Continued Growth Amidst SKU Proliferation

One common worry I hear about in the craft beer space is the ongoing proliferation of SKUs. Is there enough shelf space? Are their enough tap handles? These questions typically are based on blunt measures, like the number of SKUs across the category or within a particular style.

Although there is certainly a limit to the number of SKUs (when SKUs exceed the number of tap handles + placements in stores, we’re in trouble), I want to briefly suggest that looking broadly at a category is a poor method for thinking about when craft beer SKU proliferation has reached a breaking point.

Take for instance some data presented in the Q&A of a recent power hour by GuestMetrics:

  • In the IPA category, from 1Q13 to 1Q14, SKUs increased from 1,113 to 1,524; that’s an increase of 37%
  • During the same period, volume sales for IPAs only increased 23% (side note: only 23%?!)
  • That means SKU growth outpaced category volume growth by 14 percentage points
  • This is bad, right?

Well, the answer is a bit more complicated. To really understand whether this proliferation is problematic, we need to know a bit more about how sales are distributed across those brands. Without the full dataset, the calculations below will be a bit rough, but it is possible that even given the growth numbers above, EVERYONE is still growing. How can that be the case? Well, funny things can happen when you aggregate groups.

Let’s assume for a second that IPA sales mirrored craft category on-premise sales, with the top brands accounting for 2% of the SKUs, but 60% of the volume. Using the 1,113 SKU number, that’s 22 “top brands” and 1091 other brands. That leads to the following share distribution:

1Q13 # of Brands Share (2012 = 100) Share per Brand
Top IPA Brands 22 60 2.7273
Other IPA Brands 1091 40 0.0367

Now, one thing we’ve learned from recent years is that the tail, or those “other” brands, are typically growing faster than the top brands. It’s simply harder to grow as fast on a larger base (someone please explain this to Lagunitas).

So for this (admittedly cooked) scenario, let’s set top brands growth at 13%, which makes volume growth for the other brands 38% (to average 23%). This is a big gap, but not that unbelievable given category data. If we remove the 22 micros that made the jump to regional last year, micro growth was a whopping 42% by volume in 2013.

That would mean:

1Q14 # of Brands Share (2013 = 123) Share per Brand
Top IPA Brands 22 67.8 3.0818
Other IPA Brands 1502 55.2 0.0368

Under these conditions, both the top brands and the other brands increased their average share per brand. Although these numbers are admittedly crafted to show this precise outcome, they aren’t that unbelievable: a few top regional brands steadily growing their share while a proliferation of micros slowly take a similar share in an increasing number of locations. Sounds pretty much like the craft industry, doesn’t it?

More importantly, it aligns with the data. Last year, GuestMetrics found that the top 204 brands accounted for 79.7% of sales. This year the top 200 were down to 60%. This is exactly the kind of share shift toward the tail that the scenario above envisions. So the next time you hear something about how SKUs growing faster than a category is unsustainable, make sure to learn about more about how that growth is distributed.

Bart Watson, Chief Economist for the Brewers Association, is a stats geek and beer lover. He holds a PhD from the University of California, Berkeley, where in addition to his dissertation, he completed a comprehensive survey of Bay Area brewpubs one pint at a time.

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