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The Subtle Craft Brew Knockout

Can the giant knock the small guys out with a few well placed lucrative punches?

Can the giant knock the small guys out with a few well placed lucrative punches?

Craft brews represent just 5% of total American beer-industry sales volumes, yet they command higher profit margins, making them more attractive to bar owners and liquor store proprietors. Over the last few years, total volumes of craft beers have been rising by over 10% annually.

Meanwhile, total U.S. industry beer volumes, which take into account the major industrial brewers, are slipping. According to Anheuser-Busch Inbev (AB Inbev), 44% of today’s 21- to 27-year old drinkers have never tried a Budweiser, for decades the USA’s best-selling beer.  Bud reached its peak in 1988, when it sold almost 50-million barrels worth. A quarter century later, Bud was down to 16 million barrels. 

Light beers are partially responsible for Bud’s erosion. Bud Light usurped its older brother’s throne in 2001 to become the nation’s number one selling beer. Ten years later, Coors Light booted Bud down to number three.  Since then, the growing craft beer movement has contributed to a 9% decline in further shipments. In 2013, craft beers slightly outsold Budweiser – by 100,000 barrels – for the first time.

Still, I wouldn’t shed too many tears for Budweiser, trumpeted by AB Inbev, its manufacturer, as the King of Beers. When we say that craft brews outsold Budweiser for the first time, we mean the sum total of all the craft brews in the United States.  In other words, 2,768 craft breweries manufacturing well over 2,000 brands of beer sold combined about the same as the nation’s third bestselling beer. Bud still controls 7.6% of the $100 billion U.S. beer market, although that’s a 14.4% decline from a decade ago. 

In the past, AB Inbev (then just Anheuser-Busch) threw more marketing money at the problem and the beer decline slowed but did not stop. Their latest brainstorm is to completely alter their marketing campaigns, dropping their Clydesdales ads for something fresher and hipper that will inspire the youth to chug Bud like days of yore. 

AB Inbev is also hedging their bets. If reams of marketing bucks don’t stop the hemorrhage of sales,  why not attack the problem from the inside? As they say, if you can’t beat ’em, join ’em.

AB InBev is somewhat constrained in its maneuvering.  They can’t re-invent Budweiser with a new recipe.  This would alienate the loyal market they still currently have, mostly people over 45 who grew up drinking Bud and other beverages like it when there were fewer choices.  Money is no object.  In 2014, the total revenue for all 200 InBev brands was $47 billion.   Quicker than you could pop open a bottle cap, they could open up their own craft breweries, dozens of them. That, too, has its own problems. AB InBev, as one of the world’s largest brewing conglomerates, lacks the necessary credibility to be taken seriously by craft brew drinkers.  After the Anheuser-Bush merger with InBev in 2008, the new giant tried to tackle craft brewers head on with a specialty brewing division. The introduction of Budweiser American Ale and an attempted revamp of crappy Michelob into a craft beer failed. 

Most recently, a Superbowl ad mocking craft beers makes InBev’s ambivalent position very clear. In that ad, InBev proclaimed:

“Budweiser, proudly a macro beer. It’s not brewed to be fussed over. It’s brewed for a crisp smooth finish . There’s only one Budweiser. It’s brewed for drinking, not dissecting. The people who drink our beer are people who like to drink beer brewed the hard way. Let them sip their pumpkin peach ale. We’ll be brewing us some golden suds. “

Obviously, AB InBev wants it both ways, because at the same time, they’ve been slurping up craft breweries to leverage the credibility of what once were beloved institutions. In 2011, AB InBev guzzled Chicago craft brewer Goose Island for almost $40 million. In 2014, AB InBev opened up its huge wallet another time.  It bought the 17-year old craft brewery Blue Point from Patchogue, New York for $24 million.   At the end of the year, InBev struck again, this time by scooping up Bend, Oregon’s highly regarded 10 Barrel Brewing Company.  At the beginning of 2015, 20-year old Elysian Brewing out of Seattle was the score. 

There are two ways to look at this news.   Craft brew lovers immediately assume the worst, that the beers they adore will be watered down, literally, by AB InBev’s crew of cost-cutting MBA’s. In the short run, this belief is likely unfounded. The craft beer industry is competitive enough that a marked decline in quality of one brewery should lead true beer lovers to go get their fill elsewhere. 

Others, like Dogfish Head craft brewery founder Sam Calagione, take a more cynical view. The buy out allows these once smaller breweries to now produce output at once unimaginable levels, with a powerful distribution network to back up that production. Beer produced at greater economies of scales leads to lower prices for consumers. The end drinker would argue that this is good, but Calagione doesn’t agree. “[AB InBev will] buy a once-independent brewery and suddenly its IPA’s kegs are on the street for half as much as a true indie craft beer.   It really shows they’re using these once-craft brands as pawns in their game to knock the true indy breweries off the board.”

Calagione has a sound point. In 1873, there were 4,131 breweries in the USA. By 1910, there were less than 1,600. The numbers continued to drop.   In 1960, 229; 1970, 142; and 1980, just 82. Breweries consolidated and started to produce fewer and fewer styles. American beer became homogenous. It took until 2009, with the rise of the craft beer revolution, to get back to around the same number of breweries as 1910.   

Quality depends on consumers having a choice in an industry which remains sustainable. If giants buy out much of the competition and innovation and undercut the quality producers remaining, there will be some kind of regression. But not completely. AB InBev can’t erase the craft beer revolution any more than McDonald’s and Burger King can blot out the trend of consumers preferring higher quality customized lesser fast foods.  There will be come consolidation, as there is in any industry, but what is left behind will be better than what was there before the craft trend started in the late 1970’s. The fewer independent players will be stronger, while the bigger players produce higher quality stuff out of necessity to keep their customers. In the past, we called this capitalism.

In the long run, whatever the behemoths do, the consumers should come out ahead. 

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