Shelf Space a.k.a. Location, Location, Location

Posted on November 30, 2012

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The growth in the number of craft breweries may lead to an expanded variety of beers but that does not mean that consumers will be able get their hands on them. As of August there were 1,303 breweries in planning – there are currently 2,142 breweries in the US. Where are all these breweries going to sell their beer?  Which beers will be taken down so these new beers can go up?

With only 5.7% of the market by volume, 9.1% of sales, in 2011, craft beer could be dismissed by large brewers. The word “dominance” is frequently and justifiably used when referring to AB-InBev (which includes Anheuser-Busch, known for Budweiser, and many others) and SABMiller (which includes both Miller and Coors, and many others). These two companies control approximately 48% and 30% of the U.S. beer market, respectively. In comparison, the largest craft brewery, Boston Beer Company, is only 1% of the total beer market – 17% of the craft beer segment. With Anheuser-Busch controlling 50% of the market why would they care about a relatively small segment of the beer industry? One of the reasons is: space.

Space. Space for beer at super markets, gas stations, liquor stores, restaurant fridges, bar draft or sports arenas. Last year the craft beer segment grew 13% by volume and 15% in dollars, this is in a year during which the overall industry volume declined by 1.3%. It would seem that craft beer is replacing traditional American lagers, not adding to the overall industry volume. Loss of sales is something that the large brewers are going to fight against.

On what territory is this fight going to take place? As the number of breweries expand, so do the number of brewpubs and craft beer bars; additionally, many traditional bars and restaurants are featuring craft beer. The product mix for off-premise beer (i.e. supermarkets, gas stations, see notes*) has also been changing.

Alongside craft beer variety and volume growth, the traditional brewers are always adding new SKUs and driving to increase the sales of their flagship beers. There are long standing relationships that are not going away just because there are new breweries that want to get on the shelf.

Some locations have always had a large selection and others are expanding the floor space devoted to beer; however, there is only so much space to store and display beer – fridge space is particularly limited, both for storage and selling. This limited space is a concern for the upstart breweries, as well as for existing brewers. For the retailers, devoting shelf space to craft beer initially makes sense, each beer sold is more profitable compared to the beers traditionally sold. However, the beer from the large brewers has a higher turnover so total sales volume is higher. So the decision is: lower volume with higher profit per SKU or higher volume with lower profit per SKU. Of course there are many other variables that will tip the scale one way or the other.

People know what to expect with a Bud or Miller, this is not always true with craft beer. A brewery’s role is not over once they hand over the beer, all brewers work to maintain good relationships with their retailers, usually via the distributors. That coveted shelf space comes with some responsibilities, including: training, quality control, marketing. For the seller, with an increase in SKUs (stock-keeps units) there is an increase in the amount of time devoted to the space. The server or salesperson should know about all the beers and how to handle them. Light exposure, temperature fluctuation, expiration date all need to be controlled for by the store. At restaurants with craft beer, the server or bartender might need to know the appropriate glassware or food pairings, on top of the characteristics of each beer. At all points of sale there are quality issues that will reflect poorly on the retailers as well as the brewer. If a beer is not treated properly, i.e. the draft lines at a bar aren’t clean, the customer will likely think there is something wrong with the beer and avoid it in the future.

The brewer needs to know that the retailer will treat their beer right and promote it to customers, and the retailer needs to know that the beer quality is consistent and there is a market for it. The seller takes a risk every time they take on a new product, every square inch represents a possible sale, and if a beer isn’t popular that space represents lost revenue.

Every time you see a beer on a menu or shelf it represents a great deal: the brewer or distributors hard work carving out space, the seller assessing the possible revenue of the beer, the training of staff, a dozen other beers that wanted to be there, and, of course, the making of a fine beer.

Notes and Sources
— Distribution and distributor relationships are important topic we’ll save for later. The distributor relationship and work is one often unseen by consumers, but as the third tier in our alcohol system, it is extremely important.
— *”Off-premise” refers supermarkets, gas stations, etc. The terms references the fact that the beer is bought at a store and consumed away from the store, off the premises. A reliable source stating the breakdown of off- vs on-premise beer sales/volume could not be readily found. It would appear to be somewhere between 25%-50% on-premise.
— Many of the breweries in planning will be brewpubs that will have limited or no sales beyond the pub, or they could be nano or micro brewers who do not have plans to expand beyond their current market; however, they are still competing for customer attention to matter where they are.
http://www.brewersassociation.org/pages/community/ba-blog/show?title=breweries-in-planning-climb-over-1300
http://www.brewersassociation.org/pages/business-tools/craft-brewing-statistics/facts
— The Boston Beer Company reports their 2011 production as 2.41m barrels in Annual Report and 2.47m barrels in their 10-K.  Adam Nason in BeerPulse states that this number includes their non-beer products, i.e. Twisted Tea, making their total beer production was 2m barrels. Brewers Association reports that 11,468,152 barrels of craft beer was sold in 2011.
— Yuengling is as large as Boston Beer Company, in 2011 having matched the later in sales; however, the Brewers Association does not consider Yuengling a craft brewer due to their brewing style (I feel compelled to note that I am a fan of Yuengling and am saddened that it is not regionally available.)
— Percentages give on the size ABInvBev and SABMiller vary around 50% and 48%
— Brewers Association stats for 2011 industry growth

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Posted in: Beer Industry