Can craft-beer repeat wine's offshore success?

by Edwin Mitson / 26 September, 2016
With the craft-beer business exploding at home, Edwin Mitson looks at whether it can repeat wine’s offshore success.
Photo/Getty Images
Photo/Getty Images

The world of brewing and beer has had a shake-up in recent years from the rise of trendy craft beers, often made by tiny independent companies marketing their products with quirky labels and witty names.

The number of brewers has risen sharply, more hops are being planted and, as competition hots up, many are looking to export their product, as the wine industry began doing in earnest two or three decades ago.

Sales of traditional beer brands are flat, but craft beer sales are bucking that trend and have risen 35% in the past year, which has encouraged the establishment of new breweries: according to ANZ’s Craft Beer industry insight report, there were 39 New Zealand breweries in 2008; this year there are 168.

Consumers can now choose from 1500 brews with an alcoholic strength of more than 5%. The question of what defines craft beer is still controversial: craft labels’ share of domestic beer sales has grown to 15%, up from 9% three years ago, but some in the industry say if you dropped out foreign-owned brands such as Mac’s, Monteith’s, and Boundary Road, craft sales would only be about 5%.

Jason Crowe, business manager at Wellington’s Garage Project brewery, doesn’t like using the C word. “We just talk about making beer; we just want people to make better beer. We want more people to experience beer.” Last year, the Garage Project was named by Deloitte as the fastest-growing business in New Zealand.

The rise of craft has rekindled people’s interest in beer, says DB Breweries head of craft Grant Caunter. “If you’re a bigger brewer like us and you realise how important craft is to get people to reconsider the entire category, then it’s brilliant.”

Brands such as DB’s Monteith’s and Lion’s Mac’s act as a sort of halfway house, he says. “There’s a role for the big guys to provide the access to the category, and there’s a role for boutique, experimental brands to really push the boat out and drive their differentiation.”

Wellington-based Garage Project was last year named the country’s fastest-growing business.
Wellington-based Garage Project was last year named the country’s fastest-growing business.

Growing pains

However you want to define it, the New Zealand craft market is expanding, but it is likely to suffer growing pains, says Rob Simcic, who wrote the ANZ report. Increased competition brings its own challenges: supermarket shelf space is limited and growth will require more staff, manufacturing capacity and investment.

Wellington brewery ParrotDog recently raised $2 million in less than two days through crowdfunding to pay for its new Lyall Bay brewery, despite its prospectus noting an “inability to realise any great success in generating retail margin”. Prospective investors were told that in the past two years, its profit margin had fallen 15% to 45%, as it was forced to drop its prices to boost sales.

Setting a price point is particularly hard, says Christina Wood, from Auckland-based Liberty Brewing. The price has to be at a level that consumers are willing to pay, but volumes need to be high enough to make production viable for the brewer, she says.

ANZ’s Simcic says price points are under pressure; it seems that about $19.99 for six 330ml bottles is what marketers call a sweet spot. He warns that customers are more loyal to a style than a brand: pale ale, the most popular style by far, accounts for two-thirds of all New Zealand craft sales.

“Product differentiation is a genuine challenge in an increasingly crowded and competitive market,” he says.

Scale is also important. Industry veteran Doug Donelan, chief executive of NZ Hops, says it’s easy to go broke making good beer. “Brewing’s a volume game. [You need to] produce at an overhead you can get a margin on, that the distributor can get a margin on and the shop can get a margin on.”

The industry has already had some consolidation. Lion has bought two popular craft brewers: Dunedin-based Emerson in 2012 for $8 million and Upper Hutt-based Panhead Custom Ales this year for an undisclosed sum. Lion managing director Rory Glass says it’s not a case of little brewers against the big players. “Us versus them might make a good headline, but it’s very different from the way we view the industry and the relationships we have with customers, suppliers and other breweries.”

Garage Project’s Crowe predicts further consolidation, more “big beer buying little beer”. It raises issues about choice but “if good beer continues to grow under big beer money, that’s not necessarily a bad thing”.

Moa Brewing Company chief executive Geoff Ross recently told shareholders that the beer landscape is changing at a phenomenal rate. “Probably not since the consolidation of the regional breweries last century into the duopoly of Lion and DB has beer seen this type of change.”

Christina Wood of Liberty Brewing: setting a price point is particularly hard.
Christina Wood of Liberty Brewing: setting a price point is particularly hard.

Big increase in exports

But craft is, so to speak, still small beer. Lion’s Glass says the rest of the beer market is still five times as big and premium beer has three times the retail sales as craft beer. But the competition at home is boosting beer exports: a third of the craft-beer industry is exporting – to 49 countries – and a further third is considering it. Exports to Australia of higher-alcohol beers – typically craft – have risen to $2.2 million worth last year, up from just $600,000 in 2010.

The New Zealand beer industry can massively increase its export volume in the same way as the wine industry, whose exports are now valued at $1.56 billion, Glass says; he’d like focus on developing a strong New Zealand brand offshore. Moa’s Ross says some vineyards grew to be major players and others have stayed small, and that’s likely to be the same with New Zealand craft beer.

At this year’s launch of the ANZ craft beer report, former Labour Cabinet minister Fran Wilde said,“Twenty years ago, when I was chief executive of Trade New Zealand, we were having similar sorts of discussions with the wine sector. The beer sector has so much to offer.”

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