In the thick of recession the brewing giants are struggling. So why is craft beer - at double the price of standard lager and with ‘mega’ margins of up to 50% - proving such a hit?
Standard lager is losing its fizz, fast. Maintaining volumes in the mainstream relies on forking out millions on marketing while selling in supermarkets at wafer-thin margins.
Key to growing value in this flattened market - down 1.3% by volume last year [Kantar Worldpanel 52 w/e 5 April 2012] - is bolstering existing lager offerings with premium brand extensions. But that costs money and in a recession splashing out on a new brand launch is a risk too far for many brewers.
Their reluctance to do so has presented an opportunity for a small but rapidly growing group of artisanal operators, who are shifting growing volumes without having to resort to cut-price deals and expensive ad campaigns. And they’re attracting increasing attention from supermarkets and multinationals, each looking for a piece of the action. So what is a craft beer? What’s the secret of these thriving craft operations in such straitened times? And what’s the market’s potential?
Craft beer is certainly not a style: it might be a pilsner, pale ale, red ale, steam ale, porter. Some regard craft brewers simply as small-style operations that have been influenced by US players such as Sierra Nevada and Boston Beer Co, which pioneered the reinvention of traditional beer styles in the 1980s and have today grown to become giants in their own right. But it does seem to help that many smaller brewers avoid techniques such as pasteurisation and the use of hop extracts, which are thought to compromise flavour.
“People will pay more for a handmade beer that has 30 times more hops in it than a Stella,” says BrewDog co-founder James Watt. “The big beer companies have two very blunt tools - mass advertising and discounting. Without them there’s no reason to buy their lager because they all taste as bad as each other.”
Stuart Howe, head brewer at Cornwall’s Sharp’s Brewery - acquired last year by Molson Coors - believes the revolution is being driven by a new breed of adventurous drinkers. “They’re motivated by flavour and exploring different tastes,” he says.
In this revolution, craft beer suppliers are making real inroads in the pub trade. But selling beer in casks - a format fraught with handling and shelf-life difficulties - to local freehouses will only take their businesses so far. Now, with off-trade beer sales far outgrowing those in the on-trade, they are turning to the supermarkets for the next stage of their development, to tap into consumers who want to experiment, at relatively low cost, from the comfort of their own homes.
Sainsbury’s beer buyer Oliver Chadwyck-Healey is certainly excited. “Of course we sell a huge amount of big brand lager - that keeps our sales ticking over - but increasingly our 20 million-plus shoppers want to try something unusual,” says. “They’ll pay more to do so.”
A quick glance at the sales data shows how lucrative craft can be. Over the 90 days to 20 June, Brooklyn Lager, Samuel Adams, Innis & Gunn, Blue Moon and BrewDog - five of Sainsbury’s bestselling craft brands, defined by the retailer as ‘craft’ because of their use of ingredients and unconventional styles - commanded 124% more per litre than Britain’s five leading lagers. A litre of Stella, Carlsberg, Foster’s, Carling or Budweiser sold for an average of £2.32 in the major supermarkets while the craft brands fetched £5.20 [BrandView.co.uk].
Margins are also much higher. “Craft margins are mega,” says a sales director for one Continental lager brand. “The multiples make as much as 50% PoR - if they promote it would come down to about 25%. I’d say the multiples are working on a PoR of less than 10% for the major lagers. On case deals they’d work on two or three per cent.” Unless the lager’s sold at a loss, as is often the case, that is.
Of course higher margins mean nothing if no one’s buying. Which is where PR can be so powerful. BrewDog has turned creating hype around its powerful and provocatively named tipples - such as 5.6% Punk IPA, 7.8% ‘Class A’ ale Speedball and 41% Sink the Bismark - into an art. It’s repeatedly clashed with the Portman Group over its responsibility message and rattled the cages of industry bigwigs. In May, Diageo was forced to apologise after using its power as a sponsor of the BII to bar BrewDog from winning an award.
“If we can collectively help our consumers value modern craft beers, we have the opportunity to drive value into a market”
Nick Miller, Meantime
Craft brewers are also offering regular promotions - typically three-for-twos and four-for-£6 deals - to ensure repeat purchase. As a result, Britain’s craft brewers are flying. London’s Meantime Brewing says it will double output to 50,000 hectolitres in 2012 while BrewDog, which upped sales by 77% last year to £5.9m (20% through the multiples), is eyeing revenues of £11m this year, thanks to growing exports, more beer bar openings and new supermarket listings (see right).
The multiples are also partnering with craft brewers to bolster their own-label ranges. Last year BrewDog began making a 9.2% Double American IPA for Tesco’s Finest, Harviestoun supplies a craft lager for Sainsbury’s growing range of Taste the Difference beers and Meantime makes M&S’s London Porter.
Not that the own-label route is necessarily as attractive for brewers as it is for the multiples. “The margins are lower,” says Alastair Hook, founder of Meantime Brewing, which for seven years supplied Sainsbury’s with its range of Taste the Difference Continental-style beers until rising costs made the arrangement uneconomical. “I built Meantime on Taste the Difference and the beer buyers at Sainsbury’s were years ahead of their time. But the future is in our branded products.”
To cater for the growing off-trade interest, craft brewers are learning new tricks. “We’re spending more on ensuring our bottles are presented in a more positive and attractive way,” says Duncan Sambrook, MD of London’s Sambrook’s Brewery. “There’s more competition on a shelf than a bar so this is really important to our retail strategy. We also want to provide niche products such as vintage brews to retailers.”
So how big can this niche be? Craft beer’s potential in the multiples is huge, says Meantime CEO Nick Miller. “In the US the modern craft movement now represents at least 6% of market volume and $8.7bn in value,” he says. Lack of a solid definition of what craft beer is in the UK means the size of the market here is near impossible to measure. “If we can collectively help our consumers understand and value modern craft beers and the choice the category offers, we have the opportunity to create craft beer aisles visited by discerning drinkers and drive value into a market.”
Chadwyck-Healey thinks specialist aisles are unlikely. “Many people just don’t know what ‘craft beer’ means,” he says. “A lot of work still needs to be done to communicate what craft beer is to consumers.” Nonetheless, the appointment of Miller - former MD of Miller Brands, SABMiller’s UK arm - at Meantime last year illustrates the growing attention the mainstream is paying craft. Last year AB InBev bought US craft brewer Goose Island for $39m and last week the Australian giant Lion made moves to take full control of Little Creatures, valuing the Aussie craft brewer at A$381.6m.
The big boys are starting to tuck in over here as well. “The bigger brewers are not stupid,” says Howe at Sharp’s, which has seen production surge since Molson Coors bought it last year for £20m. “They’ve seen that people are starting to view beer differently. They’re walking away from commodity lagers and are enjoying a few well-chosen beers at home.”
And who knows? With further deals reported to be on the cards, it might even put some fizz back in the giants’ results.
The art of craft
Dead Pony Club trots into Sainsbury’s in August (£1.69 per 330ml). First made to mark the 5th birthday of BrewDog (who in 2010 served a 55% brew in stuffed road kill - left) in April, the Pony joins stablemates Punk IPA, Hardcore IPA and 5am Saint at Sainsbury’s. Last year BrewDog hit sales of £400k at the chain. It says it will double that in 2012.
Another craft brewer that reckons it will double production in 2012, thanks largely to the growing shelf space it’s winning in the supers. Meantime’s Belgian-inspired Raspberry Wheat Beer fetches £1.80 for 330ml in Waitrose. Its eclectic range of beers includes Chocolate Porter and a 7.5% India Pale Ale served in a 75cl champagne-style bottle.
Weighing in at 10% abv, this powerful ale is part of Sharp’s Brewery’s new three-strong Connoisseurs’ Choice range (the price tag is just as hefty at £5 for 330ml). First made by brewer Stuart Howe “in secret”, Sharp’s new owner Molson Coors launched the range to encourage the pairing of craft beer with food. On sale in indie stores and selected restaurants.