Looking Back At the Future of Brewing. Part 4 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five

Prior to 1980, American beermakers, whether Big Guys or Little Guys, sold essentially the same kind of beer: American-style lagers brewed with barley plus an adjunct like corn or rice. That's not a criticism, by the way; just a statement of fact. (Yes, many of the small brewers, including Fritz Maytag, made an all-malt brew, but their markets were minuscule.)

So when brewers squared off against each other in, say, 1960 or 1970, they were all selling more or less the same beer and competing for the same audience of drinkers.

But in the 1980s, in a weird coincidence, two unrelated factors collided.

First, most of the remaining small mainstream brewers players fell by the wayside (thanks to a devastating battle between Miller and Anheuser-Busch).

Second, a new wing of brewing emerged. The "craft" beermakers (or micro-brewers, as they were called then) were small and they wanted to make different kinds of beer, like ale, porter, stout. Even their lagers were different: the micro-brewers used malt only; no adjuncts.

Put another way, the new guys aimed at a different audience of beer drinkers, and beer was no longer interchangeable. The industry structure didn't change, nor has it since then. It still consists of a tiny number of giant brewers and a giant number of tiny brewers. A-B still sells most of the beer in the US and most beer sold is still made with adjuncts.

But that single difference between now and then -- varied beer styles -- makes it hard to predict how the InBev acquisition will affect American brewing. Yes, space is available on some distributors' trucks. Yes, some craft brewers will seize the moment and try to parlay that space into bigger markets, higher sales, bigger brewvats. But when they do, they'll butt heads with other craft brewers making the same move. And things could get, well, ugly.

"Nah," you say. "Won't happen. Those craft brewers are nice guys. They share recipes and hang out together. Craft brewing is one big love fest."

Maybe. Maybe not. But it's worth noting that back in the '60s and '70s, that's what "small brewers" used to say about themselves. And then came Merger Mania and some of those Little Guys became Big Guys and, hey, all of a sudden the Little Guys were mourning the loss of the good ol' days when beermakers were one happy family and whatever happened to industry collegiality and isn't it a shame?

So back to where I started: Is the craft brewing fundamentally different from its historical predecessors? Has the "craft" industry altered brewing's dynamics? Are old historical patterns irrelevant? I don't know. But here's a thought: Dick Yuengling might be the smartest guy in brewing, and it's possible that his success can tell us about where the industry is going.

More next time.

Looking Back At the Future of Brewing. Part 3 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five

The scenario I described in my previous entry played out repeatedly between 1950 and 1980.

In theory, that scenario ought to repeat itself now, especially because, as I noted way back at the beginning, A-B’s distributors are restless. And prices for barley and hops are at record high levels. Many brewers are struggling. That means there’s uncertainty in the industry.

The InBev deal adds to that uncertainty, but it also presents opportunities. If InBev succeeds, the value of A-B will likely plunge. After all, InBev will remove the Busch family, and its valuable presence. (I gather that economists can place monetary value on things like family stability.) Also, the A-B distribution system, which is rock solid and even more valuable, may tumble into disarray under InBev.

All of that adds up to opportunities for other beermakers. Miller/Coors may have a chance to grab a larger share of markets. But so will the smaller, more aggressive craft brewers.

Put simply, the weaker position of A-B will translate into opportunity and turmoil among other beermakers.

But what if the InBev takeover attempt fails? What if A-B retains its independence? That, too, will translate into upheaval. A-B will return as a leaner and, dare I say it?, meaner machine. It will work hard to repair bad relations with its distributors. It will do whatever it takes to elevate its stock price. How will it do that? By becoming even more aggressive in the craft brewing segment. It will roll out its own “craft" beers (which it’s been working on for some time).

BUT: It will become more aggressive within the craft segment. Right now, A-B owns shares in four craft breweries (Old Dominion, Goose Island, Widmer, and Redhook). (Unless I’ve lost count and missed one.) It will go after others, and likely buy some outright.

Remember: it’s a good time to do so. Many small brewers are struggling to manage their costs at at time when prices for materials and fuel are in the stratosphere. Not all of them will survive. A weak beermaker represents opportunity. That’s what history tells us OUGHT to happen. Both those scenarios played out repeatedly from about 1960 to 1980.

But this time, history may not repeat itself. Here’s why: the beer itself has changed.

More next time. (No, I’m not trying to drive readers batty by making them return the next day for the next segment. I’m just being sensitive to how busy all of us are. We’ve got ten minutes and then we gotta move on to the next item on the list.)

Looking Back At the Future of Brewing. Part 2 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five

In my previous entry, I posed two questions about the future of brewing. In order to think about them, we need a little historical background.

Let’s pretend it’s, oh, 1960. Bob Beermaker, owner of Acme General Brewing, sells beer in ten states. He’s doing okay, but he wants more. Bob learns that a fellow beermaker in an adjacent region of the country is going belly up. Bob doesn’t sell beer in that market, but he wants to do so. He persuades the other guy’s distributor to carry his beer. Bob now enjoys access to a new retail market.

Of course this means that he must square off against a new set of competitors. Among them is Harry Hops. Harry’s operation isn’t as big or as financially stable as Bob’s. Bob strikes first. He dumps much of his entire advertising budget into the new market. He slashes his prices for a month. (But does so carefully. He knows that pricing practices are governed by state and federal laws.) Customers grab the cheaper beer. They decide they like it (or maybe they like Bob’s advertising). They stick with Bob’s brand, even when the price goes back up.

Harry Hops is in trouble. He can’t afford to lower his prices, and he can’t afford more advertising. His sales drop. The local distributor eyes the situation, calculates his profit -- and makes a decision: He’s going to start carrying even more of Bob’s beer. But if he carries more of Bob’s beer, he’ll have to stop carrying someone else’s.

“Sorry, Harry," the distributor says. “I’m going to drop your beer." Harry can’t recover. He puts the brewery up for sale. Maybe Bob Beermaker buys it because it’s a cheap way to gain more brewing capacity.

Now Bob is selling beer in fifteen states. His sales increase; he earns more profit, which he plows back into the company. “Hmmm," he thinks. “Now I can afford to make a run at a bigger market." Bob uses his clout to cut deals with distributors in eight more states. He marches into battle in the new territory, but this time he collides with Marvin Malt, a much larger, stronger beermaker with an even bigger advertising budget.

This time the tables are turned. Marvin trounces Bob. Bob’s sales slide. His distributors lose interest. Bob limps into a sunset of hostile merger or even bankruptcy.

But even as he limps away, other small brewers smell opportunity. They decide it’s time to make their own run for The Big Time. They figure they’re smarter than Bob and they won’t make the same mistakes he made. They’re not worried about the threat posed by Marvin Malt. The process starts over again. Will that history repeat itself in the next few years? And what’s this got to do with craft brewing?

More next time.

Looking Back At the Future of Brewing. Part 1 of 5

Part One --- Part Two --- Part Three --- Part Four --- Part Five First, a brief recap: I oppose the InBev takeover of Anheuser-Busch. (*1) I don't want to see the company sold. I also think Carlos Brito is in for a shockeroo a few years down the road: Removing the Busch family from the A-B equation will destroy the very thing that makes the company valuable. But I also don't see how anyone can stop Brito and InBev. (Today, for example, InBev announced it's forging ahead with its plan to force a removal of A-B's entire board of directors.)

So, assuming this is a done deal, what's next? How will this affect American brewing? Can we predict brewing's future based on old historical patterns? Or has the emergence of craft brewing fundamentally altered the dynamics of the brewing industry?

Over the next few days, I'm going to examine these questions from my perspective as a historian. (Which, I remind everyone, is what I am. I'm not employed in the brewing industry and never have been.) (Yes, I know what you're thinking. History? BOHHH-ring. But I love my work!)

In an earlier blog entry, I argued that an InBev/A-B merger could mark a tipping point for craft brewing: Americans will discover the joys of local beer; craft brewing will become mainstream; we'll all walk hand-in-hand into the sunset. Sounds great.

But there's another side to that scenario: Craft brewing's stroll into the sunset could turn into a brawl.

Here's why: Brewers sell their beer through distributors who, in turn, sell it to retail outlets, like grocery stores and bars. Without distributors, brewers are screwed. They can make beer until they're blue in the face, but they can't sell that beer unless they have distribution deals that will put the beer into customers' hands.

Typically, big brewers like A-B and Miller/Coors, have solid distribution systems. Small brewers have a harder time establishing and holding onto those systems. After all, distributors have a finite amount of warehouse and truck space. They can only handle so much beer. During the 1950s and 1960s, many brewers tried to increase their sales territory in part by taking over ("merging") with weaker beermakers or by "stealing" other brewer's distributors. I detailed this process in my book.

That same scenario could unfold again over the next few years. Rising prices for barley and hops are hurting every brewer, but particularly ones that are financially shaky.

But, the nation's distributors are also experiencing turmoil because some of the distributors who carry Anheuser-Busch products have become restless. They're unhappy with A-B's sagging sales and want to distribute a wider variety of brands. You can read about it here. Rising prices for barley, fuel, etc. will continue to ripple through the brewing industry.

But an InBev takeover of A-B will cause even more anxiety among A-B's distributors. They don't know how InBev will affect the American market; don't know what impact InBev ownership will have on A-B's sales. If history is any guide, some small brewers will seize upon that anxiety and try to persuade those restless distributors to carry their beers. And that's when things may get, um, a bit ugly. Or at least even more uncertain.

Next time, I'll explain why by taking you on a (brief) trip through American brewing between 1950 and 1980.

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*1: I'm on record about my opposition on this blog; on the Stewart Varney program on Fox Business Network, and, for example, here) about it. (Not, mind you, that Carlos Brito gives a rat's ass what I think.) Here's a link to FBN and Varney, but nothing I've said on air has been streamed (or whatever it's called) to the internet.

Writing A Book = Not Much Blogging

I've spent most of the past ten months researching my new book and now, finally finally finally, I've started writing it. Well, okay, I've started writing the first chapter. I've plunged into what I call my Quiet Zone. Or maybe I should call it my Shutting Out the World Zone. I'm concentrating my mental energy on this book. Shaping the narrative. Working and re-working the prose. And, most important and most difficult, trying to figure out what the research adds up to. What do all those facts MEAN? What's the connection between this fact, that idea, and this event?

I know it will all come together; it always does. But only if I shut out the rest of the world. So if there aren't many or any new blog entries, that's why: Book in process. Writer at work.

That piece in "Historically Speaking"

Today's (May 31, 2007) Wall Street Journal contains a summary of an essay I wrote for the History Society's bulletin, Historically Speaking. Here's a link to the essay itself. Thanks for reading!