doesn’t mean the standard competitive model isn’t a better explanation for craft beer than the “bubble.” Rather, it means there is still quite a bit of unmet demand. Quality will survive.

From my relatively uneducated seat at the table I see craft beer as being somewhere in the middle of its upward trendiness.  It is marching into new markets where it is nowhere near a saturation point (i.e. portions of the Southern U.S.).  Even in relatively saturated areas, it still occupies a small slice of the entire beer pie, thus the opportunity for new fans/converts remains high.

Once craft beer reaches much higher on the trendiness line (i.e. occupies a much greater share of unsaturated/unexplored market areas and has converted far more fans) and therefore becomes less trendy, the standard competitive model makes more sense than some sudden crash due to a predicted bubble.

Cobweb effect.  Not bubble.  I’m going with that. 
*Today is the first Friday in October which means it’s time to take part in The Session, a collective effort of beer bloggers around the world to write on a common topic once each month.
** In other words, we should be denied variety so Boulevard can maintain the same taps in every bar for its flagship brands lest the entire industry crumble into ruin
*** The other segment (which I conveniently ignore) is the suppliers, particularly hop growers. The farmer who replaced his Willamettes for trendy Citra has a far more vested interest in the IPA craze continuing that the brewer who can switch to the next style trend with tomorrow’s boil. 
**** Which is not to say there are no Montana breweries seeking to become regional players. In fact, there are several beyond the big three of Big Sky, Bayern, and Kettlehouse.