Good Beer Hunting

Live & Let Die — Breweries are Closing Because the Industry is Finally Normalizing

 Photo by Nicci Peet

Photo by Nicci Peet

The Brewers Association just released its annual figures reflecting the past year of growth in the industry. In many ways, the story was the same. Volume growth increased 5%, dollar value showed an 8% jump, and overall volume share of the category crept up .6% from 2016 to 2017—it now stands at 12.7%. Objectively, it was a positive showing for an industry that is essentially flat overall.

One pair of stats did get increased attention, however, as the number of openings in 2017 (nearly 1,000) was met with 165 closings, a stark increase from 97 in 2016 and 78 in 2015. Bart Watson, chief economist for the BA, noted on a conference call with media that the higher number of closings represents a more competitive marketplace that was guaranteed to exist with the total number of breweries now around 6,300. Not only that, but outside forces that include difficulties of running a small business or cost of real estate can impact these breweries, too.

“The idea that every business is going to be successful is just not something that was going to be sustainable in the long run,” he said on the call.

That particular thought is perhaps the most important takeaway for beer lovers seeing higher number of closures and fearing the worst. Craft beer has had it pretty good for a pretty long time, and while it's easy to worry, the sky is certainly not falling. If anything, it's just foreshadowing how market trends will shift to a more normal horizon.

In fact, the lack of closures has been abnormal in an era where the total number of market participants has exploded, Watson tells GBH. Over the last four years, the closing rate for craft breweries has been 2%, 2%, 2.1% and 2.6%.

In this timeframe of 2014-2017, an average of 4,993 breweries were in operation annually, and when compared to historical context, the closing rates are lower than, say, the late 1990s and early 2000s (a period mentioned in hushed tones as "The Shakeout"). From 1998 to 2002, Watson notes that craft averaged 118 closings a year on an average of 1,428 breweries operating each year. It's worth noting that that's an average closing rate of about 8%.

"I’m still kind of shocked that craft beat the odds as long as it did," Watson says.

So yes, the odds won’t be ever in craft beer’s favor. More closures are likely coming in 2018 and beyond, but by sheer math, it would be a near-impossibility for such a thing not to occur.

According to the Small Business Administration, about two-thirds of businesses with employees survive at least two years, and about half survive at least five years. Even the Bureau of Labor Statistics plainly states on its Business Employment Dynamics analysis that even though new operations are important for the economy, "it is inevitable that some of these establishments will eventually fail."

In a 2014 study that analyzed Bureau of Labor Statistics data, researchers found that the average lifetime of "drinking places" for alcoholic beverages (which would include bars) was just more than four years for the timespan between 1992 and 2011. The one-year "survival rate" was 83%.

When looking at craft beer, the majority of businesses are small—roughly 75% of breweries produce less than 1,000 barrels a year. From an anecdotal and practical standpoint, these are likely to be the most susceptible to factors that may force them to close. Draft magazine provided some insight on the issue last year, sharing stories from owners talking their own flat growth, constraints and challenges of size, and more.

When considering these situations, reasons for closure seem thematically normal, as noted by Watson and following some recent examples of internal strife.

"For us, it was really a production restraint," Jesse Evans, co-founder and CEO of Chicago's Ale Syndicate told Draft. "It’s simple math. Overhead was too high for the amount of beer we could produce in the space we had."

Evans' story adds yet another layer to discussions, as its demise also led to the closure of Arcade Brewery, which had contracted with Ale Syndicate. The catalyst for these falling dominos? Ale Syndicate’s failed crowd-funding and unpaid taxes.

Even in Upstate New York, the recent closure of Saratoga Brewing Co. came about because of financial and legal problems. Vijay Mallya, the majority shareholder of Mendocino Brewing Co., Saratoga’s parent company, closed both businesses after being sought out by the India government on charges of fraud and money laundering. Looking closer at many of these closures, it’s common to find internal reasons for shutting down as opposed to market factors.

When closures happen, it's an unfortunate situation for entrepreneurs, families, friends, and communities. They're an undeniable hardship. But the cold, objective reality is that they're also inevitable for the industry.

American craft beer has risen like a rocket, but increased closures don't mean the fuel has run out. Despite beer’s overall struggle, craft is still hanging in strong. Watson notes that, "as we move back to a more natural state, to many it seems like the sky is falling."

—Bryan Roth