Craft brewery closures reflect impact of rising cost pressures
Nearly as many craft breweries went bust in the first six months of 2023 as the whole of last year, according to new data.
According to data obtained by accountants Price Bailey via the Insolvency Service under the Freedom of Information Act, a record 35 breweries went bust in the first six months of 2023, almost the same number collapsing during the whole of 2022 (38).
Price Bailey explained how many breweries rely on debt to finance the acquisition of equipment, raw materials and even day-to-day operating costs. As debt payments have risen with each interest rate hike, an increasing number of breweries have been unable to make payments on loans, pushing them into insolvency.
Matt Howard, head of insolvency and recovery at Price Bailey said: “The craft beer market was already oversaturated before the economic fallout from the pandemic tightened its grip. Many breweries were walking a balance sheet tightrope and have been plunged into the red by a combination of soaring overheads and falling demand for premium brands.”
Howard explained: “Breweries are very capital-intensive businesses. The sector tends to be highly leveraged and therefore vulnerable to interest rate rises which push up the cost of servicing debt. Even in benign economic conditions small breweries can struggle to turn a profit for a few years but with higher borrowing and raw ingredient costs, coupled with weakening consumer demand, many startups are likely to fold before they get out of the red.”
He observed: “Supermarkets are allocating less shelf space to premium brands as consumers rein in their spending. The shift towards cheaper global beer brands has left many craft beers with diminished market exposure.”
Plus, as he highlighted how “many craft breweries start out by selling small batches to local pubs, but a record number of pubs closed this year, which has limited their options. The remaining pubs are less willing to take risks on new beers where there is uncertain consumer demand”.
The accountancy firm also predicted that trading conditions for small brewers are likely to remain challenging as prices for many of the core ingredients used in brewing remain high and multinational brewers continue to muscle in on the craft beer market.
Howard stated: “While many multinational brewers are seeing bumper profits, smaller independents generally have much higher exposure to market risks. They struggle to respond to inflationary pressures by leveraging economies of scale and usually have minimal exposure to foreign markets. It is likely that insolvencies will continue to rise into 2024.”
Rob Fink, founder and CEO of Big Drop Brewing company added: “The independent sector is now sufficiently loud that trying to make yourself heard is increasingly difficult. You’ve got to have a really compelling reason for why retailers should take one of those big names off the shelves, because shelf space is limited. That doesn’t mean that you can’t build a small craft brewery in your local area, that makes really great beer, that has a compelling brand, selling to independent pubs locally.”
According to data from Price Bailey, in addition to interest rate rises, a convergence of other factors is squeezing the operating margins of craft breweries. These include soaring overheads, driven by raw material and wage rises, coupled with a squeeze on consumer spending power.