Is a great shakeout coming?

Last week, CNBC published an article about Boston Beer and the coming great shakeout of the craft industry. It may feel like a great shakeout to the corporate craft breweries at the top of the heap, like Boston Beer. They and the largest craft breweries enjoyed hockey stick growth the past 6-7 years. Today, they more closely resemble the corporate brewers against which they rebelled than our stereotypical image of a craft brewer. That growth slowed last year and continues to slow. Large corporate craft breweries are hardly local anymore. Many aspire to sell to stores around the U.S. Some are busy chasing global distribution.

The insatiable desire for growth is creating battles between corporate craft brewers and multinational brewers for control of shelf space and distribution. Neither group wants to stay in their lane. The craft beer industry probably won’t suffer much from that struggle. It will just be a question of who profits from it. Will the corporation worth hundreds of millions of dollars produce your craft beer, or will it be the corporation worth $186 billion? That struggle attracts a lot of attention. The irony of the situation appears to be lost. There’s another shakeout coming, one that will bring with it even more dire consequences.

If hop acreage growth continues on the current trajectory, there is a shakeout coming in the hop industry. How can that possibly be more important than the shakeout in craft beer? I’m glad you asked! Consider this … Last week, I ran into a Yakima hop grower I don’t normally see. He’s a brilliant guy and has done well over the years. We started talking about the trend of small hop farms starting across the country. He was concerned. We both agreed that they serve a purpose in their local markets but that they don’t understand how bad things can get in the market. Then, he emphasized, “Once they saturate their local markets and start selling outside of their area, they’re playing in my sandbox. If they want to do that, they better be ready to sell Cascades for $2.00 per pound.” 

Nobody wants to sell any hops for $2.00 per pound. Nobody makes money at those prices. Hop growers in the Pacific Northwest are prepared to go to the mattresses to protect their family businesses. If you own a small hop farm anywhere around the country, you should keep that in mind. Many PNW hop growers believe they can survive because they can always produce for less. That is their goto strategy. That doesn’t mean they are looking forward to it.

During the years from 2000-2005, PNW hop growers routinely sold hops far below their cost of production to drive out their competition, which at that time was other PNW hop growers. They are ready to use their size and economies of scale against the smaller farmers if necessary. It sounds like a crazy strategy, but it works. It challenges the resolve of the weaker player and to the victor goes the spoils … such as they are. For small hop farms that think this is a bluff … It’s not just hops. Even Amazon.com used the same strategy against diapers.com a few years ago.

To all the brewers excited by the thought of hops for $2.00 per pound … that should be the last thing you hope for. When prices sink below the cost of production everybody cuts corners, quality is a forgotten concept, farms go out of business, and the number of varieties available decreases. In short, you will get what you pay for.