Bayhawk’s 2012 Newsletter

The Craft Beer Industry has been one of the brightest areas in an otherwise lack-luster economy. 250 new breweries open in 2011. 1940 Craft Breweries operated in some part or all of 2011, comprised of 1063 brewpubs, 789 micro-breweries, and 88 regional craft brewers. 25 brewpubs and 12 micro-breweries closed in 2011. 1989 total breweries operated in the United States last year. That is the highest total since 1880.

Nearly every established brewery has increased their production capacity over the past 3 years. This has happened during a time when the industry has been plagued with supply problems, not the least of which has been the number of beer kegs in the market. Bayhawk’s keg supplier’s failure to meet our needs cost the company an additional 5% to 10% in sales in 2011 and probably contributed the demise of one of our larger contract customers.

The first quarter of 2012 has passed and we have managed to keep our production and sales at the same pace as last year. This has not been as easy as one would suspect given the Family restaurant business is still struggling and our largest contract customers shut its doors on January 31. I believe that this is the beginning of what maybe the next consolidation in the craft brewing business.

Certainly over the past several years, we have seen this happen in the Macro-brewing industry. Consolidations and alliances have been prevalent in all levels of our business, Miller/Coors, Bud/InBev, The Central Brewing Alliance, etc. One Southern California based regional brewer announced in 2011 that it would be shifting its resources into the hotel and resort businesses while working with a European brewery to start operations on the continent.

In my opinion, this news indicates rougher times ahead for the craft beer industry. The larger and mid-sized breweries are banding together and diversifying to take greater advantage of their economies of scale. This will put pressure on the smaller companies to compete for market share and raw materials.

In 1997 during the first consolidation, the industry did not have the advantage it possesses today. Most of the beer drinking public was unaware of the craft brewing industry 15 years ago when I came to Bayhawk. Now every year we add a new generation of beer drinkers that have always been aware of craft beer. For the first 10 years I was working at Bayhawk the micro-brew industry held roughly 3.5% of the American beer drinking market. Over the past 5 years this market share has more than doubled to approximately 7.5%. The macro-breweries have shown a decline in growth while craft industry has been increasing at nearly 16% per year. Of course in context, large breweries and imports control over 92% of the market in America today.

In my opinion, the craft industry cannot sustain massive duplications and variations of the same wasteful styles of beer. Good marketing is essential, but goading people into drinking undrinkable beer will only last so long. Most of my colleagues believe that the 7.5% of the beer market is the whole market. Their large egos and greed have been sustained by the even larger bankrolls that have kept them in the market. This could be the reason they believe they need to diversify before the markets collapses. A drinkable quality product at a competitively low price is what has driven the beer market throughout history as much as marketing. It is what Bayhawk has built its business model upon. Unfortunately, the former rather than the latter has become the basic American business philosophy since WWII.

It’s sad to believe that this is what our industry has reduced itself to self-serving egotists out to make a buck and sell-out rather than building an industry that will employ people, pay taxes, and keep jobs in America. It still brings a smile to my face when I am reminded by a Bayhawk stock holder that my philosophy is to build a brewery that will last 100 years.

Cheers,

Karl Zappa

Managing Director