A perfect storm of economic, manufacturer and consumer-driven factors have seen craft beer take a dive since the pre-Covid and Covid high times. So, where to from here?
In the first half of 2023 alone, 35 Australian craft breweries went into insolvency, nearly as many as for the entirety of 20221. The back half of 2023 saw further receivership and administration announcements. These have been the result of a range of events and factors, not just CPI related, or government imposed. Below I take a macro spin through the events of the past few years and their impact on the craft beer sector, and the potential outlook for the near term.
The way we were – Covid
The seeds were sown pre-Covid, with craft breweries mushrooming and a number putting substantial effort into education and community building.
Depending on the source and measurement metric, the number of independent breweries in Australia by 2021 ranged from 350 to 700, although the upper end of the range could be partially explained by ‘zombie’ brewery labels without their own tanks or taprooms simply subcontracting others to manufacture. The Australian market was at saturation point. To illustrate this in brewery-per-capita terms, the lower number put Australia nearly on par with the USA, with one brewery per 74,000 people, and the higher number nearly equal to the world’s highest per capita craft brewery market, the UK, with one brewery per 37,000 people2.
This wasn’t so much of a problem when shoppers were buying craft beer like the clappers during Covid because they had more money, courtesy of government handouts like JobKeeper and JobSeeker, and fewer options to spend it on when they couldn’t go out or travel. And some consumers – the beer geeks in particular – were dying to experiment to relieve the boredom of lockdowns in some states, a challenge ably met by breweries producing ‘out there’ often esoteric and arty styles and ingredients, regularly with higher ABVs. At the same time, government handouts and tax stays meant breweries could operate profitably with arguably fewer costs, at a time consumer demand was high.
This relative utopia, during which some breweries expanded their enterprises through capital investment and acquisitions, would not endure. The Covid lockdown and supply chain issue-driven increase in consumer parochialism, disguised as ‘supporting local’, was just one omen.
The post-Covid fallout: inflation and the cost-of-living crisis
Once the Covid government handouts stopped, some consumers began belt tightening, even in advance of interest rate rises. Government business handouts ceased and the ATO came calling on independent brewers who hadn’t paid tax during the Covid years, at a time that consumer spend per purchase on craft beer was beginning to fall. Cost-of-goods, transport and shipping increased exponentially.
Consumer on-premise visitation failed to return to pre- Covid levels (at time of writing it is still only around 75 per cent) through a combination of Covid-learned health-concern paranoia and unaffordability through a succession of interest rate rises. (Taprooms remain fraught; consumers, particularly sub-35-year-olds go for the experience, but some on-premise venues refuse to range breweries who have their own taproom).
These rises further dented consumer discretionary incomes. Consumers began trading down; from cases into four and six-packs, from craft back into mainstream labels, and moved away from expensive multiple hopped and high ABV or experimental beers into more familiar territory such as hazys. Or increasingly, brewing their own beer3. And accelerating their shift into seltzers, RTDs, gin, Bourbon, and conversely no- and low-alcohol (NoLo) alternatives.
With less money in which to operate, lower consumer demand, the ATO calling, market saturation, and consumer shift into other categories, craft breweries, particularly those who had perhaps overextended themselves during the Covid years, began to feel the pinch. Some have met the market by producing four-packs at consumer-friendly price points, or moving into more familiar styles such as lagers (although it remains to be seen how many consumers will pay substantially more for a craft lager than a mainstream lager that is the heartland of the two global brewers). Many are shifting away from using salaried sales representatives and back into distributors and focusing more on banner groups and wholesalers.
The outlook
Brewery closures have been the result of a perfect storm of increased input costs, market saturation, overexpansion, expensive and niche products made for only a minority of the market, declining consumer demand, and reduced consumer discretionary incomes.
As disinflation (reducing inflation levels) and deflation (actual falling prices) occur over the next 12 months to two years, theoretically consumer wallets should open a little more and craft should see an uptick.
However, as much as I hate to break it to you, the halcyon days of craft beer in Australia are likely over. It’s no longer the coolest kid on the block. The market has become more fragmented; consumer cross-category repertoires have increased, and pervading parochialism means nationwide, or even statewide, distribution is becoming increasingly difficult.
Craft breweries that will endure need to have a well-known brand and have their own taprooms to create brand experience, even if at the expense of some on-premise venue ranging. To actively create and educate communities and not just assume people will come for the product alone. To produce familiar style beers that are quality, value for money, and consistent in both quality and supply. They could consider expanding into styles and categories that are growing, such as ginger beers, RTDs and seltzers.
They should consider restaurants as a distribution supplement to pubs, particularly for more innovative styles because consumers are more likely to experiment in the on-premise than the off-premise.
They need to reduce expectations of statewide and local ranging; instead assuming constrained volumes through a hyper-local market in financials, capital expenditure and operating costs. And therefore, sew up the local market around the brewery in its entirety, before looking further afield.
In sum, do the basics well; offer a good product and price point, with an authentic story. Stick to the proverbial knitting.
The past couple of years in Australian craft brewing may turn out to be the shakeout we had to have. Those who survive will be the smartest operators who meet, and cultivate, the market. Not merely the most innovative.
This article was written by Norrelle Goldring and originally appeared in the 2024 Leaders Forum issue of National Liquor News.
Sources:
1https://www.thedrinksbusiness.com/2023/11/craft-brewery-closures-reflect-impact-of-rising-cost-pressures/
2https://www.brewersjournal.info/craft-beer-surge-top-ten-countries-to-get-a-beer-this-st-patricks-day/#:~:text=The%20largest%20craft%20beer%20producer,U.S.%20and%2016%20in%20Germany.
3https://www.kegland.com.au/blogs/news/the-6-key-factors-driving-rise-of-homebrewing-in-australia