No, There's Not a Craft Beer Bubble Brewing

There’s one thing about craft beer that is both its greatest blessing and its greatest curse: accessibility.

On the one hand, its affordability and lack of pretentiousness makes world-class beer available to just about everyone, which can’t be said of any other beverage.

On the other hand, that accessibility and casual vibe leads countless uninformed observers to believe that they can authoritatively comment on craft beer.

Randy Dotinga’s recent article about a newly released study of craft beer’s economic impact is a prime example.

That said, I will at least applaud Dotinga’s skepticism. In an industry with an almost total absence of real journalism, the cheerleading is virtually indistinguishable from the “reporting.” So even if Dotinga asked all the wrong questions, it was a breath of fresh air to hear someone question the PR.

Here’s my response to his four major points.

Revenue hasn’t kept pace with growth.

This relies on an incorrect understanding of “growth.” It’s nearly impossible to double the number of businesses in a $781.5 million a year local industry and double its revenue simultaneously. If such unsustainable growth did happen, it would be a far stronger indicator of a bubble.

The study shows that craft beer revenues increased by $101 million between 2011 and 2013, a 15 percent increase. Comparing that to an increase of more than 100 percent in the number of breweries in the county, without any consideration for how much production capacity those facilities have (i.e. how much revenue they can possibly generate) doesn’t tell us anything.

A meaningful comparison would have been between the growth of brewing capacity and revenue. Dotinga wrote: “The numbers raise at least the possibility that growth in the industry is surpassing demand.” It does nothing of the sort. If brewers were adding capacity and those tanks were sitting empty, that would indeed validate his claim.

Fortunately for us, the opposite is true: Brewers around the county are struggling more than ever to keep up with demand even while expanding capacity. Our biggest challenge is access to capital to finance expansion, not lack of demand.

A strong foundation could help the beer biz survive a storm.

Here Dotinga suggested craft beer might be a bubble, but citing Vince Vasquez, the author of the National University study, he concluded that “the high number of companies that support the craft beer business by providing ingredients like hops and brewing yeast plus supplies like brewing equipment” potentially insulate us from the coming “financial storm.”

I’ll tackle the second part first: There is not a single meaningful supplier of hops in San Diego. Nor does any of the malted barley used by local brewers come from within the county. Our hops largely come from Washington, our malt mostly from Canada and our water mostly from Colorado.

White Labs, a yeast supplier, is based in San Diego, but while it’s nice to occasionally save (literally) a couple dollars on shipping, their presence hardly insulates us from economic cycles. And there are plenty of breweries in San Diego (including mine) that get their yeast somewhere else.

Premier Stainless, a brewery equipment supplier, is based in Escondido, but only the finishing work is completed in San Diego; their tanks are imported from China.

So what is the real foundation of San Diego’s beer industry? Talent. What makes us successful is quality beer. And quality breeds quality by attracting like-minded brewers and putting competitive pressure on low-quality beer. Good brewers want to open breweries in San Diego because other good brewers are already here; it’s why I opened my business here.

One need look no further than Silicon Valley — an expensive, inconvenient series of hideous office parks — to understand that strong human capital is a far greater driver of innovation than proximity to suppliers.

As for the issue of whether or not craft beer is experiencing a bubble, brewery owners have given it plenty of thought, but none of us can predict the future.

One assertion I will address is the claim that “the study doesn’t provide evidence that more drinkers (and/or more drinking) are possible or probable.” The study doesn’t provide that evidence because it is an economic impact study, not a market research study.

Googling “craft beer demographics” would’ve done the job, though. A May 2013 market research study by Mintel shows that craft beer appeals to “49 percent of Millennials and 40 percent of Gen Xers, but just 29 percent of Baby Boomers and 22 percent of Swing Generation/World War II” and that “forty-five percent of craft beer drinkers indicate that they would try more craft beers if they knew more about them.”

In short, young people, with decades of spending still to come, are poised to buy an unprecedented amount of craft beer, and existing craft beer drinkers will spend more of their alcohol budget on craft beer.

We don’t know if anyone’s busting as craft beer booms.

Dotinga asserted that craft beer “slices into local bar and supermarket profit.” Again, the opposite is true. Profit margins for retailers are higher on craft beer than they are for mass-market beer.

One of California’s largest beer distributor recently told me that craft represents only 12 percent of their volume but 28 percent of their revenue. Naturally, they’re working to sell more craft beer, especially to chain stores, who are equally enticed by craft beer’s profitability

My point: Craft beer is every bit as complex and significant an industry as defense, or tourism, or biotech or green tech. It is a key piece of San Diego’s economic and cultural future, and it is growing rapidly.

If we’re to understand it, we’ll need informed commentators from publications like Voice of San Diego to illuminate it for us — with the seriousness such an important and complicated topic deserves.

Jacob McKean is founder and CEO of Modern Times Beer, a new craft brewery located in Point Loma. McKean’s note has been edited for style and clarity. See anything in there we should fact check? Tell us what to check out here.