The Next Great Beer War

Jim Koch, owner of Sam Adams (Boston Beer Co) and Sam
Calgione, owner of Dogfish Head

One of the most fascinating aspects of the craft beer industry has always been the sense of cooperation between brewers. This is something not often seen in other industries, where competition pits like businesses against one another. But in craft beer, it has always been us against them, where the “us” is craft beer and the “them” has been big beer. The thinking is, if we try to out-sell Budweiser, we will lose. They have more money, which leads to more marketing/advertising, bigger facilities, more volume, etc. But if we team up with each other and try to sell beer drinkers in localized markets on the idea of choosing craft instead of industrial swill, we can steal beer drinkers away from big beer much more effectively, and we all win.

So far, the results have spoken for themselves. Craft beer has grown exponentially at the expense of big beer, which has seen its respective market shares dwindle. Even in the doldrums of the recent economic trouble in our country, craft beer’s segment of the market has been doing quite well. Every year, more and more breweries are opened, and business is booming.

But is there a ceiling to all of this prosperity? Conventional economic logic says yes, although so far, we haven’t seen it. Is craft beer like so many other industries, where there is only so much room in the market for all these beer makers? Or is it more apt to compare craft beer to restaurants, in that it appears that there is endless room in the market for more and more businesses? I think it is a little bit of both, or in other words, it depends on your business model.

Up, up and away!

Getting back to that original idea in which small breweries don’t have to compete with big beer alone, but rather as a segment of the market competing against the big beer segment of the market – as the numbers show, that absolutely works to a point. But once a small brewery grows into a large brewery, it becomes a different ball of wax. Particularly when they grow out of their small, regional area and begin distributing into a larger swath of countryside, the competition with big beer becomes much more apparent.

Or perhaps, it’s not with big beer, but with other craft breweries that have also grown to behemoth proportions. You can still write off big beer because their product is inferior. But if a craft brewery from Boston, MA has grown into a national powerhouse with coast to coast distribution, and decides to try to sell beer in San Francisco, CA, a market with its own craft beer powerhouse, it is conceivable that there might not be enough room for both.

The latest offering from Sam Adams.

I brought up Boston and San Francisco on purpose, and no, it’s not because the Patriots and 49ers are still in the NFL playoffs and Brewper Bowl III is coming up – more on that in the coming weeks. I chose Boston and San Francisco because there are breweries from those respective cities that are in the craft beer headlines right now due to this very problem. To summarize, the owner of Lagunitas Brewing Company, from Petaluma, CA, Tony Magee, took to twitter recently to virtually abuse Sam Adams (Boston Beer Company) and their owner Jim Koch, for what he perceived as a territory grab. Magee is upset with a recent shift in Sam Adams targeting, with the addition of Sam Adams Rebel IPA, a west-coast style IPA. According to Magee, a mutual distributor of Lagunitas and Sam Adams was informed that Boston Beer means to take their (Lagunitas) tap handles wherever they could. In other words, replace Lagunitas taps with Sam Adams Rebel IPA taps in local bars in San Francisco, which is Lagunitas’ home market.

It should be stated in the name of bipartisanship that Jim Koch has not made an official declaration to this end, and even if he had, free market capitalism is, at least for now, the way America works. However, Jim Koch needs to be mindful of this developing problem from a PR standpoint, because his Boston Beer Company has been treading a fine line with the craft beer community for a long time, and most craft beer drinkers, if made to choose, will probably take Lagunitas’ side.

More likely, however, this real world scenario will probably go away in a few weeks, at least from the water (beer) cooler discussions. But it does illustrate a growing problem with the craft beer world - shelf space. Or more specifically, the lack thereof. To understand what I mean by that, you first must examine the laws of our great land.

To the gills. No more room here!

When the 21st Amendment repealed the Volstead Act and allowed us all to go back to legal drinking, one of the terms of the new law prohibited what was called vertical integration. Vertical Integration is defined as the combination in one company of two or more stages of production normally operated by separate companies. This was intended to prohibit one company (i.e. Budweiser) from owning the brewery, the distributor, and the store where the beer was sold, thus controlling the entire chain by which their product gets to the consumer. It was designed to prevent monopolies and make the marketplace fair for companies whose pockets weren't as deep as Budweiser’s.

The original beer war - prohibition.

Over time, big companies have devised a way to get around this government-mandated horizontal integration by bullying the distributors into favoring their products over their competitors. For example, say a very large brewery has a multi-million dollar contract with Sous Brewer Distribution, LLC (not a real thing by the way) and they decide that a smaller brewery is cutting into their market more than they would like.  They will go to Sous Brewer Distribution, LLC and tell them that if they don’t drop their 50,000 dollar contract with the smaller brewery, they will pull their multi-million dollar contract and give it to a different distributor. Obviously, Sous Brewer can’t afford to lose the main contract they have, so they very quickly drop the smaller contract with the smaller brewery. So even though it is illegal for the large brewery in this example to control the distributor, they essentially control the distributor anyway.

This is a pretty extreme scenario, but it does happen. More common terms and conditions of these underhanded deals include arrangements whereby the smaller brewery’s beers are moved down to the bottom shelf, or to a weird part of the store where nobody knows they’re there, or in the case of the bars, they get fewer kegs delivered, resulting in fewer tap handles that are placed at the end of the tap line where they’re not as prevalent. Bottom line – big breweries control distributors, resulting in unfair treatment of smaller breweries.

I’m not implying, as I have no way of knowing and haven’t done the research to conclude anything, that Boston Beer and Sam Adams are involved in any underhanded horizontal integration shenanigans involving Lagunitas, but if the tweet from Tony Magee has any merit to it, it certainly raises red flags. And the fact that big beer does this kind of garbage all the time means that it is possible. I’m not going so far as to call Sam Adams “big beer,” but they are the largest brewery considered by the Brewers Association to be a “craft brewery” and many in the craft community feel they are too big.

Watch your head.

This brings me back to our original discussion on whether there is a ceiling to the growth in the craft beer industry. In my opinion, the answer is yes and no. There is limited shelf space, and limited tap handles at the bars, so in theory, a particular market can only handle so many national-level brewers wheeling and dealing in their area. So from that standpoint, there is a ceiling, and like it or not, those national-level craft breweries are going to have to compete with each other and big beer simultaneously for those taps and that shelf space, particularly as more craft breweries decide to join the national discussion.

The reason I say yes AND no, and the reason I make a distinction between national-level brewers and regional brewers, is that regional brewers still have that advantage that craft beer has been exploiting all along – they can appeal to the sense of community and small business practices that allowed the Dogfish Heads and Stones and Sierra Nevadas of the world to grow in the first place. They are absolutely not competing against big beer, and can use the smaller distributors and retailers to ensure themselves taps and shelf space in their local market. Not to mention, they can defeat big beer and non-local beer by providing a quality product and appealing to the sense of local pride that most craft beer drinkers have inside them. The best part is, there is almost no limit to the amount of local breweries a market can support, as their consumers behave a lot like restaurant consumers do, in that if the beer is good and the price is right, they will always come back. Nobody ever says, “There are too many restaurants for the market to support in this town.” Why would they say that about breweries if the consumers of both behave the same way?

And most of them are craft breweries.

So at the risk of adding one more paragraph to an already long winded exposition on the craft beer industry’s growing pains, my advice to all of you is to go support your local brewers, enjoy all the craft beer you can get your hands on, and file everything you read here today as an interesting look into the inner-workings of the industry that provides you with your delicious craft-brewed deliciousness. But don’t worry too much because at the end of all of this, there will always be delicious craft beer for you to drink, and with any luck, we will one day defeat big beer once and for all (though that is still a long way out). And please wish all of those ambitious souls who want to enter the national-level beer war “good luck.” They’re going to need it.

Here’s to craft-brewed happiness… Cheers!