CRAFT BEER’S CONUNDRUM

Like most of you, I read a half dozen or so industry newsletters each week to stay current on trends and forecasts. What I have found in the past few months does not bode well for the craft beer industry. Several of the top researchers, economists and conference presenters are bemoaning a gloomy outlook for Craft in 2024. As for the negative 2024 predictions I want to share some observations and consumer insights, “from the trenches” and offer a potential solution.

I have 35 years of experience in the beverage alcohol industry with a focus on craft beer and cider. I began my career out of graduate school as a marketing research analyst with Grey Advertising. In that position I poured over IRI, Nielsen data and focus group results. Learning how to draft creative strategies for the creative and art directors, I saw first-hand the impressive power of strategic, creative marketing.

Currently, I split time between consulting and working in a national supermarket chain’s liquor department. This Northern California store is number one in a division of 300+ in total alcohol sales. Although humbling, I relish the opportunity to pick the brains of thousands of craft consumers. The position, essentially, is that of a roving focus group moderator. Here is what you will not find in the newsletters.

Even at the higher end of the demographic spectrum, consumers are complaining about craft beer pricing – and with good reason. I saw my first 4-pack for $19.99 this month. Five dollars a beer! A colleague performed a large-format supermarket survey for me in the east/south and found multiple craft four packs, a dollar lower than on the west coast but still up to $17.99. Consumers are reacting and purchasing alternatives. Further, I had a sit-down conversation with the beer buyer with one of the world’s largest grocery chains and they told me that, “Craft does seem to have an issue with pricing.”

For those of you with pricing responsibility, keep in mind the “battle for share of stomach.” As a former brand manager, part of my job was to determine all fixed and variable costs, margin, and potential retail price – relative to the competition. This was not an easy task as I used my stopwatch to time employees on our production line. With all respect, brewers are experts at creating delicious liquids but oftentimes lack needed expertise in financial analysis. As I mention in my book, (https://www.amazon.com/Craft-Beer-Marketing-Distribution-Skumeggedon/dp/0692503919) there are few Bo Jacksons in the world. My advice is to have your finance officer take a sharp pencil to those costs. Ask them in your next staff meeting what a single beer or cider costs your company. Once you are fully confident of your pricing you can then layer in your distributor margin, marketing contribution and final retail or on-premise margin to arrive at your shelf or tap price. Why is this so critical now? Because craft beer pricing is “elastic.” This means that when price goes up, consumers look for alternatives. An example of inelastic pricing is gasoline. As price increases, we still purchase fuel as a daily necessity.

Here are actual alternatives at or close to the $19.99 price point. Jack Daniels Tennessee Whiskey 750 ml - $19.99, Lunazul Reposado Tequila 750 ml - $18.99, Bombay Saphire Dry Gin 750 ml - $21.99, Tito’s Vodka 750 ml - $18.99, Mumm Sparkling Brut 750 ml - $19.99, Chalk Hill Chardonnay 750 ml - $19.99, DAOU Sauvignon Blanc 750 ml - $18.99, Justin Sauvignon Blanc 750 ml - $19.99 and Miraval French Rose 750 ml - $19.99.

Back to the margin. I have found over the years that few understand how to calculate such. Here is a quick example. After reviewing your fixed and variable costs (including your own profit margin), you determine that your craft hazy IPA costs you $7.75 a four-pack. The next steps are to calculate two typical distributor & retailer margins.

BREWERY 4-pack COST $7.75

DISTRIBUTOR MARGIN @ 28% $10.76

RETAILER MARGIN @ 40% $17.94

DISTRIBUTOR MARGIN @ 30% $11.07

RETAILER MARGIN @ 40% $18.45

The above examples provide the “ammo” to go into distributor and retailer meetings while offering a glimpse of how your SKU will look against the competition. The bottom line is consumers are looking hard at alternatives as craft beer outprices itself in the battle for share of stomach. What can craft and cider brewers do? As mentioned, take a sharp pencil to your costs, and expected margin return. You might also review your brand line up. I see many product extensions that do not warrant shelf space. Look at shelf space through the eyes of the retailer. Each slot is an apartment that generates monthly rent. If the tenant, (your SKU) does not pay the rent (that is, meet the monthly stocking parameter per store per month) then it will be evicted. These evictions do not build equity into your brand franchise. In fact, they tarnish it and often remain in the mind of the buyer.

The more items you introduce the greater the potential for product cannibalism as well as dilution of your marketing budget. Ask yourself if the items you have in the marketplace are ALL first stringers? If not, cut the laggards and place your resources behind your rock stars.

As wine and spirits continue to gobble craft market share, I present an option. A “primary demand” strategy designed to increase the level of demand for a product form or class. This translates into increasing both the number of non-craft drinkers and the rate of consumption among current craft drinkers.

One of the most successful primary demand marketing strategies was created by the ad agency Goodby, Silverstein and Partners. I had the pleasure of working with this agency as a brand manager in another category and found their work to be world-class. In 1993 their team created the “Got Milk” campaign for the California Milk Processor Board. The campaign consisted of a variety of creative including TV spots with a goal of getting more Californians to put down their sodas and drink milk. The results were stunning as the category gained 7% in just one year.

So why bring up this case history? Because the same can be implemented for Craft. The Brewers Association and state guilds can work together and hire an agency to create a “Got Craft” campaign on behalf of the industry. As a former ad guy, I could see the campaign kicking off with testimonials explaining what inspired their passion to begin brewing craft beer. Potential spokespeople include Ken Grossman, Suzy Stern, Fritz Maytag, Roger Lind, Jane Zimmerman, Jim Koch, and Jack McAuliffe. Graphically, I suggest a “Pavlovian” variety of craft packages and liquid to support and showcase the category.

Although the following examples promote “secondary demand” for the two brands you will be able to better conceptualize my idea. This “Drink California” campaign was supported with a post off and participation in experiential events in a synergized plan to increase both brand awareness and trial. The results were double digit for the rotating California craft brands (including new placements).

So how does “Got Craft” get hopping? Reach out to the Brewer’s Association, your local craft guild, consortium, or alliance and talk to them about it. The campaign MUST include mainstream media, social media, wholesaler and retailer participation, wholesaler incentives (which builds excitement in this critical channel), price reduction (for example, $1-2 off craft four & six packs when QR code is scanned), sampling program and an extensive experiential event schedule. The latter is imperative for gaining trial and awareness. These events are where new drinkers will “discover” the reason they select craft beer or cider (over wine or spirits) the next time they visit their local supermarket or bar.

Neat idea Mark but who pays for all this? Everybody’s 2024 marketing war chest is still intact. I suggest each craft brewer contributes a percentage based on 2023-dollar sales and add this to what the associations can contribute. Wholesalers could also be solicited for donations. A final group should be approached for significant contributions. That group consists of Ken Grossman, Jim Koch, David Ingram, and Fritz Maytag (the “$B club”). In a roundabout way, we are here because of Jim, Ken, and Fritz. Based on this group’s wealth, they could easily finance a first-class campaign that would gain national awareness and trial for our great craft beer and cider breweries. For more on me, please check out my podcast at: https://www.thebrewingnetwork.com/shinerunner-ep18-dyno-ing-the-marketing-mix/

Cheers to Beer!