Friday, 11 May 2018

Are we reaching peak craft beer yet?

If you keep predicting that something bad will happen, eventually you will be right. Except maybe for those predicting the Nibiru cataclysm. Last year I wrote a post about the rise and fall of craft beer, in which I concluded:
Lots of investors got burned in the kiwifruit industry in the 1980s. Will craft beer burn investors next?
It hasn't happened yet, but there is still cause for concern that we may be approaching peak craft beer. Max Towle wrote in The Wireless this week:
There are now about 200 craft beer brands in New Zealand, with the number of beer companies in New Zealand up almost 300 percent on a decade ago, according to The amount of high percentage alcohol that’s available (anything over 5 percent) has risen 220 percent in the past 10 years despite, in the same period, less beer overall being produced.
If craft beer is a bubble, it’s getting pretty damn big. Some say it’s ready to burst...
As I argued in my post last year, the craft beer industry is cyclical. We've seen a big increase in demand for craft beer. That pulled a lot of new suppliers into the market, which means that even though demand is higher, craft beer is pretty unprofitable. But clearly not so unprofitable that there are a lot of firms exiting the market. I certainly wouldn't be getting into craft brewing right now (read Towle's article and it's easy to see why), as it appears that profitability still has a little way to fall before the least financially secure and/or highest-cost brewers start to shut down. Once that happens, the dynamic supply and demand model (see my previous post) suggests that is probably a good time to think about getting into the market (a surprising and counter-intuitive result), as after the shake-out there will be fewer craft breweries and lower competition, which will raise prices and profitability for the industry.

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