Yes, Virginia, We Have Market Saturation

Posted by  Alex Hannagan   in  Opinion     10 months ago     1404 Views     Comments Off on Yes, Virginia, We Have Market Saturation  

Yup, it’s here.  With the news from the last 24 hours that Green Flash is liquidating its Virginia Beach production facility, there’s no denying that the Virginia craft beer market has not only reached, but is now screaming past its tipping point.  The same may be true nationally, as Green Flash joins other giants such as Smuttynose that have fallen on hard times.  Peak saturation is here, and just as when the housing bubble burst a little over a decade ago, the signs have been around us for some time.  In reality, the warning signs appeared as early as 2016.

While the growth this decade has been astounding, some perspective is needed as to what has happened, and why 2016 should have sent up red flags to all the aspiring brewmasters in the Commonwealth.  The explosion began back in 2012 with the passage of SB604, aka the “Tasting Room Bill,” which allowed breweries to sell beer for on-site consumption.  Per the Brewer’s Association, here are some trends since then:

  • 2011:  40 breweries
  • 2012:  50 breweries (25% year-over-year growth)
  • 2013:  61 breweries (22%)
  • 2014:  78 breweries (28%)
  • 2015:  124 breweries (59%)
  • 2016:  164 breweries (32%)

At the end of 2016, Virginia was ranked 13th in total breweries, but only 21st in brewing capacity…and 34th in per capita production.  In other words, lots of places were opening but they just weren’t producing all that much.   The sales numbers were equally stark:  18th in economic impact (aka, taxes collected), and a sobering 36th in economic impact per capita.  For a state our size, all these new breweries should have been making – and selling – a LOT more beers than they were.  The arrivals of West Coast titans Deschutes, Ballast Point, Stone, and yes, Green Flash along with the Anheuser-Busch (Williamsburg) and Coors (Shenandoah) facilities meant a heck of a lot more competition for all these nascent microbreweries, as well.  These production rates are going to start to matter, so let’s keep them in mind going forward.

The growth didn’t stop in 2017, either.  Former Governor Terry McAuliffe, who helped to lure those big names to Virginia, announced last summer that per the Virginia ABC, 206 licensed breweries were operating.  That marked the third straight year at least 40 new breweries opened, with another 26% jump from the year prior.  And a lot of these new breweries are excellent, too.  Richmond is, according to multiple publications, the #1 craft beer destination and the Next Great Beer Town thanks to emerging names like The Veil, Ardent, Triple Crossing, The Answer, and Garden Grove…and others among a scene that exploded from just one brewery (the venerable Legend) to 22 within a decade.  One of McAuliffe’s parting gifts to Virginians was even to lure the National Beer Bloggers & Writers Conference to Loudoun County for 2018.

Not every new brewery is going to be great, or even good, of course.  We were going to max out in the middle and lower tiers at some point, and while growth has been slowing nationally even in absolute terms, a whopping 97 breweries closed across the country in 2016, a 24% increase over previous years’ average.  Sure, you say, more breweries open should mean more closing.  And that’s still only 2% of all breweries in the country that closed.  In Virginia, the numbers are even more alarming though.  Check out this butcher’s bill of closings the past few years:

  • 2007 (1):  Hilltop (Virginia Beach)
  • 2009 (1):  Holy Brew (Leesburg)
  • 2010 (1):  Richbrau (Richmond)
  • 2011 (1):  Cally’s (Harrisonburg)
  • 2013 (1):  Shenandoah (Alexandria)
  • 2015 (2):  Vintage 50/The Beer Joint (Leesburg), Buffalo Mountain Brewery (Floyd)
  • 2016 (8):  Callaway (Callaway), Fidelis (Burke), Rock Bottom (Arlington), Double Dizzy (Amelia), C’ville-ian (Charlottesville), Blue and Gray* (Fredericksburg), Old Glade (Glade Spring), Roanoke Railhouse (Roanoke)
  • 2017 (10):  Sehkraft (Arlington), Blue Lab (Lexington), Corcoran* (Purcellville), Mad Horse (Lovettsville), Bald Guy (Leesburg), Wolfe St. (Harrisonburg), Busted Still (Weber City), Jefferson St. (Lynchburg), Mud Hound (Leesburg), Wild Run (Stafford)
  • 2018 (6):  7 Hills (Richmond), Right Turn, Clyde (Roanoke), Heroic (Woodbridge), Ornery (Woodbridge), Capitol City (Arlington), Green Flash (Virginia Beach)

* denotes the brewery was bought out/absorbed

Remember how 2% of breweries nationally closed in 2016?  Well, that number was 5% here in the Commonwealth.  It was also 5% in 2017, and it is trending higher for 2018.

That list above, which isn’t even all-inclusive (just what we could find looking through records, papers, etc.), does not include breweries that have had some form of distress.  There was the venerable South St. Brewery in Charlottesville getting bought by Blue Mountain in 2014, which helped turn it around.  A favorite among avant garde beer lovers, Aslin, had to close its taproom in 2016 and now only sells to-go growler fills and cans (though it is looking at moving somewhere with more favorable zoning).  There is also a mystery brewery in Northern Virginia that went up for sale late in 2017, and another for sale in Leesburg at this very moment.

Of the places we either visited during their hey-day, or have chatted with since they’ve fallen on hard times, some common themes emerge.  For recently departed Ornery and Heroic, they were stuck with leases which they couldn’t re-negotiate.  That was tough to swallow for Ornery, in particular, which is a GABF-winning brand.  Graybeards like Rock Bottom and Capitol City represent craft beer’s humble beginnings, but their recipes (and profit margins) sank as beer drinkers’ palates evolved (Starr Hill refreshed their entire menu in 2015-2016 to avoid a similar fate).  An inability to get – and keep – brewing and serving licenses doomed Sehkraft and The Beer Joint.  Some of those outcomes represent poor business planning, but what about the beer itself?

If you’re a nanobrewery that doesn’t distribute, you live and die by foot traffic.  While the overall craft beer market sees a whopping 40% of its sales via the taproom, for nanos (and some micros) it’s 100%.  Despite one of the best locations imaginable, and early penetration, C’ville-ian never could draw and keep that robust Charlottesville grad student/young professional crowd coming.  Fidelis got its beer on tap lists as far away as Pennsylvania, but closed its taproom inside of 18 months.  Corcoran stayed afloat for a while when it was paired with its winery of the same name, but a location nearby to Adroit Theory, Old 690, and other Purcellville breweries brought too much competition for what was mostly average beer.  Other start-up breweries that should have had a near monopoly on their territory flamed out.  In other words, putting out a sign that says “BEER!” isn’t good enough any longer.  There are too many medium-to-large breweries, with improving distribution networks and agreements.  AB-InBev doesn’t play nice.  But in a world where Ornery and Green Flash bite the dust, that’s a signal that we have just enough GOOD breweries, with just enough ACCESS to their beers, that we’ve hit the saturation point for the Virginia craft beer market.

Other writers and researchers have been pointing at this increasing trend of closing breweries and saying nothing is wrong, but all this bloviation is the equivalent of ignoring Chicken Little at this point.  Look what happens when we remove some of the spin from the 2017 Brewers Association report:

  • The number of people employed by the craft beer industry is up 7.5% since 2014!  However…  there are 59% more breweries over that same period.  A lot of aspirations are not leading to a lot of jobs.
  • Microbreweries produced 25% more beer in 2016 than they did in 2015!  However…  overall craft beer sales were up only 10% over that same period as the larger regional craft breweries actually contracted by 5%.
  • The craft beer market overall grew by 6%!  However…  the year-over-year average from 2012 to 2015 was more than 10%.
  • Craft beer’s share of the overall beer market continues to grow!  However…  both craft beer and import beer sales both grew at the same rate last year.
  • The average craft beer drinker visited 3.5 breweries last year!  However…  according to one study produced for the Brewers Association, familiarity is still the #1 driver for beer purchases, and on-premise sampling only #4.
  • 60% of craft beer drinkers say “small and local” is a deciding factor for them!  However… they simply are not voting that way with their wallets as microbreweries and brewpubs combined still only make up  26% of the total craft marketplace.
  • Julia Herz, BA’s Craft Beer Program Director, said 2017 was an “incredible year for the craft beer community.”  However…  Ben Watson, BA’s economist, cautioned that “craft brewers continue to thrive, if at a slower pace.”

National trends, local implications.  Yes, we’ve been averaging 27% growth in the number of breweries every year since 2012.  However…  just look at all those closings.  If you take Watson’s numbers to heart, 83% of Americans now live within 10 miles of at least one brewery, and the average craft beer drinker has visited 3.5 breweries near their home.  Well, RVA has 30+ breweries, NoVA 50+ (including DC and Maryland), Charlottesville has 10+, the 757 has 20+… you get the idea.  That means there’s a lot of places folks just can’t get to on their regular schedule given all that density.  Here, then, are the number of breweries closing per year as a share of the breweries opening:

  • 2014 and earlier:  6-10%
  • 2015:  4%
  • 2016:  20%
  • 2017:  24%
  • 2018:  10-15%    …so far

Depending on who you ask, somewhere between 41 and 62 breweries are in some form of planning across the Commonwealth right now.  We’ve already lost six this year in just the first quarter alone.  That means, in theory, that if 20 or so breweries go under this year, a 30-50% loss:growth ratio isn’t out of the question.  In other words, for every 2 breweries that open, 1 might fail this year.  That is a horrifying number.

Are all these new breweries destined to fail?  Of course not.  But as the Brewers Association itself notes, growth is slowing and new breweries desperately need to win shares of both on- and off-premise local markets in order to survive.  And there are only so many craft beer drinkers right now, with so many visits to make to taprooms, stores, and bars.  Here in Virginia, all the new microbreweries have neither been producing enough nor selling enough of those beers to achieve revenues in line with all the new openings.  Something was bound to give…

…and it has.

[Editor’s Note:  This post was updated after a brewery requested to not be associated with this site.]