Navigating the shifting tides in the craft beer industry

Before I dive into the topic, I would like to provide insight into my background. I work for Anton Paar. Therefore, I am biased, but I am honest about it.

My opinion is based on the information gathered through countless meetings with business partners or other players within the brewing and beverage industry; from coast to coast, whether small or big, that either myself or my team has conducted. Said meetings involve beverage producers themselves, canning line suppliers, researchers, brew house suppliers and so on.

Now, let’s get to it:

It seems like the party is over. Over years we saw a tremendous growth in the craft beer industry. New breweries popping up frequently like mushrooms, while other breweries have been expanding – getting their own canning lines, adding tanks, beefing up quality control. Many brewery owners started brewing in their basement for themselves and friends. The hobby became a passion, which became a business. That is the story of hundreds of craft breweries in Canada.

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Those days are behind us for now. To add some beef to it: In Ontario, mobile canning dropped to less than 50% of capacity in 2023, Vessel just stopped mobile canning all together. Our business with the craft breweries is taking a deep dive. Other players that are based in Canada and support the craft industry switched their focus completely to our southern neighbor. Taking a look at used brewery equipment, one can get used tanks, brew houses, canning lines for excellent prices as producers are closing their doors.

The general trends are (fall 2023) that the Atlantic region seems to do better on average than all other provinces (which is surprising to me). When it comes to correlating business problems with brewery size, it can be simplified with: the smaller the brewery the bigger the financial issues.

Why is the industry not doing well? Where is that divide in size coming from? Let me provide my assessment and my opinion of what the future holds.

Home-grown and external challenges

While some challenges stem from external circumstances, others are home-made. I will start with the ones that are out of the control of the breweries.

Cost - One major challenge is the increasing cost of beer production, from start to finish: malt, CO2, labor, tax basically everything.

Taxes – certainly a potato. In times where sales are down, increasing tax is hurting the industry a lot, in particular as this is something the government controls and therefore could simply be stopped, different than many of the other cost increases. Having that said, at least small breweries pay less tax than big players, see (1). Also, on some level, government officials are weighing in.

Raw materials - Prices for malt has increased more than 35% in the last 20 months. There was a massive shortage of CO2 in between in certain areas, but even after that issue was resolved, cost of CO2 has also massively increased.

Labor: The industry faces at least two challenges: cost for labor went up significantly over the last years, following inflation to a certain degree. But even if breweries are willing to pay, they often struggle to find skilled staff at all. Frankly speaking, many people are leaving the breweries and go to other industries that pay more or the jobs are more attractive. We had conversations with clients about automation that were purely driven by shortage of skilled labor.

The only thing that did not follow the increase in cost to make beer in the last years is the price of beer for the consumer. Since beginning of Covid, inflation averaged in the area of 5% (and spiked over 8% in between), while prices for food went up even more, see malt. While the majority of Canadians did see wage increases, for many of them it did not keep up with price increases of essential goods, such as housing, energy and food. While increase in cost to make beer since 2020 might justify a price increase of beer of more than 40%, breweries are stuck between a rock and a hard place: increase price to compensate for increased cost - which will decrease sales volume massively – or keep prices (almost) flat with the effect to produce with little to no profit, in many cases it would be below cost.

Let’s move on to home-grown road blocks. The quality and consistency of the product is a major issue for small producer. It is no secret that the quality control equipment of big brewing companies, such as Labatt, Molson or Sleeman, costs more than a complete small craft brewery including brewhouse, fermenters, BBT, chiller and canning line. I cannot sugar-coat it, a lab with staff does not come cheap.? As small craft breweries are often operated out of passion, the head brewer (often owner), puts all his love in the product when making it; whilst the big guys are razor-sharp focused on one thing only: profit. If that is the case, why do they put so much money into the QC department that does not make any money? Superior quality control saves tons of money on the following:

-??????? Avoiding call-backs. While many small breweries might have never experienced this, a call-back is a very pricey issue which involves: getting the product off the shelf, collecting, dumping it, pay a fine, suffer revenue and reputation losses. Call-backs could come from exploding/buckled cans, spoiled product, product out of specification that is regulated (ABV).

-??????? Avoiding shipping a bad product. Depending on the analysis, bad products can be caught before they are shipped, saving a loss or reputation, fine, collecting it throughout the province. I have seen questionable products still being sold after lab tests have shown it has major issues (too high CO2, ABV out of spec, way too much DO,…).

-??????? More efficient use of raw materials. Malt and yeast are natural raw materials which underly fluctuations in their properties. Therefore, when following the same recipe – amount of malt, yeast, aeration, water, temperature – each brew will vary. If the big guys make a beverage, most if not all products are blended to target. Products made from small batch craft breweries can easily deviate 0.3% in ABV and often beyond that. If a product comes in higher in ABV than advertised, the producer is giving away product for free.

-??????? Avoid losing customers. I know lots of beer-drinkers that got disappointed by certain breweries too often and now do not buy their products anymore.? This is a very important aspect. Quality control enables producing a consistent product which enables consumer retention. One may or may not like Budweiser or Molson. However, no matter where one buys their products, they always taste the same, whether in Toronto, Paris or Tokyo. As a consumer, I will accept a way too hoppy lager only so often before I move on to another brand.

I admit that having a million dollar lab makes no sense for a brewery with 1K hectoliter a year. Having that said – one can start small. pH, microscope, digital density meter, CO2, DO,…step by step. Below a certain size, using an external lab is a good idea. It might be a coincidence and I do not know all breweries in Canada but the ones that I am aware that are in trouble have limited quality control and the ones that are doing well have a quality program in place.

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Another challenge that can be managed by the beverage producer is the kind of product. Many younger Canadians do not drink beer as much the older generation – I guess I need to count me in here - but consume RTDs, mocktails or non-alcoholic beer instead. If this market is not served by breweries, they will miss out. Quite a few breweries have started making RTDs and some also mocktails. There is certainly a lot of room for many other to tap into this market. In particular when it comes to new products, the craft brewers have a huge strength: agility. New products can be developed quickly whereas in huge companies this takes more time – bringing marketing, sales, every player on the same page and execute accordingly is usually not done in a week. For the small producers, a new product can sometimes be on the market in 3 weeks.

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A way out?

If one follows my line of argumentation above, the way out is clear.

Establishing quality control to ensure a consistent product. If the freshly brewed pilsener tastes like an IPA, it can not be sold. Clients will reward producers that provide consistent products.

To get a handle on the labor issue, automation is key. Getting a de-palletizer and reduce labor requirement during packaging. Use faster canning lines.

Automation in the making of the beverage before packaging has multiple appeals:

-??????? It reduces labor.

-??????? It provides quality monitoring.

-??????? It increases other efficiencies.

Let me provide some examples, 2 that are very budget friendly and one that involves a bigger investment.

1)???? Brewhouse automation. How is one deciding when stop lautering? By experience (I hear that a lot from small producers)? Sight-glass? By volume? The great way would be to automatically stop transferring once wort basically becomes water – the sugar concentration drops below a certain level. Depending the current SOP one can save up to 5% in yield. While the increase in yield – more wort for the same amount of malt – might not be dramatic, this capex is small.

2)???? Interface detection. When packaging, what is the current process when switching product? A sight glass might be a very poor indicator if one pushes one blonde beer with another. By dumping a certain amount without measuring, it is possible that either one dumps too much product or packages product that is not in specification. A sensor, as close to the filler as possible, can minimize the amount that needs to be dumped. Depending on the line/hose size and pump speed, savings bigger than 50l are possible for each interface: beer/beer or beer/water. Also, the sensor acts as additional quality control, it can be monitored (and documented) exactly what is pumped to the filler.

3)???? Inline blending and carbonation. Let’s start with carbonation. Every beer needs to be carbonated. The cheapest option in terms of capital investment is doing it in the bright tank. A carbonation stone and maybe a controller for CO2 flow is all it takes. Therefore, why switching to inline carbonation?

a.????? Time savings. Carbonation in tanks takes time, many hours. Carbonation in the line is instant – beer going into the skid with 1% CO2, coming out on the other end with 2.6%. Zero waiting time. That enables to carbonate more beer in the same amount of time which means with the same number of tanks can produce more beer.

b.????? Labor savings. The higher quality carbonation units are automated. One needs to input the target carbonation level, that is all. A CO2 sensor will verify that the required amount of CO2 is injected and the built-in PLC will adjust it on the fly. No manual testing and adjusting is required.

c.????? Quality control. The sensor measures the CO2 and some skids have the capability to save it. The QC team can evaluate those data later on or on the fly during packaging, no manual interaction required.

d.????? Massive CO2 savings. Using inline carbonation, one can skip using a bright tank. The setup can be fermenter – (optional centrifuge/filtration) - inline carbonation – small buffer tank – packaging. A brewery uses 30-50% (depending on tank size) of the CO2 that is being used for bright tank purging. If the bright tank can be bypassed, it does not need to get purged.

e.????? Space savings. As bright tanks are not required anymore, that space comes available for e.g. more fermenters.

f.?????? No out-of-spec packaging for CO2 concentration. As it is carbonated on the fly and measured, no stratification can happen and out-of-spec packaging is history.

Those skids can come with an option for inline blending, too. How does that help? When brewing beer, one aims to get a certain ABV at the end. As described above, the results will fluctuate. Inline blending can automatically blend the product to target if it is above target. In fact, many bigger breweries intentionally target a higher ABV in their fermenters which gives them the capability to prevent undershoot, they always blend to target. That ends up in higher yield of the finished product, depending on the variation before, a 5% increase is possible.

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The (only?) option for the beverage producer to make all of this happen is to grow. At a certain size, many technologies that are available for everyone, will pay for itself quickly, just some examples outside of the ones mentioned above:

Dealcoholization skid. As the market for non-alcoholic products is growing, missing out on this market means the competition will grab it. For producing non-alcoholic products, other things come into play, too, that require fundamental investments: quality control in the lab, pasteurizer for shelf stability, water de-aeration system. To make this worthwhile, producing 5K hectoliters a year is not enough.

Faster, more automated canning line. Filling 20 cans a minute with 3 operators is a lot of cost. Instead having a faster line with 40 cans or more a minute with a de-palletizer and only one operator saves a lot of labor.

The following years

I forecast this scenario for the craft beer industry in the next number of years:

Some small, local breweries will remain alive only because of their very local loyal customers and tap room. As they are small, investments in extended on-site quality control, automation is not paying back in a reasonable amount of time. Those will have a very hard time.

Other smaller breweries will expand, invest in operation technologies, quality control, marketing and sales. This will allow them to produce at lower cost and give them wiggle room when it comes to pricing their product. Also entering new markets (mocktails, RTD, non-alcoholic beer) will help them build their brand outside of their traditional market. If they play their cards well, they will do well.

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1)???? https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/edbn32/adjusted-rates-excise-duty-beer.html

2)???? https://metchem.com/mash-filter-press-brewing/