Big Beer, dogged by sagging brands, tries to control the market.
One of my many favorite craft brews used to be Lagunitas IPA, brewed in Petaluma, about 40 miles north of San Francisco. I used to be a regular buyer for home use – though when I’m out, I try beers I don’t know. In 2015, Heineken International, one of the world’s largest multinational brewing conglomerates with 180 or so brands, from Tiger to Tecate, bought a 50% stake, following in the footsteps of other multinational brewing conglomerates: they’re all on an acquisition binge of American craft brewers.
Why? Because craft beer sales have been soaring, even as sales of the big brands, despite costly marketing and Super Bowl ads, have been sagging. The market is tilting toward craft brews, and the conglomerates figured this out too.
Conglomerates are cost-cutters. They buy a brewer and try to make it work by cutting costs. One way they cut costs is by using cheaper commodity ingredients that their other breweries buy, which pushes down costs. This is American corporate theology.
A crucial ingredient in beer is hops. Craft brewers use carefully selected specialty hops. Some of the best hops in the world are produced in the US, often on a relatively small scale. But these products are more expensive than the commodity versions traded globally.
After Heineken bought Lagunitas, I was worried about the cost cutters, but continued to drink the IPA. For a while, it was fine. But not too long ago, I noticed a change in taste. It had lost its pizzazz. What killed the taste of this IPA? Here’s a guess: corporate cost-cutters who insisted on saving a few cents per bottle by switching to cheaper hops.
Also, the corporate marketing folks might have figured that the bitter flavor of hops could be watered down in some way so that more people who don’t like bitter flavors would buy the beer, and those who buy it, might drink more of it. That’s the reason why these ingenious marketing folks made sure decades ago that the bitter flavor of hops was leeched out of the big brands.[Update April 24: Karen Hamilton, Director of Communications at Lagunitas, stated emphatically, “Nothing has changed,” and added: “You’re incorrect about the machinations of our partnership and its impact on our beers.”]
After a couple of months of being frustrated, I switched. There are other brews to choose from. So what’s the problem? And how big of a problem is it in this vibrant entrepreneurial chaos of craft brewers, a booming industry that came out of nowhere?
In 1980, after decades of consolidation and mergers, there were just 92 breweries left in the US, most of them controlled by a handful of big corporations. Per-capita beer consumption had begun to decline, though overall beer consumption was still inching up due to population growth. But there were also some craft brewers among them, and their sales were soaring, and other entrepreneurs jumped into the fray and made great beers. By the end of 2016, according to the Brewers Association, there were 5,234 craft brewers and brew pubs in the US.
Growth in overall beer sales stopped years ago. In 2016, they remained flat at 197 million barrels. But sales of craft brews grew by 6.2% to 24 million barrels, and sales of imports, controlled by Big Beer, grew by 6.8% to 33.4 million barrels. And that came at the expense of Big Beer domestic brands.
Why have craft brews succeeded while the big brands have languished? It was the combination of Yankee ingenuity and America’s new hankering for a flavorful beer. Americans had been fleeing the big brands for decades – no matter how much they spent on advertising – and sought solace in wine and liquor. But with craft brews, there were alternatives.
So Big Beer with its languishing brands is once again trying to take control of this $108-billion market. AB InBev, the world’s largest brewing conglomerate (among others, it has acquired Anheuser-Busch and a gaggle of US craft brewers), and Molson Coors, the world’s third largest brewer (among others, it has acquired MillerCoors and a number of US craft brewers), carve up between them about 90% of US beer production.
Where are the folks from the Antitrust Division of the US Department of Justice? No one knows. Meanwhile, the largest two brewing conglomerates that dominate the US market are marketing what CNN calls “fake-craft brands.”
In this excellent clip, Sam Adams beer founder Jim Koch says this threatens the real deal (if you encounter an ad, hang on, the interview is worth it):
This is how the American Beer War has turned sour. Read… Layoffs Hit Craft Brewer, as Big Beer, Big Money, Overcapacity Rattle American Craft Beer Market
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