New research undertaken by Plimsoll Publishing into the UK’s burgeoning brewing industry suggests that the recent spate of acquisitions of small craft breweries by multinational brewers could become an industry wide trend.
Over the last five years, the number of small UK breweries has risen by 64%, causing the marketplace to become overcrowded. The boom in small breweries has been in part due to tax breaks, introduced in 2002, but also due to a huge rise in the popularity of ‘craft’ beer produced by independent breweries.
However, Plimsoll’s latest research suggests these smaller breweries may face difficulties in the months to come.
David Pattison, senior analyst at financial intelligence provider Plimsoll Publishing, says: “The arrival of such a large number of small companies means that the brewing industry has become highly fragmented; 70% companies are run with less than £500k of investment.
“Costs are rising faster than sales and 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.”
One solution to the cash flow problems for smaller breweries is acquisition by larger firms. Many small breweries have taken up this option in recent months, with Aspall Cyder, Meantime and Camden Brewery seeking investment from Molson Coors, Asahi and Anheuser-Busch InBev respectively.
Room at the bar
“The crowded nature of the marketplace will lead to more small breweries seeking investment, and so with a large quantity of companies becoming available, prices may eventually stabilise,” continues David. “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 and 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 and boost profits.”
This approach may not prove fruitful, as 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; and as a result SIBA has introduced an ‘Assured Independent’ logo for what they designate genuine British craft beers.
Brewing up a storm
One option would be for a number of smaller breweries to team up in order to share resources.
David adds: “We have already seen a trend in the decrease of asset values, suggesting that companies are becoming leaner. But if a number of smaller breweries were to merge, share costs and resources, this could allow them to benefit from economies of scale, allowing them to raise more capital and ultimately become more competitive.”
Another advantage craft breweries have on their side is the millennial demographic. The YouGov report also found that craft beer is particularly popular among 25-34 year olds, offering the potential to harness social media, e-commerce, and even online delivery services to reach more customers.
The unabated pace in the number of new UK breweries opening up, coupled with recent news of pub closures across the UK, means the brewery industry may need to change tactics sooner rather than later in order to avoid a fragmented market, in which profits constantly diminish and companies become increasingly frail across the board.
This could cause a rapid rationalization in the industry, with the potential to see many breweries disappear.