1997 Re-visited

I have now brought up the mid-late 90s boom and bust several times here without much context, partially because I was 12 years old at the time. Brewers bring it up anecdotally, blaming the dive of craft beer growth on new companies that came into the industry just to cash in on the backs of others. Those companies reflected poorly on craft and lots of drinkers turned their backs on what had been a rapidly-growing niche market. Whether that is the real reason or not, I don’t know, but their word is all I have.

To illustrate this with numbers, according to Brewers Association data from 1986 to 1995, craft beer grew anywhere from 29% to 75% year-over-year. From 1995 to 1997, growth dipped from 58% to 26% to 2%. This is the ‘bust.’ Growth was anywhere from 0% to 6% from 1997 to 2003, quite modest relative to the years before and after the boom decade.

So with that in mind, it’s natural to see the mid-90s mentioned as craft beer surges to 14-15% growth in 2011. Is history repeating itself? Most brewers would probably tell you that is in some ways and isn’t in some ways. When you consider the massive expansion that so many breweries, especially regionals, are undertaking, no one seems to be concerned about 1997 occurring again though.

What’s interesting about 1997 is that a report just happened to be released early that year profiling the craft beer industry. You can find the PDF hosted exclusively on a random Angelfire website (yep, that Angelfire).

It’s a bear of a report to skim through in just one morning at 225 pages but there are some things that remind me a lot of 2011.

Like this paragraph on Miller Brewing…

Holding onto a solid second place is the Miller Brewing Co., a subsidiary of Philip Morris, Inc. Miller’s best-selling brand is Miller Lite. Miller participates in the craft/specialty segment through a subsidiary it set up in 1995, the American Specialty & Craft Beer Co. This unit serves as an umbrella for the Jacob Leinenkugel Brewing Co. (which Miller bought back in 1988), and two craft breweries in which Miller acquired a controlling interest, the Celis Brewery, Inc. and Shipyard Brewing Co.

Sound familiar?

How about issues around the definition of ‘craft’ and its impact on the ‘index’…

To an enormous extent, the answer depends on how one defines the market. If Anheuser-Busch, Miller, Coors, or one of their subsidiaries introduces a product (or repositions an existing product) as a craft/specialty brew and that product takes off, then the category could be as large as Anheuser-Busch, Miller, or Coors wants to make it. As a matter of fact, the definitional problem will hit in 1997 when the IBS adds Leinenkugel and F.X. Matt to its domestic specialty index, inflating the index by hundreds of thousands of barrels. The IBS’s time series will have to be footnoted to facilitate apples-to-apples comparisons with its historical data.

How about this one on new products…

Until now, much of the craft and specialty segment’s growth has been fueled by new products, new markets, or both. We believe (but don’t have the data yet to confirm) that brand loyalty is still generally low, and that many craft beer customers are still at the experimental stage, willing to try new products that sound appealing, look appealing, or come with strong word-of-mouth recommendations. But evidence is beginning to mount that the new product pipeline may be overflowing.

History sure seems to be repeating itself.

So what did the analysts make of the ‘health’ of the industry and what did they predict for 1997 and beyond?

Unfortunately, only a few pages of the report were dedicated to the declining growth happening at the time. Here are four factors that researchers identified that preceded the steep decline in growth:

1) Declining growth by public brewing companies

2) Declining growth in the Pacific Northwest, the most mature craft market in the U.S..

3) Drop in stock prices of craft brewers

4) Slowdown in distribution growth

One could debate whether these were really key factors in 1996 though it begs the question, “What are the important factors in predicting a slowdown in the current decade?” That question, in itself, deserves a blog post so I will leave it at a question for now.

Keying back in on the report, the analysts admitted that the above factors were crude factors were crude in attempting to predict the near-future of craft beer. There were two main things to which analysts boiled things down…

…that craft has a ceiling…

At the high end, the craft segment is bounded by the simple fact that most Americans do not like the taste of beer. The largest segment of the domestic beer market—by far—is light beer, with a market share of about 37%. Anyone who has ever tasted a light beer knows that light doesn’t just mean low in calories—it means low in taste. When Consumer Reports reviewed beer in its June 1996 issue, they presented a flavor profile of all the beers tested. They graphed each beer’s flavor profile on what amounted to a 99 grid that measured hop flavor (or bitterness) on the horizontal axis and malt flavor on the vertical axis. As a group, most of the six light beers tested rated a 2 (very low) on hop flavor and a 1 (even lower) on malt flavor. These are the most popular beers in America, and are three times more popular in the United States than in any other country in the world.

…and a floor…

There is also a floor under the craft/specialty segment. This is not a fad segment like packaged draft, dry, ice, clear, or perhaps even red. While growth in the craft segment will slow, it will not peak quickly and then lose share, as the fad beers have. The craft/specialty segment has firm underpinnings from homebrewers and other beer aficionados. Many of the homebrewers prefer to brew their own beer (done right, it’s even better than the best of the craft brews), but they often sample commercial brews to try unfamiliar or difficult-to-brew styles, and of course they’re top prospects for drinking craft brews when they are at a restaurant or brewpub.

By and large, both of these remain true today so it’s not beyond a reasonable doubt this this ride we are on is part of a cycle and not permanent.

At some point, growth will dip back into the single digits but how far into the future will that year come?

After studying the industry and acknowledging that a decline was imminent, the analysts predicted double digit growth to hold all the way through 2000 and predicted 8% growth in 2001.

Their predicted craft beer production figure in 2001?

8,740,000 barrels.

Actual craft beer production in 2001?

5,350,000 barrels.

They over-estimated growth during that period by over 60%.

email newsletter signup box anonymous tip form

7 thoughts on “1997 Re-visited

  1. been there, saw that.

    a coupla two, tree reasons for the late 90’s decline in craft beer, chicago style:

    1. way, way too many brewers making too few styles- the “we got our red, this is our golden, that’s our stout,” thing. meanwhile, innovative startups got crushed under the weight of the above type competition taking up shelf and tap space. golden prairie brewing in chicago, being just one of those early innovators that was choked to death.

    2. brewers on the fly, not doing enough DD. ask yourself: would you want to build a brewery in an old wooden timbered, brick walled, former leather tannery? with all those nasty microbes from 100 years ago, still present in the pores of the wood, and in microspaces in the bricks? yeah- maybe if you’re making sours– but not lagers and red ales. maybe the guys behind the old chicago brewing company, off elston avenue in chicago back then in the ’90s, should have asked themselves about this. maybe they wouldn’t have had the poor outcome they did have.

    3. too many already established craft and old-line brewers trying to get into the “craft segment” in other cities, jumping in to too many markets outside of their home territories. believe it or not, yuengling, schell, hinterland, and boulevard were selling in chicago in the mid-late ’90s, those just being four examples off the top of my head. there were many, many more like that.

  2. Totally agree with the previous statement. Having gone through this in Oregon, there were a couple of key factors involved for the brewers that didn’t survive:
    1) The breweriess who had strictly gotten in to capitailze on the trend and didn’t focus on a quality product. The consumer saw through this quickly and moved back to the quality products.
    2) The breweries who were undercapitalized and undermarketed. They were spread too thin and were not able to hang on to reach the next tier of production.
    Here in Eugene, the first wave of breweries (1990s) saw an almost 100% turnover for mostly reason 2 above. Thankfully wave two seems to understand what needs to be done to succeed.

  3. one other note: the jumping into new markets by brewers hundreds of miles away from home ain’t new. around and during world war two, say about 1937 to 1950, many small old line (and even new start up breweries of the day- there were such things), tried selling beer to distant markets in attempts to either remain in business due to collapsing local markets, or just simply to try and expand their reach, without doing much or any DD as to where they were going. we’re not talking miller, or anheuser-busch, or falstaff or ballantine. i mean small breweries of the time, typically making 5,000 to 200,000 barrels of beer a year. with few exceptions, the out-of-market expansions failed. even really small players like mchenry brewing co., of mchenry illinois, tried this just before they folded in 1943. as their local market in far northern illinois (outside of chicago proper) faltered, mchenry tried selling in chicago. epic fail.

  4. It is interesting to note the major fundamental economic differences between then and now. In 97-98 the economy was doing exceptionally well and we were on an upswing in the business cycle. Consumer confidence was high and unemployment was below 5%. So it makes sense that fools were rushing in with their money and fueling an asset bubble, so to speak, in craft breweries. There was a lot of greed to be had, and we know during times like these is when foolish capital allocation starts to take hold. But the same can’t be said of today. We are still recovering from an economic collapse. GDP growth is nearly stagnant. Unemployment is at 9.1%. Consumer confidence is in the doldrums, investors are scared shitless and yet more people are choosing to drink better beer and spend more of their income on it. Do I think there are people opening breweries that shouldn’t? Yes, but something is fundamentally different with this “Craft Beer Bubble” and I think there are larger social-cultural transformations taking place. Any thoughts?

    I will say that if brewers aren’t careful to properly gauge their various consumer groups price sensitivities, and prices keep rising, there could be some negative backlash from their core consumers. I’m sure there are plenty of hipsters drinking craft because it is “cool” and once they move on to mezcal, grappa and other hip, rare craft spirits, prices will have to retract and some breweries will lose their shirts.

  5. I started getting into craft beer in 2003, so I missed the bubble days but it was still talked about then. From where I sit, demand seems real and lasting. People are knowledgeable and they want good beer. I don’t know what the upper end of demand is, but

    A few more points.

    A lot of craft drinkers are really drinking their local brewery. What percentage of craft drinkers are people who like to taste almost everything? What percentage of craft drinkers support a few locals they are familiar with or bigger national brands (Sam Adams/Sierra Nevada/etc)? My guess would be in the 90s people were drinking particular breweries and when they crashed it looks like craft drinkers went away. Just a guess.

    We have to understand the history of bubbles. You need cheap capital. Today, I doubt a new brewery could get financing without a reasonable business plan. Was that true in the 90s? Also, there was a shakeout in railroads in the 1800s. Railroads remained and grew in importance. There were a ton of automobile manufacturers that went away. Automobiles continued to grow in importance. There was an Internet bubble in the late 90s. The Internet didn’t go away. It’s still around and as important as ever. Lots of companies died.

  6. Pingback: Three Floyds Calumet Queen - The Barley Whine

Leave a Reply