How Can Craft Brewers Shape the Future of the Industry?

At the 2024 Craft Brewers Conference, Bart Watson, Chief Economist for the Brewers Association, gave his annual report on the state of the craft brewer industry. It came at no surprise that the overarching results showed the industry is at a standstill, with craft production measured at -1% in 2023.

While not experiencing significant growth, craft beers are far from going extinct. The hardest year in modern craft brew history was 2020 with production at -10% due to the effects of social distancing during the height of the COVID-19 pandemic.

Watson laid out the landscape for why 2023 ended up being such a competitive and challenging year. It’s true that one source of competition for the industry is manifest in couches and smart devices—a culture among society that may have some roots in the working-, eating-, and living-from-home aspects of 2020. But Watson breaks it down to three core challenges.

Demand

Watson says the era of rapid adoption has come to an end.The first challenge is demand. For two decades, the industry experienced serious demand that expanded faster than supply, which led to high growth and high success. Retailers and distributors jumped onboard, selling craft from their taps and trucks. Thousands of breweries opened and very few closed.

“For years, we were in an era of rapid adoption, that kind of classic ‘S’ curve growth, where new drinkers were coming into the category. They were discovering your amazing beers. And they were also increasing craft as a percentage of their occasions,” said Watson.

But like all “‘S’ curves,” eventually that demand slows or starts to decrease, reaching the natural limits of that era. A 10-to-one opening-to-closing ratio of craft brew businesses permeated from 2014 to 2016. Since 2022, there have been approximately 1200 openings and 900 closings. Watson admits that so far in 2024, the Brewers Association tracks more closings than openings.

Another way to put it is that between 2012 and 2019 the number of craft breweries was growing and compounding annually at 3.5% rate. Since 2019 drinkers have decreased to a compounding 1.6% rate.

Watson explained that there are two ways to increase demand, 1) through the number of drinkers and 2) through the percentage of occasions they dedicate to the category of craft beer. The Brewers Association data shows that more people are moving out of the category than are stepping in.

With demand decreasing each year, craft brewers need to find new ways to attract and retain drinkers.“You go back to 2015 and you can see that [individuals drinking more craft beer] outnumber [those drinking] less by more than four to one. So, during that time period, not only were we getting more drinkers, but they were leaning into the category and increasing the percentage of their total occasions. Fast forward to 2023, just as many people are taking a step out of the category as those people who step in, that means we begin to have this dual effect where not only are our drinkers less constant, but the occasions aren't growing,” said Watson.

The gap between openings and closings is indicative of the difficulty in keeping craft brew businesses open, but Watson says there are reasons for optimism.Fewer constant drinkers make for a slow growth environment. But Watson expressed confidence that the industry could start that growth anew, this will likely begin in a more incremental pattern as craft brewers get back to the hard task of finding ways to attract more drinkers or providing more occasions with handcrafted options. The most successful breweries at this time are using this methodology in their business decision-making.

Competition

The second challenge discussed by Watson was competition, both within craft and across the entire alcoholic beverage industry. To measure this challenge within craft, the Brewers Association measured the production capacity ratio of craft breweries, which has dropped to its lowest level at 51% since being an added data point. This means that, collectively, the capacity of craft is only half used, which has led brewers to supplement with other parts of the beverage industry to fill that excess capacity. More than 600 active breweries now have distilled spirit permits, according to research by the Brewers Association.

Competition within craft beer as well as among alcoholic beverages is increasing.Data also suggests that as hemp-derived THC products become legalized, many breweries will move into that space as well to fill that excess capacity.

Beyond the craft supply, research also shows an increase in the number of TTB (Alcohol and Tobacco Tax and Trade Bureau) permits for breweries, wineries, and distilled spirits. Currently there are more than 37,000 active TTB permits across these categories, which Watson estimated at about one permit per 4,021 American drinkers. This results in competition for the drinker, retailers, and distributors as well.

“Just making good local beer may no longer be enough. You have to do more to stand out. And that often comes down to business decisions,” said Watson.

The business environment

The third challenge listed by Watson is the overall business environment. Cost for just about everything a craft brewer needs to make beer has increased in recent years. Considering that craft brewers cannot pass on the price increase to the customer due to the lack in demand, this challenge has a significant impact.

Watson pointed out that the entire beverage alcohol industry is experiencing this same challenge. He speculated that a contributing factor may be the growing international demonization of alcohol from public health and anti-alcohol activists seeking stricter rules and regulations. Such views may be impacting Americans’ perception as well.

Watson suspects the growing international demonization of alcohol may be impacting American drinkers.According to a recent poll where individuals were asked if monitored drinking was good or bad for health, there has been a 12% decrease in the number of those who say good and a 12% increase in the number who say bad in comparison to 2001 numbers.

However, Watson said the bigger contributor is the state of the alcoholic beverage market.

“The basic point here is it's a crowded marketplace. And it's harder to get your products out on the market than it was before with so many options,” he said, but emphasized, “It's worth remembering that customers are still willing to pull out their wallets and spend money on beers and brands that they value.”