I've written a couple of times about the craft beer industry and how, as many new craft breweries had entered the market, prices and profits would be falling, and eventually firms would start to exit. This is a type of market dynamic that I discuss with my ECONS101 class.
It appears to be playing out in Australia as well. As the National Business Review reported last month (paywalled):
For beer lovers, the craft brewing industry is like beer nirvana.
So many cool brands to sample, so many varieties, so many hip brewery venues to visit.
For a time, around a decade ago, it seemed the industry was unstoppable as a flood of new breweries with clever names and unique flavours posed a threat to the established players.
If you were a serious beer fan, why would you take a can of plain old VB when you might try something really exotic, like a Sydney dark ale called Motor Cycle Oil or a Juicy Banger from Byron Bay?
On the production side, a craft brewing startup was an inspiration to a younger generation of entrepreneurs who could create a unique beer and sell it in a trendy destination venue, often with live music and ‘designer burgers’. It was not just beer, it was marketing a lifestyle.
And, if you got lucky, there might be a big payday if one of the major brewers came calling with a cheque book.
Like so many exuberant business cycles, however, the craft brewing industry in Australia is enduring a painful reality check, with multiple business failures and an uncertain outlook. These are not just growing pains or over-investment. There are some significant economic headwinds that have emerged for craft brewers...
There are about 700 craft breweries in Australia, with the industry growing by 80% or so in the past eight years. It’s a market worth A$160m and, according to the Independent Brewers Association (IBA), it contributes A$1.93 billion to the economy and employs about 10,000 people.
In the past 18 months, however, about 30 breweries have folded and there are predictions that a new wave of failures is on its way.
The problem here is the over-enthusiasm of craft brewers. In the 2010s, the industry was flying high, with (relatively) high prices and profits. The problem was that, with the advent of contract brewing (where craft brewers contract out their brewing operations, and therefore don't require a large investment in brewing equipment), the barriers to entry into craft brewing fell. So, many more brewers could enter the market. And that's exactly what happened in Australia and New Zealand.
This increase in market entry increased the supply of craft beer, which has decreased the price as well as the profits to be made from brewing. Many of the brewers are closing down. I described these dynamics in this post in 2017.
However, all is not lost. This market is cyclical. After the market shake-out is complete, and prices and profits are low, there may be an opportunity for new craft brewing entrepreneurs to get in early on the next wave of the cycle. The smartest of these entrepreneurs will try to pick the bottom of the cycle, just when consumers have become frustrated with the faux-craft offerings of the major brewers and the decrease in quality of the craft products that they have bought out. It is bound to happen. The only question is when.
However, it is not easy to pick the bottom of a cycle, and an entrepreneur who gets in too early is likely to lose big. That is part of the challenge of the 'hit-and-run' strategy - trying to pick the bottom of the cycle (and hit the market). The other part of the challenge, of course, is trying to pick the top of the cycle (and run from the market, probably by selling out to one of the major brewers).
As I predicted in that 2017 post, many investors in craft brewing have lost big. However, it won't be long before the profit opportunities for new entrepreneurs in this market rebound. This will be an interesting market to watch in the next few years.
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