Brewers Association (BA) chief economist Bart Watson rounded off the trade group’s week of looking back at 2022 with a Collab Hour webinar Thursday, analyzing craft’s 2022 performance and sharing predictions for 2023.
The webinar followed the BA’s release of its Year in Beer annual report. Watson also gave an in-depth review of craft’s 2022 last month at the Brewbound Live business conference in Santa Monica.
Watson focused his presentation on four areas: distribution, brewery growth, supply chain and the economy. He noted that those areas don’t cover an “exhaustive” overview of craft, but are the areas he is “getting the most questions about.”
Distribution: Craft Won’t Grow, But Opportunities Still Exists for Segment
Over the past two years, changes in craft performance have come with the caveat that consumer drinking habits changed during the COVID-19 pandemic and there was a channel shift to primarily off-premise sales. Now, “we’re out of the channel shift argument,” Watson said.
In March, BA-defined craft’s volume share of beer in IRI-tracked channels (multi-outlet plus convenience) fell below 2019 levels, and stayed below, with the exception of a small spike in the fall.
Additionally, the on-premise channel has returned to business as usual, but draft sales have not. In 2019, draft was between 10% to 11% of total U.S. beer production, according to Watson. Now, it’s averaging about 9%. Additionally, keg use on-premise through June 2022 was -10% to -15% below 2019 levels.
As Watson also shared during Brewbound Live, at-the-brewery sales continue to be the “bright spot” for craft as the segment’s core consumers have returned. However, “we have to ask ourselves how long can it continue?” he said Thursday.
“What percentage of beer can really go through this channel before customers just want other things?” Watson asked. “And before there’s conflict with other tiers?”
Watson pointed to state-level changes that could limit breweries’ ability to expand taproom presence, including New Jersey, which limited brewery licenses in 2019, citing concerns from bar and restaurant owners.
As a result of the distribution landscape for beer, Watson predicts that the “distributed craft volume won’t grow in 2023.” However, that “doesn’t mean craft isn’t important to wholesalers or retailers,” or that “opportunities for growth don’t remain,” Watson said.
“But it does mean that brewers are going to have to think differently,” he continued.
Watson pointed to comments by retailers at Brewbound Live that the consumer landscape has changed and producers need to provide retailers with offerings that cater to new growth opportunities, rather than hoping the trends of 2019 and earlier will return.
Brewery Growth: Openings Will be Lowest in ‘Over a Decade’
The amount of breweries operating in the U.S. continues to grow, with a 2-to-1 ratio between openings and closings holding through Q3 2022.
“That said, we continue to see that brewery growth, and the brewery openings driving that, slowing down over time,” Watson said.
There are “a variety of reasons” for why openings are slowing, including a “more mature market,” a “more difficult lending and borrowing environment,” and people “seeing opportunities in other areas,” Watson said.
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 the preliminary numbers in the BA’s Year in Beer report. While it’s still an increase year-over-year, the annual increase in breweries is “flattening” and could be “totally static in early 2024” if the current curve continues.
Watson predicts that openings will be the “lowest that we’ve seen in over a decade” and that closings may rise again, resulting in a static brewery number by “the middle or end of the year.”
“There’s still going to be openings, there’s still opportunities to find that new location, new innovation, new business model,” Watson said. “There are still people who are interested in entering the industry, but that interest is going to be lower than it’s been in over a decade.”
Supply Chain: Breweries Will Still Feel Weight, But Prices Will Come Down from Peaks
In the past, a brewery’s dollar sales growth was typically a good indicator of its “financial health,” but that’s “a little less true today,” Watson said.
“Numbers can be trending up, but if you’re getting hit on that cost side, you may be making equal or less money than you were even if your sales are going up,” Watson said.
Breweries are facing supply chain cost increases across the board on everything from malt to fuel. While prices are starting to tip slightly downward, if those prices are “static” throughout 2023, many brewers are going to feel inflation “for the first time” as they renegotiate annual contracts, Watson said.
“If you had any malt contracts that you last negotiated in February or March of 2022, you’re going to feel that rise for the first time in March or February of ’23 if you’re on an annual contract basis,” Watson said. “Some brewers haven’t yet felt the full weight of inflation we’ve seen and that’s one thing we’re gonna play out over 2023.”
Still, should trends continue, Watson predicts a decline in peak prices in 2023 for goods such as malt, aluminum cans and freight.
“I certainly don’t want to say I’m predicting a smooth supply chain next year – one thing that COVID has taught us is how fragile those supply chains are in many places,” he said. “But what I am going to predict is that collectively average prices will come down from their ’22 peaks.”
While prices likely won’t go down to 2019 levels – which Watson said likely won’t happen “anytime soon” – the “20%, 30%, 40%, 50% increases we saw last year are going to start to moderate a little bit.”
Economy: Craft Will Not be Significantly Impacted by Economic Slowdown
The “most watched” economic factor right now is inflation as the U.S. faces “unprecedented” times, Watson said. While inflation has started to come down in the past few months, “the Fed still thinks it’s too high,” meaning interest rates will continue to rise in 2023.
“So why does that matter?” Watson said. “It matters because higher rates equals slower growth.”
However, increased rates “probably doesn’t shift the numbers that much” for beer overall, Watson said.
Historically, the difference in beer growth during times in and out of recession are statistically insignificant, Watson explained. What craft producers should look at is the changes in consumer habits and demographics.
“We can’t just say, ‘OK, we’ve got inflation: What does this mean for overall beer or for overall craft?’” Watson said. “We have to be a little bit more precise in how we think about how inflation might play out over company brand and category.
“The point here is that craft drinkers look differently, demographically, and so we’re going to respond to economic shocks differently and generally are going to be a little bit more insulated based on what we’ve seen in recent economic downturns in the United States,” he continued.
More than half of craft drinkers (55%) are college graduates, while 81% have some college or an associates degree under their belts, according to Watson, citing the U.S. Bureau of Labor Statistics. Those groups historically have been less affected by unemployment, inflation and other economic factors.
Within craft, there’s “not a lot of evidence that higher price craft brands are getting affected more” than lower priced brands, with core premium craft consumers falling in the category of consumers who are less impacted by inflation.
“If we look at the change in craft, it’s universally poor across the board, unfortunately. … But it’s not any worse as you move up in price point again, suggesting we’re not seeing a lot of trade down within the category,” Watson said.
Watson predicts that the brand strength of individual brands will be a much larger factor in craft performance than “economic headwinds,” with a “lot of variations” in how brands are perceived by consumers.
“Yes, the economy is going to matter – it’s going to affect some of your customers,” Watson said. “But how you position your brand, the strength of that brand loyalty, is going to be very impactful as – maybe you need to reappraise prices, maybe the economy slows down – whether or not you can keep those volumes where they were.”
The “gimme” predictions for the economy is that growth will be slower and rates will be higher, Watson added. However, craft’s existing dynamics – “good or bad” – will continue.
Additionally, craft employment may see a rise next year despite national trends, as taprooms and brewpubs continue to have a “healthier” performance and “on-site sales continue to grow.”