The Craft Beer Market Saturation Argument

Jake Wrote:

I think the notion of saturation in the current craft beer market is bullshit. There, now that we have that out of the way, let me explain.

The topic of saturation is at the forefront of a number of conversations right now. On an almost daily basis, I see a quote from an owner of a large, established brewery talking about how we are on our way to a repeat of the late '90s bubble or, as one Indianapolis Star article so eloquently put it, "There's an option for craft beer on every corner." Hell, even Darren Rovell tweeted about it the other day. By the way Darren, please stick to sports.

It would be foolish of me to dispute that some areas of the market are nearing a saturation point, but, this view that craft beer is like a snake that tried to swallow a deer and is about to explode seems misguided. The argument breaks down into two categories: The crazy growth the craft beer segment is experiencing and that the vast majority of new breweries are making the same styles of beer.

The growth in the number of breweries, the volume, and the dollars is undeniable. As a refresher, in 2011 the craft beer segment grew 13% in volume and 15% in dollars from 2010. In 2012, the growth was 15% in volume and 17% in dollars for the year. The first two quarters of 2013 are keeping pace with those numbers as well. However, the liquor stores, distribution warehouse space, and tap lines that get beer to our drinking lips are not being added at anywhere near that pace. The pinch point of getting beer into the market is where I see the first part of the saturation discussion starting. Additionally, there are now the most breweries in the United States than ever before in history according to the Brewer's Association (2,538 in 2012). The 2,538 is often compared to pre-prohibition numbers of 2,011 in 1887 and 1,179 in 1919 (the year prohibition was enacted).

The second part of the discussion is rooted in the large amount of breweries making roughly the same beer; namely Blonde, Porter, and IPA. I have a theory that as people explore craft beer, brand loyalty falls. Think about it. As you and your friends try different styles, you are looking for a style and a price point that you can support within that style. Eventually, you find a few breweries that you like and then the brand loyalty builds to a point where you are buying different styles from the same brewery because you trust them with your dollar. Once you get there, then you still try the Blonde/Porter/IPA from a new brewery, but you're a little jaded and not as willing to tolerate what you once were. At least that is what my experience has been.

So, there is the construct that I see for the saturation argument. The market doesn't have capacity to get beer from brewery to the drinker and there are already 50 well made beers in the style that consumers may not be interested in number 51. As John Laffler told the Chicago Tribune when he was opening Off Color: "If you go into Binny's, there are 50 well-made IPAs. Why the hell would you throw your hat in that ring?"

But, I think there are some holes in the assertion that we are in a saturated market. First, the population in the last 100 years has obviously grown. In 1919, there were an estimated 105 Million people in the US. Math says that is 1 brewery per ~89,000 people. As I am writing this in 2013, the estimate is 316 Million people and ~124,000 people per 1 craft brewery in the US. I read a great statistic a few months ago that there are 10,000 people turning 21 every day in the US. If beer accounts for 49% of overall alcohol sales, I can deduce that 4,900 of those newly minted legal purchasers will buy beer. Craft beer accounts for 10% of dollars spent on beer, so 490 of those people will spend money on craft beer. So, 3,430 new purchasers of craft beer enter the market every week. If you're a math nerd like I am, Indiana is 2% of the population or 69 new 21 year olds every week. Anyway, the people, and their money, are in the market.

Now, the tough discussion. As I mentioned above, there is no doubt that it is a crowded market. My chief concern for those 1,600+ breweries in planning is how they will differentiate themselves from the existing 2,538. It feels like we hear of a new brewery opening in Indiana on a weekly basis. Invariably, they list a core set of beers that are a Blonde, a Porter, an IPA, and a fourth beer. Some will choose to differentiate by location and others will choose recipe additions. Either way, I hope it works.

As with any industry, there are going to be places that never should have opened. A wise man once said, "Just because you can open a brewery, doesn't mean you should." My point is that I do not think those closings are because of a saturated market, I think they will be because of an inferior product or location and people choosing to spend their dollars with a trusted brand that is already established.