Could everyone be drinking DIPAs in taprooms soon, or not?
Craft breweries are advised to navigate rising costs by brewing higher margin beer styles while focusing on taproom sales.
Speaking exclusively to the drinks business, beverage analysts at Rabobank identified how craft brewers would need to choose between either working closely with retailers and distributors to raise prices together, but risk losing custom; or find ways to increase margins, like brewing higher ABV beers, like double and triple IPAs (DIPAs and TIPAs) while focusing almost entirely on taproom sales rather than costly broad distribution roll outs.
Jim Watson, Rabobank senior beverages analyst told db: “Craft brewers are absorbing costs because the craft beer market is too fragmented for any individual brewer to raise prices on their own without risking a significant hit to market share. We often see a strong correlation between industry consolidation and ability to take prices. Brewers first and foremost have to work with their partners (distributors, retailers, etc) to understand where they may have the realistic option to take prices at all. Many non-alcoholic drinks brands have taken large price increases – so the ability to increase prices is there if the industry moves together.”
Watson reassured, however, that there were other ways to navigate the issues and these could, in turn, lead the next beer trends. Despite the bleakness of the current situation craft breweries are currently facing, Rabobank offered up hope to struggling breweries, noting how “resilient” and savvy they could be when refocusing on creating “higher margin brews”.
However, Steve Dunkley, head brewer at Beer Nouveau, quashed claims that it would be higher ABV IPAs that would be the answer for all breweries and pointed out the higher duty charges for styles like DIPAs, also highlighting how each brewery is different, so higher margin beers would mean different styles for different breweries.
Dunkley told db: “Unfortunately it’s not a single style across the board. For each brewery there will be a different style or brand of beer that they make that is higher margin for them.”
Watson explained: “For those brewers that can’t raise prices there are other ways to protect margins. Cost cutting is the main option – and while this is second nature for the global brewers, this has traditionally been further down on the priority list for craft brewers. Second we could see an attempt to shift towards higher margins styles or channels,” hinting “that might mean moving towards high ABV IPAs, or pulling back to focus on tap room sales”.
But Dunkley pointed out: “Saying ‘focus on higher margin beers at direct-to-consumer venues’, yeah that’s fine, but it’s not the DIPAs, especially with the changes to the Alcohol Duty System that are coming into effect from August. The new system means that the amount of Duty relief a brewery gets is based on the overall production of pure alcohol, not the overall production of beer. So those breweries who focus or specialise in the DIPAs and TIPAs, the higher strength beers won’t get as much relief as those that focus on the lower strength ones, such as the session pales and traditional styles. And the relief level is then applied to everything they brew. So a craft brewery that sells DIPAs will be paying more Duty than one that doesn’t.”
Justin Rivett, sales and marketing director at Lune Brewing Co and former sales manager of beer wholesaler Jolly Good Beer and Moor Beer Co also believes that the way forwards is not via DIPAs and TIPAs, but says the the answer is more linked to creating “desirable” beers and names a few beers known for being sessionable, tasty and well-balanced.
Rivett said: “DIPA’s and TIPA’s don’t sell outside of a very small pool of ultra desirable beers..the market is in pale ale, always has been..Deya are currently doing it with Steady Rolling Man and Cloudwater have spent the last year clarifying their pale ale offer”.
According to Rivett: “B2C sales are nice, they saved many brewers during Covid, but they aren’t volume and without volume small brewers who want to stay small do very nicely on niche beers” he Mills for sours and Emperor’s for stouts spring to mind, but these are atypical of the producers who need to brew a range of beers to satisfy a taproom, let alone the wider industry”.
He explained: “There is a very good model based on taprooms and bars, Brewdog at the top end, Howling Hops on the smaller end are good examples, but it takes capital and a diverse understanding of the whole market to achieve, something most brewers don’t have.”
Rivett went on to point out that “the idea of ‘higher margin’ beers is to some extent a fallacy” because “you can brew a beer that has a nominally higher margin, but you’ll sell less of it, and pay even more to the exchequer which creates cashflow issues around the Duty payments as these tend to be in advance of the sale.”
Dunkley explained: “Really, it’s a case of breweries needing to look at what their higher margin beers are” and added that the issue is that most craft brewers have already been monitoring this kind of thing closely for a while now and are still struggling, despite staying vigilant. He revealed that the “thing is, that’s what they’ve mostly been doing for the last three years already. It may be an opportunity to recheck the profit margins, but in the current climate with so many costs rising I don’t know a single brewery that isn’t looking at every single cost every single month”.
Dunkley observed that “direct-to-consumer sales are great, a lot of breweries discovered that during the lockdowns and have since continued to do it” but reiterated that “the problem here though is that by doing so you’re taking sales away from the bottle shops and bars. And they’re any brewery’s first line of marketing.”
Dunkley observed how “most people find out about a new brewery by seeing it on the shelf of a shop or the taps of a bar. And if the staff/owners like it, they recommend it. By bypassing them, you can find yourself not being stocked there again. So it’s a tricky balancing act.”
He admitted: “It’s the same with taprooms. No matter how big or busy your taproom may be, it’s very unlikely to make up for lost sales volume to the local pubs it’s competing against. But then, before I stopped supplying pubs myself I was making about £10 profit on each cask I sold to a pub, yet £1 profit for each pint I sold over the bar in my tap. Sell 10 pints, and the rest of the cask was a bonus.”
He lamented: “People bang on about how beer shouldn’t be a luxury, but the same people also go on about how it should demand a premium price. The long and the short of it though, is until brewers can afford to make beer cheaper, and until drinkers can afford to buy it, it’s not going to sell.”
Watson also hastened to point out that “despite the news of recent shutdowns, breweries are proving more resilient than our worst case scenarios” .
Could this mark the rebirth of a new wave of DIPAs, TIPAs and assertively boosted beers? Could brewery taprooms become the venues of the century, the places that offer everything and on terms that feel fairer to the craft movement? Analysts predict that this could be one route to success, but only if brewers take a few next steps towards reining in costs by controlling both their margins and their future.
According to Dunkley: “It really is a case of looking at what works best for the individual breweries, but to be quite honest I don’t think it’ll make that much of a difference overall, but then I’m becoming more and more cynical about the whole industry’s chances at the moment. People don’t have cash to go out drinking, all their other costs have gone up. So a beer has become a luxury.”