Is the Craft Beer Rocket Ride Fizzling Out?

Craft beer is still growing as a segment of the total beer industry. Like wineries, there is a craft beer brewery in all 50 states. Craft brewing, as a category in the alcohol beverages industry, has only been around for approximately four decades; however, there is no specific event to delineate an official genesis of the industry. In 1859 the Anchor Brewing Company in San Francisco started brewing operations. Unfortunately, until 1965 the company had a sordid history of financial failures in making fine beer. However, since 1965 it has a stellar record of success and is now recognized as America’s first craft beer brewer.Despite the growth in breweries, the craft beer industry is experiencing significant issues. For example: constantly changing consumer trends; rapid industry expansion; growth in product offerings (this includes new products such as hard cider); distribution restrictions; response to market trends; and, imports. However, in December the new tax law took effect and should free up capital to fund expansion and marketing programs without incurring debt. “CMBTRA (Craft Beverage Modernization and Tax Reform Act-2017) as part of the new tax bill is cutting the excise tax bill in half for the nations small brewers,” reports Bart Watson-Chief Economist for the Brewers Association. That’s a decent chunk of capital for reinvestment. “There are benefits for wine/spirits producers as well.”Per capita beer consumption in the U.S. has been flat for about a decade. However, and this is a major point, “craft beer” appears to be up approximately 5% in 2017. The major concern in the “here-and-now” is the loss in shipments that occurred in 2017 for the industry in total. Beer Institute economist Michael Uhrich notes, “the 2.2 percent decline in shipments (through November 2017) is the largest percentage decrease in annual domestic beer shipment volume since 1954.” This begs the question: Does this signal changes in the industry? Beer sales are reported by barrels shipped; the 2017 numbers indicate 3.8 million fewer barrels shipped. In 2017 U.S. brewers produced 170 million barrels; each barrel representing 248 glasses of beer. A barrel of beer is 30 gallons versus wine’s 60 gallons barrels. As an aside, the craft spirits industry realized a 4% increase and wine is expecting to report a 2% increase in production.Mr. Bart Watson, attributes the decrease in domestic shipments in 2017 to consumers trading their domestic lager and light lager domestic brand preferences for imported brands. Further, issues with marketing/branding, distribution, demographics shifts, etc. are impacting the industry also. “I would expect this trend to continue for the medium term,” Watson writes. “In addition, wine and spirits growth in market penetration are two other reasons.” Craft brewers are leading the way in addressing new niches such as in style and marketing.

U.S. households who consume wine, beer and spirits (26 percent of households and 55 percent of sales dollars for adult beverage) now outnumber those that consume only one or two of those, according to Nielsen Homescan figures. A Harris Poll conducted Jan. 16-18, 2017 found that 39 percent reach for beer first, while 29 percent go for wine, 27 for spirits and 4 percent for hard cider. That’s up for wine from 21 percent who said it was their choice a decade ago but down for beer from 45 percent and for spirits from 32 percent. This reflects a shift toward wine as the millennials get older.Younger consumers aren’t drinking wine as often as older consumers, according to Nielsen Scarborough and Wine Market Council.It is important to realize the craft beer industry is producing more than 400 styles of beer; many are targeted at regional drinker preferences. A craft beer consumer demographic is:· 44% have a Household income of $100,000+ (90% of the Household comprise 2 or more persons)· 80% of craft beer drinkers are white· 57% of market is male ages 25-54· 22% of the market is female ages 25-54· 50% have college and post graduate degrees· 81% have some college, college degrees or graduate degrees· 55% of the craft beer markets are West Coast and AtlanticOne of many things that have fostered growth and interest in craft beer is the hobby of home brewing. My first experience in home brewing was in 1976 when I had my first taste of home brewed beer-it was exciting. Even in wine, there is a cottage industry of people who produce some of their own wines. This includes people who buy vines and have their own mini-vineyard.Simply, beer and wine have had the benefit of being able to be nurtured as a small batch hobby. This has allowed people to experiment with new beverage products. It is interesting to note that Fritz Maytag, who saved Anchor Brewing from one more bankruptcy in 1965, has also entered the craft distilling arena in 1993 with Anchor Distillery. Anchor Distillery is now recognized as the first craft distillery in America.Craft distilling will not be a threat to brewers initiated by hobby distillers! Corie Brown writing for “Entrepreneur Magazine” makes an important point: “Distilling at home stills remain illegal, a law that appears to be carved in stone as much because of the fear of exploding stills and accidental poisonings as an aversion to “demon” spirits. So, the movement has grown far more slowly. There are no firm numbers on the size or value of the craft spirits sector.”As of 2017, there were 8,800 (licensed) breweries in the U.S.; 1,100 being in California: many are not fully operational however. A more realistic number is closer to 6,100 active. On average there are approximately 150 craft beer brewers that close the doors. (That is a percentage failure rate below that of restaurants.) Of all breweries approximately 2,000 are considered brewpubs. Still, craft beer breweries do not numerically compare to the nearly 10,000 wineries in the U.S. But the one thing beer and wine have in common; California represents approximately 50% of the beer and wine companies.What are the attributes of beer that is driving the craft brewing industry?· Beer is refreshing· There can be some distinct aroma’s· Numerous profiles/styles of beers· Affordability· Taste options can be easily achieved· Accessibility of the productSomewhat unique to craft beer is the need to understand demographics of the customer and market. Interestingly, new beer styles can appear from a brewer in a relatively short time whether it be a seasonal brew, event oriented or changes in consumer preferences.Craft beer branding isn’t unique to anyone in the alcohol beverage industry, but it is intense due to the immediacy of the market. Branding is dictated by market(s), customer base, budgets, competition, capabilities of the distributor, cross-state laws, and long-term strategies.In conversations with more than 20 craft breweries, all state that local tasting and sales rooms are critical to establish the brand and credibility of the product; it is important to create an experience around the craft product. Coronado Brewing Company in Coronado, CA have been effective in building a perceived experience between the consumer and the company.Distribution in the alcohol beverage industry is fraught with issues in building a relationship with the customer. At the end of prohibition (in December 1933), the Three Tier Distribution system was initiated; basically, producers discount the product to their sole distributor who then sells that product to the retailer. However, over time each state has refined their approach to beer distribution. California is one of those states that allow self-distribution and brewpubs. Again, every state has a slightly different approach to regulations on distribution.

The problem for a small brewer, should they deem distributors best fit their needs, distributors are only interested in selling craft beers that can produce volume. Further, this system means a small producer is at the mercy of a limited number (due to consolidation) of distributors, even if they may also be working with a competitor.In discussions with consumers at a large brewer in the Sacramento area, I ask how many craft breweries had they visited in the past year? The average was 6. The next question was, do they have a favorite? The answer surprised me because, yes, they have favorites, but not because of the brand but rather the quality of the beer. Price was not the consideration quality was the determinant. As would be expected, bad beer is the death knell of a brand.Looking forward the craft beer industry faces four significant challenges:· Bigness. Aggregators who generate market share (control) by gobbling up independent producers will put pressure on small producer that lack access to capital or distribution.· Over time the cachet of “craft”, “estate” or “Select” can be diminished and that will impact a lot of existing brands.· Cost of distribution will impact craft beer brands, customer exposure, margins and the value of the enterprise; whatever the channel employed.· Ability to recognize market changes and respond effectively. There are several prominent universities that have expanded programs to address the craft brewing marketplace. UC Davis and Sonoma State in Rohnert Park, CA have recognized the importance of the beer category and have classes in beer fermentation, marketing, and ingredients; all to help the industry anticipate and respond to change. They also offer outstanding research in all things beer.Like all industries, they experience business cycles. Success is dependent on financials, product and messaging, responsive to competition and trends and a healthy dose of luck. The question remains: Is the craft beer industry over heated and heading for a retraction? Probably, is the best answer. Craft brewing is a business and therefore must be managed within all the accepted disciplines pertaining to a business-Finance, Marketing, Operations, Legal, Sales, Distribution and Internal Controls.Cheers!

Sources of Business Finance

Sources of business finance can be studied under the following heads:

(1) Short Term Finance:

Short-term finance is needed to fulfill the current needs of business. The current needs may include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short term finance arises because sales revenues and purchase payments are not perfectly same at all the time. Sometimes sales can be low as compared to purchases. Further sales may be on credit while purchases are on cash. So short term finance is needed to match these disequilibrium.

Sources of short term finance are as follows:

(i) Bank Overdraft: Bank overdraft is very widely used source of business finance. Under this client can draw certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet short term unexpected expenses.

(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill which can be used to finance immediate needs.

(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, these are also used as source of financing the operations necessary to execute the job order.

(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred payments are used as a source of financing small expenses which are to be paid immediately.

(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to take loan from banks and that loan amount can be used as finance for a short time period.

(vi) Financial Institutions: Different financial institutions also help businessmen to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange short term financial assistance for businessmen.

(vii) Trade Credit: It is the usual practice of the businessmen to buy raw material, store and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain time period. Goods are sold on cash and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in meeting financial difficulties.

(2) Medium Term Finance:

This finance is required to meet the medium term (1-5 years) requirements of the business. Such finances are basically required for the balancing, modernization and replacement of machinery and plant. These are also needed for re-engineering of the organization. They aid the management in completing medium term capital projects within planned time. Following are the sources of medium term finance:

(i) Commercial Banks: Commercial banks are the major source of medium term finance. They provide loans for different time-period against appropriate securities. At the termination of terms the loan can be re-negotiated, if required.

(ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to have the required goods with payments to be made in future in agreed installment. Needless to say that some interest is always charged on outstanding amount.

(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on different matters.

(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as a source of medium term finances. Debentures is an acknowledgement of loan from the company. It can be of any duration as agreed among the parties. The debenture holder enjoys return at a fixed rate of interest. Under Islamic mode of financing debentures has been replaced by TFCs.

(v) Insurance Companies: Insurance companies have a large pool of funds contributed by their policy holders. Insurance companies grant loans and make investments out of this pool. Such loans are the source of medium term financing for various businesses.

(3) Long Term Finance:

Long term finances are those that are required on permanent basis or for more than five years tenure. They are basically desired to meet structural changes in business or for heavy modernization expenses. These are also needed to initiate a new business plan or for a long term developmental projects. Following are its sources:

(i) Equity Shares: This method is most widely used all over the world to raise long term finance. Equity shares are subscribed by public to generate the capital base of a large scale business. The equity share holders shares the profit and loss of the business. This method is safe and secured, in a sense that amount once received is only paid back at the time of wounding up of the company.

(ii) Retained Earnings: Retained earnings are the reserves which are generated from the excess profits. In times of need they can be used to finance the business project. This is also called ploughing back of profits.

(iii) Leasing: Leasing is also a source of long term finance. With the help of leasing, new equipment can be acquired without any heavy outflow of cash.

(iv) Financial Institutions: Different financial institutions such as former PICIC also provide long term loans to business houses.

(v) Debentures: Debentures and Participation Term Certificates are also used as a source of long term financing.


These are various sources of finance. In fact there is no hard and fast rule to differentiate among short and medium term sources or medium and long term sources. A source for example commercial bank can provide both a short term or a long term loan according to the needs of client. However, all these sources are frequently used in the modern business world for raising finances.