Can craft beer make the transition?

It's not new news. Craft beer growth is slowing. Competition is heating up. Large players are acquiring leading breweries to build out distribution and scale. Small entrants continue to grow in number. More players, more competition, big players taking over craft market share, and slowing growth - smells like trouble?

For established players, this trend is not new. Growth has been slowing in the United States now for 2 years. Latest 2016 IRI data shows craft beer only growing at 6.3% across multi-unit retail in the United States. That, while the number of US craft breweries shot up to 5,005 by the end of the same year. Within that growth, many of the top 50 craft breweries are showing declines in dollar volume. In fact, most of the growing brands in craft were owned and backed by major breweries like ABI.

Meanwhile, the concentration of business among few players continues in the United States, and intensifies. Out of almost 1,200 craft beer vendors selling to US supermarkets, only 45 of them represent 80% of the dollar volume. A long tale, indeed. And with that, combined with slowing growth, space on supermarket shelves will get harder to acquire, and protect.

Closer to home, Ontario is migrating to a hybrid model of grocery, TBS and LCBO distribution for beer. New licenses for private retailers should total close to 500 by next year. As that business transitions we are seeing an interesting trend - while the LCBO allocates roughly 25% of their beer space to craft beer, supermarket chains are allocating 50% of their space to craft beer. They are seeing an opportunity for a point-of-difference, in part due to the domination over beer sales in Ontario by TBS (The Beer Store), owned and controlled by Anheuser-Busch (ABI), Molson Coors, Sapporo and a few other major players. Since TBS still controls over 70% of retail beer sales in Ontario, and only dedicates 10% of its space to independent craft beer, it's clearly an opportunity for supermarket chains to essentially "do the opposite."

In BC, the latest sales figures from total retail beer sales show that among the major players (Molson Coors, ABI, Sapporo, Pacific Western) were flat in sales from 2015 to 2016 - at approximately $608 million. In contrast, over the same period the top 20 independent craft breweries in BC grew their retail sales from $120 million to $140 million - a 17% increase. Yet, the growth was driven from the largest players, unlike the United States.

It appears the Canadian landscape, for now, is more favourable to larger craft breweries than the United States. At least as far as the retail and distribution landscape is concerned. Government-run liquor distribution branches tend to support local companies based on social pressure, as well as on sales and category growth. And in Ontario, it appears the domination by the large brewers over TBS is - ironically - helping small brewers enter that retail landscape in supermarkets. Meanwhile in the United States, it's all business. Brewers have to earn space, and maintain it solely based on sales performance.

Latest numbers show there are 644 breweries operating in Canada, according to Beer Canada, or put differently, a brewery for every 55,000 people. That, versus a brewery for every 63,000 people in the United States. Comparable.

As major brewers continue to grow their dominance in craft beer, new entrants continue to grow, and retail becomes increasingly competitive, the question remains for many independent craft breweries - can they make the transition to become a significant player in the retail landscape?

For many, they don't want to. Some successful business models around hyper-local are emerging. Breweries like 33 Acres have a model that focuses on the urban scape that surrounds them, and doesn't go beyond it - it's a model that's working, and one they will expand surely. Others like Brassneck don't ever want to sell at retail - and why would they? When they get $1,000 per hL at their brewery selling pints I don't see why they would either!

What I believe we are seeing is a segmentation occurring within craft beer, and one that will continue until we see the structure of the business change again, after it's first wave of growth.

In five years, it's likely we will see fewer craft breweries supplying major retailers, however with more brands driving greater growth. Much like any market change, the first wave of entrants is not always the most profitable -it's often the second or third wave of change that reaps the greatest rewards. Those craft breweries in the United States that survived off of the IPA craze may not innovate fast enough to catch the next wave, or may be acquired or grow smaller as the market shifts. Those now emerging have the opportunity to see new growth areas, and expand where craft beer has not yet gone. The white spaces essentially.

At VI Brewing, we are focused on innovating in the white spaces. We believe there are many opportunities to grow, and many untapped segments (excuse the pun). Much like our best peers, we believe innovation will always drive growth. And it's innovation that created craft beer. However, it maybe different innovation that truly brings craft beer to the mainstream as the standard, and not the exception. I am excited to see what this next wave of innovation brings.