As of April 2015, the Brewers Association reports that there are roughly 34.6 million barrels of craft brewer capacity. Additionally, craft brewery production is now greater than the total capacity of craft breweries in 2012. Either way you slice it, the craft beer industry is making (and has the ability to make) more beer than ever before. These growth trends are creating more brewers, more breweries and more beer – requiring more supplier and equipment to keep up with them demand.
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We recently spoke with Ron Lindenbusch, head of sales and marketing at Lagunitas, and Greg Shuff, owner of Dryhop Brewers about the competitive landscape of craft beer, the pros and cons of large distribution models vs. brewpubs, and how your relationships with suppliers can make or break your brewery.
Competitive Landscape of Craft Beer
The top 20 craft breweries make about 80% of all craft beer. With almost 3,000 craft breweries in the country and a lot more in the planning stages, there are a lot of breweries making only a little bit of beer. Even if a craft brewery isn’t a major producer, they can still be very profitable at their own tasting room or across their own bar.
Not only can a brewpub be an incredibly profitable addition to an up-and-coming brewery, it also creates brand loyalty that increases a brewery’s ability to build a following in their geographic area. Every successful craft brewery has established a strong local presence first, which has helped propel brands like Dogfish Head, Bell’s and Deschutes to the national spotlight. Building up demand for your beer will increase the velocity of your brand, making it more valuable in the eyes of distributors.
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And the way Ron Lindenbusch, head of sales and marketing for Lagunitas, sees it, it also creates an opportunity for craft breweries to lure drinkers away from Blue Moon, Shock Top and other beers produced by the larger breweries.
“The cool thing about that is they’ll [new craft breweries] create excitement for the category. They’ll bring new consumers away from Bud, Miller, Coors, Heineken, Corona and all the lager beers that everyone was forced to drink for all those years,” laughs Ron. “There’s a lot of excitement about the category now, a lot of buzz, and a lot of that is being created by all these smaller players that are just getting started.”
Craft beer is a category within a category; there’s budget beer, premium beer and super premium beer, where craft beer falls. Corona, Heineken, and any other beer that sells for between $8-$10 a six-pack also belong to the super premium category. So up-and-coming craft breweries not only have to compete with larger, regional craft breweries, but major players like Anheuser-Busch InBev, MillerCoors and more. It’s crucial to think about how your pricing, quality and branding stacks up to those breweries in addition to the craft beer competitors.
"Anything out there that's in that higher priced range we compete with for the consumer dollar. They've already decided to spend more money, so [it's about] if we can get them to shift over," explains Ron.
Distribution Breweries vs. In-House Brewpubs: Which Model is RIght for You?
Both are viable options, so it really depends on the end goal of your business. Greg Shuff, owner of Chicago’s DryHop brewpub, is obviously very biased to the brewpub model.
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For example, many small breweries start out by producing bombers, 22 ounce bottles which are both the most profitable from a brewery standpoint and the most expensive from a consumer standpoint. But since so many players in the craft beer space are following this model it means that retail shelves are full of these bottles. What makes one stand out from the other? That’s a real challenge.
“To a large degree, the brewing business is the marketing business,” says Greg. “We’ve been able to make beer for thousands of years – you’re not inventing anything particularly noteworthy. For the most part, you’re building a brand.”
Another challenge for breweries is that a lot of them are just getting bigger. As a local brewery, you’re not only competing with breweries in your local area but also competing with breweries from all across the country. Production distribution breweries have gotten so large that they’ve created increased competition and challenges.
Despite the increased competition and challenges, Greg feels that there is still plenty of opportunities in retail, even if it’s your own tap room at your brewery, and across your own bar in a brewpub setting.
“All the bars in the world are switching over to carrying at least some craft [beer],” states Greg. “But there’s not a lot of really great craft beer spots. But there’s plenty of opportunity to make a relevant spot to what’s going on – I think there’s a lot of opportunity there.”
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"I always try and tell people that are thinking about starting up, if you do nothing else, you have to have a retail presence," Greg continues. "It can be as simple as you open your garage door and you have a picnic table there and you can sell someone a growler when they walk in the door, but you have to have that."
Know Where Your Next Hops Are Coming From
Another key to success for Lagunitas ties directly into the relationships they built with suppliers. Their foresight allowed them to gain access to the hops needed for their most popular beer, the flagship IPA, while forging mutually beneficial relationships with the farmers who produce the hops.
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John Seegal, whose family developed the cascade hops used in the IPA, became a key partner for Lagunitas. Back in 1995, when the IPA debuted, the market for hops was not nearly as large as it is today. Nailing down supplier relationships earlier, particularly for raw materials that are in limited supply, allowed Lagunitas to get a jump on the game.
“The smaller breweries that are getting started really need to look a few years down the road at their raw materials, especially hops,” Ron explains. “Breweries like us have contracted out for years to make sure we can get the supply, so other breweries will go to order mosaic [a type of hops] and there just aren’t any to be had. Looking down the road and forging some relationships with suppliers of hops and malt is going to be important.”
Greg agrees, stating that brewers starting out need to think really critically about what makes their beer significant. Because many of the hops used in speciality IPAs are really scarce and hard to get, are brewers thinking about the fact that they need to buy hops in the futures markets.
“I buy hops four years out,” shares Greg. “Most people aren’t doing that, so they’re making an IPA with basic hops and saying their product is better. Why would I prefer that [IPA]?”
Furthermore, the relationships Lagunitas has with suppliers gives them the confidence to experiment with new hop varieties while giving Lagunitas exclusive access to the best materials available.
“We forged relationships with them because we’re guaranteeing that we’ll keep them viable and sustainable. If they experiment with a new hop variety and they decide it’s not a magical hop, we’ll buy it all and make extract for our Hop Stupid,” Ron says. “If they do hit a homerun and we financed it for them, then we get it all for a few years.”
