Wednesday, August 17, 2016

Craft Beer, Industry and Insights

It's been a while since I wrote anything. So here is probably ten posts' worth of ranty text.

For the last couple of years, at this time of year, the ANZ bank has put out a report on the New Zealand craft brewing industry. I had a go at critiquing last year’s here. Last week in the lead-up to Beervana the bank released the third edition of this report. I haven’t been able to find any criticism of the report online, so it looks like I’m going to have to give it a crack again.

For context (and disclosure) the ANZ have loaned my business a lot of money and they could put us out of business at the stroke of a pen, so voicing dissent on their work may not be the smartest thing for me to do.

The gist of the report is that in New Zealand, the brewing of a category of beer called Craft continues to thrive, it has a big and rapidly growing chunk of the beer market and is rich with opportunities – including exporting - for plucky local startups.

All the optimism is pretty much based on two foundations:
- lots of hearsay from brewers about the export markets they’re selling into and
- the announcement that sales of craft beer have grown 35% and account for 15% of the market.

There’s a footnote attributing that growth figure to “Statistics NZ, industry sources, NZ Customs data, ANZ analysis”. (In last year’s paper a corresponding claim of growth was footnoted: “Sample represents approximately 15% of New Zealand’s off premise liquor sales. Sources: Statistics NZ, ANZ analysis Sources: Statistics NZ, news reports, ANZ analysis”.)

So this year the bank seems to have done away with sampling bottle store sales, which is probably a good thing because it would be disastrous to try and extrapolate results from one chain of stores or from one region of the country.

What about the other sources? Statistics NZ publish figures on what they call “Alcohol Available for Consumption” which pretty much reports on payments of excise by anyone putting alcohol into the New Zealand market. In other words, Customs collect data as they collect excise tax and Stats publish it. Then we’re left guessing about what “industry sources” and “ANZ analysis” might be. My guess is that Lion Nathan’s and DB’s annual reports reveal a little about their sales. But to the best of my knowledge no-one is gathering production reports from all the smaller breweries.

Now the NZ Customs/Statistics data reports only volumes of beer, stratified into bands of alcohol strength, for which excise has been applied. There are five bands - up to 1.150%, 1.151%–2.500%, 2.501%–4.350%, 4.351%–5.000% and more than 5.000%. This year’s release, which is of numbers from the 2015 calendar year, show that overall consumption has dropped but there has been a shift away from the middle bands (2.5% – 5%) towards those above and below (1.5% – 2% and 5% and over).

Customs and Statistics NZ don’t tell us anything about the breweries filling out the customs declarations on which these statistics are based. But it has become accepted practice to assume that breweries known as “craft” typically brew stronger beer and to then interpret the shift in volume to “more than 5%” as a sign that “craft” breweries are growing their market share.

Now this might not be as arbitrary and risky as it sounds. It’s pretty hard to find any mass-market bland lager that’s over 5%. Of course it would include a lot of beer made by those big breweries’ “crafty” subsidiaries. I’ll come back to that later.

But about these records of beer over 5% ABV that’s available in the market... Here’s a plot of that statistic over a few years:
source: Statistic NZ.

That's not the steadily rising trend we're supposed to see. I see two possible explanations here. Either
- the market for beer of this strength is only just recovering from a massive slump that seems to have gone unreported.
- OR these statistics are ropey as anything.
Any other interpretation?

Moving on then… the ANZ report asserted a couple of things:
- Something called “Craft” is 15% of the market and
- This thing called “Craft” has grown at 35% in the last year.

Now, according to Statistics and Customs, between 2014 and 2015 there was a 38% increase in beer stronger than 5% ABV available in the market. So I think this might account for a lot of that 35% growth figure. But there needs to be a little more to it, because the total beer market in New Zealand is, according to the same Statistics publication, 281 million litres, but this greater-than-5% stuff is only 18.7 million litres, which is 6.6% of the market. But if “Craft” is 15% of the market then it must be producing 42 million litres of beer. So 23.6 million litres of “Craft”’s output must come from less strong beer (as you’d expect) and it must have grown from 17.8 million litres the year before.

Now none of these numbers are outlandish, but to be credible you really have to accept a few givens. 15% growth for “Craft” is 11 million litres. To have produced an extra 11 million litres, the industry probably needs to have installed around 11 million litres of additional capacity. If you assume that on average (and this varies a lot) a batch of beer stays in a stainless steel fermenter or bright tank for two weeks, then that tank space can be used 26 times a year, so the industry must have added 423,000 litres of fermentation/conditioning space between 2014 and 2015. If tanks are, on average, 2000 litres (and again this varies a lot) that’s more than 200 such tanks added to our “Craft” breweries in that time. Again it’s a not outlandish figure and we know plenty of ParrotDogs and Liberties who were busy adding tanks in that time.

But 200 such tanks? And 42 millions litres of total annual production at a time when only a handful of our “Craft” breweries have passed the 1 million litres mark? And remember that plenty of our breweries and brewing companies are doing about 50,000 litres a year.

The explanation that ANZ literally couldn’t bring themselves to say is that they’re including the brands Mac’s, Monteith’s and Boundary Road, which are subsidiaries of corporate breweries, as well as recent acquisitions by those big breweries, such as Emerson’s and Founders. (The statistics pre-date the Panhead sale.)

Which is fine if you come out and say it. But for some reason the report’s author told the audience at the launch that they didn’t want to get into a definition of “Craft” and that they’d leave that to drinkers. Anyone else as dumb-struck by that as me?

Apart from the sheer academic negligence of refusing to offer a definition of the category that is the subject of the report, there’s a big problem. A lot of the report talks fairly vaguely about the challenges and opportunities that exist for “Craft” breweries. They talk about access to market, logistics, capital raising options and exit strategies. At one point the report uses the term “artisan producers”. Every word of text suggests that they’re talking about small and independent brewers. But every production statistic clearly includes the subsidiaries of the big breweries.

What else does the report talk about? There’s a lot about export. A lot of breweries boast that they’re exporting and apparently it adds up to 50 countries. From what I know of the importing operations in those destination countries, a lot of them are small businesses bringing over a pallet at a time. And it could be that if enough breweries each have small-time importers in a few dozen countries then those small orders will add up to a lot of value.

But I’m sceptical for a simple reason. New Zealand is just about the worst country in the world to export beer from. I say this because it costs more to produce beer here than in other places (for reasons such as lack of scale and high ingredient costs) and then because the cost of shipping beer to markets is high. (Remembering that unpasteurised beer generally needs to be shipped cold which puts a New Zealand brewer in competition with other agricultural industries for the use of refrigerated shipping.)

Shipping small orders to the curious in a few markets is one thing, but when the people like Tony Magee make it their mission to bring American beer to the world, and beer leaves American breweries at about half the price of ours, the ANZ needs to get specific about how we’re going to compete.

I can imagine a couple of possible answers to that. One is to brew in the market that is being “exported” to. Yeastie Boys and ParrotDog already do some of this. I know others have looked at it. Exactly what it does for New Zealand Craft Brewing, other than hopefully bring some profits home, isn’t clear.

Another answer is to assert that we will produce beer at the higher end of the market. There is a small but growing international market for beers that command wholesale prices of $20 a litre or more. And breweries like 8 Wired are indeed already exporting such beer. At these prices beer becomes economically a little more like wine, which, as we know, is such a lucrative business that it has never run into any crises that have resulted in bankruptcies or producers being sold to off-shore conglomerates whatsoever.

In fact, as an aside, can I suggest a really good way to develop an export market for beer? By distilling it. The resulting beverage trades at high prices, doesn’t go off and can be shipped without refrigeration.

But my biggest issue with the ANZ report is this. It has nothing to say about the two really big issues that small New Zealand brewers face.
1. their access to the on-premise market is still, for the most part, blocked and
2. very very few are making any money.

Maybe this is a good time to bring in the Oregon example. After all, the Oregon delegation that were here for Beervana were also at the ANZ report’s launch. Oregon is an economy with a similar population to New Zealand, a similar climate and with beer’s ingredients also produced locally. And their craft brewing industry began at about the same time as ours. And they’re producing 200 million litres of what might be categorised as “Craft”, with a third consumed in the state and the other two thirds exported. (I will concede that their export markets are far closer, which is a massive advantage.)

As people are probably tired of hearing from me, it’s all about access to market. In Oregon there are no obstacles stopping breweries from selling to bars and their craft breweries have 63% of the on-premise draught market. In New Zealand there are massive obstacles stopping breweries selling to bars and our craft breweries (if you exclude the big breweries’ subsidiaries) have about 2% of the on-premise draught market. It’s as if the ANZ are padding out the numbers with sales by the industrial breweries’ subsidiaries to compensate.

Here are some other issues that the industry, and people commenting on the industry, might want to consider:
- The (small and independent) brewing industry needs to decide whether it wants to pay for distribution. That means breweries finding some margin to share when there isn’t really enough to go around but also not going behind the backs of distributors the moment they develop a large customer.
- The current moral panic over alcohol hurts everyone. It interferes with good, responsible brewers and bars going about their business and adds costs at several stages in the supply chain.
- Brewers are still disadvantaged by excise rules compared to winemakers. The Brewers Guild correctly identified inequality over rules about storing wine. But then they forgot to mention the more egregious problem that wine is simply charged excise at a lower rate.

While plenty of industries grow with the help of government assistance, brewing is generally self-reliant. This should be a good thing, but when an industry is materially handicapped by regulation, tax and an anti-competitive business environment then it's expecting too much for it to thrive.

Almost forgot. Have a read of this. It's talking about a different market that's in a different phase of its development, but it rings pretty true.