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On-Premises Retail vs. Brewery On-Premises

2018 Outlook (Issue 34)
Lester Jones, chief economist of the National Beer Wholesalers Association.
Lester Jones, chief economist of the National Beer Wholesalers Association.

Following years of double-digit growth in the craft beer market, the beer industry as a whole is flatlining. Consumers had their first tastes of new and unique beers from thousands of breweries popping up all across the country, but now, growth has stalled and new watering holes for craft beer fanatics are beginning to dry up.

On-premises retailers, or places where beer can be consumed on-site, are changing dramatically, and such establishments “could be the top story to watch in the beer industry in 2018,” according to Lester Jones, chief economist of the National Beer Wholesalers Association.

“The reality is we’ve seen a change in the on-premises retail marketplace,” Jones said. “Classic bars and taverns are in decline, but the options for on-premises are growing.”

According to Statista, the number of bars, taverns and nightclubs in the United States has dropped dramatically since 2003. There were 71,969 of those establishments in 2003, but in only 12 years, the number of such businesses has shrunk by more than 8,000 to 63,862 in 2015.

On the other hand, the number of breweries in the United States has grown from 1,485 to 4,548 from 2003 to 2015, and has exploded to more than 6,000 today.

The beer industry is also concerned about the growth of wine and spirits, the latter of which replaced beer as the most valuable on-premises product, according to Nielsen.

“The traditional model we know and love – the neighborhood bar – is slowing down and declining,” Jones said. “Year-over-year, there are fewer beers sold in those channels, because on-premises sales around them are changing."

The first major shift Jones pointed to is the emergence of the brewpub. Wineries have long had tasting rooms for consumers to sample wares, with more than 10,000 in the U.S. alone, but breweries lagged behind on this front. Now, brewpubs and brewery taprooms are popping up on major city street corners and small community main streets throughout the country.

Jones said brewpubs are primarily a restaurant, though they are licensed to make and sell beer on-premises.

“It’s a nice small business format,” Jones said. “It certainly started with just a few of them and now has blossomed into a huge business model.”

Seeing the success of brewpubs as a source of steady income, more breweries are beginning to open taprooms, which serve as a place where a brewery can serve its beer – often without a food aspect.

On top of the emergence of brewpubs and taprooms from breweries themselves, establishments outside of traditional beverage-serving models have taken notice of the growing love and interest in craft beer. The “experiential taproom” is a growth avenue many might not have considered, according to Jones. Three of his primary examples for the “experiential taproom” were the San Diego, Philadelphia and Baltimore zoos offering a “brew and zoo” concept.

“They’re the ultimate experience,” Jones said. “I love animals. It’s brilliant.”

Additionally, movie theaters, grocery stores, nail salons and barbers are all beginning to offer beverages to their clientele.

“We talk about a decline in the beer industry, but it seems to be exploding,” Jones said. “We just don’t know how to classify it. It’s complicated and it’s not easy."
 

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Brendan Gary, Director of Marketing
Alliance Beverage Distributing - Grand Rapids, Michigan

In craft beer-saturated Michigan, the trend is noticed by Brendan Gary, director of marketing at Alliance Beverage Distributing.

Gary said for the first time in five years the traditional on-premises avenues aren’t as vibrant, where a variety of events – supported by nonprofits – pull one-day licenses for special events like triathlons and quirky beer festivals.

“That’s up about 40 percent for us and our fourth-largest premise class of trade,” Gary said. “When people are going out, they’re seeking a different experience, and these special events are a huge growth driver.”

Lester Jones of the National Beer Wholesalers Association is also taking note of those special events and nontraditional retailers, and "whether they spell growth or not in the industry is still unknown," Jones said.

“Retail is so dynamic, it’s small and local, it’s about finding a niche,” according to Jones. “If there’s a pocket of activity it can work. So, at the same time that we’re seeing bars and taverns close, these other experiential ones are opening. Is it a net gain? Is it good? It’s just what it is. The alcohol industry is just evolving.”

Overall growth, or lack thereof, is where the industry is still trying to find its tune. Through the first 11 months of 2017, Chicago-based market research firm IRI Worldwide found beer sales volume declined 0.5 percent, while dollar sales increased 1.1 percent. These numbers come with the caveat that IRI only tracks off-premise retailers.

Gary noted that on-premises sales generally correspond to off-premise by saying success in an on-premises account will typically equate to off-premise sales as well.

The decline in volume sales with an increase in dollar sales does hint at the growth of craft beer. Domestic beers, such as Budweiser and Miller Lite, dropped in volume sales by 3.9 percent. Super premiums, like Michelob Ultra, grew 9.2 percent in volume with sales up 11.2 percent.

Craft beer volume sales increased 3.6 percent, with sales up 5.5 percent.

Some of the major craft brewery brands saw a decline, however. Sierra Nevada Brewing Co. and Boston Beer Co. saw dollar sale dips of 2.4 and 5.5 percent, respectively. Deschutes Brewery declined 5.4 percent, while other firmly entrenched brands such as New Belgium Brewing Co. and Lagunitas Brewing Co. saw single-digit growth.

Two Michigan breweries were the leaders according to IRI, with Founders Brewing Co. far-and-above any others at a 43.2 percent volume increase and 51.9 percent dollar sales growth. Bell’s Brewery grew 19.2 percent in dollar sales.
 

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Bart Watson, Ph.D., Chief Economist
Brewers Association

 

Growth, especially for breweries not already playing in major retail spaces, will be limited, according to Bart Watson, chief economist of the Brewers Association.

“We’re running out of space,” Watson said. “We’ve come across that a little sooner than some people maybe thought, and it’s more challenging for regional breweries.”

On the ground, Brendan Gary said Alliance Beverage Distributing is already trying to get behind the rotation idea of selling beers. Rather than going in to sell the newest and perhaps most interesting beer, they’ll try to sell the most promising or proven brands.

“It’s slowed down a bit, and it’s now apparent there are winning and losing brands in craft,” he said. “We’re starting to take care of the horses and have fun with the rest.”

Beer bars, another apect of the on-premises retail market that has seen growth, are changing as well. A place with 20 taps might now shore up the rotation to 10 consistent tap handles – often by the same brewery or even the exact same beer – and use the other 10 taps to offer a new beer or brewery, Gary said.

“Rotation slowing down does cause some issues,” he said. “There are more breweries and more brewing capacity, so we’re getting a lot of kegs of one-off batches, and we’re getting a little stacked up.”

For those anecdotal reasons, Gary said he hopes breweries will start to focus on a specific brand or two.

“Three years ago it was about the craziest thing you can do,” he said. “Now it’s better to hunker down and make one or two things. In this day and age, you need a call sign people can go out and recognize.”

Gary’s main example of anchor beers for a brewery were Bell’s Two Hearted Ale and Bell’s Oberon Ale, which account for 80 percent of Alliance’s sales from that particular brewery. IRI data has Two Hearted sales up 26.2 percent this year.

Meanwhile, going back to the fastest growing brewery in the United States by far, Founders Brewing Co., the increase was led by the growth of All Day IPA, which grew 47 percent in the first 11 months of 2017. Founders has grown from producing little more than 6,000 barrels in 2007 to finishing 2017 at nearly 470,000 barrels.

Other brands carrying their breweries are Firestone Walker Brewing Co.’s 805 blonde ale improving by 30.9 percent, New Belgium’s Ranger IPA going up 39 percent, and Deschutes' Fresh Squeezed IPA increasing by 16.2 percent.

In terms of on-premises sales, Jones believes taprooms will continue to grow and thrive. He looks at major breweries opening experiential taprooms, like Lagunitas’ taprooms, Diageo with the Guinness Open Gate Brewing and Barrel House in Maryland, and Labatt in Buffalo, as well as the AB InBev taproom plans for the craft brands it acquired, such as Goose Island Beer Co., Golden Road Brewery and 10 Barrel Brewing.

The new taprooms are a clear indication that there is competition to attract people to drink their beer, Jones said.

“I started in 2017 saying it will be a battle for the taproom and an escalation in what’s going on in taprooms,” Jones said. “They’re big. Maybe we have to stop calling them taprooms and call them brewing experiences. You can clearly see there is an arms race that is starting to heat up for the biggest, baddest taprooms in the country.”

“Let’s sit back and watch it unfold,” Jones continued. “It’ll be fun.”

For those traditional bars, Jones said the days of a place opening with three tap handles are long gone. The bars want a broader selection of taps to offer the consumers who want them, so bar owners grab what they can and move on, a tough sell for a small local brewery trying to grow that wants a steady tap to know its beer will sell.

Jones said that poses a problem because small breweries don’t have the resources a big brewery might, which is why big breweries can be so efficient at keeping ownership of a tap handle.

“Think about it when you stare at a tap serving Budweiser,” he said. “Think about how many kegs are lined up to maintain that keg. Think of all the beer in the supply chain to keep that one tap handle always flowing with Budweiser.”

Keeping a tap handle as a revenue source is in part responsible for the rise of the brewery taproom.

“They can manage it themselves and don’t have to worry about the tap being stolen,” Jones said. “If the tap runs out of pale ale, and they don’t have a keg of it left, they can grab a pilsner to put in its place.”

The taproom, however, offers a problem. It’s a “mousetrap” as Jones calls them, and they have to attract and keep people in the establishment, hence why they’re becoming more gimmicky and entertaining as the industry matures. On top of extravagant entertainment options, brewery taprooms also offer events like yoga and movie screenings to keep people coming back.

Grassroots events like those are the best way for small breweries to compete with larger companies, as the large brewing companies have more resources they can pull from to increase their access to gimmicks to attract consumers to the taproom.

“2018 will be very messy in defining the channels of business,” Jones said. “It’s evolving as we see traditional on-premises declining, because we can use our eyes to see that something else is rapidly evolving out of that. It’s not empirical, it’s an observation. You have to be blind to not see 10 taprooms and 20 food trucks and not recognize something is happening.”

Following years of publications writing about the rise of craft beer and asking about bubbles, those same publications are pushing rhetoric of how bad the business is now, according to Jones. In truth, he believes there are still  two sides to the story.

“If you’re from outer space and speak English and read about the decline of on-premises, per-capita consumption and the consolidation, you’d think this is the worst industry to start a business,” Jones said. “But then you look, and everyone is opening a new place, which creates more beer brands and more innovation. You see two very different stories that come out."

“One is written by the data and one is through actions of businesses  even though the data tells us it’s going the other way.”