Craft sector of brewing has been growing and the growth will continue but may be slower than dilution of market share as more competitors entering into this sector. Increasing production costs may be a bigger issue for them than declining sales.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Better beer sector (over premium, craft mainly) had experienced growth for years.
• Many companies experienced decrease in sales in 2016/17 due probably increasingly intensive competition inside the sector. In order to meet the increasing demands for better beers more craft beers are produced either by more new craft brewers or by increasing capacity among existing craft brewers.
• Competition has also been from outside including local alternative beer products and other alcohol products.
• It seems that companies’ sales volume may be rebounding back in 2018 under the costs of lower profitability caused by increasing production costs and marketing costs.
• Consolidations among mass-produced brewers, who focus on premium beers and also make diversified products, accelerated and thus are making fewer big international players.

 

Causes behind the trend

• We believe there are two fundamental factors behind the current trend:
  1. Demographic changes among consumers ( aging population)

  Consumption of beers by aging population who were probably the major consumers for premium beers decline as people are getting old. And at the same time, young people prefer high quality and better taste craft and other over premium beers than their fathers and grandfathers. (Data indicates that teenagers may be the major driver behind the growth in craft or better beer sector).

  Older people, compared with younger people, usually have more stable income and stronger economic support and thus are more likely to shift away from premium beers to high alcohol and high quality products such as craft or wine and spirit products.

  Decreased demand for premium beers worsen the competition among mass-produced brewers whose revenues come mostly from sales of premium beers. For example, the brewers have to spend significantly on marking. While Synergy saving resulted from those consolidations could be significant, controlling price, which otherwise may have to shrink under the pressure of competition, presents the major reason behind intensive activity of consolidation among mass-produced brewers.

  2. Challenging economic conditions

  People with income in middle or lower range are the majority of premium beers consumers but also more vulnerable to the impact of challenging economy. Therefore, they are more likely to reduce their consumption for beers or downgrade their consumption to cheaper beers facing downturning economy.

  It seems that the challenging economy had little or no impact on craft consumers who are usually young or people with high income.

 

Industry Future

• We believe the trend in craft sector will continue since demographic factors behind it will still exist in the future. Recovery of economy will only add more fuel on this process.
• The pace of new investment running into this sector will slow down in the next several years.
• The growth in craft sector of brewing will continue but market growth seems slower than dilution of market share due to more competition.
• The factor of aging population will continue to put more pressure on sales of those premium beers brewers. Recovery of economy may help premium beers brewers to slow the process of losing their customers. However, it will not be able to change this trend.

General Financial Performance of Companies In the Sector

The sector had been growing before 2016 as consumers’ taste shifted to better beers with higher quality and better taste while the whole beer industry, especially premium beer sector, has been declining. Sales of companies in this sector decreased in 2016/2017 , as indicated by decrease in volume (about 6% annually ) while increasing unit price ( about 1.5-2.5% annually), and started a rebounding in 2018.

Because unit price continued to increase, companies’ margins seem to have generally been improved while decreased sales. However, increase in price/increased margin was partially offset by gradually increasing production, labor, and packaging costs since 2017. Therefore, in current situation where demand seems to be rebounding, we have seen a general improvement in profitability among companies in this sector in the past year. The average gross margin is currently about 42% and operating margin down to 7%.

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