In many ways, the presentation from Bart Watson this year at the Craft Brewers Conference in Nashville sounded much the same as it did last year in Minneapolis. Delivering the State of the Craft Brewing Industry to a full house at Music City Center, the Brewers Association’s chief economist pointed to another year of disappointing performance. However, a key difference this year is that we’ve come far enough out of the effects of the COVID-19 pandemic to realize that—unless the industry takes innovative action to turn things around—craft brewing will remain stagnant.
“After years of strong growth, followed by a maturing growth rate, and then two very, very unique years due to COVID, craft brewing in 2022 was on par with 2021—aka, things were flat,” Watson says. “If we look at this over the last six years, I think this points to the need for brewers to find new ways to grow, to innovate.”
Since 2017, the craft brew industry has seen an average annual growth rate of 1.2%, Watson notes. “Those years of double-digit growth are clearly well in the rearview mirror,” he says. “And unless something changes, I don’t think we’re going to see it again anytime soon.”
|See what Bart Watson had to at last year's State of the Craft Brewing Industry address in Minneapolis.|
Watson points to this slow to no growth as the “new normal” for craft brewers—unless something can be done to change that. He’s quick to explain, however, that 0% growth is not the same as no change. “There’s a lot going on under the surface. There’s variation in business models, variation in all sorts of things,” he says. “In fact, all of the changes going on around us in beverage alcohol is one reason the craft industry growth is so slow. So we shouldn’t take this 0% number to mean that the industry is static.”
A post-COVID world
Over the past few years, a lot of the numbers seen in the market have been explained by COVID. Channel shifts were key, for example, as people drank more at home during lockdowns rather than out. “We bought a lot more beer from grocery stores, convenience stores, liquor stores, and we bought a lot less draft beer from bars and restaurants,” Watson says. “That explains the first couple of weeks of COVID, and since then, we’ve been slowly seeing that tide that went out recede back, and that’s explained a lot of the numbers.”
But the trends have stabilized, and the numbers are no longer being explained by COVID. “That’s just the market we’re in,” Watson says. “We see this persistent gap between hospitality and distribution brewers.”
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Referring to his presentations from 2017 to 2019, Watson notes some recurring themes, particularly slowing and fracturing growth. “But there’s fundamentally something very different here,” he says. “It’ll be a slow-growth competitive environment that we saw in those years, and one that’s actively contracting now. And based on the numbers that I’ve seen in the first quarter of 2023, the numbers aren’t going to get better anytime soon.”
There’s a little more positivity in the microbrew subsector, which saw 1% growth last year, Watson notes. Much of this is driven by their heavier draft portfolio, since the market is still seeing some bounce back in on-premise draft brews in 2022. Although this is growth, Watson is convinced that it shows even more the change in the distribution market. “If we go back to prior to COVID, and we look at microbrew growth, it was really, really strong—double digits two out of those three years in 2017 through 2019,” he says. “So this shift from very, very strong growth to a little bit of growth, I think is an even bigger one than what we saw with regionals and really shows how much the distribution market has changed for all breweries of all sizes.”
Breweries will need to be careful that they’re not too small with their distributors, but also not too large or too far afield so you’re no longer considered a small, local, cool, nimble brewery with craft beer drinkers. “For distribution breweries of all sizes, this is going to be a challenging environment to navigate for the next couple of years,” Watson says.
A lot of breweries will need to refocus their efforts on the brands and geographies where distributors are willing to co-invest, Watson says. “They need to zero in on those brands and markets where their brands can truly perform and meet retailer goals. This is a painful process because it often means you have to come to grips with the fact that for some of the places where you’re selling, those brands probably aren’t as relevant as you’d like them to be,” he says. “But I think that kind of refocusing, reexamining can set the stage for future growth, and for scale over geography.”
Hospitality positivity, but reinvention still needed
Where Watson found positivity in particular in 2022 was with the hospitality sector—the taprooms and brewpubs. “These breweries are still seeing demand growth. And I think more than any other, this suggests to me that there’s not a bubble bursting—craft demand isn’t necessarily going anywhere,” he says. “That said, I think we’re going to need to see some reinvention.”
Taprooms and brewpubs together saw 7% growth in 2022. This growth makes sense, Watson says, because these breweries are selling most of their beer on-site, which is another sign of health in the industry.
Within this sector, there’s a gap between taprooms, which grew at 9%, and brewpubs, which grew at 4%. One theory Watson has on this point is based on operational concerns. “Running a brewpub is hard right now,” he says. “I don’t envy anyone who’s trying to keep a kitchen staff.”
But another theory focuses on the point that taprooms tend to be younger than brewpubs. Taprooms and brewpubs that opened 2018 or later have virtually identical growth rates of 20% in 2022. Meanwhile, both taprooms and brewpubs older than that saw a growth rate instead of only 2%. “I should note that a 2% growth in this environment is nothing to sneeze at, particularly if those businesses are stable and profitable,” Watson adds. But it nonetheless points to the need to reinvent hospitality business concepts. “This pretty big gap in growth between the before and after 2018 breweries shows that no one should be rested on their laurels. And even in this category, which is clearly the bright spot within craft, breweries are going to have to work to reinvent, to stay competitive.”
Continued ability to grow on-site sales is a key reason that craft brewery openings continue to outpace closings. Although this has been the norm in the craft brew space, it certainly isn’t the norm in most other industries. That could be changing for craft brew as well, according to Watson.
“That closing rate remains remarkably low. In 2022, we measured 529 openings for craft breweries all around the country. That is the lowest number since 2013, against 319 closings. The era of everyone opening and no one closing, though, is clearly going away,” Watson says, noting that he expects openings and closings to be more balanced within the next couple years. “Back to the theme of this talk, What is normal? That’s normal. Most industries have roughly openings and closings in balance. What has been abnormal is the last 10 years, where everybody opened and almost no one closed. That doesn’t typically happen. And it’s a testament to the hard work, ingenuity, tenacity of everyone in this room.”
Competition from alternative adult beverages
One of the reasons Watson expects those openings and closings numbers to come more in line with other industries is because of the health of the overall beer industry. The slide he showed (shown here) is a stark reminder that beer is certainly not where it once was, and that its place is being usurped in part by a range of alternatives. The graph on the left shows traditional beers. “It’s pretty shocking how much volume beer has lost since roughly 2008,” he says. “Some of this is due to competition from other segments. If we looked at this in per capita terms, what we would learn is that Americans drink about the same amount every year, and beer has lost as hard liquor has taken some of our occasions. But another reason that traditional beer is losing is there’s a growing number of alternatives on the market. Americans love flavor and variety, and we’re offering them lots of different options out there.”
The graph on the right shows data from the Beverage Marketing Corp. on the alternative adult beverage market. “When I look at this graph, I would stress a couple of things to you. The first is how much growth there has been in this alternative market and how closely that lines up with the beer volume loss that we’ve seen,” Watson says. “The other thing that I would point out is that, even in a year where a big part of this alternative market, hard seltzer, had pretty rough numbers, was pretty clearly down, the total category grew.”
Watson stressed again that Americans love flavored variety, and right now this is one of the categories giving it to them. This category goes well beyond hard seltzers and flavored malt beverages; it includes things like hard versions of sodas, iced teas, and coffees, hop waters, and many others. “I think, increasingly, these products overlap more with craft than many people in this room have fully come to grips with,” Watson contends. “In the past, a lot of the alternatives I don’t think overlapped craft that much. Flavored malt beverages and hard seltzers I think largely competed in different spaces—different price points, going after different occasions, different consumers. When you look at a lot of the new products that are in the market right now…they’re competing around flavor and variety, the things that define craft, and they increasingly are going after our occasions and our customers.”
Distributors and wholesalers are looking for growth from the alternative markets as well. Watson brought up data from the National Beer Wholesalers Association (NBWA) noting that its members expect, within five years, up to a third of the products in the warehouse will not be traditional beer but will instead be other products, including wine, liquor, and non-alcoholic beverages. “Your wholesalers do a lot of things really, really well, but if you think they can keep the same attention on traditional beer when they go from 100% of their warehouse to two thirds, you’re deluding yourself,” Watson says.
Of course, craft brewers themselves are getting more interested in these alternative products as well. Among those brewers who responded to the Brewers Association’s latest survey, non-beer products make up about 2% of their total production. This was a growth of 19% over the previous year.
For the third year running, Watson was unable to present the slide saying that craft brew is at an all-time high. “Unfortunately, I don’t know when we’re going to be able to do it in the near future,” he says. “Again, I think we’re in a new normal of slow to no growth.”
Though some of this is maturation and normal, the craft beer industry is going to have to start innovating to capture more of the market. “The things that got us to where we are are probably not going to be the things that level us up,” Watson says. “We’re going to have to do new stuff as an industry if we expect to get different results.”
One area is in channels—redoubling the commitment to being offered in more places and deepening in existing channels. Another is finding new occasions in consumers’ daily lives. “This is something that the liquor industry has done very effectively to beer over the last 10 to 20 years—from concerts and sporting events to more everyday occasions, they’ve used their brands and marketing to target your occasions,” Watson says. “At a baseball game now, there’s a lot of liquor there where it used to be a pastime for beer. We need to think about how we can use the brands and marketing with craft, and there’s many wonderful strong ones to flip that script and to offer craft beers in more occasions.”
Watson points in particular to the strongly growing non-alcoholic beer market. “Non-alcoholic illustrates a great opportunity to grow,” he says. “They’ve taken places where there wasn’t going to be a beer in someone’s hand and said, ‘Here, here’s a beer that you could put into your hand for this occasion.’ And in doing so, added incremental growth to the category.”
Chasing style trends isn’t the answer, Watson insists. There’s just not enough growth in any given style to make room for everyone. “My challenge to the people in this room today is to think about your opportunities to grow your brands, not in style terms, but in what you do best and what you offer,” he says. “This is really how it got started. Nobody was chasing the hot market trends; craft was exactly the opposite. People were doing what they thought they could do best, that they thought they could do uniquely. And I think that’s the place that we need to get back to in the marketplace. What are the brands in your portfolio or your taproom that are growing the most strongly? How can you lean into those as a differentiator?”
Finally, new customers are essential to grow the craft brew space. “Beverage alcohol always has changing customers. Every year, we get a new generation of 21+ adults who want different things,” Watson notes. “In the past, these new generations have largely benefited craft. We saw the Millennials come of age—they loved craft, they moved into craft, they increased our demographics. I think one reason that we’re seeing an overall craft stagnation is that’s not happening as much anymore. We have a new, different generation, with different preferences, and maybe more concerns about moderation as well. And unlike past generations that have moved into craft, I think we’ve seen the new generation of craft drinkers generally moving away from craft demographics.”
In particular, Watson points to female and BIPOC (black, indigenous, and people of color) sectors of the population. “To put it as bluntly as possible, craft has the lowest percentage of female drinkers and BIPOC drinkers of any major beverage alcohol category,” he says. And why does this matter? “All of the growth in beverage alcohol customers is in female and BIPOC drinkers. So we’re going to need to change something if we want to connect with this new, diverse generation.”
As Gen Z comes of age, even more pressure will be on craft brewers to reinvent themselves. “They look different than current craft demographics,” Watson says. “So we’re going to need to think about new ways to welcome them to the craft party. You will have amazing beers amazing spaces to offer. If we need some inspiration there, I think we can look to taverns and brew pubs.”
Unfortunately, Watson doesn’t have any set answers to hand out to the CBC crowd. “What I do know is the first two-thirds of this talk showed us that if we continue to do the same things the same way we’ve been doing them, that’s a recipe for slow growth and stagnation.”