They Keep Asking Me: “What Do You Think Is Going to Happen?” 9


(Ed Note: Buckle the heck up, Junior Rangers. This is going to be a long one. It is also somewhat inflammatory.)

The other question I get is “what do you think is going to happen?”

It’s usually phrased that way and to be honest it means different things depending on who is asking the question. “What do you think our chances are?” is one way of reading it, and I get that sense of it from new brewers that are just starting up. “What do you think is going to happen to the market?” is another way of reading it, and that’s usually from established participants in the market who just want to know about stability and whether it’s likely to exist. “Do you think we’re overcrowded?” or “Do you think it’s a bubble?” I get from brewers who are worried about their place in the market and from newspapers and magazines who think impending doom is a better story than “Ontario continues to thrive.”

In person, my answer is usually positive: Your chances are good, the market is going to be relatively stable, and there’s going to be a bit of a correction but it’s not a bubble.

That probably ought to come with a few caveats.

THE FOURTH WAVE

When we wrote the history section of the Ontario Craft Beer Guide this time around, we broke up the history of the modern brewing renaissance in Ontario into three separate waves.

Wave One was 1984-1995 and heralded the birth of the industry to a period of significant market contraction marked largely by a dearth of quality. You can’t truck in wort to brewpubs and expect to make good beer. You also can’t be sold to a pension fund and expect to continue to exist.

Wave Two was 1996-2007, a little arbitrary, but essentially post-contraction to the beginnings of expansion and proper media coverage (Josh Rubin sort of gets the nod on that one, believe it or not, for having a column in the Star). For the most part this period was about staying alive and reclaiming the public’s interest. Ex Upper Canada employees from all walks did a lot to make that happen.

The Third Wave was 2007-Present Day, that era defined by impossible expansion without failure, ceaseless experimentation and effort on the part of brewers, social media sharing on the part of individuals, and incredible industry coverage in media. When you think of the number of quality beer writers in Ontario that existed during that period and that there was (in something like 2012-2013) a situation where every weekly in Toronto had a beer columnist and most dailies had some kind of coverage, that was unprecedented and a real help to the industry.

It is my contention that we’re entering Wave Four. Further, if I had to pick a date that would happen, it would be this Friday morning at about 9:30 barring a leaked (ha!) tape.

BACKGROUND

Last year I was retained as a futurist for Beau’s. Steve Beauchesne wanted me to game out the next ten years for a comedy presentation at the Ontario Craft Brewers Conference. There were some good bits in there and I think there’s a PDF on an OCB website somewhere if you’re curious. The real moneymaker, and I do hope that Steve copyrighted the name for Canada, is the Beerstream. Jokey highlights include a time travelling George Eagleson and the creation in 2019 of the Trump Buck. The idea there is that after he drives the economy into the ground, Trump unveils a new US Currency with his own face on it. There is no real difference in the bills except that they are slightly larger and more vibrant in colour.

In order to get to that joke, I had to predict a Trump presidency. In September. Of 2015.

Disclaimer: I did not actually want that to happen, but a punchline is a punchline.

It actually makes a lot of sense to predict that if you come from a craft beer background and I’ll tell you why, but I need a little help from a widely discredited political scientist.

Francis Fukuyama, in his book The End of History and The Last Man theorized that essentially Liberal Democracy is going to win out in the end and that eventually we’re going to enter into one universal and homogenous society as a Liberal Democracy. You know: The Star Trek Future.

He wrote his book in 1989 when communism was falling in Berlin. It was a good time to be optimistic. In the long run, he may even be proven right, but he didn’t really account for the growing pains we’re going through as a planet at the moment. The population is incredibly high, we can’t feed everyone, global warming is displacing entire societies who become migrants, and automation of production strips away employment leaving a lot of people twiddling their thumbs and without purpose.

Think about craft beer in the context of the American experience for a moment: Small, Local, and Independent. Mom and Pop. Main Street. This is as opposed to enormous brewing conglomerates owned by overseas companies. It creates employment. It creates a sense of purpose. If the 20th century’s consolidations of breweries represent anything, it’s that headlong rush toward a more universalized and homogenous world. Fukuyama’s End of History would theoretically be accompanied by corporate hegemony, and make no mistake: AB In-Bev would very much like to become the only brewer on the planet through merger and acquisition.

Craft beer is kind of a bellwether for the political situation in the US. Locally owned production vs. Internationally owned production in a struggle represented online by a very vocal minority. Nationalism vs. Globalism in a struggle represented online by people who run around calling each other cucks on twitter. If you strip away the idea of quality product or the effectiveness of the  ideas involved on a societal level, the dynamics are pretty similar. Essentially it’s just a tug of war between purely local and international interests.

With the election of Trump, the US is poised to act less benevolently internationally. We’ll see how that works out for them. I suspect quite well in the very short term and then catastrophically.

We’ll get back to international impacts later. For the time being I want to talk to you about Ontario.

MARKET DEMOGRAPHY

Ontario is an odd market with a lot of strange forces acting upon it. We have a unique combination of retail systems. We have a governmentally mandated price floor. I have talked about it before over here. The amount of beer actually produced in the province dropped dramatically since 2009 (probably to do with the raise in the price floor). All you really need to know is that instead of buck a beer ($24/case in 2009) we have a 37% increase in seven years ($33/case in 2016). It vastly outstrips the consumer price index. It should also, within the next year render value brands obsolete.

One of the things that people don’t talk about is demography. It’s incredibly important, and I’m going to talk about three factors within it that tend to define the beer market.

Over here at the end of this link is a table defining the population by five year cohorts. In this book talking about the beer wars of the early 90’s, some of the interviewees refer to 18-35ish as “prime beer drinking years.” That’s probably accurate. People are going to get through the majority of their beer consumption in that period of their lives. Look at the table. For 2016, the population of Ontario is, near as dammit, 14 million. The problem is that because of the boomer generation, that famous elephant in the snake, a lot of the population above drinking age skews above 50. You’re talking something like 5,263,000 people. These are not people who are buying a case of beer a week.

They did, though! Oh, how they did! If you’re now 60, that means you reached drinking age in 1976! That was just about the high point for modern per capita alcohol consumption in North America. You drank your face off and drove home in a Pontiac Firebird. It was a different time.

Being kind and assuming that there are 200,000 19 year olds in Ontario, the number of people between 19 and 50 who are available as beer drinkers is 5,886,000. That’s going to make up the majority of your sales, but it’s never going to be a 24 a week again.

Who are these people? Let’s factor in a couple of other demographic criteria. According to this statscan data (I worked for them last summer. Good data is important.) 102,701 people died in Ontario last year. The good news is we added 147,244 babies! That’s a net positive of 44,543. The population, however, is expanding more rapidly than that. In fact, in the last six months, faster than any period since 1971. It is mostly due to non permanent residents and new immigrants. In Ontario, it’s like 140,000 non permanent residents and new immigrants.

The end result is a diversification of society, which I think is a good thing in a general sense, but which is probably not great for the beer industry. There are people who come from cultures and religions where beer is not really a thing in the way it was in whitebread European descended Canada in 1976. It’s not a failing on their part, but it is a fact and it’s important to know. As time marches on, I don’t know whether the cultural mores change with generations. One assumes some cultural adaptation, but I don’t have numbers on that.

To sum up: Population 14 million. 3 million below drinking age. 5.2 million no longer buying in volume. Remainder increasingly non-beer drinking/buying in volume. If you wanted to be really clever, you’d look at income level amongst millennials whose wallets are the current prize. An unpaid internship don’t buy beer in quantity.  

RETAILING AND PACKAGING CHANGES

I have espoused elsewhere that the most significant event in the history of beer retail in Ontario was the month in 1985 when the Beer Store shut down in a union dispute. Really bad things happen when businesses forget they exist to serve the customer and not the other way around.  

In the case of The Beer Store, that event precipitated the loss of a monopoly. It turns out that if you take away an entire province’s ability to buy beer for a month or so, you make people properly angry. As a result of that the LCBO sold beer and eventually grocery stores sold beer. You may remember the time I commissioned polling on it.

The LCBO has been engaged in the beer market for over three decades at this point. There are second generation customers that are now used to the LCBO as a retail outlet. If you were born after, say, 1980, there’s a pretty good chance you have never needed to go to The Beer Store except to return empties. The LCBO is not going anywhere.

The grocery stores? Well, same thing, really. It’s inculcate consumerist tendency. By 2025 there will be 450 stores (approximately the same number as Beer Stores oddly enough) and it’s pretty likely that if you were born after 1996, you’ll split your beer purchases between the LCBO and the Grocery Store and never set foot in the Beer Store even for empties.

The Third Wave period of craft beer was at least partly defined by exponential brand growth that could never continue to exist indefinitely. The population is finite. As the number of brands increase, the competition for the consumer’s finite attention and money results in decreasing return. For the second edition of the Ontario Craft Beer Guide we reviewed something like 1075 beers. If we had included all Ontario seasonals and one offs, it could have been something like 1500.

You remember how it happened: There were craft six packs at the LCBO. Then there were seasonal bottles. Then the number of seasonal bottles increased. And the craft six packs became 473 ml tall boy cans.

I want you to look at Beer Canada’s 2016 report, page 11. In 2010, bottles made up 62.6% of packaging. It’s down to 47.3%. If anything, Ontario is lagging behind the national trend where it’s closer to a 20% loss in that period. It’s going to continue because people like that format. Also, people hate returning empties when there’s a blue bin.

COMPETITION

Packaging got smaller and smaller and competition is getting more intense. The LCBO is basically out of shelf space. You know how I know? They increased the sales quota you need to make to stay listed. It’s 20 litres per location per month, as I understand it. That’s not unreasonable. That’s something like 42 tall boy cans. It used to be 10 litres. There were companies moving less than a case of tallboys a month in the LCBO.

The message from the retail channel here is clear: You no longer get points for existing.

Just showing up isn’t enough in the craft beer industry anymore. I know a brewer who I lost a lot of respect for after he said to me that he wanted to punch the clock. Show up at nine and punch out at five. Remember earlier when I said that really bad things happen when businesses forget that they exist to service the consumer and not the other way around? Same rules apply.

I’m fond of biological models for craft beer because it’s basically a little ecology. In the past I’ve used Darwinian evolution and Predator/Prey models to explain concepts on the blog. In grade 12 biology you do an exercise with food and deer and wolves in a limited ecological system. For the purposes of this analogy you may consider the customers food, the breweries deer, and the dearth of shelf space is the wolf at the door.

As I think I’ve established, the food is dwindling, the population of deer is at an all time high and continuing to grow and the wolf population is about to thrive. The wolves will pick off the old and the infirm first, as in nature. That sounds bad, but it isn’t if you’re a consumer. It’s ecological balance. The overall health of the herd is improved on aggregate by that competition for survival.

The overall volume of the beer market is going to continue to remain about where it is. The craft beer market is going to continue to grow. That doesn’t mean that there won’t be casualties as the market corrects.

Survival as a brewery over a certain size (say 2,000 HL) at this point is not going to depend simply on beer quality. It needs marketing, logistics, sales reps, quality control, packaging, design work, accounting, and a business plan that doesn’t suck. A lot of the time beer isn’t about beer. At this point you’re better off poaching an excellent sales rep than a talented cellarman.

Let’s shift a moment to evolution.

On Galapagos, you’ve got myriad species of finches that evolved different survival techniques. Basically, each species eats a food the others can’t get at and they developed beaks to do that. If you’re a small, local brewery or brewpub and you engage with your community and you sell out your front door, you’re probably going to be fine. Consider it an evolutionary advantage.

THE FOURTH WAVE

A lot of what happens next depends on US foreign policy. Trump (or if I may paraphrase Roy Orbison, “The angry orange clown they call the tan man”) has avowed some really interesting positions, although not in any great depth. The consensus amongst analysts I’ve seen online seems to be that the dollar is going to increase in value in the short term. The thing that makes a difference to Ontario is that NAFTA seems seriously to be under review.

Given the strictures of the market, more shelf space is probably a priority for brewers over 2,000 HL. The good news is that there will be 300 more grocery stores. The timeline on their rollout is somewhat problematic in that it may not help enough people quickly enough. I have the terrible feeling that a trickle of stores are kept in reserve to act as a political distraction for the incumbent in an election year regardless of party.

However, there is space that exists.

There’s a significant perception problem that goes with putting your beer in The Beer Store. Craft brewers have spent so long railing against doing it that they’ve basically convinced the public not to shop there. Consider, though, that The Beer Store could be reclaimed if the province’s small brewers get desperate enough for growth and are willing to engage in some image rehabilitation. Guaranteed space in a store for your product for X dollars and there isn’t a 20 litre limit? Yes it costs money, but there’s nothing that says you have to buy in all at once. It could be managed incrementally with targeted geodata and sales information. Not impossible or even difficult to do. Plus, the first five stores are free now, aren’t they? And big brewery sales are going to continue to dwindle, so on a long enough timeline it is a reclamation project. The recycling concern that goes along with it dwindles in importance as the size of the bottle float decreases. The industry standard bottle might as well be a dodo.

On the other hand, what if NAFTA gets the axe?

You may recall angry conversations about why The Wine Rack exists? Well, it’s grandfathered in under NAFTA. The stock is all from Ontario and under NAFTA it wasn’t possible to have a protectionist retail outlet. The Beer Store is not like that. You can buy in from anywhere in the world. But, since 1993, it has been impossible for there to be any new Ontario only retail stores. It’s one of the reasons small brewery cross sales and Ontario brewers store didn’t factor even remotely into the grocery store debate. It wasn’t a real possibility. It is technically possible if NAFTA goes bye bye. Where the hell the capital funding would come from is maybe an insurmountable concern. Besides, it would basically be The Beer Store, but disallowing the involvement of large brewers and imports.

I wouldn’t root for that outcome, however. A strong American dollar and the removal of free trade would have some pretty significant effects on ingredients. Do breweries want to pay more for cans they’re shipping in? Do you like those late hopped IPAs? Those Yakima hops are going to be more expensive. Do you think we benefit from exporting a lot of barley to the states? Look up what Big Bill McKinley did to Prince Edward County in 1894. I’m also a little worried about our water rights, but I think that’s a second term issue.

TO SUM UP

Craft beer in Ontario is going to be better than fine. The competition will make the market healthier and make the quality of the beer better. Several currently extant craft breweries and contract breweries are not going to be fine. Hopefully the employees will land on their feet elsewhere. More breweries will spring up to replace them and hopefully they will have learned from the examples set. The amount of shelf space will expand, but not fast enough to prevent the correction. There is nothing at this point that will prevent the correction. If you’re going to expand, make sure you have somewhere to put the beer and that you’re not just doing it on spec.

There is going to be competition. Craft beer has until now been a pretty collegial little world, but it’s going to be less so. My advice to you is to try and preserve as much of that as you can. The basic conviviality is one of the main draws for the public and always has been.

Above all: Don’t forget that you’re not entitled to customers. Your brewery exists to serve the customer. When businesses forget that, bad things happen.

I have said in the past that each new day is the best day for beer in the history of the province. That will continue to be the case, even given the coming difficulties.


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9 thoughts on “They Keep Asking Me: “What Do You Think Is Going to Happen?”

  • Derek Harrison

    Interesting stuff. “Fourth wave” is on point.

    I struggle with this though: “I know a brewer who I lost a lot of respect for after he said to me that he wanted to punch the clock. Show up at nine and punch out at five.”

    I think it’s admirable to strive for work life balance. Wouldn’t any brewery that was able to provide that for themselves and their customers have a more sustainable business?

    • admin Post author

      Maybe for a cellarman, or an assistant brewer. You want to be in charge of a brewery and you’re not out there promoting the brewery as part of the message? That’s not the gig.

      I’m not advocating they don’t get paid for the time. I’m saying that they need to be willing to put in that time.

      • Greg Bowie

        I agree with Derek actually. I remember watching a YouTube video a few years back from John Kimmich at the Alchemist in Vermont. At the time they were selling their main beer, Heady Topper, like gangbusters and there was pressure to expand the brewery to keep up with demand. John’s argument was he would rather keep doing what they were doing, but provide a better life for their employees (higher wages, retirements, health care, etc.) then to expand for the sake of sales. In this regard, John wanted his staff to not only be 9-5, but also provided for, while continuing to make a solid product (number 1 beer in the world for a while on beer advocate) for the consumer. I think the idea of a brewer working hard 12 hour days is a little off. If your a new brewery trying to get your legs under you then perhaps the extra effort is needed to build some momentum. If your brewery is established, you likely have other brewers that can work the second shift, for example, and you don’t need to be there all day and night. It also becomes a role of mentorship, if a brewer can teach someone the main beers, and consistency/quality are there, that gives the head brewer an opportunity to do something else, be it experiment or whatever else.

        • admin Post author

          I bet you John Kimmich isn’t 9-5.

          I grant certainly that work life balance is important and that people should be paid for their work. I think there are scales at which that’s not the practice.

  • Greg

    I often wonder how many different retail outlets in Ontario have to start selling beer before the owners of the beer store just decide to close up shop? I mean if every walmart, loblaws and costco in Ontario sold beer, would it make sense for the beer store to exist? Especially with overall sales dropping why bother paying for that insane amount of overhead when you can just sell your beer to walmart when they are basically selling the beer for the same price it would be selling for at the beer store?

    • Paul S

      TBS isn’t really “an insane overhead” though. They operate on a break-even basis, and distribution there is incredibly easier than a broader network. TBS exists because it is insanely profitable for brewers who sell through them.

      Also, as is, TBS makes almost no markup on sales. Their entire cut is volume-based and ranges from approx $0.35-$0.53/L (which is maybe another reason volume brands may be endangered). Beer costs what it does in Ontario because the low markups allow for the market to tolerate high taxes. Cutting in retailers who would presumably want a take of sales to make it worthwhile (grocery stores use beer now as a loss leader) and the increased distribution costs would raise prices considerably. WalMart in the US takes up to a 60% cut of goods sold by small producers in their stores. Even titans Coke and Pepsi give up 30%. TBS currently takes what averages out to around 10% markup, LCBO slightly higher. What would major retailers tolerate in order to deal with the headaches of selling beer (relatively short shelf life compared to most grocery items, social responsibility, high volume churn to be profitable) and what would it cost consumers? Most people are only anti-TBS because they think they make beer more costly (when they have the opposite effect) and expect cheaper beer in a less regulated market. Alberta proved that doesn’t happen (where the government eagerly stepped in to be the high margin distributor) so, why bother? Mind you, I’m biased as a TBS employee, but they are here to stay until regulations or decreased market share (I do not share Jordan’s view of severe demographic doom for TBS) reach the point where it’s not worth it.

      • admin Post author

        Well, that’s the thing, isn’t it? It’s largely about the direction the market and, indeed, the Beer Store take. The current framework designates a certain ownership structure, but I am not confident that the actual market share will look like it does now by 2025. One wonders, in fact, whether Molson and Labatt locked in their (is it 8 votes out of 15?) prior to expansion of market growth on the part of some other companies.

        Let me put it this way: The market now doesn’t look very much like it did in early 2007. I don’t know what it will look like in 2027, but I don’t think the large brewers retain the same market share and therefore decision making ability that is currently locked in by the mandate. In some ways that mandate represents stability for them.

        And to be fair, most people are not Anti TBS because they think it makes beer more costly. Most people are Anti TBS because a lot of the stores are grody and nasty and smell like stale beer and the selection isn’t nearly as good as it is at the LCBO. Most people haven’t given the ownership structure or cost structure any thought at all. We had to fight like hell as beer writers to get it anywhere near being in the public consciousness.

      • Greg

        Of course there is an insane amount of overhead. Google tells me 400+ retail locations and 7000+ employees. That is a lot of money being spent on property taxes, utility bills, maintenance and wages. I am sure there are all kinds of accounts at A-B that knows at what point it becomes more profitable to stop paying all those expenses, (and sell the assets) and just ship truckloads of Bud light directly to Loblaws warehouses and have them deal with it.