In 2017, craft beer is a large part of the American lifestyle. American palates have changed drastically over the past few decades, and with them the market for beer. Demand for newer, limit-pushing beers have dramatically altered the beer drinking experience in the United States, and if the noticeable proliferation of craft breweries in communities across the country wasn’t enough to prove it, the numbers speak for themselves. According to the Brewer’s Association, craft brewers – described as small, independent, and traditional – occupied a $23.5 billion segment of the overall American beer market.
This impressive sales volume comes with jobs, too. Craft brewing accounted for more than 424,000 jobs in 2014, a figure derived from the “total impact of beer brewed by craft brewers as it moves through the three-tier system (breweries, wholesalers, and retailers)” along with “non-beer products like food and merchandise.” That’s an impressive market for an industry comprised mostly of brewpubs and microbreweries.
A variety of supply challenges await any business operating in an industry the size of craft beer. Many consumers are familiar with a great deal of these challenges, but similar to how only a small percentage of drivers understand all that goes into getting a vehicle into a showroom, craft beer drinkers may be surprised by the hurdles that must be cleared to get a new beer on a beverage menu.
Supply Chain Challenges
The craft beer business is big, but it’s not “big business.” Many breweries have hyper local supply chains for ingredients beyond hops, and each brewery has its own unique set of flavors it prefers to experiment with. Take Braindead Brewing in Dallas, Texas for example. Ingredients for just three beverages include malted barley, wheat, pine, citrus, licorice root, coffee beans, chocolate, caramel, banana, cherry, grapefruit, and at least two different types of hops. Short’s Brewing Company in Bellaire, MI, uses honey, sunflower seeds, brown sugar, raisins, figs, vanilla bean, chocolate, mint, and strawberries. When it comes to the bill of materials for a craft brew, anything is on the table, like a constant state of R&D.
Direct Material Purchasing – Hops
The biggest challenge lies in the most important of raw materials to the craft beer industry: hops. There are over 50 different varieties all used to produce different style brews, and purchasing them is not unlike purchasing many other commodities, which means it’s not exempt from pain points, especially when at low volumes. Consider this noted by Craft Beer & Brewing Magazine:
Homebrewers and small startup breweries often purchase hops on what’s known as the spot market. This market is really just whatever remains after the contracted hops have been set aside from that year’s harvest.
The article goes on to add that in the event of a shortage, the demand on spot markets can “boost prices to many times those of a normal year, forcing some craft brewers to reformulate recipes to get by with what’s available.” This is common for any food commodity that responds to changes in climate or severe weather, and makes availability extremely difficult to plan for.
This supply uncertainty combined with the lack of purchasing power of a traditional beer giant like AB Inbev, makes repeating recipes a primary challenge. The unpredictability of the spot buy market is not a new problem for small or midsized businesses in the United States, but how is craft beer able to sustain such rapid growth without substantial buying power for its most critical ingredients?
Unique Industry, Unique Solutions
One answer can be found at Boston Beer Company, a big business that does have the buying power to purchase on contract, even the most coveted of hops varieties. Jim Koch, an entrepreneur much like the aspiring craft brewers in 2017, founded the company in 1984. Today, his company reports revenues of over $968 million. It also engages in micro-loan programs for small breweries, helping keep the industry healthy, and in 2008 launched a hops sharing program to alleviate the spot buy market pressures facing new craft brewers.
Raw material prices and their availability are two of the biggest problems facing the craft beer industry today, something brewers of all sizes understand. With demand for craft beer showing no signs of slowing down, outpacing the rate of hops production, these supply challenges will persist into the future.
Industry methods used to tackle these challenges are as unique as the craft breweries themselves, ranging from the unheard of – a raw material sharing program born from a brewery CEO’s passion for the industry – to the simple – hops farms locating closer to the brewers (75% of U.S. hops come from Washington State). At either extreme and in between, like any small or midsized business, the same is true of craft breweries: success often hinges on access to the right materials at the right price.
We hope this blog post provides you with fresh insight for analyzing purchasing challenges in a unique industry and sparks creativity for effective solutions that drive purchasing performance.