The last decade has seen an explosion of craft beer entrepreneurs in Canada, but with so many new microbreweries popping up, the market is quickly getting crowded. As overall beer sales decline, what do breweries need to remain viable and solvent while competing for a share of the beer market? We look at the market dynamics and challenges facing the microbrewery industry as well as what support is available to tackle them.
Beer enthusiasts have never had so much choice – as a result of the decade-long expansion of the craft beer industry, there are now more brewing facilities per capita than ever before in Canada, offering consumers a greater variety of suds. According to data from the Canadian Craft Brewers Association, there were 1,005 craft breweries in operation nationwide as of June 2019, with an additional 195 expected to open for business in 2020.
This success is appreciated by consumers, but this growth is also breeding anxiety. The market is showing signs of overcrowding, potentially putting at risk the stability and viability of new start-ups as well as more established microbreweries as they’re all vying for a share of a retreating consumer base. While beer still accounts for nearly 40% of total alcohol sales in Canada, data from Statistics Canada show there is a growing taste for wines and spirits.
The culture of beer drinking appears to be changing as Canadians are consuming less beer than in the past. Statistics from Beer Canada show beer sales fell 4% in 2019, the most significant drop since Prohibition. What may play in favour of craft breweries is that they tend to emphasize flavour over volume, providing a broader diversity of taste to satisfy consumers.
More than 90% of breweries in Canada are small, local operations producing less than 15,000 hectolitres (or about 176,000 cases of 24 12oz beers) a year. Rather than going toe-to-toe with the economies of scale of global beer companies, the success of microbreweries is based on producing authentic and quality brews, winning over consumers by introducing them to flavourful and innovative styles of beers. The margin for error in this market is slim as patrons may not give a bad product a second chance considering the wealth of other options available to them. Quality control is key to building and maintaining a loyal customer base.
In addition to offering customers flavourful beers, some craft breweries are trying to stand out by building an experience around their brews. Many are opening restaurants, fill-stations or tap rooms, even renting facilities for special events and creating social gatherings around beer tasting to bring customers to their products.
A significant number of craft beer start-ups have been created by home brew enthusiasts who wanted to turn their hobby into an enterprise. But establishing a new brewing operation requires considerable capital investment in the form of equipment like boil kettles and stainless-steel fermenters, as well as systems to facilitate processes such as mashing, sparging and bottling. Then there is also the cost of ingredients (e.g. malt and hops), as well as the human resources required to run the brewing operations. In addition, it often takes several years for a craft brewery to generate cash flow as a result of set up timelines as well as the time needed for licencing and establishing distribution channels.
Not everyone in craft beer has the same ambitions for their business, however. Some microbrewery owners run their operations part time as a side gig or hobby, some others are only looking to run a small brewing operation to earn a living for themselves or their family. But the hard truth is that only about 50% of all Canadian breweries are profitable, according to data from Statistics Canada.
Many microbreweries struggle to establish a good financial flow, and some end up in receivership as a result of heavy debt and limited revenue. In some instances, this is because they have adopted a “wing and prayer” approach to launching their enterprise, foregoing a business plan and sales strategy. With the right guidance, some manage to turn things around, finding a more stable footing in the market or making their business appealing enough to attract potential buyers or investors.
There are a number of challenges to growth that reinforce the tendency of craft brewers to stay small. Expanding into multiple provinces, for example, is difficult as it implies additional production and distribution costs. Most microbreweries, especially in places removed from highly populated urban areas, do not possess the means of transportation to distribute their product. Furthermore, the ability of microbreweries to expand in their own jurisdiction is also complicated or restrained by a simple fact of geography: Canadian population centres are often separated by great distances. Some microbreweries operate in communities that are not populous enough to sustain more than a limited number of craft beer establishments, limiting the potential for successful expansion at a local level.
Provincial tax and regulatory considerations come into play as well. In certain provinces, microbreweries are almost encouraged to remain small. For instance, Ontario has a tax system in place that can penalize breweries once they produce a certain volume of beer. This creates an issue when breweries that try to scale up cannot grow large enough to create economies of scale.
Then there is the challenge of getting products on store shelves. Shelf space is shrinking as more and more brews are making it to market, making it imperative to focus on gaining and keeping shelf space for established products. Yet many breweries prioritize new product development instead. In addition, the selling price is often dictated by stores or the provincial regulator. Liquor stores may choose not to purchase a craft beer that it feels is overpriced or too niche, as they are motivated by products that sell quickly with higher margins. As such, craft brewers may not be able to price to quality when selling to stores. That is why some only distribute their beer to local bars, or prefer to open their own taprooms or filling stations.
Whether you are a seasoned craft brewer, a new start-up or someone considering getting into the market, understanding the state of play – and how your business is performing within it – will help you remain viable and in control. For brewers concerned about current or future viability, here are some of the warning signs to look for:
Running microbrewery in the current market can be challenging, and you may find yourself struggling to keep the business on a stable financial path. Our specialists within Grant Thornton can help you gain insights and advise you on next steps.
Talk to us. We want to help you succeed – whatever your situation may be, we’re here to work with you to find the best solutions to meet your needs.
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