CRAFT BEER MARKETING & DISTRIBUTION - BRACE FOR SKUMEGGEDON

ii – OVERVIEW

Many brewers today are introducing new styles and style off-shoots at a lightning-fast-pace. This over segmentation of the market leads to product cannibalism which is a marketing term referring to manufacturers who produce two (or more) very similar products that meet one consumer need yet require the support of two marketing budgets. It is strongly suggested, therefore, that prior to brewing or distilling a new product some research and rationale are provided to support this expensive introduction even before the R & D phase begins.

Although it may seem like a good thing to do at the time, consideration should be taken into account for buyer response (they will quickly become jaded by the constant flow of me too products if sales teams continue to hound them with products that are not significantly different from the current line up and that are not appropriate to their customer base), wholesaler capacity, incentive support, the sales process required from your team, tap handle cannibalism/trade out and overall marketing resources. From a consumer’s perspective, with each product that you send to the market with marginal differentiation from the others, you risk consumer brand dissociation as the consumer connection gets lost with each ensuing SKU. This book will help you to better understand how to compete at all levels within the beer business as well as improve your wholesaler selection criteria and relationships.

The US Beer Industry is experiencing its greatest renaissance in the history of the business. In fact a January 2014 report by Judy Hong with Goldman Sachs reported the following key trends supporting this resurgence¹.

1-The core beer drinker is coming back.

2-Millenials may return to beer as the beer industry closes the gap with wine and spirits. It seems that the finicky millennial appreciates beer’s variety and expanding flavor styles.

3-Beer’s pricing when compared to wine and spirits is also closing.

4-The alcohol consumer is noticing beer industry innovation, particularly at the high end.

5-US demographics are swinging in favor of beer.

6-2015 volume growth is forecasted at 2% and is expected to continue through 2020².

The Brewer’s Association based in Boulder, Colorado, is a non-profit organization that helps to serve the growth and substantiation of the US craft beer industry. Their purpose statement is, to promote and protect American craft brewers, their beers and the community of brewing enthusiasts. The following data, although it may age after this book’s publication, is provided to share the overriding positive outlook for sustained optimism for the craft industry. I think it safe to say that forecasts like this will be applicable to craft, spirits, and wines as well, as American consumers continue to gravitate to the better consumables available to them. So what is happening in this white hot industry?

Brewer’s Association (BA) economist, Bart Watson, reported in his April, 2015 State of the Industry overview that total beer category dollar sales exceeded $100 billion in 2013 which translates into 196,241,321 barrels of beer (one barrel yields 31 gallons). Further, there were 3,418 breweries in the United States with 2,051 breweries in the planning stages. This total consists of 1,412 brewpubs, 1,871 micros and 135 regional crafts. Only 46 closings! This is the highest number of breweries since the 1880s with 1.7 opening per day³. For historical perspective, there were 2,685 breweries in 1876, 357 in 1952, 229 in 1960, 154 in 1970 and 79 in 1982⁴. California alone has over 430 breweries with more popping up weekly.

Some analysts predict 5,000 breweries will be opened by the end of 2015, representing an all-time United States record. Some reports show that there are over 100 new craft or specialty beer companies entering the market – every month. To say that the industry is robust would be leaving some beer on the table as craft beer volume increased a Godzillian 18% to 22,200,000 barrels for a total beer share of 1.6%⁵.

As a percentage of beer category growth, craft was 6.5% by volume yet 11.9% by dollar share in 2012. At the close of 2013, the BA reported that craft volume share, of all beer, grew to 7.8% and by a whopping 14.3% dollar share to over $14 billion. In 2014, volume grew again to 11% on 19.3% dollar share. This performance is truly impressive within the food and drink industry and is expected to reach as high as 20% by 2020 per the Brewer’s Association⁶.

In Mr. Benj Steinman’s April, 2014 presentation at the Craft Brewer’s Conference in Denver, Colorado, his numbers were even more optimistic as he revealed how the craft beer category has grown 80% from 2008 to 2013 despite the beer industry being down 4% during the same time span - losing share to spirits and wine. Speaking about the On Premise, Mr. Steinman shared that one-third of all dollars spent in this channel were attributed to craft beer purchases. Interestingly, in bars, hotels and restaurants, over 1,000 new craft brands were introduced to the On Premise. The craft category also contributed to increasing patron check averages by 15%. The most robust craft growth On Premise was in fine dining which was up 13%, with bars up 11% and casual up 7%. In 2014, Mr. Steinman forecasts the craft category to maintain double digit growth at 15% as more consumers gravitate to better quality beers⁷.

It is important here to define exactly what is - a craft brewer? The BA has altered this definition slightly in 2015 to the following: An American craft brewer is small, independent and traditional. The Association further defines the craft brewer below⁸.

Small: Annual production of 6 million barrels of beer or less (approximately 3 percent of U.S. annual sales). Beer production is attributed to the rules of alternating proprietorships.

Independent: Less than 25 percent of the craft brewery is owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member that is not itself a craft brewer.

Traditional: A brewer that has a majority of its total beverage alcohol volume in beers whose flavor derives from traditional or innovative brewing ingredients and their fermentation. Flavored malt beverages (FMBs) are not considered beers⁸.

So why the explosion in craft brewing? There are multiple reasons. The most significant is the consumer taste switch from domestic beer to craft and albeit a smaller percentage, to imports. It seems that domestic drinkers are using amber and/or Hefeweizen craft styles as stepping stones into the craft segment then graduating to pale, session able IPAs, IPA, stouts, porters, sours and others. The second major reason is the growth in the 21-34 year old demographic, known as the Millennial. With 57 million Millennial drinkers today, there is much optimism in the industry as this group is expected to expand to 81 million by 2020⁹. This segment is not concerned about brand loyalty. They want the best products and they want them now.

Another long term trend, also enjoyed by the spirits and wine categories is the trade up to higher quality beverages. This drink-less-but-better philosophy began with the baby boomers (78 million in the US) as they realized their days of polishing off a full bottle of spirits or wine or even a couple of six packs were long over. With the country’s highest discretionary income and education levels, the ‘boomers bought into marketing pitches for upscale wine, scotch, tequila, vodka…and most certainly for craft and imported beers. Watch for this trend of buying better but consuming less to continue.

Premiumization – Get a Little Less of the Good Stuff

Paul Gatza agrees with the drink better long term trend stating that he sees, an imminent share shift towards the high end. Moreover, the beverage alcohol high end segment grew 1 share point in 2011 which included crafts and imports. Paul estimates this segment at 12 share points when high end spirits and wine are included which bodes well for super premium craft and import brands¹⁰.

These short and long term trends bode well for brewers, however, there may be some grey clouds in the lager. The issue for so many brewers is; where are they all going to fit? Are there enough distributors to get the beers to market? Is there adequate retail space to properly merchandise all these great brands? Will you settle for the warm shelf? How will your local sports bar make the decision to carry brand X’s IPA on draft vs. brand Y or Z or A or B? Brand and SKU proliferation is not rampant – it will be epidemic. And how will thirsty consumers make their purchase decisions?

Bump Williams, beverage alcohol consultant on the industry stated in a January 2014 state of the industry address, that retailers only want brands that produce (i.e., sell). In fact, many are beginning to evaluate brands by their price per ounce vs. velocity per ounce. After they do this retailers plan to study which beer segments and packages are truly generating the profit and growth needed by the large retail chains.

With over 10,000 beer packages in the United States, a SKU shakeout is inevitable. This will result in big brand package cuts (currently taking up dead real estate) as retailers realize that they do not need to carry a six pack, twelve pack, fifteen pack, 24 ounce single serve, three pack, eighteen pack, thirty-pack and conventional twenty-four pack case all of the same brand. They are also realizing that this brand bias results in out of stocks for more popular craft beers that may have just one slot for either their six packs or 22-24 ounce bomber bottle.

Another interesting point made by Mr. Williams was that retailers are now looking at a new data point, items not handled. This report includes a list of hot items that retailers do not currently carry but realize they need to make space for. This is a list to be on – for the short term. These changes to the retail side of the business are very promising to the craft brewer, especially for the ones that brew popular styles such as IPAs (West Coast and Imperial) and sour Belgian style beers.

So what does the passionate brewer do with his/her prized liquid offspring? They may hire equally talented marketing and sales people to market their beer, merge with other brewers (watch for some big announcements…), consider contract brewing or go bankrupt. With so many great beers looming on the retail horizon each vying for premium yet scarce real estate, door closure for some will be inevitable. There just isn’t space nor are there enough quality distributors to handle this onslaught.

You probably are thinking that your beer is so much better than anyone else’s and that you won’t have this dilemma. Don’t let your ego blind you. The key to success is investment. You will need a solid marketing manager or consultant, feet on the street and a comprehensive marketing strategy supported by committed distributor partners. You will also need to out market the others. This book will help show you why you must do this.

If you believe that the beer industry will go through a shakeout due to over segmentation resulting in too many brands competing for single privations, then you should buy this book. A shakeout or shake up seems imminent despite the increasing quality level of brews available to American consumers. That may be unfortunate for those who have space. However, retailers just won’t be able to stomach product cannibalism as their category managers will be hard at work divvying out space to only the strongest and best marketed brands.

If you do not understand these terms or what marketing really is, then you should buy this book. If you are a craft, import or domestic brewer, either a veteran or newbie, then you should buy this book. If you are affiliated with the spirits or wine business, then you should buy this book as it will provide you with ideas on how to market your brands as well as how to better manage the shrinking distributor/wholesaler pool.

A trend for you to monitor is beer distributors stepping into wine and/or expanding their licenses to distribute spirits. Why are they doing this? Because the few, large spirits and wine wholesalers do not share love with small to medium-sized brands. Will the huge wine distributors be able to warehouse and sell the growing draft bourbon and wine brands? I doubt it. Do they have the personnel to do this? And these niche, high-end categories are precisely where the millennial likes to play, and ‘boomers like to discover.

If you are a graduating senior who abhors the high tech sector as much as I do and you are considering joining the beverage industry then you, too, should buy this book. If you are a marketing professor who wants to add some extra credit reading to his/her class on an old school subject, then you should recommend this book to your university. If you are in the non-alcoholic beverage business then this book is for you too as it serves as a catalyst for ideas that you can combine with your own for some highly creative marketing execution. It will also teach you a great deal about US beverage distribution. If you are an MBA with marketing responsibility and little time for creativity but an interest in ascending the ladder, then this book is also for you. Lastly, if you are a European or International agency looking to learn more about how the US market works on behalf of your exporters, then this would be a valuable book to disseminate prior to the execution of their export program, joint venture or market visit. Herbologists? You can learn a great deal about how to market your adult-herbs as well. So please read on.

DSD Definition

Before we get into the hops of this book, let us first be sure that we understand how most alcoholic and many non alcoholic beverages get to their final On and Off Premise locations. On Premise is hereby defined as bars, nightclubs, restaurants, hotels/motels, lounges, bowling alleys, golf courses, delis and sporting venues. This is where beverage alcohol can be consumed at the point of purchase in either draft or packaged (bottle or can) formats. Off Premise, referred to as the General Market, Independents or Up and Down the Street class of trade includes corner markets, supermarkets, wholesale clubs, convenience stores (referred to as C-Stores), gas stations, drug chains, liquor stores and chain grocery stores.

The term DSD stands for Direct Store Delivery. This form of distribution requires a wholesaler/distributor (these terms are used interchangeably throughout the book) to physically receive beer or alcohol from the supplier (brewer, vineyard, distillery, etc.). The distributor warehouses the product and then physically takes it to the final selling location such as an Off Premise retailer or an On Premise bar/nightclub/hotel/restaurant – provided they possess the necessary license to resell the beverages. This three-way process is known as the Three Tier Law.

Three Tier Law - Defined

In 1919 the US Congress passed the 18th Amendment totally outlawing the manufacture, distribution and sales of alcoholic beverages. This dark period in our history quickly became known as the Prohibition Era which stimulated illegal alcohol sales spawning the emergence of moonshine runners that replaced the services offered by wholesalers. However, in 1932, Franklin Delano Roosevelt entered the Presidential race as a Democrat. His claim (or KDA) to the Presidency was the end of Prohibition and the return to wet traditions. After his election, the 21st Amendment was passed (party time!) by Congress in fewer than one hundred days, bringing an end to Prohibition. The newly ratified amendment returned to the states the power over the sale and distribution of beer, wine and spirits. This resulted in Federal and State tax levies as well as eradication of the tied house (see Federal Alcohol Act – 1933) which forbade anti-competitive arrangements within the Nation’s three-tier system. (Source: Wikipedia).

Two models emerged from the 21st Amendment as states were allowed to creatively interpret the Amendment. Thirty-two states (including California) opted to permit the private sector to distribute and sell alcoholic beverages (including DSD). The remaining eighteen decided to adopt a control model whereby the state is involved in one or more tiers of the three-tier system. The following graphic depicts the traditional 3-tier system as practiced for over 70 years by the 32 US states¹¹.

(Illustrations taken from Clip Art files, black and white photo taken from Google Images public library).

The three-tier law benefits states and consumers in many ways. It essentially establishes a series of checks and balances requiring specific tiers to be held accountable for valuable aspects of the process. Here are a few benefits of the law:

1-Minors do not have access to alcohol.

2-Taxes are collected and remitted to state and local governments.

3-Quality control is ensured for those 21 and over.

4-A level playing field is created between small and large retailers thus promoting competitive market health.

5-It establishes a clear chain of accountability.

Craft Brewer Categories

I see the craft beer business as comprised of six categories.

Mini Micro – Just graduated from home brewing and actively selling via self-distribution. Typical barrelage will not exceed 100 per year. A barrel is defined as 31 US gallons.

Nano Micro – Still self-distributing but adding some smaller distributors along the way. Barrelage loosely defined as 101-2,500 barrels per year.

Local Craft – Getting traction with some local distributors (you sold the self-distribution truck). This could also include brew pubs/restaurants that sell to the public and to nearby distributors. Defined as a Local Craft brewer that produces between 2,501- 15,000 barrels annually.

Regional Craft – Brew 15,001 – 200,000 barrels and distributes brand(s) throughout a number of regional states. The brand(s), however, do not have national distribution.

National Craft – Full-fledged brewery/ies with the majority of US metro markets covered via DSD distribution. Barrelage is defined as producing between 200,001 - 6,000,000 barrels annually.

Multi National Factory Brewer – International brewer that leverages/exploits this efficiency. Often dominates all preceding categories by sheer size. Barrelage requirement exceeds 6,000,001 barrels annually. Company is also publicly traded on globally recognized stock exchanges.

I – Marketing, Why Bother?

I recall a lively conversation with a petroleum engineer working for one of the largest gasoline refiners in the world. She stated that marketing simply adds to the cost of her fuels which results in higher prices to the end consumer. She firmly believed that by eliminating expensive marketing personnel that she could help make the company more profitable while reducing the price per gallon to the consumer, ultimately improving the brand’s competitiveness in the marketplace. I asked her where I could buy her company’s fuel. She gave me quite a look as the fuels were available at most major intersections throughout the country. I then asked how the final price per gallon was determined (with its resultant effect on the brand) and how do consumers know about the new SU2000 Super Unleaded fuel that she was responsible for introducing throughout the country? She smirked and said to go to my local gas station to get a fill up and learn about the new SU2000 by picking up a brochure at the station or by watching a TV ad during a NASCAR race (which featured their sponsored car) or to ask the gas station owner about pricing.

I explained that marketing is responsible for how the fuel gets to the station, where the stations are located, the station design and layout,