Over the past decade, craft beer has grown from a small, quirky community of brewers and consumers into a dynamic economic sector that netted $14.3 billion in sales in 2013. While overall beer production declined 1.2% in that year, craft beer production increased by 17.2%, and the number of new breweries opening has been rising meteorically.
While this trend has been great news for beer drinkers who favor a full-flavored, locally produced beverage over the watery commodity beer put out by A-B InBev and MillerCoors, it has been causing serious consternation for the brewing giants. That anxiety was amply apparent on Superbowl Sunday, when Budweiser ran an ad that disparaged craft beer drinkers while ham-handedly denigrating one of the products of a craft brewery it had acquired a few days prior. If the existing trends continue, Big Beer’s oligopoly status, and the profitable advantages that such market position entails, will be increasingly difficult to maintain.
In response to this long-term threat to their bottom lines, the big players have started muscling their way into the craft-brew market, sparking off a string of controversies. First, they tried their hand at making “craft-like” beers out of whole cloth that embraced the aesthetics of the community, with Blue Moon being the most successful example. When that tactic failed to reverse the major brewers’ declining market share, they began eyeing local and regional craft breweries for possible acquisition. In 2011, A-B InBev made waves when they purchased Chicago’s Goose Island, and in the past few months they’ve raised further eyebrows by snapping up several iconic Pacific Northwest breweries, including 10 Barrel and, most recently, Elysian Brewing.
However, this strategy of purchasing craft brewers outright has been problematic for the major players. The Brewers Association’s maintains that a “craft” brewer must be “less than 25 percent […] owned or controlled (or equivalent economic interest) by an alcoholic beverage industry member that is not itself a craft brewer,” so any outright purchase by one of the large brewers automatically forfeits the acquired firm’s claim to craft status in the eyes of the leading craft brewing trade association. A term has even emerged to describe the product of such bought-out brands: “crafty” beer.
Furthermore, much of the value of most craft brewers’ brand derives from the often almost cult-like devotion of their fans. Those fans immensely cherish the localized identity and independence of their breweries, and, after many years and often thousands of dollars of product purchased, the sale of the brewery to the likes of A-B InBev can feel like a deep betrayal. Intense social media backlash has become the norm in these situations, which raises doubts about the effectiveness of direct acquisition of craft brewers as a viable strategy by which the big brewers might re-establish their total hegemony over the beer market. What use is it to purchase a brand, if the brands loyalists who make it profitable will jump ship for an independent alternative as soon as the change in ownership casts doubt on its authenticity?
In the face of this challenge, large breweries have responded with tactics aimed at obscuring their ownership stake, so that a facade of local control and character can be maintained, while the profits accrue to their shareholders. One example of this practice in action can be found in the case of the “Craft Brew Alliance,” a publicly traded company that includes the Red Hook, Widmer Brothers, Kona, and Omission Brands. While it has “Craft Brew” in its name, the alliance fails to meet the Brewers Association definition due to a 32.2% A-B InBev ownership stake.
A second, more innovative example is Alchemy and Science. An “independently operating subsidiary” of Boston Beer Company (whose continued “craft” status is the result of the Brewers Association tripling the maximum production ceiling to accommodate them), A&S was created by Magic Hat founder Alan Newman after he sold that brewery to the first in a series of owners (it currently resides in the portfolio of Costa Rica-based Florida Ice & Farm Co.). A&S has purchased or created a handful of brands with moderate success thus-far, but their strategy of submerging ownership beneath several layers of shell companies/identities is one that offers a potentially viable strategy for limiting the backlash sparked by direct acquisition by a major brewer.
Finally, the most shadowy mechanism for divorcing a brewery’s ownership from its operations without creating an easily traceable trail is private equity. Exempt from many of the disclosure requirements of publicly traded companies, it can be difficult-to-impossible to determine which individuals and/or companies are using a particular fund as a vector for their investments.
An example of this mechanism in action is Massachusetts-based private equity firm Fulham and Co., which purchased Vermont’s Long Trail Brewing Company in 2006. Long Trail, in turn, acquired Otter Creek Brewing in 2010, and Otter Creek also now produces the Wolaver’s Organic and Shed brands. So, if a consumer wants to know who owns Wolaver’s or Shed, one has to trace through two further layers of craft breweries to get to the private equity firm. Then, when one examines the most recent SEC filings of Fulham and Co., all that can be determined about the investors is that there are 55 of them, that they have each made a minimum investment of $5,000,000, and that the total sum total invested in the fund is $227,693,000. Beyond that, the identities of the ultimate owners of Long Trail/Otter Creek/Wolaver’s/Shed (as well as Fulham’s other holdings) is shrouded in mystery.
In the face of such increasingly sophisticated strategies aimed at undermining the independence of craft brewing and re-consolidating control of the industry in the hands of a few mega-corporations, what can be done to stem the tide? Happily, some innovative breweries are challenging the dominant ownership paradigm and pioneering models that offer hope for the future of creative, independent craft brewing.
For larger craft breweries, one of the most exciting developments has been the growing embrace of selling to the employees as an alternative, ethical exit strategy for retiring founders. New Belgium’s experience was featured in a recent documentary about employee ownership entitled “We The Owners”, and, in 2014, Harpoon Brewery followed suit. Both of those companies have used the Employee Stock Ownership Plan (ESOP) model for selling to their employees, and the newly forming 4th Tap in Austin, Texas will be the first brewery in the U.S. to utilize the worker co-op structure.
A second encouraging trend also got its start in Austin: consumer cooperative brewpubs. Black Star Co-op Pub & Brewery opened its doors there in 2010, and five years later they have more than 3,000 consumer member-owners, each with an equal share of the company. Their success has inspired similar start-up co-ops in cities around the country, and their model offers a tangible way to use broad-based ownership to structurally support the emotional and identity investments that many consumers make in their favorite breweries.
In the end, what makes the craft beer scene so special is the passion people have for the product and the community. It’s a sector that emerged very much against the wishes of the big brewers, but to the benefit of the millions of consumers who are no longer forced to decide between a handful of varieties of tepid monopolist booze-water. However, the incentives driving the brewing behemoths to re-assimilate the craft brewing community into their empires are large, and growing larger with each year of the craft beer sector’s continued success. The most recent buy-outs are canaries in the coal mine. If we want to defend the spirit of innovation, collaboration, and community that makes craft beer special, it is time to begin a serious conversation about who owns, and should own, our beer.
Matt Cropp is a co-op geek who lives in Burlington, Vermont. He’s the Program and Outreach Coordinator for theVermont Employee Ownership Center, and is a core organizer with theFull Barrel Cooperative, an initiative to create a worker self-managed, consumer-owned brew-pub in Burlington which recently reached the incorporation stage.