The Great American Beer Festival will kick off its 35th year this week with a record number of craft breweries pouring, a record number of beers vying for awards, and a capacity crowd of attendees sipping samples.
It’s a trend that’s become almost old hat for this sub-sector of the U.S. beer industry.
But the 2016 storyline in craft beer is a tale far more complex than a ballooning of breweries to above 4,600 and a bevy of questions about a bubble burst.
The industry has matured, growth trajectories have narrowed, competition has become more fierce, multibillion-dollar market-movers have joined the fray, and business plans have evolved in their sophistication.
Craft beer is all grown up.
Nationwide, the small, traditional and independent breweries generated $22.3 billion in retail beer sales last year, according to the Brewers Association, the Boulder-based craft beer trade association that hosts the GABF. By production volume, craft beer has a 12.2 percent share of the overall U.S. beer industry, according to the Brewers Association.
Through May, the Colorado Liquor Enforcement Division tallied 350 manufacturing brewery and brewpub licenses — which include breweries in planning — triple the total recorded a decade ago, according to a recent University of Colorado study commissioned by the Colorado Brewers Guild.
That same study stated industry sales totaled $882 million and an economic impact of $1.7 billion.
“The Front Range has certainly seen a very high concentration of brewery openings in the last four or five years,” said Steve Kurowski, marketing director for the Colorado Brewers Guild. “Whether it’s tapped out? I think that remains to be seen. I think there’s room for good breweries making high-quality beer across Colorado.”
Take La Junta, for example, he said, adding that the eastern Colorado townsoon could be home to its first brewery. Additionally, a greater proportion of the 40-plus new breweries that open annually in the state are smaller, neighborhood-focused breweries or brewpubs, he said.
Gunbarrel Brewing Co. is one such brewery.
Diversify, diversify, diversify
The brewery has been in the works for three years as homebrewer Jamie Fox and his wife, Marie, sought a suitable space in the Boulder County neighborhood. In that time, more than 100 breweries opened in Colorado and Gunbarrel gained the new headquarters for the Boulder-bred Avery Brewing Co.
The Foxes picked away at their dream, acquiring pieces for the brewery and perfecting the stock of recipes via taste-tests with friends and certified beer judges.
“You can’t have good, fast and cheap,” she said. “And we had time on our side.”
The biggest win: Acquiring a coolship (or koelschip), a shallow, open-topped vessel that allows for the wort to be exposed to the air and cool overnight. It will allow for Gunbarrel Brewing Co. to offer some ales crafted with wild yeast from “spontaneous fermentation.”
Fox said she is keeping mum about specifics of the beers and the location for another couple of weeks, but disclosed that Gunbarrel Brewing’s initial focus will be to serve the neighboring community.
“If there’s going to be a bubble that’s going to burst, quality and community breweries will do just fine,” she said. “I think that we’re one of those breweries. I think we’ll be OK.”
New breweries aren’t alone in their adapting to a booming and increasingly crowded craft beer market.
Boulder’s Twisted Pine Brewing and Denver’s Wynkoop Brewing Co.both ceased distribution operations to focus solely on their respective brewpubs. The nearly 4-year-old Former Future brewery off South Broadway shrugged off its name and traditional beers to operate under Black Project Spontaneous & Wild Ales its in-house brand of wild and spontaneously fermented ales.
What was a pet project started in 2014 caught on with beer fans, collectors and traders, who sought out the unique and small-batch ales.
“I do feel, from a business perspective, that differentiation is going to be key for the future,” said Sarah Howat, who runs the brewery with her husband, James. “I don’t think it’s going to get any easier.”
Tempered growth and big deals
Breweries have been opening at a rate of two a day for the past couple of years, but that swelling of the ranks doesn’t indicate the craft sector is in a bubble, said Bart Watson, chief economist for the Brewers Association. Market demand, measured by production sales, continues to outpace the number of total breweries, he said.
“We’re still seeing (sales/demand) growth,” he said. “That growth is maybe a little bit slower than what we’ve seen in the past.”
Watson attributes that to industry maturation. With a larger base, it becomes increasingly impossible to achieve the high-percentage annual growth rates sustained when the industry was smaller.
At the mid-year point, U.S. craft beer production growth sat at the 8 percent range. That’s down from 13 percent in 2015 and 18 percent in 2014 and 2013, according to Brewers Association data.
“I do think we’re going to reach a point where it’s a little more like the restaurant industry,” Watson said. “We may see a more gradual leveling.”
As craft beer continues steady on its trajectory — acquiring bigger bites of the overall beer market — the industry leaders have not remained sleeping giants.
Constellation Brands, holder of Corona, Modelo, Black Box and the like, made its big splash in 2015, buying Sculpin-maker Ballast Point for a cool billion. Industry leader Anheuser-Busch InBev — while in the throes of trying to combine with the No. 2 SABMiller — has been trotting across the nation, snapping up notable regional craft breweries like Oregon’s 10 Barrel and Colorado’s Breckenridge Brewery.
MillerCoors has invested in its craft-focused division Tenth and Blake Beer Co. and wrapping in craft acquisitions such as that of Terrapin Beer Co.
“I think for them, it’s all about diversifying their portfolios,” said Nick Petrillo, industry analyst with market research firm IBISWorld. “I think it’s more about cornering the market, building a portfolio … to pick and choose some of the most popular craft beers that are already well-known brands.”
The spree of craft acquisitions that occurred in 2015, tailed off in 2016. Private equity also appears to have started to shy away from the sector, he said.
“I suspect (they’re) looking a little at the craft beer boom that we’ve had and starting to wonder if this might be a plateau,” he said.
Kyle Leingang, a Dorsey & Whitney LLP attorney who specializes in the craft beer industry, believes that merger-and-acquisition activity in craft beer should continue to be on an upward swing.
A lot of those deals could come from within the sector, he added, noting moves by Longmont-based Oskar Blues Brewery. The now private equity-backed Oskar Blues has acquired craft brewers such as Perrin Brewing Co. in Grand Rapids, Mich., and Cigar City Brewing in Florida.
Leingang said he’s also watching closely to see whether craft breweries will take to the public market, a la Ballast Point.
Just how craft brewers are affected by the consolidation — notably what happens to distribution channels and access to market if AB InBev and SABMiller combine to have a 53 percent market share — remains to be seen, he said.
The small breweries and the large craft operations should remain fairly insulated, he said. But the ones in the middle, who are still trying to get their beer on more shelves and make a name for themselves, will be put at the greatest risk, he said.
Colorado has its own unique challenges, said Kurowski, of the fractured state brewers guild. The new law that puts full-strength beer and wine on some grocery store shelves in Colorado will complicate how smaller craft operations can sell their beer at retail locations, he said.
“Doing business with an organization like Walmart, Target or King Soopers is much more different than doing business with the liquor store down the street,” he said.
The new distribution landscape could lead to an acceleration in the number of community-focused breweries, brewpubs and taphouses, he said.
“I think there’s still a lot of opportunities,” he said. “There are a lot of people who still drink American light lagers out there.”