99 Bottles of beer on the wall? For craft, it’s actually about 11,727 — and that’s not a great thing.
The bigger number is the total amount of craft brands being sold at bars and restaurants, according to on-premise data supplier GuestMetrics, which tracked those SKUs through the first quarter of 2015. In two years, the number has increased by nearly 50 percent, from 8,027 in the first quarter of 2013.
Exuberant entrepreneurs might look at the number and see the pint glass as half-full. But while a broader selection of beers might be great for the drinker, it’s problematic for brewery owners and publicans alike. Despite the fact that on-premise accounts are stocking more SKUs, they aren’t turning product as fast as they were in 2013.
During yesterday’s Power Hour, hosted by the Brewers Association, GuestMetrics’ VP of strategy and insights, Peter Reidhead, displayed a graphic that highlights the growing problem: the number of craft brands being sold on-premise has continued to expand faster than the category, which GuestMetrics believes will put pressure on brewer economics.
In other words, adding more taps doesn’t necessarily mean restaurant operators will sell more beer; In fact, the effect might be the opposite. Back when there were 8,000 craft brands being sold on-premise, craft sales, by brand, indexed at a score of “100,” Reidhead said. Over the last five quarters, however, the number of brands being sold on-premise has grown by a consistent average about 20 percent. As a result, velocity has decreased and craft beer sales by brand are now indexing at a score of 78.
“The number of brands being sold on-premise has grown 22 percent and during that time craft beer sales are only up 5 percent,” he told Brewbound during a phone conversation.
The best way to understand the figures, Reidhead said, is to consider proliferation. While the number of unique craft beer brands being sold is on the rise, the sales efficiency of each brand is deteriorating.
So with more choice comes slower sales – not exactly top-secret information, but the numbers could serve as a warning sign for brewers who rely on strong on-premise sales to carry the load. Additionally, Reidhead said, on-premise trends can be a leading indicator of what could happen 3 to 6 months later off-premise.
Reidhead also pointed to the craft spirits segment as a comparison, where sales in that category are growing at a much healthier clip relative to proliferation. When including Tito’s Vodka in the data set, sales of craft spirits are up an impressive 50 percent on-premise. But brand proliferation is only up 10 percent. That’s significant, because it indicates that new product introductions are not outpacing consumer demand — something that is the exact opposite in craft beer.
“The math here isn’t particularly complicated,” he said. “Look at the growth in the offerings versus growth in actual sales. The question really is, are these new craft brewers making money?”
So, new brewers can continue to sprout up and introduce SKUs, as long as those brands are profitable.
That could explain why there’s been a glut of new IPAs hitting the market. IPAs have accounted for 25 percent of all newly launched craft beer products since 2013, Reidhead said. The style is continuing to drive craft’s share gains of total beer, however, while share gains in other styles have tapered off.
And while it’s very probable that the total number of brands being sold on-premise will continue to rise, craft’s overall share gains in the channel might not, Reidhead said.
Craft beer already accounts for 30 percent of all on-premise beer sales, he said, but share gains are slowly decreasing. Craft beer gained 1.3 share points of total beer dollar sales in the first quarter of 2015, down from 2.6 share points in the first quarter of 2014.
“Mathematically, it is probably very unlikely that craft will be 50 or 60 share of beer category on-premise,” said Reidhead. “At some point, there will have to be a peak and it will have to take place at some point in the next couple of years.”
Reidhead predicts that craft share gains will continue tapering off as restaurant and bar operators zero in on what he calls a “optimal assortment.”
“In our data, craft beer has a 30 share,” he said. “If you have 10 tap handles, why would there be more than 3 or 4 taps handles devoted to craft?”
Reidhead added that many large restaurant operators GuestMetrics’ is currently working with have indicated that they have “gone too far” into craft.
Nevertheless, there are still opportunities for growth, especially in areas like Texas, Arizona and Florida, where craft’s share of on-premise beer sales is under-indexed.