The Difficult Middle Market
Beervana Show co-host and university economist Patrick Emerson made an offhand comment on Twitter last night about the difficulty of the “middle market”; that tier of “cheaper, 'good' beers aimed at a wide audience.” He was specifically thinking of national or super-regional brands of a kind that used to be more common: Sierra Nevada Pale, Sam Adam’s Boston Lager.
The observation ignited a conversation that describes craft beer’s unique strengths and limitations in the beverage category. It sheds light on where the segment is headed in a post-pandemic era in which large companies have abandoned beer for seltzers and FMBs as more reliable vehicles for national sales. Depending on how and where you look at that situation, it paints an alternatingly comforting or alarming picture.
Before we go too far, let’s give Patrick the floor. In a longer thread this morning, he unpacked his thinking.
The first macros saw the success of craft locally and the national reach of Boston Lager and SN Pale and said "We can do that, but better and cheaper!” Et voila, Bud American Ale and such. Which tanked each time. Then they said "Dang, it is the brand that is our problem so let's buy a brewery with cred and rep and brew their beer at volume and cut the cost by 50%.
At the same time, the successful craft breweries like New Belgium, Deschutes, Brooklyn, etc. tried to emulate Boston Beer and Sierra Nevada and go from regional to national on the wings of Fat Tire, Mirror Pond, Lager by growing big and lowering costs. It failed time and again, led to retrenchment, and a struggle to stay relevant in their home market. Arguably the only company that has seemed to survive and even thrive in what I call this ‘middle market’ is Sierra Nevada. And kudos to them. But, to me, this is the exception that proves the rule.
One important caveat: I am talking about a national middle market. Locally, yes, there are plenty of examples of decent craft beers at lower price points. But even then these beers are generally not lasting over the long haul. Remember Fat Tire? Mirror Pond? 805 is a good test case, it is killing regionally, but for how long?
So I think there is a national market for macros and local markets for quality craft but the national 'craft' market: beers that are more craft-like but please from coast to coast and cost less than locals? I don't think it exists.
Clearly, there are certain national brands that do occupy this space: Lagunitas IPA, Sierra Nevada’s Hazy Little Thing, Blue Moon. But Patrick’s larger point, that this is a bit of a phantom space, is well taken. Let’s consider why.
Courtesy Goose Island (via Instagram)
The Challenge for Big Breweries
For decades, big beer has looked at its declining volume with alarm. As long ago as the early 1990s, companies like Anheuser-Busch recognized that craft, a pimple on the industry’s backside at the time, represented danger. That was largely because the US isn’t a single, uniform market. In places like Portland and Seattle, craft was developing a decent following. That put pressure on A-B’s distributors, who were losing far more to craft than the 1% national share the little guys had seized. Bud needed to take care of its wholesalers in weak markets to ensure strength nationally. It also suggested Craft could spread.
Big beer has experimented with a bunch of different strategies to build brands they could sell efficiently across their national footprint. They bought pieces of independent breweries (Redhook and Widmer). They started stand-alone brands (Blue Moon). Ultimately, they just bought breweries outright, retooled the beers so they could be brewed at the big lager facilities, and taken them national.
Trouble is, even when that works there’s a low ceiling for growth. Blue Moon remains the most successful of these ventures, and it topped out at about two millions barrels (I think). For a craft brewer, that’s tremendous. For a big brewery in a 200-million barrel industry, it’s marginal and requires a lot of support and selling just to keep it from declining. A-B’s approach of buying breweries was a good one, but it was far from a complete solution. The company has twenty North American plants and needs to replace tremendous lost volume, not just a few hundred thousand barrels here and there. And, from an efficiency standpoint, craft has always been a sucker’s deal. Customers in that segment crave variety, which means having to create new beers constantly, supporting them with ad campaigns and new marketing, and working with their distributors to get the new products to move at the retail end.
Goose Island is a cautionary tale. A-B was able to flood the market with cheap beer and they drove sales way up, making it one of the most popular IPAs in the US. But it never achieved serious volume—like Michelob Ultra volume—and it required constant effort just to keep it from declining. That’s not what big beer does well. Big beer makes an efficient stream of liquid, packages it in volume, and ships it nationwide in a process that looks the same in Peoria or Portland. That’s why they’ve always been ambivalent about craft and why FMBs and seltzer are so good for them. They can make giant vats of neutral products, flavor, and ship. It’s so much more efficient and looks so much more like their older business models. Bud Light Seltzer is a way better fit than Goose IPA.
The Challenge for Craft Breweries
Show me a large regional craft brewery and I’ll show you a flagship brand that was wildly popular in past decades. Breweries became regional powers because they had a dominant flagship or two, allowing them to scale up and ship to a large footprint. Yet these breweries confront the same problem with their older brands A-B did with Goose IPA: after time it takes more and more effort to keep these brands from precipitous decline.
Successful regional breweries manage to introduce new products that take the place of older flagships. Sierra Nevada replaced Pale with Hazy Little Thing. Deschutes shifted from the Mirror Pond/Black Butte duo to Fresh Squeezed. Firestone Walker exploded with the release of 805 fifteen years into the company’s life.
The obvious downside here is that no brewery can engineer the next 805. Since its success with Fresh Squeezed a decade ago, Deschutes has floundered trying to find the next thing. It’s why breweries have increasingly gone to brand “families,” trying to extend the recognition of that new tentpole beer to drive sales. And also why many regional breweries have also turned to seltzers and FMBs: that’s where the growth is.
Turns Out Craft Beer is a Weird Market
In many ways, there is no single beer market. I stopped in at Culmination last night and found a brewery thrumming with activity. I had three beers: an expensive hazy, a rum-barrel Baltic (or Polish) Porter, and a Grodziskie. Not a one of those beers could ever enter the middle market. The people at the brewery weren’t there for “normal” beers, either. They wanted a unique local experience. In this sense, craft breweries are like restaurants.
Many breweries occupy a tier one size up, selling several thousand barrels locally. They may be anchored by taproom sales but sell the majority of their volume at restaurants, other pubs, and in package at specialty stores. And up and up it goes, bigger breweries selling further from home and with greater penetration into grocery and chain restaurant outlets, all the way to those few super-regional or national breweries. Yet as everyone has discovered, there seems to be a natural ceiling on growth—one far below that amusingly spacious six million barrels the Brewers Association expanded their member criteria to allow years ago. The more national a brand becomes, the harder and more expensive it is to keep volumes up. As Patrick notes, few have ever figured out how to solve the “middle market” riddle.
All of this is especially interesting to me because we have arrived at an inflection point. Two contrasting realities have emerged. On the one hand, every shred of evidence suggests craft beer is a robust, vibrant industry—not least the recent pandemic, which most breweries survived. People have a deep affection for their local breweries and the mutable, intense products they offer. Yet for the very same reason, craft beer is poorly positioned to seize a mass audience. The very idiosyncrasies people appreciate about their local breweries prevent them from getting too big.
For the first time in decades, the explosion of a new segment has scrambled the way everyone thinks about these realities. Big beer can quit trying to use the imperfect vehicle of craft beer to grow volume. For a quarter-century, many of us have clung to the assumption that craft would slowly replace mass market lagers. (Guilty!) But perhaps the craft beer we fell in love with—the quirky, idiosyncratic beverage with a human face—was never positioned for growth. That’s probably a great thing! Especially as I now look at the new faces making that beer—women, people of color, LGBTQ brewers—I see an endless vista of possibilities. Our interest in the non-mainstream led us to craft beer in the first place. The space it has carved out may not be huge, but it appears to be very healthy and poised for a lot of fun growth and change in coming years. But Patrick’s middle market? That’s not likely to ever be a comfortable space for craft beer.