I spend a lot of time thinking about the state of the Ontario beer market. When I’m trudging about town between various activities, I’ll run into brewers and reps and they will quietly and confidentially intone things to me that make me wonder whether there isn’t a little bit of panic out there. Sentences like “but how many of them do you think are making money?” and “I hear they will have to close by September.” I was in one bar recently which, due to the seasonal downturn in business, only had 14 of 30 taps pouring anything. It gives you pause for thought and a sense that some stock taking is necessary. 

At some time in the next month, we’re going to have legitimate data for the last five years about production stats in Ontario. The truth is that no one actually has a figure on the current state of the market. The stats that the Ontario Craft Brewers use to tell the media about market share are under representative of the success of small brewers in the province. They’re derived from retail channels: The LCBO and The Beer Store. As I covered over here, the problem with that is that it doesn’t account for brewery direct sales to licensees or sales out the front door of the brewery. 

The production numbers that Beer Canada has told me they are going to come out with are going to be broken down by excise band. We’ll have a sense of what volume is being made in each province by breweries in various excise bands. I keep a spreadsheet of breweries that exist in the province, and if there are ~420-430 companies (contract and physical) depending on the week, it’s a certainty that the majority of them are significantly below 5000 HL. 

My suspicion is that small breweries in Ontario are winning, but in some ways it is a pyrrhic victory. “Craft Beer” has a larger piece of a smaller pie, and that slice of pie is being divvied up in a lot of different ways. 

I’m going to talk here about the challenges the market faces at the moment. You will probably have your own insights, so feel free to chip away at them in the comments. 

Demography

I talked over here about the demographic challenges facing the beer industry in Ontario. 

Since I covered it pretty thoroughly, I’ll just recap. The best the Canadian Beer Industry ever did was in about 1974. People were buying ~120 litres of beer each. That was the baby boom generation. There were a lot of them, and they were on their way to the disco. There were not a lot of choices. They drank the brands that were available to them, which were advertised nationally on a very small number of channels.

If you look at the Statistics Canada age pyramid, you can extrapolate that the boomer cohort actually made up just less than half of the Canadian population in 1977. Millennials, who are an echo of that population density, are fewer. Gen Z are fewer still. 

Based on 2016 census data, there were just over 2 million people aged 15-19. This means that for the last three years you’ve had ~500,000 people reaching drinking age. For the next four years, it’s actually lower. ~475,000 people reaching drinking age. (Edit: If you assume Ontario is a third of Canada’s population, you’re down to 160,000) 

Consider this as an expression of percentage. The total population of Canada was 22,992,605 in 1976, and the 15-19 group was 2,345,000 while the 20-24 group was 2,134,000. Your prime 20-24 year old beer drinking demo was 9.3% of the population and was about to be higher. For 2018, it’s 37,242,000 total population. The 20-24 year old cohort is about 5.4% and about to be lower. 

We’re consuming, on a per capita basis, 55% of the beer we were consuming in 1977. Coincidentally, the prime beer drinking age cohort is 58% of what it was. Not suggesting a causal relationship, but the numbers sort of line up. 

Big Brewers and Excise

If you believe Beer Canada’s reporting, the Canadian beer market took a 726,000 HL hit last year. PEI had 90,000 HL of domestic sales in 2018. We lost 8 PEIs last year. 1.13 Manitoba’s worth of domestic sales went out the window last year. That being said, we probably didn’t lose it from those markets. 

One of the extraordinarily large number of problems with Buck-A-Beer is as follows: In order to get to the point where Buck-A-Beer is even theoretically possible, you had to remove the annually increasing price floor.  I explained that back here in 2018. Basically every year from 2009 until Buck-A-Beer was introduced, the minimum price for value brands would increase automatically in March, tied to the consumer price index. 

When Buck-A-Beer came in, the minimum price dropped significantly, but no one who counts went along with it. In fact, the large brewers have raised the price of a 24 of value brand beer from $34.50 in January of 2018 to $37.95 currently. They were no longer tied to CPI inflationary tools. Buck-A-Beer actually resulted in more expensive beer. The removal of the price floor coincided with a 10% increase in cost to the consumer. 

Also, you can’t put the price of value brands up without maintaining the difference between value and premium. A case of Budweiser was $37.50 in January 2018. Actually cheaper than a value brand beer is now. A case of Budweiser is now currently $40.95. If you’re a blue collar, brand loyal beer drinker, you voted for the wrong guy. 

The retail market is not adequate to meet the challenges of the industry, and that’s no surprise to anyone. The Beer Store recorded a $13.1 Million cash shortfall last year. They claim, according to Josh Rubin’s excellent reporting, that they are down to ~60% of retail sales with grocery and the LCBO making up a more significant share than in past years. With the LCBO acting as wholesaler for grocery, that cuts drastically into The Beer Store’s business.  They have been on the hook to spend $100 Million in capital expenditures, of which 80% is to do with their stores. If you go back and look at The Beer Store’s asset sheets from 2014 to 2018, their occupancy cost has gone up by $11 million p.a., their operating cost is up by $9 million p.a, their salary and wages are up $14 million p.a. Overall, their expenses in 2018 were up $42 million from 2014. 

They are selling off assets to meet the MFA investment requirements, at least in the 2018 report. In 2018, they made $51 million in net proceeds doing that. The value of the land owned January 1, 2014 was $7.07 million down to $4.386 December 31, 2018. The value of the buildings owned January 1, 2014 was $106.64 million down to $74.747 million December 31, 2018. My suspicion is that their assets are significantly undervalued in terms of market rate. 

The Beer Store is stripping value from their capital assets in order to operate. Every time they do so, the cost of operations increases because even if they sell the land and lease it back, they are now paying a lease instead of accumulating property value. With a snowballing operations cost, the value of the chain will decrease annually indefinitely. If they expand grocery in 2025 and allow convenience stores sales, The Beer Store is going to be untenable from a retail perspective. Of course, that’s what the MFA was designed to do. It’s a graceful 10 year transition and we are at the mid-point.

In the meantime, the large brewers are taking advantage of the monopoly on 12 and 24 package sales by jacking up the price. Look for that to happen again real soon. They’re conditioned to do it March 1st. 

Licensee Sales

Did you know that just about every flagship brand from every craft brewery is cheaper than “Premium Brands” at the same volume. A keg of Budweiser is $352.50. This is completely insane, especially considering a keg of Steam Whistle is $299.95. Those prices include deposit.

Now, I imagine that someone somewhere is paying full price for kegs. And I imagine that there must be breweries who are not directly incentivizing sales. I’m going to suggest to you that incentivization has been a thing since the advent of industrial brewing and it probably isn’t going away. The problem on that front is the fog of war.

Incentivization is theoretically illegal, but the AGCO does not have the manpower to do anything about it. Investigations are performed on a complaint basis. So who is going to file a complaint? The licensee who’s being incentivized? The drinker who got a discounted happy hour pint? Breweries can’t complain about other breweries incentivizing, because it will almost certainly lead to a circular firing squad. Periodically, someone will come up with the idea that you could have a group of brewers who sign a pledge not to incentivize licensees. That’s a pact that would be broken day one because game theory. Also, since the people outside that group would continue to incentivize, it’s a great way to price yourself out of the market. 

It has led to something of a race to the bottom scenario. That said, if you believe Beer Canada’s packaging data, kegs really only account for 10% of total industry volume, and affordable pints really ought to be a draw. 

There are definitely things impacting sales. For one thing, housing costs. For another, and this was suggested to me the other day, one of the reasons you go to a bar is for food. If you can have ubereats or foodora or skip the dishes deliver the food to you, and you can have drinks delivered to you as well, why would you go to a bar? It would have to be pretty exceptional. 

I’ve noticed that the exceptional bars are doing fine. It’s less established properties doing less well. With commercial rents increasing and winter months being slow, things are hard. 

Small Brewers

It’s odd to think about, but just about every neighbourhood in Toronto has a brewery now. They have taprooms and they are competing with local licensees for custom. They have the advantages of the freshest beer possible, a continuous flow of new products, continuity of aesthetic and branding, high margins, and customizable events to draw in customers. In the last couple of months I’ve been to Avling, Stonehooker, Black Lab, Rorschach, and The Six. Four of those are doing pretty good business. They’re typically set up to be able to expand production if they want to, but realistically the core business model is set up to weather some of the difficulties the market is facing. 

Basically, we flipped the industry on its head in 35 years. Instead of top down volume sales of Blue and Canadian sold everywhere, there’s now a brewery in every neighbourhood with something for everyone. Some of them are expanding into the LCBO. As long as the core business is intact, why not?

Mid-Tier Brewers

Imagine you’re a mid tier brewer and you’re in both The Beer Store and Grocery. I think craft beer accounts for something like 2% of The Beer Store channel. You’re working really hard to sell a very small volume most of the time. With LCBO, you need to move something like two cases a month per store to retain your shelf space. Grocery is not any easier. 

Innovation will help a little. I mean things like the Muskoka Midnight Kettle series, which provides a rotating selection of one offs for licensees. The level of competition that exists is greater than ever, so having a gimmick helps. 

My sense is that Mid Tier Brewers are getting squeezed from both ends and that the projected volume growth most people were banking on has gone up in smoke. The export market is less viable as well, given that it’s not just all the towns in Ontario that have breweries. It’s more or less every neighbourhood in every major city worldwide. 

If you’re making more than 25,000 HL a year and you’re not an actual owner of The Beer Store, you’re currently working harder than ever for less result. 

Market Trends

• Hard Seltzer

Can we talk about Hard Seltzer for a moment? White Claw is outselling Budweiser in the USA. Budweiser and Bud Light have lost about 1.2 Canadas worth of annual volume sales since 2009, so it’s not as impressive as it would have been.  

White Claw is going to make a real impact in the Canadian market, especially because it is flanked by dozens of imitators looking to cash in on the trend. They’re low calorie and gluten free. People like that. 

Of course, the majority of the impact is going to be on mass produced brands like Bud Light, Coors Light, Miller Lite. A segment where people are looking for flavourful, low calorie options. White Claw isn’t a replacement for a hazy IPA. What it does mean is that last year’s 4% volume loss is going to continue. The mass produced brands make up a significant portion of the market. They’re going to be hurting. 

The thing that concerns me is the concept, antiquated as it is, of the Gateway Beer. People sort of start off on mass brands and then find their way to craft beer. In terms of drinking career and habituation, if you have people turn 19 and buy hard seltzer, do they make that leap? I guess we’ll see. 

• Legal Cannabis

For a while, I was worried about THC laden non-alcoholic beverages. It turns out that there is not enough retail market to make that anything. Waterloo Brewing put out a press release saying that they considered the total potential revenue from the segment to be about $150,000. That’s not enough for a downpayment on a house in Toronto. 

Because these beverages were going to exist and there was a non-zero possibility of people sending samples, I thought it would be responsible from a professional standpoint to try Cannabis before that happened. I got really good at video games for a week. Quite relaxing. I understand the appeal.

Also, from a price point perspective, you can get 15 capsules for about 12 dollars. Massively less expensive than bad beer, let alone good beer. And that’s at retail. At a bar? Forget about it.  Zero calories. Zero gluten. If you were a value conscious person with limited spending money, the appeal would be significant. I know anecdote isn’t data, but it seems to me like all the people doing analysis saying it isn’t having an effect on the beer market are extremely invested in having that not be the case.

• Non-Alcoholic Beer

I’ve never met a non-alcoholic beer I would actually purchase for my own consumption. Your mileage may vary. 

That said, it is having a moment. I’m not as worried about this trend. People drinking non-alcoholic beer at least have a taste for beer. It’s beer adjacent in a way that hard seltzer and pot aren’t. 

Summing Up

We’re in a fundamental re-ordering of the market which has been taking place since the MFA was signed in 2015.

In addition to the most competitive beer market Canada has ever seen, we’re facing demography which actually reduces the number of new consumers year over year. We’re facing legal cannabis, hard seltzer, and a burgeoning non-alcoholic segment taking some of those customers. The large brewers are charging more than they ever have to replace volume loss for the same products, the mid tier brewers are getting squeezed by their larger competitors (as is traditional) and the small brewers which are continuing to open. The Beer Store is pretty much on its way out in 2025, to be replaced by grocery and convenience which present their own series of challenges. On the way to that eventuality, industry volume decrease is going to continue but mostly from the largest players in the market. Also, if consumers were cocooning before due to delivery and streaming media, throwing the coronavirus on top of that to reinforce the behaviour is going to result in non-optimal outcomes. 

If you’re a small brewery, you should probably focus on differentiation rather than expansion. Imbue your brewery with meaning. Create projects that people can care about. Try to tap into some kind of zeitgeist. Express some personality. Draw people to you with events. Shore up the taproom and front-door sales. Get them to come to you. Consider banding together with other local breweries to draw money to you.

If you’ve a contract brewer with generic labels and your plan was to get purchased by the big brewers, that ship has sailed. If you’ve broken more or less even, you might consider getting out of contract brewing instead.   

We’ll have a better idea of what the industry looks like next month when Beer Canada’s stats come out for 2019. Until then, I’ll leave you with a question. If “Craft Beer” achieves a 25% market share, but does it in a market that is half the size it was a decade ago, is that still a victory?