A brewpub is a specific type of microbrewery that sells its product on site, often accompanied by a restaurant. This is not a revolutionary idea in the beer industry, in fact, it is the origin story of the industry. Before the Industrial Revolution launched the world into the era of globalization, beer was usually brewed in small quantities by the taverns that sold it. Today, brewpubs are experiencing a resurgence as the popularity of craft beer grows.The future of brewpubs seems promising as beer consumption returns to its roots, but growth may be held back by the very nature of microbrewery.
Prohibition radically altered the entire beer industry in many ways, and one of those was the disintegration of the production-to-consumption chain. The 21st Amendment created a three-tier structure, where breweries could only ship their product to an independent distributor who would then distribute the product to the retailers, where the beer could finally reach the consumer. Brewpubs can circumvent this via individual state laws. In Idaho, for example, brewers that produce less than 30,000 barrels per year can sell directly to consumers.
These laws have created a resurgence in brewpubs, and in 2013, they produced 955,599 barrels of beer, which amounts to 5.3% of craft beer production. However, this is still just a drop in the bucket of total domestic beer production. What is the future of this market segment? Will it continue to eat away at the macrobrewer’s share, or is it merely a fad of a consumerist population with growing levels of expendable income?
It appears that the most likely scenario is a continued slow growth in production and market share. Brewpubs are held back by their small market size. They are mostly local businesses, and their market only extends as far as people are willing to drive to drink a unique brand of beer. As is the case with an overwhelming majority of microbrewers, the marketing expenditures for a brewpub are minimal, sometimes nonexistent. These brewpubs cannot reach consumers in distant markets, and even if they could, those consumers are unlikely to make the trip to the brewpubs. Another strategy of expansion is franchising, but this is only a viable option until the firm loses its microbrewery status, and is unable to make direct contact with the consumer. These legal issues will continue to be addressed as brewpubs continue to expand their production.
Due to these aforementioned legal concerns, the only viable option to expansion is the introduction of new firms into the market. This is a capital-intensive, slow-moving process, so a rapid growth of production and capture of market share is unlikely.
Instead, brewpubs’ hopes for continued growth relies on their largest demographic group, millennials. Beer is a normal good, so as this generation of consumers advance in their careers and see their levels of disposable income rise, more of them can be expected to enter the consumption market, and existing customers will consume more.
Sources:
https://www.brewersassociation.org/statistics/national-beer-sales-production-data/
http://www.hawleytroxell.com/2013/07/the-difference-between-a-brewpub-and-a-microbrewery/
11 Comments
This legal issue of microbrewery status poses an interesting threat to brewpubs as their own industry. If the brewpubs can only manufacture a certain (and relatively small) amount of beer, it seems their market share can only expand so far in a growing industry. I wonder if the trend will move toward brewing industry giants buying smaller enterprises, such as ABInBev’s purchase of Chicago brewpub Goose Island. The industry leader bought Goose Island’s production plant several years ago, but will soon be closing on a deal that will leave it with sole ownership of the brewpub – the original location of the first Goose Island sale. Owner John Hall said things should remain pretty similar in the coming years, aside from some kitchen changes and the end of wine and spirit sales at the pub. But ABInBev will have control over future changes to the pub, which is signed onto a lease until 2023. I wonder if this trend will continue as brewpubs grow. Is it easier for smaller entities to sell off to larger companies? Will brewpubs continue to grow as an industry if they are capped at a certain production level?
Source:
http://www.chicagotribune.com/suburbs/oak-park/news/ct-goose-island-sells-original-brewpub-to-anheuserbusch-20160219-story.html
Consolidation in the brewpub market will be interesting to follow. As was discussed in an earlier post, many unique beers are in fact produced by larger corporations (ex. Blue Moon, Shock Top, and Goose Island). I assume that the people of Chicago are aware that Goose Island is no longer a microbrewery, but that might not be the case for tourists. It would be tough to blame a microbrewery like Devil’s Backbone for being acquired by a major corporation– there would be huge production and marketing perks. But I wonder how quickly this has come about. I have not seen any statistics showing both the increase in craft breweries and the increase in brewery acquisitions.
Also, we cannot forget that beers like Shock Top are distributed by the same distributors of Miller, Budweiser, and Coors. The big winners in macro-breweries buying microbreweries are distributers as they can charge higher prices for a “micro” beer. As more microbreweries become bigger and are acquired by macro-breweries it will be interesting to see how distributors capture the economic and financial benefit.
The three-tier system is challenging to analyze, a topic that we’ll likely hear in our visit to DB. Brewers can’t legally control the price that distributors charge retailers, they can only suggest. Our two-part price mechanism is not used (as far as I know), so the market between brewer and final consumer is high for a volume retail good. That suggests that system profits aren’t being maximized, but I know of no empirical work.
We did talk about this during the end of our visit to DB. The COO mentioned both distributors and retailers have huge margins (more than 50% combined if I remembered correctly) while the brewers themselves only account for about 10%. So the actual cost of a six-pack of craft beer before shipping might be less than 3 dollars but it is going to sell for around 10-12 dollars in the supermarkets.
I think with the rise of craft beer in the US, brewpubs will also enjoy a steady, growing success in the years to come. Even if brewpubs are capped at a certain production level, preventing any individual brewpub from becoming overly large, the number of brewpubs will increase. The numbers of craft breweries in the US has skyrocketed over the last decade (from 2012 to 2014, the number of craft brewers increased from 2,401 to 3,418 in the US). It’s not uncommon for these craft breweries to open one or more brewpubs in their home state at which locals can share a beer or two with friends, and see if it is worth investing in a pricey six-pack or case. Our own local Devil’s Backbone Outpost is a prime example of this (DB Headquarters are in Roseland, VA). With this trend, and with the growing lobbying effort being organized by craft and micro brewers, I think we can expect more brewpubs in the future.
source: https://www.brewersassociation.org/statistics/number-of-breweries/
When thinking about the idea behind the brewpub, one interesting company that comes to mind is Shake Shack – a sort of hybrid brewpub (or maybe not even a brewpub at all, I don’t know how to classify it). Originally a fast food stand in New York City, Shake Shack has expanded and can now be found in locations across the United States (though it does not franchise). Along with its expansion, Shake Shack has also partnered with the Brooklyn Brewery (also in NYC) to produce a unique beer (called Shackmeister Ale) to sell in its restaurants. Though this is not technically a brewpub as the beer is produced elsewhere and shipped to the restaurants, the fast food plus craft beer model under one roof is certainly an interesting intersection between food and beer. As Shake Shack continues to expand and gain name recognition, I wonder how both consumers and other fast food joints will respond to this new kind of competition…
Sources:
https://www.shakeshack.com
http://brooklynbrewery.com/brooklyn-beers/perennial-brews/shackmeister-ale
That is an excellent point about the growth of a Shake Shack type of model. Another idea that is gaining popularity is that we can match craft beers with different types of foods. This is similar to a tasting menu with different wine pairings. This type of model would appeal to millennials who see it as trendy, and see wine pairing menus as too high society for their preferences. There is an entire event dedicated to it in Seattle called “Craft Beer+Food”. They offer cuisine from local restaurants paired with beer from local breweries. One menu item is a pastrami hot dog with sauerkraut, melted swiss on a rye bun paired with Black Raven Brewing Co. that boasts an astounding 34 flavors of beer. While this festival simply connects restaurants and breweries together, it is easy to see how you could combine the two into one tasting menu experience. While this doesn’t necessarily take away from the main beer players, it could prove to be a profitable niche market that brings a new experience to drinking beer.
Sources: http://www.craftbeerplusfood.com
http://www.blackravenbrewing.com
Do brew pubs compete with craft brewers. I argue “no” – on-premise and off-premise consumption are not close substitutes.
However this is a fascinating example of bundling. Where do restaurants make their profit? – on beverages, NOT on food. Vertical integration in this case lets a pub source beer cheaply, and provide a good marketing story.
One minor correction: distribution is controlled at the state, not the Federal, level. A handful of states (California and Massachusetts?) do not mandate the use of distributors, that is, brewers can sell and ship directly to retailers.
Locally, DB successfully supported legislation that allows them to serve beer at the brewery. Before it passed, they could only offer free samples. Since they charge as much or more for beer at the “Outpost” as do retailers, they make much more money on such sales, particularly on growlers where they also eliminate the cost of canning/bottling.
I think it is hard to compare these breweries directly. Brew pubs account for such a small percentage of beer brewed that I think they will have no major impact on the larger breweries in the United States. Additionally, I have to agree with the professor that on-premise and off-premise consumption are not close substitutes. When we looked at how the Industrial Revolution caused a dramatic change within the beer industry, we largely look at how inventions such as refrigerated railcars and pasteurization increased the shelf life. This increased shelf life along with automated bottling and canning has made it easy for people to drink within their homes and has decreased the need for such on-premise locations. Nowadays it seems that people would be going to these brew pubs largely for the environment and not simply for the beer, which leads me to believe that brew pubs can’t directly be compared to the larger breweries.
Comments are closed.