Beer Business Unplugged

This year’s Craft Brewers Conference has just concluded, and once again, the event was well attended with over 12,000 industry people. While the attendance was impressive, the initial feedback from a number of attendees was not positive.  From those who attended, many mentioned that the overall excitement from previous years’ conventions was missing.

The early first quarter numbers continue to show a dramatic slowdown in crafts’ volume and dollars.  Longtime established crafts, including Sierra and Boston, have negative trends.  Only New Belgium seems to be ahead of the trends, predominantly due to their 15-pack cans of Dayblazer.  The downward trend was one of the main topics of conversation at the CBC.

Given the crafts’ downward trend, along with the recent announcement or more than 7,000+ active breweries, one can see why the conversations at the CBC centered on the future of the industry.  The two most talked about topics were consolidation and fallout.  Taking a page from Charles Dickens, it was the best of time, it was the worst of times.

Even those brewers that are currently successful are concerned about the industry and its direction.  Many have commented, though not publicly, that if given the opportunity to build again, they probably would not, knowing the standings of today’s industry. Soon the industry could see more brewery closings than openings. Not unlike what happened to golf courses after the 2008 real estate crash.

The question is: will 2017 be remembered as the year that marked the end of the craft growth?  Perhaps, 2017 will be the year that ends the wannabe craft brewers or more aptly stated: will this be the beginning of the amateurs vs. the pros?

Two additional issues always seem to surface: first, finding quality people; and, second, finding distributors for the craft beers.  Regardless of what happens, both of these issues will continue to play key roles in the industry.

In the future, three craft models will continue to be functional.  One is simply the corner brewpub with a restaurant; the second is the small distributor who self distributes; and third is the fully integrated brewery. The corner brewpub has obviously been a successful venture for years.  The small distributor model works given certain guidelines and expectations, as is noted by the many successful brewers around the country. Finally, there are those who have the means, ability, and willingness to achieve a fully integrated brewery. These are the industry pros.  The point that good people are hard to find, should be more in line with good people are hard to find for what I am willing to pay!  From brewers to top beer executives, good people are available; brewers just have to be willing to pay for top hires.

To find distributors, brewers have to understand that there is more to creating and building a brewery, and that hiring good staff requires good compensation.  A successful brewery must build branding, marketing, a sales teams, pricing, promotions, and on and on.  Those who will, and can, will have no issue in finding distributors.  If you build it, the distributors will come.

The craft segment is not dying, nor is it making the shift to consolidate. What the craft industry is doing, is changing to accommodate those who have a clear vision of what is needed in the industry to be successful.

An investment in knowledge pays the best interest….

I acquired Texas Beers in May 1981 and Schlitz immediately announced a general market price increase.  As a new owner, this decision on the part of Schlitz, put me in an awkward position. Retailers would be pushing back at the idea of a new owner raising prices on their product. So, despite having a more than 40% market share, the increase caused me to be unsettled about the immediate future of Texas Beers.

Fortunately, AB, Miller, Coors and multiple other beers increased their price at the same time.  Despite this small respite, I took steps to increase the Schlitz inventory in Texas Beers warehouses, while at the same time holding the current price.  My competition however raised their prices.  Remember, in 1981, retailers only changed prices when the product changed prices, so Schlitz was now one price point under AB, Coors and Miller.

Upon depletion of the current Schlitz inventory at the old price, I was forced to match AB, now, however, my sales had been soaring, and for the month of June I was the number one volume wholesaler in the state of Texas.  Needless to say, all of those increases disappeared after the price increased.

Well after Stroh took over the Schlitz Brewery, and Stroh had terminated most of Schlitz support programs, including electronic media, the negative trends for Schlitz began accelerating.  To change the Schlitz trends, Stroh repositioned the Schlitz brand by lowering the price, thereby making the brand price-point more regional than national.  The consumer, unfortunately, did not buy into this new pricing and the rest is history.

A recent WSJ article entitled, Gillette, Bleeding Market Share, Cuts the Price of Razors, tells the story of P&G, who had purchased Gillette for $57 Billion in 2005.  After 12 years of raising prices on their blades, Gillette decided to lower blade prices by 20%.  Gillette razors had been losing market share for the last six years going from a 70% share in 2010 to 54% last year. Gillette’s market decline was attributed to their price increases along with the competition from Harry’s and the Dollar Shave Club both which cost much less per blade than Gillette.  According to the WSJ, this price reduction would translate to a lowering their PTC to about 12% less than today.  A question might be, where is the other eight percent going?

Both Harry’s and Dollar Shave Club now have a blade share of 12.2%, up from only 7.2% in 2015.  This includes both in-store sales and on-line sales.  One Barclay’s analyst believes it will be very difficult for former Gillette users to switch back from Harry’s or the Dollar Shave Club now.

To some degree the ongoing story of the Gillette blades parallels the last 10 years of AB’s model in the US.  AB’s rapid price increases in all segments have driven their drinkers elsewhere.  So the question is, should AB, unlike Schlitz or Gillette, continue to maintain their pricing strategy or slow down their price increases or even lower their prices?  AB seems to be doing that with their price beers to generate summer volume.  With these brands, they probably will have some success.

Looking back, Schlitz should have just maintained their premium price points and had all brewery, wholesalers and retailers make full margins instead of trying to save the brand by lowering pricing.  At least all would have made more dollars.

Cutting prices or putting things on sale is not a sustainable strategy. On the other side, one cannot cut costs to save one’s way to prosperity…..