The crucial advice breweries should follow to avoid closure
Drinks analysts have advised brewers to consider adapting market structure, timings, listings and beer recipes to stay in business this year.
In an exclusive discussion with the drinks business about the plight of craft breweries, Rabobank senior beverages analyst Francois Sonneville said that brewers need to first ask themselves the question of “whether you are exclusive and distinctive enough?”
Sonneville told db: “Some craft has either chosen a channel or a market where pricing power is low” [such as mainstream supermarkets or budget pub chains like Wetherspoons] and explained that although “this gives them more volume” it also means that “competition is fierce”. He pointed out that, alternatively, many other breweries have taken other routes where their reach is compromised, but not the value of their product and outlined how these breweries “have opted for lower volumes but stronger consumer ties” [one example would be a brewery using its own taproom rather than seeking out broader listings].
According to Sonneville, brewery business owners need to consider how their brand positioning is important and apply this knowledge when tackling its game plan on how to deal with costs. He explained: “The former [those who chose the value-listing route to market] is at greater risk of losing volume when raising prices” but said “that might still be the right decision, but it could also lead to diseconomies of scale”. While, it advised how “the latter group of craft brewers [ones who cultivated a loyal following via their own means] faces less direct competition in its small niche and they will be better positioned to pass on higher costs”.
Speaking to db about what craft brewery business owners might do, Sonneville also outlined that, during these harder recession days, the “timing” or “duration” taken to gain listings is also a fundamental consideration when it comes to surviving the challenges, observing the dedication and time it takes to acquire a prominent route-to-market and giving up the mantle also comes with a risk. He explained: “A lot of money is spent on getting a listing at a retailer and if the duration of higher input costs is short, it might be better to forego margins or even operate temporarily at a loss, rather than give up a listing.”
According to Sonneville: “You don’t walk out of a retailer and expect to be back on the shelf as soon as you lower prices again” warning that “moves by the competition are also important” and so “keeping prices constant and sacrificing margin when mainstream brewers increase their prices might not lead to much extra volume, but if craft brewers subsequently have to raise prices six months later, they might lose market share”. He suggested: “Sometimes it is better to follow the market”.
Sonneville added : “In order to be able to operate at a loss or at low margins, brewers will need financial strength…for start-ups that have no financial buffers, this is tough” whereas “for large companies, there could be levers to turn on, eg ‘we will postpone that expansion into xyz and avoid start-up losses until the market improves”.
As a direct result of the shift, Rabobank has also forecast that there will almost certainly be a survival-of-the-fittest situation that unravels as a result of all of the competition between breweries for their space in such a crowded sector that is fraught with cost issues.
He told db: “What will also happen is a distinction between the strong and weak craft brewers” and said that “for many start-up’s, brewing has been a hobby rather than a professional business and the growing number of craft brewers has made it difficult for all to earn money” but predicted that “with the number of craft brewers under pressure, survivors will be able to benefit it longer term”.
Rabobank also floated the idea of how adapting recipes would also help breweries out of financial strife and changing the way a beer is brewed or what ingredients are used should be advised as “a final consideration” for “whether to change [the] recipe of the beer”.
Sonneville pointed out how “for strong craft beer brands this is a no-no as it kills off brand equity and can’t be reversed easily” but suggested that “for brewers on the edge, it might however be the only way to survive, but probably better to do it with a separate brand, rather than with the main product” he added that one route “for craft brewers with several products they might be using one product to fight in the mainstream segment” and hinted that this could be a good path to take “while keeping other brands reassuringly expensive”.
The question of whether to switch New World hops from certain beer recipes and move to new progressive British hops like Jester, Olicana and Harlequin was recently suggested by the British Hop Association (BHA) director Ali Capper when outlining ways UK craft breweries could keep costs low while also reducing their business’s carbon footprint.