Author: Thad Fisco

“If we can get 1 million new craft beer drinkers to drink 1 pint a week, that’s 200,000 incremental barrels. 5 million new drinkers is 1 million bbls. 
For there to be enough new growth for everyone in this room to succeed, we’re going to have to widen our view and not think about the 13%, but the other 87% that’s out there to capture.”

Bart Watson
Brewers Association’s Chief Economist
2019 CBC State of the Industry Address

Given the hammering that the guys from Crafting A Strategy (CAS) and I took over the last two weeks, this feels pretty damned good. The BA now recognizes that there are A LOT of people to win over to craft. That’s a major victory and a sea change from where things stood when we spoke with the BA execs in the bar I mentioned in my previous blog post. 

Even better: what just happened is progress.

Now the hard work starts.  We need to be realistic about what craft beer is, and what percent of the market is drinking it today.  Then figure out how to work together, all of the stakeholders combined, in order to right the ship, end the negative rhetoric, and work for success.  Define success as you see fit, but it’s not Facebook likes, as one critic has suggested.  Facebook likes don’t pay payrolls or clear loan covenants.

We are willing to stake our reputations
and take an incredible amount of heat
to move this conversation forward.

Why is this so important?

Short answer:

1. The negative rhetoric is damaging this lovely business, and exposing us to challenges that should not exist
2. There is another set of very real, and largely ignored numbers that can help us change course and move forward
3. We are casting a shadow of our own making over ourselves by excluding other contributors to our sector’s health (I’ve already been yelled at about it, save your breath)
4. There are very legitimate challenges ahead that are going to require industry wide cooperation.

Long Answer:

What matters is the well-being of our breweries, taprooms, and other craft beer businesses, which we love, and which provide good jobs, benefits, and growth opportunities for thousands of people.  While we pour our heart and souls into them, great beer flows out. We, BA included, have changed the world of beer forever. In that spirit, the BA has been a major contributor to the success, and has enormous potential to help the craft beer industry moving forward.  But there are still issues. The biggest is the BA’s definitions and misleading statistics which undermine us in ways that are being ignored in the current conversation.

I understand that big breweries are responsible for some very shitty practices. But not all are equally culpable.  We need to be wary of bad actors and take them to task as necessary. Somehow, we also need to find common ground, or the one thing we will have in common is bad news.

Remember, we are not alone in making our success.  Forces outside of our business are partnered with us, and they will listen to our negative rhetoric and react accordingly.  Landlords will be less inclined to lease to breweries and may move to more enticing tenants like marijuana businesses.  Banks will tighten lending standards and pile covenants on loans with higher interest rates.  New entries in the form of talented, innovative, and energized entrepreneurs will move away from beer.  Why would we needlessly inflict this on ourselves?

It’s not 2015; times have changed.  The problems on the horizon are shrinking market share from wine, weed, and spirits, and the lack of a unified, strategic plan to deal with challenges that are only now becoming known.  What happens when weed is legal in 30 or 40 states, and an edible replaces a few beers? Let that thought sink in.

There is no doubt a lot of good ideas are yet to be conceived around our challenges.  They will find an audience when we begin to work together as an industry, not before.

On a personal note, I am sorry about pissing people off.   This conversation is about a collective problem, not an individual or company.  I say that, despite the nasty emails and comments I/we have received from people who clearly feel otherwise.

It’s been pointed out repeatedly that we are being dispassionate about a very passionate business.  I am not dispassionate, and we are not dispassionate.  Quite the opposite.  I am passionate enough to lose clients and suffer verbal abuse.    We are willing to stake our reputations and take an incredible amount of heat to move this conversation forward.  The entire point is to bring about progress and grow the craft beer market share.

This is by far the best industry I’ve ever been a part of.  I will spend the remainder of my working life dedicated to making it better by helping independent breweries and small businesses succeed in the face of endless challenges.  It is extremely important, as we tackle those challenges and face down failure, that we recognize and celebrate our wins, both big and small.  While the BA may never admit it, Mr. Watson’s words above are a big win…for everyone.

Portland Kettle Works is proudly independent, as is our brewery and taproom: The LABrewatory, and we support all other independents in the craft beer industry.

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Portland Kettle Works was founded in 2011 in Portland, Oregon USA. We build high-quality stainless steel beverage and brewing equipment. We have built and installed over 375 state-of-the-art craft breweries worldwide. As a result, our craft brewing clients are among the best of the best. They regularly win beer tasting competitions and they have the gold, silver and bronze medals to prove it. We’ve expanded into winemaking so, if you’re serious about winemaking, contact us so we can help you, too. And, if you’re located in Mexico or Latin America, click here to visit our Spanish language site.

There is a Serious Problem with the BA’s Definition of “Craft Beer”

Late last year my team and I had a chance meeting with two Brewers Association (BA) executives in a brewery.  This is not the start of a bad joke — it is how I learned about a serious problem with the BA and the huge opportunity I see in the craft beer industry.

After a couple of beers and some serious conversation we understood that the BA is not focused on the +80% of beer drinkers that don’t drink craft beer, and that protecting craft beer’s 12.7% of independent market share from AB-InBev is their primary goal.  According to these BA folks, Anheuser-Busch is absolutely determined to put independent craft breweries out of business.

We believe this vision is flawed and out of sync with reality. It is based in empty rhetoric and fear that harms rather than helps independent craft breweries and keeps good ideas from finding the light of day. Below we describe why this is true, and we start by getting quite blunt about what craft beer is and who is making it.

What is craft beer?  We all know it’s not fizzy, yellow water.  Instead, it’s the “Premium Beer” that we all love as beer drinkers, regardless of who makes it. A “craft brewer” is someone or some firm that is engaged in producing it. This is not the BA’s “definition” which seems to change subject to political or economic necessity. Our inclusive definition of craft beer provides a view of the industry landscape from a broad and open perspective, and here is what we see:

Anheuser-Busch, Heineken, Constellation Brands, MillerCoors, Mahou San Miguel, Kirin, Asahi and the other big players are fully invested and very engaged in the business of craft beer.  Collectively they have likely invested over $2 billion into the business of premium beer. That investment will continue. They are also in competition with the mounting number of worldwide independent craft breweries, and they are strong competitors in a space that they have traditionally owned.  The competition is healthy and helps to drive innovation and quality throughout the industry.

AB InBev and the other large
breweries that have invested in
premium beer offerings are
helping raise all boats

The evidence shows that the big brewers are not out to destroy craft beer, craft beer drinkers, or craft breweries.  Last year Anheuser-Busch became the nation’s largest dollar volume craft beer producer surpassing both Boston Beer and Sierra Nevada in craft-derived revenue.  

The systematic plan that Anheuser-Busch has implemented in buying independent craft breweries between 2011 and 2017 is likely over.  Adding to their portfolio through the acquisition of SABMiller makes Anheuser-Busch the undisputed king of craft. Yet the craft beer community is needlessly being led into battle against AB InBev who is actually helping the industry make headway toward what we need most: growing the premium craft beer market share. Should we follow the BA, engaged in industry in-fighting and craft maxing out at 18-20% market share, or should we instead push craft forward toward 50% market share of the beer market?

Portland Kettle Works isn’t the only company that thinks the Brewers Association has painted themselves into a corner. The members of Crafting A Strategy (CAS), a global online community of beer business entrepreneurs of which PKW is a member, recently spoke out against how the ever changing and narrow definition of “craft” from the Brewers Association is misleading and potentially dangerous. In an October 2018 blog, CAS President Sam Holloway and V.P. Mark Meckler noted that AB InBev, Heineken, and Mahou San Miguel were using their vast resources and marketing expertise to convert the 85% of non-craft drinkers in the USA into craft drinkers. These breweries are working hard to bring in more craft beer drinkers, but their contributions to the overall premium craft beer market share are not counted in the BA definition. CAS suggests that we are closer to a 20% craft market share and this is a tipping point where we can quickly accelerate market share toward as much as 50% by 2025. CAS’s logic, borrowed from innovation diffusion logics, is depicted in the figure below. Whereas the BA’s definition of craft suggests we are maxed out, CAS and PKW believe we are on the cusp of widespread market growth if we are wise enough to keep our eyes, and our strategy, looking forward.

Growth in business is a measure of success.   Stagnation and shrinking market share eventually lead to failure.  If craft beer does not grow as a market segment we, meaning craft brewers including AB InBev, put ourselves under siege as we fight over a non-growing business with increasing competition. It is therefore incredibly dangerous to narrowly under-define the craft beer sector.   The stakes are high. While the BA is engaged in protectionism, AB InBev is experimenting and redefining the market in an effort to remove barriers to entry for the 80% of non-craft beer drinkers.  Independent brewers have a lot to learn from their efforts to grow demand in an increasingly competitive business.

Using BA statistics, 3,743 new breweries opened between 2014 and 2017 which translates to a 116% growth rate.  During that same period, market share for craft beer, as defined by the BA, grew just 4.9%.  This is equivalent to 30% growth per year in brewery openings against 1.3% growth in market share.  This is a serious problem, but only because of definitions inadvertently designed to depress the business of craft beer.

…equivalent to 30% growth
per year in brewery openings
against 1.3% growth in
market share.
This is a serious problem…

Portland Kettle Works makes continuous efforts to define trends that affect our business. While the most recent annual numbers are just now becoming available, they are almost certainly supporting recent historic trends. Here are some recent findings:

• Using publicly available records from the BA, we estimate that from 2014 to 2017 approximately 1.5 million barrels of craft beer were removed from the craft market sector as big breweries bought small breweries
• At the end of 2017 the breweries previously defined as “craft” controlled roughly 4.9% of the overall market share
• When this 4.9% is added to 12.7% “craft” beer share, the more widely defined craft/premium sector becomes 17.6% of the overall market
• AB InBev and the other large breweries that have invested in premium beer offerings are helping raise all boats

It would not be at all surprising to find that craft beer, as defined in this article, is now in 2019 controlling over 25 and possibly as much as 30% of market share. This number feels better.  However, it needs to continue growing.

At a recent brainstorming session, our team along with Crafting A Strategy examined what success should look like in the future.  Framed in terms of market share, we decided that 50% for craft/premium is a worthy goal. In this moment, the Brewers Association has chosen to lead us into a battle, armed with a well intentioned campaign of “independence”.  We absolutely stand with the BA’s effort to promote the importance of American entrepreneurial innovation, grit, and an undying determination to succeed. Given time and enough money, the independence campaign may well move the needle a bit as a small minority of the public that cares to identify and buy our beers over those of large breweries becomes educated.  However, in our opinion, this is a misuse of BA resources. This effort will not grow the craft/premium market share one bit. We will remain besieged. Growing craft market share should be our collective and undisputed priority.

About 196 million barrels of beer were produced in the US in 2017.  According to the BA definition and statistics, craft beer accounted for about 25 million barrels of that production (12.7%).  Adding the premium sector increases that craft/premium piece of pie to 34.5 million barrels in 2017 (17.6%). This means, at 49 million barrels, craft/premium owns 25%, and at 98 million barrels, it is half of the market.   How can that not be good for independent craft brewers, even if Anheuser-Busch and other big breweries help to get us there?

This is a future that we can look forward to.  A robust environment with a huge, inclusive base of enthusiasts, willing and eager to enjoy high quality, flavorful beers from thousands of innovative independent breweries across the US and, if trends continue, tens of thousands worldwide.  A lot of collaborative and rewarding work lies ahead. Rewarding work beats the blues any day.

Cheers,
Thad Fisco
Owner & Founder
Portland Kettle Works (PKW)

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Portland Kettle Works was founded in 2011 in Portland, Oregon USA. We build high-quality stainless steel beverage and brewing equipment. We have built and installed over 375 state-of-the-art craft breweries worldwide. As a result, our craft brewing clients are among the best of the best. They regularly win beer tasting competitions and they have the gold, silver and bronze medals to prove it. We’ve expanded into winemaking so, if you’re serious about winemaking, contact us so we can help you, too. And, if you’re located in Mexico or Latin America, click here to visit our Spanish language site.

Fact:  Purchasing Quality, New or Expansion Brewery Equipment Pays

Portland Kettle Works designs and manufactures some of the best beer and kombucha brewing equipment to be found anywhere, and we strive to make financing and investing in our brewery equipment as easy and seamless as possible.

PKW Goal:  Critical, Hassle-Free Brewery Financing

In some cases, the approval process can take as little as 24 hours. Both brewery startups and established breweries are taking advantage of our brewery financing options.

PKW Services: We Can Help You Start Your Brewery

1. We design the brewery system to your needs
2. We manufacturer it specifically for you
3. We arrange your financing for the brewing equipment
4. And, we’ll buy it back when you’re ready to expand

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We have over a 97% success rate starting more than 300 breweries.

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Buying Brewing Equipment Isn’t Supposed to be Like a Bad Trip to Vegas, Where You Lose Money and Wake Up with a Very Bad Hangover…

Why then are brewery buyers gambling with their brewery equipment purchases? Brewery equipment buyers need to sober up and begin asking for guarantees, statements of fitness, letters of credit, and question why an initial 50% (or greater) deposit is required for equipment that will not be received for 6 to 12 months.

In the last three years Metalcraft, Systech, Global Manufacturing, Accent Stainless Steel, DME, and NSI (Newlands) have gone out of business, and JVNW was taken over by ICC to ensure that its doors remained open.  For the last 24-months, Portland Kettle Works has been advising brewery clients to avoid unnecessary risk when buying a brewhouse or other brewery equipment. It’s unfortunate that 120 DME and NSI clients didn’t get that message.

PKW’s first response upon the announcement of DME and NSI entering receivership.

As a buyer, it is time to research your vendors’ credit positions and supply chain.

Take the following steps to protect yourself; before signing a contract or depositing funds towards the purchase of any brewing equipment, demand the following:

• Banking Reference – The best way to do this is to ask your bank to verify the quality of your perspective vendors’ relationship with their primary bank
• Landlord Reference – Ask if the landlord can provide a positive credit reference for your vendor
• Primary and Secondary Stainless Steel References – Ask for two primary stainless suppliers’ credit contacts and verify that payments are made on time according to payment terms
• Heat Exchanger Supplier Reference– Ask for the heat exchanger suppliers credit contact and verify that payments are made on time according to payment terms
• References from Other Suppliers – Ask if materials are paid on time according to payment terms
• Certificate of Origin– Verify the country of origin with a legally binding certificate provided by the vendor
• Tour of the Manufacturing Facility – Get a feel for the quality of the business and relationship you are about to enter.

If you do not like the answers, either find another vendor you can partner with in a long term, trusting relationship, or demand a letter of credit drawn on a U.S. bank.  This is your insurance that you receive your brewery or you get your money back:  No trip to Vegas, no lost money, no hangover.

Why you need to be extra diligent…

A contract with a financially unstable company could cause your own demise.  Since 2017, in response to only 0.5% of Portland Kettle Works clients requesting credit references, we began providing dated letters of reference from our vendors and banks, as well as statements of fitness for our company with every quote. You, the buyer, must proactively verify the credit worthiness of perspective vendors.  

DME and NSI, two prestigious Canadian manufacturers, will now lay waste to tens of millions of investors’, brewers’, and vendors’ money.  In many cases, the unraveling of these firms feels like quasi-Ponzi schemes as manufacturers use today’s deposits to fund backorders.  How many times must this happen before the industry addresses these risks?

How did this come about?

Between 2014 and 2017, nearly 4000 new breweries opened in the US, the world’s largest craft beer marketplace. During this boom, many manufacturers took on massive debt loads in order to ramp up capacity in an effort to meet growing demand.  Today’s slowing sales and increased competition are making servicing that debt impossible, leading to predictable results.  Unfortunately, the risk is not diminished by the DME and NSI incident.  It highlights an ongoing problem that is both global in nature and potentially accelerating.

Both domestic and international vendors are at risk.

Overcapacity, rapidly increasing shipping costs, government shutdowns, tariffs, and the slowdown in US craft brewery growth will lead to more DME/NSI-style failures of domestic and Chinese manufacturers.  Consider that a typical Chinese brewery system navigates a cloaked and hidden factory, international shipper, international freight forwarder, land-based international transport, US broker, land-based domestic transport, and, potentially, an overseas broker in China! A break in any one of these links presents an opportunity for catastrophic failure and a complete loss of unsecured deposits.  The wise buyer will protect their investment from inherent risks associated with international transactions by demanding a letter of credit, drawn on a US bank.

Unfortunately, the risk is not diminished by the DME/NSI incident.  It highlights an ongoing problem that is both global in nature, and potentially accelerating.

Chinese vendors are likely in a more perilous position than many North American manufacturers. Many suppliers conceal their association with Chinese manufacturers behind German or American sounding names and marketing slogans.  It is critical to find out where your equipment is manufactured.   Again, if you are working with overseas supply chains, mitigate your risk:  demand a letter of credit drawn on a US bank.

Best of luck, and please feel free to contact me personally for any reason.

Thad Fisco, Owner, Portland Kettle Works

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