Bart Watson: ‘Don’t Denigrate Where Consumers are Entering Craft;’ Early Craft Volume Data Tracking Below Expectations

Craft beer dollar sales and volume at off-premise retailers declined in 2022, and 2023 is not expected to be much better for the segment. If craft wants to win consumers and occasions, producers must meet new consumers on their level, Brewers Association (BA) chief economist Bart Watson shared last week at the New England Craft Brew Summit.

“We have to think differently about how the next generation is going to enter beverage alcohol, and then what they’re going to want to drink after that,” Watson said. “These days, there’s lots of different options when you enter beverage alcohol, and that means there’s going to be lots of different entry points for craft.”

Watson was the keynote speaker at the seventh annual New England Craft Brew Summit, hosted by the Maine Brewers Guild, which brought together nearly 600 attendees in Portland, Maine.

Watson said the trope of craft brewers sticking their noses up to certain bev-alc offerings threatens to turn new consumers away from the segment before they’ve even tried it.

“I hear brewers sometimes say things like, ‘Oh, that lacto-smoothie sour’s not really a beer,’” Watson said. “If I’m the consumer and I hear that, [I’d say] ‘OK, I don’t like beer,’ and go search out something else.

“Hopefully people in this room can refocus that kind of energy on, ‘OK, that’s not the beer I make, but if you like that beer, I’ve got a beer for you,’” Watson continued. “Hopefully we can capture a few more of these consumers and keep them here, because the entrance journeys for beverage alcohol are way more different than they used to be.”

Keeping craft consumers is increasingly difficult as drinkers have become more “omnibibulous.” About one-in-10 craft consumers every year say they are drinking less craft beer in favor of another bev-alc segment, Watson said. In order to bring those consumers back into the fold, craft needs to be open to a variety of beer styles and possibly beyond beer offerings.

“People when they walk into a bar often are not thinking what beer am I going to drink, but what beverage alcohol am I gonna drink, and then what product,” Watson said. “Other people are doing a good job taking our [beer] occasions – people drink canned cocktails with baseball now – we need to do a better job of taking their occasions.”

Expect A ‘Culling’ of Craft

Watson is still tabulating data from the BA’s annual production survey – about half of the nearly 9,500 responses have been input so far – but as of last week, Watson calculated a +0.6% production volume increase from craft breweries in 2022. That growth is lower than expectations Watson had projected in mid-year 2022, and significantly lower than the 5% increase Watson predicted at the end of 2021.

Additionally, if non-alcoholic beer producers were taken out of the data, that growth would be negative, Watson said.

“My prediction is we’re going to see very, very slight growth when all is said and done,” Watson said.

Regional breweries recorded a volume decline based on data so far (about -1%), while microbreweries recorded “slow growth.” Taprooms and brewpubs are expected to record an increase in volume. However, taproom growth was “much stronger” than brewpubs, for reasons yet to be diagnosed, Watson said.

The declines can be somewhat credited to the dueling trends craft has dealt with over the past year – and will continue to battle in 2023 – where wholesale inventory and retailer shelf space is getting crowded, while draft sales have yet to return to 2019 levels.

A weakening draft market was already starting to happen before the COVID-19 pandemic shut down many bars and restaurants. Even when adjusted for that trend, draft volume is still 2.5 million barrels below where it should be, Watson said. That shift is due to a combination of reasons, including shifting consumer preferences, fewer tap lines and shorter bar and restaurant hours, but is a major concern for craft, which makes up between 30-40% of the draft market, Watson said.

While many breweries switched to an off-premise focus during the pandemic, wholesalers are starting to feel the weight of overloaded inventories. That is only expected to get worse for craft as retailers cut down shelf space for the segment for growing segments such as ready-to-drink cocktails (RTDs), flavored malt beverages (FMBs) and imports.

“The pressure for wholesalers to reduce us [craft beer] to get that inventory down is only going to increase until they can bring that back down to pre-COVID levels,” Watson said. “Distributors are going to lean into other categories, retailers are going to cut shelf space. And this cycle, unfortunately for the short term, is probably going to self perpetuate to a certain extent.”

Bump Williams, president and CEO of Bump Williams Consulting, warned craft producers later in the conference not to be surprised by spring resets as some distributors are expected to order 15-20% less in 2023 then they did at the end of 2022.

The glimmer of hope for craft breweries has been at-the-brewery sales. However, Watson said the collective craft beer industry should be thinking about “how long they can continue.”

“There’s still strong craft demand; people still love our products, our consumer numbers still look pretty good,” Watson said. “But in the short term, there’s a lot of brands out there. It’s a competitive market. And so we’re gonna see some culling for lack of a better word until we hit a point where we can start to grow back on that smaller base.”

Watson’s 2023 Predictions

Watson also elaborated on some of his 2023 predictions for craft, which he originally shared during a BA Collab Hour webinar in December.

     1. Distributed Craft is Not Going to Grow

Watson has commented several times on his prediction that distributed craft will not grow in 2023, but added that the segment “still has further to fall before it hits its base.”

That is not to say there aren’t still opportunities for individual breweries to grow, but those breweries will have to do one of two things:

  • Create incremental growth by providing something new to consumers and adding to the overall beer category;
  • Or take volume away from another craft brewery.

“When you’re thinking about your growth plan and distribution, it either has to be, ‘here’s the share we’re going to take from somebody else,’ or ‘here’s the share we’re going to add to the collective pie by finding incremental opportunities,’” Watson said.

Key opportunity areas for craft include:

  • The convenience store channel and single-serve offerings, particularly with higher ABV offerings such as double IPAs;
  • The non-alc segment, which again accounted for a significant portion of the craft volume growth collected by the BA so far in its annual survey.

Watson also noted the opportunity for craft with women consumers, as well as Black, Indigenous and People of Color (BIPOC), which are all growing consumers within bev-alc, but are consumers craft has failed to attract in the past.

     2. Brewery Growth Will Slow and Hit Equilibrium

Even before the pandemic, the growth of new breweries entering the market was beginning to slow, with the gap between openings and closings narrowing. That trend will continue over the next couple years until breweries eventually hit an equilibrium, Watson said. However, he emphasized “that’s normal.”

“Nobody expects the restaurant industry to add 20% restaurants year-over-year-over-year-over-year with no closing,” Watson said. “Welcome to a normal industry.”

That equilibrium will likely fall somewhere between 9,500 and 10,000 breweries, Watson predicted, as the industry has already started to move “more toward normal industry averages.”

More than 9,500 breweries operated in the U.S. at some point in 2022, with more than 550 openings and 200 closings, according to preliminary numbers shared in the BA’s Year in Beer report. Watson previously predicted that growth could be “totally static” by early 2024.

     3. Consumers Will Continue to Change

While Watson admitted that “demographics always change” and changing consumers is a bit of a “gimme” prediction, he noted that there are some changes that could work in craft’s favor.

Millennials, which are some of craft beer’s core consumers, are now in their late-thirties and forties, which is typically when consumers start to trade up to higher priced items – a category that craft falls under.

“This is good for craft,” Watson said. “We just saw a generation that drinks a ton of craft, the millennials, move to a place where they generally spend about the same amount and they generally trade up a little bit more.”

What is a potential future concern for craft is the next generation, Generation Z, with the bev-alc spending of under-25 consumers “dropping pretty dramatically” compared to millennials. Younger consumers are also drinking less, though data surrounding the drinking habits of Gen. Z should be taken “with a grain of salt” as the generation may “be more wary of answering questions about alcohol in a social media age when they’re worried it might get plastered everywhere,’ Watson said.

Gen. Z consumers also have different wants from bev-alc, with less of a focus on local, and more of a focus on a company’s alignment with their beliefs, such as environmentally friendly products, charitable donations, or great working conditions for employees.

“There’s the possibility that we’re gonna see a next generation that drinks differently, wants different things, and isn’t as attached to craft as the millennials,” Watson said. “Millennials were very into local and internalized ‘local is good because it is local.’ I think Gen. Z is not necessarily as convinced of that. Local can be good if they believe in the things that I believe in, but it’s not inherently good.”