The last five years have seen a sharp increase in the number of UK breweries, in part due to tax breaks introduced for small breweries which were introduced in 2002. But the rise in popularity of ‘craft’ beer – loosely defined as high-quality beer produced in small batches by independent breweries – among increasingly discerning consumers, has also transformed the market.
The sheer number of companies currently jostling for position means that the industry has hit a turbulent period, and smaller breweries may face difficulties in the months to come. As David Pattison, senior analyst at financial intelligence provider Plimsoll Publishing, comments, “the brewery industry has become fragmented; 70% companies are run with less than £500 thousand of investment. Costs are rising faster than sales; for the first time in 9 years margins have fallen below 4%. This lack of investment means that some companies will struggle to grow, even if demand for their product is high.”
The Problem with Acquisition
One solution to cash flow problems is acquisition from a larger brewery. However, partly as a result of the level of consumer demand, Plimsoll has found that values are up by 4%, in an industry where buyers have historically overpaid.
With the large quantities of companies becoming available, however, prices may eventually stabilise. But among so much competition, small breweries may find attracting a buyer a challenge. What’s more, the increasing popularity of craft beer has also affected the market leaders; 22 of the UK’s 50 largest breweries have seen profits fall. Many large brands have already introduced craft-style beers to their ranges in an attempt to capture a share of this demand.
But research carried out by YouGov, backed by the Society of Independent Brewers (SIBA), has found that authenticity and clarity are important to modern beer-drinkers; as a result SIBA has introduced an ‘Assured Independent’ logo for what they designate genuine British craft beers. This could mean that despite necessity, acquisition by a large brand may be detrimental to the appeal of smaller craft brewers; instead they may need to grow by other means.
Opportunities for Growth
One option would be for a number of smaller breweries to team up in order to share resources. Mr Pattison continues, “We have already seen decreasing asset values, suggesting that companies are becoming leaner. But if a number of smaller breweries come together, sharing costs and resources could allow them to benefit from economies of scale, raise more capital and ultimately become more competitive.”
Another thing craft breweries have on their side is a millennial demographic; the aforementioned YouGov report also found that craft beer is particularly popular among 25-34 year-olds. This means there could be potential to harness social media, e-commerce, and even online delivery services to reach more customers.
With the numbers of new breweries continuing to rise, coupled with recent news of pub closures across the UK, the brewery industry may need to change tactics sooner rather than later in order to maximise growth.