This article summarizes some of the key facts and figures of a turbulent 2020, with an eye toward the craft market in 2021. For those who missed it, there is a longer presentation available to Brewers Association members.
Small and independent brewers are on track to see their numbers decline 7-8% in 2020. This could change if on-premise slowdowns deepen in December, traditionally a strong selling period for small brewers. This follows a 10% decline at mid-year and a 5% decline in Q3.
There are large variations by brewer and region in that number. For example, while the total craft number was -5% in Q3, the smallest brewers have been hit harder, due to their reliance on draught and at-the-brewery sales, and so were down closer to 30% during the quarter.
For 2021, my models are showing growth of 6-7% over 2020, but production levels that still fall below 2019, meaning it will take craft until 2022 to recover to its previous levels, and longer to fully return to the growth trend it had been following of 3-4% per year.
The on-premise has borne the brunt of the pandemic’s market disruptions. While data suggests that things improved between Q2 and Q3, most indicators showed on-premise sales still down a quarter or more year-over-year in Q3. In addition, near real-time indicators from companies like BeerBoard and Nielsen CGA show November and December numbers that are trending downward, suggesting Q4 might look more like Q2 than a sustained recovery.
The biggest reason that full recovery is unlikely anytime soon? Around one-fifth of on-premise consumers are waiting for a vaccine or treatment before they return to the on-premise (source: Brewers Association analysis of Nielsen CGA data). For that reason, it seems hard to believe there will be any significant recovery until late Q2 at the earliest.
In addition, although the second half of 2021 will likely look better, I believe it’s unlikely we’ll get back to 2019 levels right away. The combination of new customer patterns (not all of those 20% are going to rush back to the way they did things before) and closed accounts will put a cap on the extent of the recovery. In addition, as you plan for 2021, I urge you to look at how the same level of sales might look different. Urban areas that rely on office workers may come back much slower as people continue to work from home, whereas the suburbs may see increased sales. Different places, patterns, and businesses will mean similar sales have different winners and losers for the next year or two.
Based on the Brewers Association’s ongoing brewery tracking, we currently are on pace for around 700 openings in 2020. That’s about 30% lower than last year. That said, the trend has been weakening in the past few months, so a number slightly below that mark would not be surprising.
In 2021, expect lower openings to continue if not decline further. Why? For one, most of the decline we’ve seen this year has nothing to do with the pandemic. Openings had been declining for around a year before the pandemic hit, and as much as two-thirds of the decline in openings this year is related to that longer-term trend rather than the impact of COVID-19.
2021 may see openings decline further as fewer breweries in planning enter the pipeline and as other structural factors such as lending make it more difficult to plan and open a brewery until the pandemic passes.
On closings, the numbers are positive and perplexing. Currently, our closing number suggests that 2020 closings may be similar, if not lower than 2019 (about 300 brewery closings in 2019). We will certainly find more in our end of the year sweep, but given the sharp decline in sales, it seems almost unimaginable that closings haven’t risen more.
I fear that 2021 will be a year where the closing number matches the current market reality more closely, and we see closings rise sharply. We should not confuse the lack of business deaths with business health, and there are numerous signs, from brewery sales and revenue, to broader small business confidence surveys, that small business, particularly those in hospitality, are hurting. As market conditions return to normal, this may accelerate closings, both as breweries take stock of the hole COVID-19 has dug in their finances, and as other players, such as landlords, end extensions or forgiveness on rent.
Early in the pandemic, there were numerous voices speculating that COVID-19’s economic damage might cause beer drinkers to trade down, opting for lower priced beer segments. In reality, however, we’ve seen the opposite. If anything, the pandemic has accelerated beer’s premiumization, as the fastest growing parts of the beer business over the last six months have been its highest priced. Looking at beer, segments priced above premium (including craft, import, and super premium) are all exceeding the growth rates of premium and have seen large bumps in off-premise scan data. Premium has seen a small bump, and sub premium has actually seen slower dollar sales growth than a year ago (source: IRI Group MULO+C, last 26 weeks’ dollar sales growth).
Going forward, this is likely to continue for two major reasons. The first is that this is a long-term, stable trend. Above premium in beer has steadily grown share for nearly three decades. This isn’t a cause in and of itself, but the aggregation of numerous factors related to brands, demographics, and consumer choices. The second is that the economics of the downturn are hitting low wage workers the hardest. So above premium beer drinkers have not seen employment and wages hit as hard as lower wage workers.
Craft has been growing its consumer base steadily over the past decade. Nielsen Harris data (presented to members earlier this year) shows that the percentage of the 21+ population that drinks craft has risen from 35% in 2015 to 44% in 2020.
These demographics are likely to continue improving in 2021—and for the next several years—as an aging millennial population stays in or moves into the core craft age range.
That said, national age trends are not the same in every state or region, and the next generation (Gen Z) is showing signs of different preferences and buying patterns. Consequently, while craft still has run room demographically, in the longer run the industry will need to broaden its core demographics to keep growing its consumer base.
Something that on the surface seems paradoxical has been occurring in our annual consumer survey. The percentage of craft drinkers saying that both “high alcohol content” and “low alcohol content” are important in their purchase decision has been growing. We can reconcile this disconnect by remembering that the growth is driven by different drinkers and different occasions, but this dual growth has driven much of the style change over the past few years. On the one hand, stronger flavored beers, primarily IPAs, have seen growth at 6% ABV or higher. At the same time, a range of more sessionable styles, such as blond ales, golden ales, Kolsch, and lagers have seen growth at 5% and below. The average craft beer is in the 5-6% range, but that middle is shrinking as its own bucket as that average gets pulled on both ends.
In terms of what’s next, I’d highlight three flavor profiles, and the styles that follow:
- Juicy/hazy: This IPA sub style is being driven by numerous demographics. In our annual survey, female drinkers and drinkers ages 21-25, 21-34, and 35-44 all said they were more interested in this style. That’s a recipe for continued growth.
- Crisp: The other end of the spectrum is captured by “crisp” beers, with female drinkers and drinkers ages 21-25 and 21-34 all more interested.
- Tart: Tart doesn’t necessarily fit neatly into the patterns I identified above, partially because like IPA, it has the malleability to take on different forms. From session sours to higher ABV smoothie sours with fruit, tart isn’t one style, but has numerous forms. It’s polarizing in consumer surveys, but with 21-24 year-olds more interested in it, it likely has run room to grow driven by the next generation of craft drinkers.
Outside of the hops shortage of 2008, it is possible that 2020 has been the year with the most supply chain challenges in recent history. From CO2 to aluminum cans, as well as items no one would have considered before the year, such as personal protective equipment or propane heaters, 2020 meant more planning and more challenges than ever before.
For 2021, the key message is “plan ahead.” The primary challenge is going to be aluminum cans. Right now, we’re simply demanding more as a country than manufacturers can make. There are some options abroad, though those may pose quality challenges (we’ll have more resources here coming soon). That challenge won’t ease in the first half of the year, and even in the back half may only ease slightly, as much of the new capacity is spoken for, so plan accordingly.
More broadly, although the acute challenges may have passed for other items, in a year that will bring more economic swings (some positive this time), expect disruption as shifts in the economy ripple through the supply chain, and spend more time planning for your needs and what happens if those needs change.
If on-premise was the loser of 2020, e-commerce was arguably the winner. Prior to the pandemic, estimates were that 2% or less of beverage alcohol volume flowed through e-commerce, even using a broad definition. Beer was a small portion of that, with Rabobank estimating beer at only $115 million in sales prior to the pandemic — that’s 0.1% of beer’s total retail sales.
Like total consumer spending, e-commerce took a huge leap forward when the pandemic hit, as clicks replaced bricks in people’s buying patterns. Why visit a store when beer can show up at your doorstep (where legal) for a modest fee?
The data shows that we’ve receded from the peak (where perhaps 8% of beverage alcohol off-premise was flowing through e-commerce), but that e-commerce sales, for both beer and all beverage alcohol, remain far beyond where they were a year ago.
Expect this to continue, and for e-commerce growth to re-accelerate in 2021. E-commerce was already growing—albeit more slowly—prior to COVID-19, driven by new business models and innovation, younger legal drinking age consumers more comfortable buying everything on their phones, and slowly updating regulation and legislation for a digital economy. In addition to those forces, COVID-19 has likely set off a cycle of further growth, driven by investments made during the pandemic to up capacity, increased consumer awareness, and then a feedback loop of market growth, consumer demand, and regulatory and legislative changes.
Speaking of regulatory and legislative changes, the pandemic brought an incredible number of changes to market access, for brewers as well as beverage alcohol retailers. One example is direct-to-consumer sales, which were at least partially allowed in 35 states, up from fewer than a dozen prior to the pandemic. These changes were a lifeline to connect breweries to consumers while their primary business model of welcoming visitors to their taprooms and brewpubs were on hold.
Although I do think some of these new rules will stick around, my prediction here is that fewer of these rules will be made permanent than many brewers are thinking right now. It’s easy to confuse the pendulum swing of more market access over the past decade as pure progress, whereas a longer-run look at beverage alcohol in the United States tells us market access often cycles with greater market control. In addition, even the market access opportunities that get made permanent will likely see additional rules going forward, as freer markets often lead to even more regulation.
That’s why I want to close this piece with a plea for unity in 2021. Your state guild or Brewers Association (BA) dues are an easy item to cut as you budget for next year, but now more than ever is the time for unity and concerted action. As conditions improve lawmakers may be tempted to roll back the rules you need to dig out of the hole COVID-19 has made in your business, and now is the time for your guild and the BA to preserve and expand those rights.