Why Stone Brewing is Wrong

2017 has been called "the year of the Lager" and for good reason - most production sized craft breweries are pursuing the all-mighty lager category now, and showing great success. The lines between craft beer and mainstream beer are getting more blurred each year, and this recent trend is set to challenge anyone on why we would not just call it "great beer", and abandon the idea of "craft" altogether.

It's just great beer. That's all "craft" beer is.

How different is it? Well, the difference between quality, ingredients, process, water, and production controls is as diverse between craft breweries as it is between craft breweries and macro breweries. In fact, in terms of quality and process management, few "craft" breweries measure up to their larger peers in macro land. Macro breweries micro-manage quality to ensure consistency and shelf life versus optimizing or maximizing flavour - surely they have different objectives, yet also achieve great success in their outcome.

Now that craft breweries are entering the space of lagers, how will that affect the market dynamics within the category? Will it dilute the craft brewery differentiation? Or will it reinforce it? Well, the answer depends on how the craft breweries enter the segment.

As we at VI Brewing just exited the value beer category segment, rinsing ourselves of a strategy to drive volume through cheap and cheerful lagers, others are jumping into the segment with both feet. Central City Brewers just launched Beer League - a value priced lager offered in 15 packs, sold well below the price of macro breweries' value beer offerings. This strategy may achieve one of two things: 1) drive the equity value of the premium Central City brand down, or 2) will attract a macro acquirer aiming to kill the Beer League brand and protect value beer pricing and margins in the west. We saw this happen with Lakeport Brewing in 2004-2005 in Ontario.

However there is risk in selling value beers. Value priced beers lower average selling prices, margins, and revenue per hL. Just ask Big Rock - their revenue per hL hovers around $210/hL - a full $100 less per hL than many premium craft breweries. Big Rock trades publicly at a significant discount to craft beer peers. And on the other end of the spectrum, Ballast Point had among the highest revenue per hL in the industry, and we know how that turned out - they fetched one of the largest valuations in the history of craft brewery acquisitions. $1 billion.

So while some fight it out in the segment of value priced lagers, others are approaching the lager segment with the thought that lager doesn't have to be "cheap and cheerful". Our sister company, Muskoka Brewery have done a great job supporting premium pricing and positioning with their Craft Lager. And that brand is doing very well for them as more consumers enter craft beer. It's an approachable beer brewed with quality and care.

Another great example of a premium strategy on lager is from our neighbours at Hoyne Brewing - Hoyne Pilsner has become somewhat of a benchmark locally for a lager drinker, especially on draught. And a notable entry into lager locally was Phillips Pilsner, a beer launched with a digital campaign that literally took the world by storm. Their launch video achieved global coverage, and helped to put Victoria craft beer on the map - thanks Matt! Tide lifts all boats...

Most recently, we at VI Brewing launched our Juan De Fuca Cervesa - a craft take on the Mexican lager made with flaked corn maze to help with flavour rather than to reduce costs in fermentation, as the macros tend to use corn. We expect big things from this beer, especially since it's gotten great support from retail out of the gate.

We will also be relaunching Victoria Lager in early May, a true-to-style Dortmunder Export - a beer style dead set between a Pilsner and Helles Lager in bitterness. We will be using only the best German hops, malt, and yeast, and long maturation times - just as the Germans do it! No short cuts. Premium priced.

So if 2017 is truly the "Year of the Lager" then it could be very interesting on how well "craft" breweries succeed in taking market share from macro breweries in the premium lager segment. And more interestingly, what, if any, response will come from macro breweries in order to defend their share? Already we have seen ABI purchase Mill Street Brewery, well known in Canada for it's Organic Lager representing the majority of its sales before the acquisition. We also see recent craft brewery acquisitions of macro breweries being used to block independent craft draught lines at venues and at on-premise chains. "We have craft" being the line used to buyers in order to justify blocking independent breweries from taking macro draught lines - but that's another story, isn't it?