Inflation and other economic factors may be the talk of the country, but they’re not necessarily what craft brewers should be focusing on, Brewers Association (BA) chief economist Bart Watson shared during Brewbound Live last month in Santa Monica, California.
In a presentation appropriately titled “It’s the Industry, Stupid,” Watson relayed to attendees that industry-specific challenges, such as changing consumer demographics and fourth category competition, are what craft needs to address moving forward.
Craft 2022 Performance Weaker Than Expectations
While the BA has yet to complete its annual report on craft performance for 2022, distributors and retailers cut back on craft offerings in the summer and fall, and with lackluster Q4 performances, 2022 projections are weaker than initially expected, Watson said.
“The numbers are gonna end up lower than I was talking about at the beginning of the year and I think we’re still gonna see craft grow, but it’s going to be at a low single-digit rate,” Watson said.
During his state of the industry address at the BA’s Craft Brewers Conference (CBC) in May, Watson labeled 2022 a “make or break” year for craft as the industry – particularly smaller businesses – continue to tackle the fallout from the COVID-19 pandemic.
Breweries reported an average performance increase of +1.4% year-over-year in the BA’s midyear survey of producers. However, that number is likely more in the +4% to +5% range after weighing the “over-representation” of regional breweries and a positive response bias, Watson said.
Broken down by channel, draft sales increased +31.7% YoY, while package sales declined -3.4%, according to survey responses. Those numbers were most likely explained by a channel shift in consumer drinking habits that was continuing in the first half of the year as a result of COVID-19, Watson said.
“By channel shift I mean the radical way that beer drinking changed during COVID,” Watson said. “We drank about as much beer as a country during COVID. We drank it in radically different places.”
However, when analyzing Q2 and Q3 performances, “we have to change that story,” as “craft starts to not only not cycle last year, but also not cycle 2019 very well,” Watson said.
On-Premise ‘Back,’ But Not for Draft
The on-premise as an overall channel is “back,” selling as much as before the pandemic, Watson said, citing data from the U.S. Census Bureau. However, draft sales have not returned, impacting craft performance. While draft was between 10% to 11% of total U.S. beer production in 2019, it is averaging about 9% in 2022, indicating that “draft has lost share within beer.” Additionally, keg use on-premise through June 2022 was -10% to -15% below 2019 levels.
“So you’ve got an on-premise that’s back fully in terms of dollar sales and draft beer that’s not back,” Watson said. “And we don’t really know why, but obviously this isn’t good for craft breweries given that craft brewers have 30% of draft.”
At-the-brewery sales have continued as “a bright spot” for breweries, driven by the return of core craft consumers, Watson said. He warned that breweries should “watch out” for changes in traffic patterns for other consumers and how they are attracting new drinkers.
“The power users have come back from pre-COVID, but it doesn’t take a lot in hospitality for everyone else to move on,” Watson said. “Making sure we’re welcoming new people into brewpubs and taprooms may be more important going forward.”
Inflationary Pressures Impact Craft Consumers Less
Craft performance can partially be credited to economic factories, including continued supply chain constraints and price increases and rising interest rates, which the federal government will continue to increase, Watson said. However, the impact of these economic factors doesn’t necessarily apply to craft consumers.
“Your consumer is not the generic consumer,” Watson said. “Your consumer is gonna have a very different economic situation and outlook than the typical average American consumer.”
While there has been “a lot of predicted talk” of inflationary pressures causing consumers to trade down in beer, there’s “very little evidence of it,” with “high-end areas like FMBs and imports” still growing, Watson said.
“The people who are getting hit by inflation aren’t necessarily the people who are buying craft, which averages $60 a case equivalent,” he continued. “Sure, they’re getting affected by inflation, but it affects them less than somebody who was maybe already in the value category, who that inflation is going to eat into more.”
Market Factors More Impactful to Segment
“There’s a lot that’s gone on in the beer business that’s happened very slowly that we’ve kind of taken credit for, and there’s a lot that’s going on very rapidly right now that we’re not paying attention to,” Watson said. “And you put those two things together and there’s an incredible amount changing with the industry.”
A key shift for craft has been SKU rationalization by distributors and retailers. In the early 2000s, beer accounted for about 60% of all bev-alc spending, while spirits accounted for 30%. That gap has steadily shrunk over the past two decades, with beer claiming a 45.6% share in 2021 and spirits claiming a 38.4% share.
“If craft was still mid-teens [share] of a 60-share industry, you wouldn’t see retailers be as quick to cut share as they are now,” Watson said. “You wouldn’t see distributors be as quick to rationalize SKUs.”
Some of the “underlying conditions” driving that change are pricing and demographics, Watson said.
Additionally, the growth of the fourth category continues to challenge craft beer. While hard seltzer had a slight impact on the category, more recent trends such as ready-to-drink canned cocktails (RTDs) are a more pointed threat to craft, as the segment fulfills similar wants of craft consumers: flavor and variety.
“Unlike [hard] seltzer, which really was a refreshment play, competed with light beer, we’re gonna see these compete very directly with craft,” Watson said. “We’re seeing them compete with craft directly now, and that challenge is going to increase in the next five to 10 years.”
Competitive entrants in the RTD segment differ greatly from traditional craft plays, with large non-alcoholic beverage companies such as PepsiCo and Coca-Cola entering the market.
“Investment levels are different. The players are different,” Watson said. “The No. 1 and No. 2 players [in RTDs] aren’t actually spirit companies, they’re a wine company [E. & J. Gallo Winery’s High Noon Sun Sips] and a beer company [Anheuser-Busch InBev’s Cutwater Spirits]. This is going to be the next challenge and craft’s gonna have to really fight this off if it doesn’t want to see that distribution loss, retail loss that it’s already seen.”
Watch Watson’s full presentation above, which includes a more detailed analysis of craft performance, and what craft must do to compete against the growing fourth category.