Economics_of_Micro-Brewery

The Liquid Economics of Craft Breweries

With over 8,000 craft breweries in the U.S. alone, it can be tough to keep your (foaming) head above water

As you’ve no doubt noticed in the last decade, craft beer got big in a hurry: Last year, it was 25 percent of the total beer market, double where it was just seven years earlier. It’s no real secret why — it tastes great and it gets you drunk! But then, when enough craft beer lovers look in the mirror and see a future master brewer and business owner staring back at them, well, the market gets a bit saturated. In 2010, there were nearly 1,800 breweries overall in the U.S. Nine years later, there were 8,300. So how much money do craft breweries make? Is it some kind of gold rush? What’s the blueprint for success, if there is one? How’s it all work? We pried open a barrel for some answers. 

What’s it cost to get started?

It can really vary. Traditionally, many craft beer brands started out in someone’s garage, as they woodshedded for years on the taste and ingredients. A lot depends on how big or small someone anticipates starting out at — a one-barrel system (meaning, it can make up to 31 gallons at a time, which is 320 bottles) can be had for $100,000. Many craft breweries have 10- to 30-barrel systems, though giants like Sierra Nevada and mass-market brands like Budweiser can produce hundreds of barrels per batch, or tens of thousands of cans/bottles at a time.

So just the machinery — lots of big, stainless steel stuff — is a big investment. Then of course you need the real estate for it: either a warehouse, or a retail space for breweries going the brewpub route. That’s not cheap either!

What is all that big metal stuff?

Long story very short, the engine of the brewery is called the brewhouse. There’s a hot tank (which heats the water); the mash/lauter tun (where flavors are extracted from grain); the boil kettle (where hops are added); a whirlpool (to filter the big stuff out); a fermenting vessel (where yeast is added); then a brite tank (where it’s cooled and stuff is filtered out). After that, it’s ready for kegging, bottling or canning.

But before all that, a brewery needs a permit from the Bureau of Alcohol, Tobacco and Firearms, which can run into the thousands and take several months. It can only be granted after all the equipment is in place, meaning a brewery has to have enough cash on hand to see that through before selling any beer.

So you make the beer, then what?

According to Tony Roberts, co-executive director of the Oregon Brewers Guild, the common first move is to get some local tap handles, i.e., get your beer into the taps of local bars, where people can try it. Unless there’s any kind of marketing budget, at this early stage it’s all about earning new customers one glass at a time and building up some buzz (pun not intended). Once a brewery has sold beer and made some kind of name for itself, things can go in a couple directions — or both.

And they are?

A brewery can bottle and can the beer and distribute it (more on that in a moment), and/or it can build out a taproom and pour beers directly for customers. Taprooms, which resemble a bar (though are regulated differently) can run the spectrum from classy joints to a charmless countertop and some barstools near the front door of a brewery’s warehouse. The advantage of a taproom is the huge markup a brewery can put on its beer. There’s no wholesaler or middleman taking a cut — the brewery pockets it all! And if the taproom happens to be on site, that means there’s no extra real estate costs involved. A brewery can also sell beer in take-home containers: growlers (glass) or crowlers (metal).

Distribution is a different animal. Purchasing a bottling or canning line can be a whole other, huge expense for all that infrastructure, but Roberts says there are mobile packaging lines now, which roll in and do several runs per day, which saves a brewery the huge investment cost of buying its own equipment.

As for the cost of distribution, well, it can be a heavy cost! A brewery can sell half a barrel of beer for four to five times more through its taproom than to a distributor. But a distributor is the key to scaling — getting a company’s beer into convenience stores, supermarkets, restaurants and bars all over the place.

What’s distribution like, though?

There’s a lot that goes into it, including, a somewhat seedy side. But the biggest thing is that it’s simply an extra layer, a huge additional variable in the equation. Distributors take a huge cut and enter into contracts that can be extortionately expensive for a brewery to break, and distributors tend to have a lot of clients. Where does a given brand sit within a distributor’s portfolio of dozens of beers? Are they a priority, or not?

More tap handles and additional shelf space don’t come along quite as often as new breweries do. There’s a constant fight for real estate on retail shelves and on bar and restaurant taps, and so a given brand can get lost in the mix. Or worse, graft can take place, which is widely assumed to occur among the macro beer brands.

Sounds like a surprisingly tough business.

It can be! Coronavirus certainly didn’t help matters — as bars and restaurants closed around the nation, the number of tap handles instantly dropped to zero, and craft beer relies more on tap handles than macro beers do. 

There are now more breweries than ever, and inevitably that means more breweries closing than ever. And sticking around sometimes entails following trends, like brewing fruit-flavored IPAs over the past several years, or, more recently, producing hard seltzer, or marketing to a certain demographic (anyone from hippies to dirt-bike riders) in order to become a lifestyle brand — all trends that can make beer purists’ heads explode.

So how do you make it nowadays?

According to Roberts, there is a silver lining to this craft-beer rush. Brands who got into craft beer 15 years ago might’ve wanted to be the next Sierra Nevada, he says. But that takes decades of work and an amazing product. Building a national, independent brand is hard! But there are different models now, and breweries just need to recalibrate success and find their niche or comfort zone.

“I’ve had folks ask me if there’s a magic formula for success, and in this new competitive marketplace, I don’t think there’s one model,” Roberts says. “Some folks become regional breweries that open more pubs so they can sell more beer over the bar. Others gravitate more toward packaging and expanding into a handful of states. All those models, or a combination, can be successful. But I don’t think the traditional model of success where you do A, B, C and D and then find the pot of gold at the end of the rainbow necessarily applies anymore.”

Unless Molson Coors or AB InBev want to buy your craft brewery, it’s not easy to get rich doing it. But making and selling your own original, tasty, non-mass-market beer? As thousands of beer enthusiasts decided over the past decade, that’s pretty fucking cool.