Craft Beer and the Coming Recession

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Craft Beer and the Coming Recession
by Daniel Pische

In recent years, there has been no shortage of articles and interviews on the continued expansion of the craft beer industry. While the market continues to expand, an area of increasing attention has been the struggles of well-established brands such as Green Flash and Smuttynose. As more breweries open and the number of closures begin to edge higher each year, I can’t escape this question: what happens when the current competitive environment intersects with an economic recession?

As a reference point, let’s take a look at the current period of economic expansion that began after the end of the Great Recession. The Great Recession lasted from December 2007 through June 2009, and was followed by a period of economic expansion that has extended to present day. At the end of 2010, the first full year of recovery following the recession, an estimated 1,759 breweries were in operation in the United States. By the end of 2018, there are an estimated 7,000 breweries operating, a near 300% increase from 2010.

I pose this macroview of the economy as perspective for the next question. What happens when the next recession hits and the associated economic pressures are placed back on consumers? As of February 2019, the current period of economic expansion is entering its 116th month. The longest period of economic expansion to date is 120 months.

This is not to say that the next recession heralds doom for the craft beer industry, rather that it would amplify challenges already present. Between the ever-growing number of breweries and increased capacity at many prominent of producers, competition comes from the bottom, the sides, and the top. The bottom represents new, up-and-coming breweries who are looking to carve out their footprint. The sides represents the out-of-market breweries whose increasing capacity will require them to expand into new markets. Finally, the top represents larger breweries already in market with greater production capacity and capital.

Regardless of how strong the economy or a specific industry is, any business owner can confirm that even if times are good, they are never easy. As we enter 2019, I believe there are measures that can be taken now to help the business for whatever challenges lay ahead.

Finding your Place Amongst Parity:

We live in a golden age when it comes to the availability of excellent beer. Prior to moving to Miami in late 2016, I use to live down the street from the Beer Temple in Chicago, IL. My work takes me back to Chicago regularly, and every time I stop in at the Beer Temple, I am amazed at the selection of beers just sitting on the shelves. For me, coming back to Chicago and visiting bottle shops is like stepping out of a 2016 timewarp. Just a few short years ago, I remember seeing Facebook posts about new bottle releases and then jetting out of my office to try and beat out the enterprising entrepreneurs following the trucks around the city. Today, those beers and many that are better can be found on shelves, with not a truck chaser in sight.

I believe the simple reason for this is the volume of quality beers seeing distribution. Coupled with the limited offerings available as brewery only releases, there is no shortage of quality offerings in most communities. This parity is a major factor in the squeeze being felt by breweries across the country.

In this landscape, where does your brewery fit in? As more breweries open and the number of available beers available increases, I believe this question becomes even more important.

While some breweries focus primarily on specialty offerings, you have to ask where a $40 barrel aged sour or stout fits, when people are more mindful of their spending. As nationally-distributed breweries can offer a comparable product at half the price, what impact does that have on a more price-conscious customer base? If customers focus more on price point, does the brewery have the ability to adjust offerings to accommodate those changes?

In a crowded marketplace, I believe narrowly-focused breweries are at risk. When breweries such as Hill Farmstead and Side Project have determined that selling pilsners and hazy IPAs is necessary, that is something to take note of.

Focus on the Customer Experience:

When it comes to limited beer releases, lines are a reality, but hours-long lines are a choice.

In a landscape of increasing competition and market parity, customers will inevitably come around to this fact. In 2018, there was no shortage of stories about beer releases with overnight lines, with some even receiving local news coverage. What happens when consumers begin to ask why this sale was not conducted in a manner more respectful of their time?

Justly or unjustly, breweries who are fortunate enough to have to deal with considerable demand for their limited releases will be judged on how they manage the sale process. While I often believe this criticism to be misplaced, it remains nonetheless, and must be managed accordingly.

In reviewing the ways that bottle releases were run in 2018, I would like to highlight two breweries who did excellent job in terms of the experience they brought to their events and regular releases.

In-demand breweries are in a difficult position, as they have to both manage their production of product as well as the expectations of the market. For this review, I will consider a pair of breweries who have done an excellent job of managing releases on a local level, as well as a market level.

Voodoo Brewing (Meadville, PA) has built a nationally recognized brewery in Western Pennsylvania. Combining their production facility in Meadville with satellites spread throughout the state, Voodoo has built a loyal following, as well as national attention for their Barrel Room Collection. I find their management of the Barrel Room Collection to be beautifully simple. With seemingly no advance notice, Voodoo will release bottles periodically throughout the year, with pickup options at most of their facilities.

A system that rewards local supporters as well as those who follow on social media, the release process is extremely fair, as it does not allow for much planning on those looking to corner the market. This no-frills approach trades the hype that can be created in the weeks leading up to a major release in exchange for a process that puts products in the hands of local supporters.

Moving from local releases to ones that expand across a larger market, Revolution Brewing (Chicago, IL) has expanded their Deep Wood series over the past two years, and found a way to balance their highly sought-after releases between their own facilities and the bars and retailers who carry their product throughout Chicago. What I love about this approach is their ability to pair the marketing of their barrel-aged beers, normally released in pairs through their taproom, with release events at local craft beer bars and retailers.

This view respects the relationship between brewer and retailer, and includes both in the release process when much of the industry has moved in the opposite direction. As the craft market continues to mature, I believe the breweries who focus on building distribution channels will benefit in the long run, as they will cultivate a diversified distribution network capable of reaching more supporters and fans.

Putting the Fiscal House in Order:

The number of brewery closures is clearly on the rise, and unlikely to reverse course anytime soon. While the reasons for these closures will vary from brewery to brewery, this is a trend that I expect to continue as the market becomes further saturated.

So what can be done? While the natural inclination is to focus on the brewery or the taproom as the two most integral components of most breweries, measures can be taken to help improve the financial wherewithal of the business.

For those breweries with existing loans on their books, reviewing the terms and upcoming maturities ahead of time can be extremely beneficial, given the rising rate environment that we now find ourselves in. After nearly a decade of flat interest rates, rates have been rising steadily for the past twenty-four months. While predictions on future rate increases in 2019 are uncertain, breweries with loans coming due in the coming year or two may want to consider renewing those facilities ahead of schedule, in order to lock in lower rates for the upcoming term.

This remains especially true for breweries who are borrowing on variable or floating rate terms, specifically lines of credit or credit cards. Since borrowing costs adjust as rates rise, the carrying costs associated with these loans will increase accordingly. If a line of credit or credit card was used to finance any type of fixed asset or equipment, refinancing that debt into a fixed-rate term loan can be a simple way of hedging your associated exposure to rising interest rates.

In addition to managing exposure to rising interest rates, reviewing standing balances on a line of credit or credit card can also be a proactive way of managing cash flow. If either of these facilities has carried a balance for an extended period of time, without the typical paydowns that a lender would expect, that loan could be modified to require regular installment payments. Addressing these balances proactively can allow a brewery to negotiate the repayment terms in a manner that better fits their cash flow rather than having those terms dictated to them under their existing loan agreement.

As the craft beer industry continues to grow, challenges will present to brewers both new and old. Regardless of what the coming period holds, taking measures to improve your business will only help position your brewery for the road ahead.

Daniel Pische is a Commercial Lender and can be reached on LinkedIn.

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