Lessons from Craft Beer

At this year’s Pizza Expo in Las Vegas, I had a chance on the last day to walk around the show floor. As I came across the “Craft Beer Pavilion,” it caused me to ponder why craft beer is so popular. What are the underlying reasons for its growth? So I set out to learn more.

You might ask why would I take time to study an industry that is pretty different from my core business. Besides natural curiosity, I have found that valuable business lessons can be learned from many places.

This proved to be true again. Here is what I learned. After Prohibition ended in the late 1930s, nearly 750 small breweries sprung up across America. Over time, a few of the bigger companies focused mainly on consolidation as a means of gaining a price/cost advantage over their competition to squeeze out smaller competitors.

By 1950, the number of breweries had declined to roughly 400. By the 1980s, that number had further declined to 80 locations, owned by 51 companies. Of the 51 companies, the six biggest (Anheuser-Busch, Miller, Heileman, Stroh, Coors, and Pabst) controlled 92% of U.S. beer production.

These big companies mainly competed against each other based on minimizing costs and maximizing mass market advertising. They spent more time focusing on creative advertising (think about Super Bowl beer commercials) and packaging innovation (Coors “Cold Indicator” labels) than on what was actually inside the bottle.

The beer in their bottles was very mild flavored. Made from inexpensive, bland sources of starch like rice and corn, using huge mass production techniques, the biggest American beer brands were consistent, but offered very little in the way of flavor differentiation.

Meanwhile, starting in the 1980s, many consumers were discovering BIG flavors (think Napa wines, spicy condiments, international cuisine). A few craft breweries began popping up in western states, specializing in highly flavorful beer styles made with superior quality ingredients, according to traditional Old World methods.

As craft brewing quality and consistency matured, craft beers began attracting a larger and larger consumer audience which didn’t mind paying a bit more for premium flavor. Along the way, additional people decided to try their hand at brewing and the young industry began to grow.

Unlike the large corporate breweries, most craft brewers were small, independent, and traditional. They honored traditional ingredients and methods. Because they couldn’t afford conventional mass market advertising, they tended to rely on attracting new customers via word of mouth from other enthusiastic regulars. Demand for premium quality craft beer continued its steady growth.

Big companies are slow to change. That is especially true when they are more focused on building market share through mergers and acquisitions than on paying close attention to emerging consumer trends.

As a result of continued consolidation, by the mid-2000s, the two largest beer companies in the world, “AmBev” (Anheuser-Busch merged with European beer conglomerate InBev) and MillerCoors (Molson Coors merged with Miller), controlled 70% of U.S. beer production.

On the other hand, since the 1980s, the number of successful independent craft breweries in America has continued growing, with nearly 3,000 today.

Today, the craft beer category accounts for more than 10% of all beer by volume consumed in America (and nearly 20% of the revenue). Said another way, consumer demand for craft beer continues its double digit growth, while “conventional” mass market brands are losing market share.

Here are some lessons I learned from the craft beer industry which I think can be applied to any type of business, including yours and ours:

1) Don’t let yourself get caught thinking that past success guarantees future prosperity. Successful businesses tend to remain paranoid about not missing evolving consumer preferences.

2) Never ignore what the consumer is seeking. The key to keeping a business relevant to each generation of customers is finding ways to incorporate changing preferences into your business without compromising product or service quality.

3) Quality always wins out. While there have been some craft beer casualties along the way, superior quality craft beer continues to grow in popularity, even with premium prices and little/no advertising.

4) Never stop improving. Superior quality can provide a competitive edge over bigger, cheaper competitors, but only if you keep it sharp over time.

Like I said before, solid business lessons can come from almost anywhere.