WARNING SIGNS

Craft Beer’s Looming Crisis

Find out if your favorite local or national craft brand is in danger of disappearing.

08.12.16 1:00 AM ET

You may want to grab a barstool before you hear this: Craft beer has some very serious issues.

While things certainly seem bubbly on the surface for the category—years of double-digit sales growth have led to a large increase in brands and an overwhelming selection of IPAs, stouts, saisons, and just about every other conceivable type of beer on store shelves—growth is slowing, putting pressure on the industry. What makes matters worse is that breweries are still opening at a rapid pace around the country and unfortunately, many of those bottles on the shelves are old or have gone bad.

And there is also the fact that fruit beers are flooding the market, which is truly a sign of the apocalypse. (Mango IPA, anyone?) This will not end well.

You might be tempted to dismiss these warning signs and order yourself another pint of your favorite cask-conditioned session brew. Don’t. This is not a prediction, it’s a replay. These events, commonly referred to by people in the business as “The Shakeout,” happened before, in 1996. Some of the bigger brewers went out of business, others were bought by competitors, and sales of craft beer—the term that was then just beginning to replace the word “microbrew”—went flat for five years.

There is increasing speculation (and worry) that the bubble will burst again.

The main concern is that despite the hype around craft beer, its rapid growth may have peaked. Thanks to an explosive decade, where the category went from representing under 4 percent of total beer volume in the U.S. to more than 12 percent in 2015, sales during the first half of 2016 were considerably slower.

At the same time, expansion continues unchecked: Roughly three new breweries a week opened in 2015 alone. The Brewers Association, the category’s official organization, has called for increased quality control, with director Paul Gatza citing beers that “were not good.”

And then there are all those fruit beers. “The signs you point out are humorous, but also serious,” admits Bill Covaleski, co-founder of Victory Brewing in Downingtown, Pennsylvania, which he opened in early 1996 as things started shaking the first time. He remains bullish as long as “everyone spends their money wisely, on quality control and assurance.”

But will everyone spend money wisely? Will young brewers, who may have been in grade school in 1996, learn the lessons of the last correction?

I hope so. Fortunately, the industry has always had a strong tradition of cooperative competition, sharing information and experience among brands. Plus, the Brewers Association has invested in setting up quality assurance standards. “If [new brewers] aren’t paying attention to them, they’re foolish,” says Covaleski.

New brewers may actually have an advantage, the same one their predecessors had over the mainstream brewers: fresh ideas paired with a quick decision cycle. And as consumers become increasingly interested in locally-made products, there has been a rise in beer bought in brewery tasting rooms, which is much more profitable for a brand considering it cuts out several middlemen from the transaction.

So much beer is purchased there, in fact, that some people think category sales are significantly under-reported by retail sales-tracking services like IRI or Nielsen, which rely on register data from large store chains. Industry consultant David “Bump” Williams, who once ran IRI’s beer data division, thinks the amount is significant. He estimates that 20 percent or more of total craft beer sales go unreported. (He also points out that for some small breweries, meaning those that produce less than 20,000 barrels a year, direct sales are the only way their brews are available.) It’s a rapidly growing phenomenon, and one that could very well account for a percentage of the disappearing growth rate.

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But even if one figures in direct brewery sales, the recent meteoric rise of craft beers can’t go on forever. If sales of the category continued at 2015’s rate of 12.8 percent, the entire U.S. beer market would be, well, completely craft in 17 years. That’s simply not going to happen.

At some point, things must slow down. When that will happen is anybody’s guess, but it will probably be between six months and three years from now. The magnitude of the downturn, however, is harder to predict. Some of the businesses are in good shape, but too many are undercapitalized or overextended. There is a lot of money flowing into the industry, but not all of it is backed with due diligence.

“I feel that it’s not going to be widespread, but there’s going to be some bloodletting,” says Covaleski. “It was personal back [in 1996], because there were so few of us. We knew each other. This time around, there will be more people affected.”

But, as it was 20 years ago, the change will be a correction, and the surviving brewers will have the opportunity to grow into large national brands. Unfortunately, we could lose as many as 500 breweries in the process, though eventually the industry will emerge even healthier—just like it did the first time around.

How can you tell if your local or favorite brewer is in trouble? It won’t be easy. Some of those that fell the hardest in the Shakeout were riding high. Some crashed because of bad management, some because of bad business models and some simply failed to respond to changes in taste, like a sudden shift away from sweet raspberry-flavored beers.

Brewers that will survive will have some common traits. The winners will be deeply enmeshed in their local markets and locked in with their communities. Equally important, their bottled or canned beers will still taste great at least three months after packaging. They won’t discount. When they come out with new beers, they will be leaders, not followers, with innovative, original ideas.

And just maybe there will be less fruit beer, but that remains to be seen.