Wells Fargo outlines beer category trends.
Wells Fargo recently attended Beer Business Daily’s 12th Annual Beer Industry Summit and came away generally encouraged by industry trends.
Key themes throughout the two-day conference were: (1) the surging growth of crafts, fueled by new brands and consumer demand for variety & authenticity; (2) the ever-increasing importance of the Hispanic and millennial consumer; (3) the overall retail trends are encouraging; and (4) mergers and acquisition activity should accelerate.
Wells Fargo also noted some additional themes:
(1) “Glocalization”—in other words, Globalization + Local Movement. “Over the last several decades, borders have come down, which combined with overall industry consolidation has driven the top four brewers’ share from 21% to 45%. However, in response to that, there has been a large demand for “local” and “authentic” products, particularly from Millennials,” Bonnie Herzog, managing director beverage, tobacco and convenience store research for Wells Fargo explained. (2) Blurring Of Three Tiers—The current three-tier system (manufacturer, distributor, retailer) is under pressure as small brewers push for more control over distribution and many craft beers are expanding into the retail segment by operating brewpubs or tasting rooms; (3) Innovation Accelerating—In 2013, there were 700 new beer innovations; by May 2014, there were already 700 YTD innovations. However, in general, the beer industry is lagging spirits in innovation, Herzog noted.
Beer Industry Trends
Wells Fargo noted that the craft segment growth continues to expand (both beer and spirits), with almost a new brewery opened every day. “However, overall sales per brewer have been declining as the number of brewers grows faster than the overall craft category. In fact, the top 20 craft brands account for 36% of on-premise volumes, but had flat sales growth last year, with all of the craft growth coming from the long tail of smaller brands, particularly premium-priced crafts, Herzog said.
Millennials and Hispanics are becoming increasingly important demographics. “According to Lucas Herscovici (VP consumer connections, Anheuser Busch), Hispanics are responsible for 67% of the beer category growth, and will represent an increasing percentage of population/consumption over time. Additionally, Millennials continue to drive a large portion of A-B and MillerCoors’ marketing strategies,” Herzog said. “According to JB Shireman (First Beverage Group), Millennials are driving a lot of the demand for variety which has helped support the proliferation of craft brands.”
Overall retail trends have been encouraging for the on-premise channel, which saw slight declines in traffic in 2014, but had a spike in traffic in December, likely driven by lower gas prices, with casual dining a key beneficiary, Wells Fargo reported. One major trend expected is the growth in food/bev retail e-commerce, which Boston Consulting Group believes will grow from 2% to 10% of total sales in next five years and many new apps and sites have been recently created to deliver beer the last mile.
While manufacturers remain focused on mergers and acquisitions, challenges remain. “Given the rapid growth of small craft beers, many of the major manufacturers are highly focused on (mergers and acquisitions) to drive growth. However they’re confronted with numerous integration challenges including: (1) maintaining distribution; (2) offsetting the negative synergies in acquiring small craft beers; (3) considering future micro trends that support subcategory growth; (4) elevated craft beer valuations (13–15x EBITDA). Despite these challenges, expectations are that there will be many acquisitions, JVs, strategic partnerships, minority investments, and other creative ways for the large manufacturers to participate in the rapid growth of the craft segment,” said Herzog.