The Limits of Independence

Last week, when publicly-traded Monster Beverage bought Canarchy, a collective of six breweries that together constitute the 15th-largest US beer company, it seemed like the Brewers Association would be forced to boot them from their membership roles. That’s what happened to Lagunitas when it sold to Heineken, to Craft Brew Alliance (CBA) when it sold just a third of its company to AB InBev, and to dozens of other breweries over the past decade. In a surprise, they did not. In fact, the Brewers Association rushed to post a clarification within a few hours of the Monster news that Canarchy would remain a member in good standing.

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Sixteen years earlier, the Brewers Association ruled on whether CBA could remain as a member. At the time, no rule existed about minority ownership. The Brewers Association seemed to go out of their way to set a standard that would punish CBA for doing business with Bud. When I was writing The Widmer Way, I spoke to Jim Koch, who was on the BA board at the time, and he was transparent about the organization’s hardball tactics:

“We talked about different numbers and the number we came up with was 25%. Now could it have been 30, could it have been 20? Sure. But there was a benchmark. It became 25%. I think the Widmers were at like 33. I remember having discussions with them and they’re like, ‘We think the number should be higher.’ I said, ‘Well, look, it’s 25%; we think that gives somebody a pretty good semblance of control, but we’d love to have you back… All you have to do is buy back 8% and you’ll be under 25.’”

The Brewers Association is an industry trade group created to advance the interests of its members. Trade organizations are beholden to nobody but their members, and they alone decide who is eligible to join. The shift in their membership approach—from punitive to permissible—got me Why would the BA scramble to keep a brewery that by no definition could be called “independent”—their principal selling point? What has changed so much in that decade and a half?

 
 

All you have to do is look at the list of largest American breweries to see what’s going on. Within the top twenty largest US breweries, not many are independent anymore. Once they reach a certain size, it becomes increasingly difficult for breweries to compete against international giants. Year after year we see sales of the most successful craft breweries, the charter members who helped shape the Brewers Association. They take their volumes with them, damaging the BA’s effort to speak for “craft beer.” The losses of Bell’s heightens a problem that started with Goose Island and continued with Lagunitas, Founder’s, New Belgium, Ballast Point and the rest.

Efficiencies of scale, distribution footprints, and marketing and advertising disparities all make it very difficult for relatively smaller breweries—even those making more than a million barrels—to put a profitable six-pack on the shelf of a grocery store in a distant market. As a result, they keep peeling off the list of “craft.” Have a look at the twenty largest US beer companies—even among those designated “craft” by the BA, very few are free-standing independent breweries.

Breweries that grow to a certain size enter a reverse-Goldilocks problem. They are too big to stay in their local market and have to start pushing out. Yet they’re not big enough to sell efficiently in a regional or national market. In the past eight years, we’ve seen them deal with this challenge in familiar ways: selling a portion of their company to partner with a large, national brand who can add those efficiencies; combine with other breweries in a collective; expand into non-beer segments; or sell out entirely.

This means headaches for the Brewers Association. For the most successful of the craft breweries, “independence” is increasingly a losing proposition. A larger craft brewery can sacrifice ownership independence and sell to partners or private equity, or they can sacrifice organizational independence by joining a collective. Going it alone—true independence—really becomes challenging when a brewery enters the rarefied heights of the country’s top twenty breweries.

Of those breweries we would consider classic craft companies, only Sierra Nevada has remained healthy selling beer while remaining truly independent. Deschutes and Stone have been in trouble for years, Gambrinus and Yuengling have carved out a niche as regional domestic lager breweries, and Boston Beer has shifted to an FMB strategy. If the Brewers Association were to stick with the punitive approach that 86-ed CBA all those years ago, they’d have to think long and hard about how Canarchy, Duvel, and Boston Beer would qualify.

This isn’t a problem of the Brewers Associations’ making. It’s a structural feature of the beer industry in the US. It is also a worrying development, an echo of an earlier era when consolidation blighted the industry. What does it say about how we regulate the sale of beer in the US that the most successful start-up breweries eventually have to sell out to giants to survive? Is this the world we want to live in and, critically, what changes would allow those larger regional breweries to compete?