A Perfectly “Hip” Competitive Market

Hipster. There is a lot of requirements for a person to be able to be associated with this word. Vintage clothing, vinyl records, interest in independent and underground bands. And craft beer. Many different industries have been impacted positively by this new movement, especially microbreweries residing in the beer universe. A microbrewery or craft brewer has been defined by the Brewers Association as being “those that produce fewer than six million barrels a year and are less than 25 percent owned by a large beverage maker.” The demand for these craft beers has been rising in the last few years as sales reportedly increased by 17.2 percent from 2012 to 2013. The supply has also matched demand as 1671 more microbreweries have appeared in just the last 5 years. The important question to ask here is, “why isn’t every Joe Six-Pack with brewing experience trying to establish the next popular brewery?” The market has profit written all over it: low barriers to entry and endless opportunity for growth. But there are strings attached to this seemly “perfectly competitive market.”

Rich Boyle, a co-founder of a highly popular Boston-based brewery, made a point in his interview with the New York Times. His company rose to become the 12th largest microbrewery in the nation, but he isn’t reaping the reward anymore. He cashed out. The reason being a valid one. The time will come when a microbrewery looks to expand and expand, until they are a large company. The day this happens the brewery ceases to be a microbrewery and all the appeal of its exclusivity and obscurity disappears. This is not to say that a brewery cannot accomplish this, it simply means that the company now enters into a new market. With a new market comes new rules. The low barrier to entry becomes high and the market is filled with competitors that have significant control of that marketplace. Anheuser-Busch, SABMiller, and Heineken International are all examples of these macro-breweries that distribute millions of cases a day and, often own shares in smaller distributors and microbreweries. The result is that these companies directly and/or indirectly control the distribution channels within this market. So here is the dilemma for any craft brewer looking to increase his profit; to be able to expand one’s place in the craft beer market they have to gain support from larger distributors and breweries. The microbrewery thus runs the risk of not only losing its current market as it expands, but it also faces fierce competition from very well established brands. Maybe Boyle had it right; cash out while the alternative college students and fanatic beer lovers still believe that your beer is new and hip because it probably won’t always be!

2 Replies to “A Perfectly “Hip” Competitive Market”

  1. Great post. Let me propose that maybe there’s a wrinkle in the competitive landscape here (still very competitive, particularly in long run), namely product differentiation. This allows us to break out a model we rarely get to talk about enough in classes, that of monopolistic competition.
    Differentiation by quality helps us understand why craft brewers can charge substantially more than the macrobrewers but people still buy from them. Beer isn’t just beer. This also allows for differentiation within the craft beer segment. Ever wonder why Ballast Point can charge $13 a six-pack for Sculpin IPA but Two Beers EVO goes for $8? Probably not, because people understand differentiation (even if its just based on perceived quality). However, if there aren’t barriers to duplicating the quality of Ballast Point or Russian River and their production isn’t significantly more expensive (for this we’d need to compare profits, not prices) then we would eventually expect competition to drive down those $13 prices.
    For now, we are still in an increasing demand environment (tastes and prefs.) so prices overall continue rising, even though a lot of entry is occurring. However, when this slows, a reckoning may be coming for brewers and we may see a cull (in economic speak, exit) as prices fall due to over entry, and likely mergers as well.

  2. Great post and great comment. Garret, would the interstate regulations also be an existing limit to the size of the beer companies? I could be wrong (so please correct me if so), but as I understand it there are a number of regulations restricting the movement of alcohol between states such that only a really large company with revenue could go national. So Washington beer (and I am extremely depressed about this) has a hard time getting into Texas based on the fact that its from Washington. Local Texas beers or “less local” Colorado and New Mexico beers have an advantage in not competing as heavily with out of state microbreweries.

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