Editors Note: In the following article, BMI Advisor and beverage industry expert, Cliff Panneton notes that craft brewers need to look at new product lines in order to survive and thrive. While not specifically addressing mergers and acquisitions in this article, Mr. Panneton predicts that these changes hitting the beer industry will drive many players to look to acquire or be acquired.
Craft Brewers Need to Lighten Up to Survive
by Cliff Panneton
As I predicted in a previous article, the outlook for the craft brewing industry would become difficult. Recently a few large craft brewers, such as Boston Beer and New Belgium, have reported a drop in market share due to new craft brewers and products in the market. Unlike the typical Budweiser drinker who drinks the same beer all the time, most craft beer drinkers have little loyalty to one particular product or company. Why drink the same IPA when you have a choice of hundreds? Budweiser used to be known as the second choice for some beer drinkers. When people could not find the beer they were really looking for, they would then ask for a Budweiser. This could be the same for the large craft brewers. When people cannot find a new or unique beer to purchase, they then resort to their second choice, being one of the larger, well-known craft brewers. A significant problem I see with the craft brewing industry is the products they are creating are very hoppy and have higher alcohol contents. It seems there has been a race to develop the hoppiest beer or the beer with the highest alcohol content. While the average IPA clocks in somewhere in the sub-100 IBU (International Bittering Units) range, DogFish Head’s “Hoo Lawd” is at 658 IBUs. At one time, Malt Liquors were noted for having high alcohol contents, but now some craft beers are coming in at 18% ABV (Alcohol by Volume), or more, with “Snake Venom” being one of the highest at 67.5% ABV. While this may help gain notoriety, does it really equate to long-term sales growth?
Years ago, the alcohol content in beer was noted in Alcohol by Weight (ABW) instead of Alcohol by Volume as it is today. Back in the 1980’s, friends of mine going to college in West Virginia, where the alcohol laws were stricter, could only get 3.2% ABW beer, which is basically what light beer is today. One day, they told me they were going to have a party and were driving up to Pennsylvania to get the “good stuff” to bring back. The “good stuff” was 4.0% ABW. I had to laugh at the fact they were going to drive over an hour to get .8% more alcohol per glass! I also heard stories of people driving to Canada to get beer because there was more alcohol in those beers. What they did not realize was that Canadian beers listed Alcohol by Volume instead of Alcohol by Weight as it was in the United States. Therefore, 5% ABV in Canada was the same as 4% ABW in the USA. Today, beer in the United States is listed by volume instead of weight.
“I’ll Have What She’s Having” by Evil Genius Beer Company is Chocolate Hazelnut Imperial Stout that clocks in at 9.4% ABV. As tasty as this beer is, I will not be drinking much more than one, and most likely, neither she nor I will have that beer during a hot, humid day beside the pool. So, what is my point? I believe in order for Craft Brewers to survive they need to develop and market great-tasting, lower-alcohol beers. One of the most successful beer products ever developed was Light Beer. Although historians report that New York’s Rheingold Brewery produced the first light beer, Gablinger’s Diet Beer, in 1967, some people dispute this fact and say August-Wagner brewery in Columbus, Ohio, should get credit for producing the first light beer, Mark V, before that time. Regardless, neither beer was successful because those beers were marketed as diet beers, with 33 1/3 less calories. Aside from not having much taste, men back then were not really interested in being seen drinking a diet beer. Dr. Joseph L. Owades, a biochemist, is credited with inventing light beer for the Rheingold Brewing Company. When the product failed, his boss permitted him to share his formula with a friend at Chicago’s Meister Brau brewery, which soon came out with Meister Brau Lite. Miller Brewing acquired the light beer process when it bought assets of Meister Brau in the early 1970s, and made a few changes to the formula to create Miller Lite, which was introduced in 1975. The “tastes great, less filling” marketing strategy, which used football players and other muscular types, helped Miller Lite prosper. Anheuser-Busch Natural Light was introduced in 1977, and Coors Light in 1978. Anheuser- Bush used the Natural Light name because of concerns of harming the Budweiser name. As the trend for light beer sales increased they introduced Budweiser Light in 1982 and then changed the name to Bud Light a few years later. The Stroh Brewery Company, who became involved in acquisitions with Schlitz and Heileman brewing companies, never did a really good job of marketing their light beers, which I believe is one reason they are no longer in business today.
While some breweries started to get on the light beer bandwagon, others thought it was a fad. One brewer of that era, Joe Ortlieb, of Ortlieb Brewing of Philadelphia, offered a recipe for a “Do-it-Yourself Light Beer Kit”. His instruction was to mix two parts of his beer with one part of his sparkling water. Joe’s comment was, “that’s all it takes to brew your own light beer.” In 1981 it closed its doors when the Christian C. Schmidt Brewery purchased Ortlieb’s and moved production to its plant on 2nd and Girard. In 1978, struggling Pittsburgh Brewing Company developed Iron City Light. They also used local tough-guy celebrities, such as heavy weight wrestler Bruno Sammartino and former pro football tight end Mike Ditka, to help market their beer. In 1982, they changed the name to IC Light, which was marketed aggressively to younger drinkers and captured more than two-thirds of light beer sales in the area. They had the “Hey Give Me an IC Light” campaign which was so popular that every bar and night club in the area was serving it. The campaign also helped restore the Iron City brand, and in 1980 the company reported a net profit of $1.3 million. Revenues went up from $25 Million to $38.4 million that year, and they were on their way to making one million barrels of beer.
Today nine of the top twenty beers in the United States are considered Light Beers. 68.32% of the total case volume of the top 20 beers sold is Light Beer. The average APV of all the 20 top selling beers comes in at 4.8%. If you remove the Light beers from this list, the average APV is 5.13%. The average alcohol content of craft beer is 5.9 %.
What many people are doing when having a craft beer is known as the Fred Eckhardt (memorialized as “the Dean of American beer writers.”) Light Beer Method. This is where water is consumed before or after having a craft beer. This delivers all of the benefits of light beer while still allowing the full, rich taste of a favorite craft brew to come through. A problem this creates is that Craft Breweries are selling less beer than they could, which I believe is going to be a big problem in the future, as more of them try to enter the market place.
Mr. Panneton started researching the brewing industry while a student in college. That love of beer and breweries led him to work in various management capacities for Pittsburgh Brewing, Stroh, Pabst, Boston Beer and other beverage companies. He has spent over 30 years analyzing the Brewing industry. He continues to consult for major beverage, spirit and food companies as well as advise in mergers and acquisitions with BMI. Mr. Panneton can be reached at BeverageM&A@bmimergers.com.