Craft beer update

Perspectives

Craft beer in Australia

Going from strength to strength

In a follow-up to our article on the emergence and rapid growth of the craft beer industry, despite the decline in Australia’s total beer consumption, this article looks at the trends in the craft beer market in the past two years.

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Craft beer in Australia – going from strength to strength

The production of craft beer in Australia has evolved from a small industry comprised of home-brew enthusiasts, to a large and rapidly growing industry with annual sales in excess of $370 million, growing at a rate of around 10% per year. Sales of craft beer represent an estimated 5%, and growing, of the total sales in the Australian beer market1.

In a 2014 Agribusiness Bulletin article Craft beer – bucking the trend in Australia, we explored the emergence and rapid growth of the craft beer industry despite an overall decline in Australia’s total beer consumption. In this article, we explore the trends in the craft beer market in the past two years. And while growth prospects are still strong, we also see some interesting emerging trends which could influence the future growth prospects for the industry.

Craft beer bucking the overall decline in beer consumption

In Australia, total per capita consumption of beer has been steadily declining since the mid-1970’s, as consumers have cut their alcohol intake and shifted their preference towards wine and spirits and more recently cider (see diagram 1 below). As a domestically-focussed industry, and with imported varieties remaining popular, this decline has had a significant impact on Australian beer production.

However, despite this downturn in per capita beer consumption, demand for craft beer has grown considerably in recent years, attracting a different demographic from traditional target markets. The growing popularity of craft beer has been attributed to younger generations living in inner-city areas2. This suggests that the transition from mainstream to craft beer could be a longer term generational shift with lasting implications, rather than a short term trend or temporary fad.

 

Per capita consumption of alcohol in Australia (litres of pure alcohol, per year)
Emergence of bigger producers – is it really “craft” beer?

The Australian beer industry is made up of around 350 brewers and microbreweries, up from 200 in 20133. While most new entrants have been smaller craft breweries, there is also a growing presence of some major beverage companies that have invested heavily in once-independent labels. Global beer giants Lion and SABMiller (soon to merge with AB Inbev) now own and distribute labels which represent over 50% of the craft beer market. Realising the growth and high-margin potential, these beverage companies have acquired some of Australia’s largest craft breweries and their labels, including Matilda Bay and Little Creatures.

Also, retailers have taken an interest in craft beers:

  • In 2012, Woolworths gained exclusive rights to sell Sail and Anchor, a Fremantle-based craft beer
  • Coles has also launched its own private label, Steamrail Ale4.

The growing concentration of the craft market is generating obstacles for smaller, independent craft brewers. In 2014, the ACCC began investigating supply arrangements that made it harder for smaller craft brewers to access the hospitality market, which represents around 30% of beer sales in Australia. The two major beer distributors have an estimated market share of around 85% of the total beer market in Australia, giving greater market power for exclusive arrangements with venues. The period of time taken by the ACCC in its investigation, which is still ongoing, has drawn the ire of some craft brewers who believe they have been locked out of bars and pubs as a result of these arrangements5.

Providing a boost for regional tourism and agribusiness

Despite the growing influence of global distributors, microbreweries and craft beer labels remain a valuable attraction to regional and rural Australia. Similar to wine, cheese and gourmet goods, many nationally-distributed Australian craft beer labels have strong ties to their place of origin. While this practice adds brand value to the beer, it also increases recognition of the place where the beer was brewed or where the ingredients were sourced. Additionally, microbreweries can become a food tourism drawcard for a growing number of regional areas, benefiting the local hospitality and retail venues that stock the product, as well as boosting the overall regional economies.

The growing appetite for craft beers also represents an opportunity for Australian producers of hops and barley. Unlike producers of mainstream beers, craft brewers demand specialty varieties of hops to create a differentiated product6. Hop producers in alpine regions of Victoria or Tasmania are reportedly benefitting from the craft beer movement – expanding farming operations to produce larger volumes and different varieties of hops7 including more aromatic and specialty regional varieties. Craft brewers are also demanding more specialised malt products, allowing grain growers and malters to differentiate their product and attract higher premiums. Craft beers tend to be richer in malt than mainstream beers, meaning greater demand for malt barley overall8. In May, GrainCorp announced strong half-yearly profit growth in its malting business, which they attributed (in part) to strong demand from the craft beer and distilling markets9.

Export potential

Although it is now a considerable size, the craft beer industry has relatively low exports at the moment. IBISworld estimates that exports represent around five percent of sales of Australian craft beer. One reason for is that craft beer is produced in smaller batches, meaning that many craft brewers don’t achieve the scale required to export cost-effectively. Furthermore, exporters face strong competition from local producers in markets where demand for craft beer is strong, such as the United States and Europe.

However, the growth of Asia’s middle class may present an opportunity for Australian craft brewers to expand into substantial new markets. Mountain Goat, a Melbourne-based craft brewery, has been exporting to Asian markets for over five years. Unlike most craft beers, Mountain Goat is canned (as well as bottled) to overcome some of the quality issues that can affect bottled beer when it is exported10.

Untapped potential

The increasing presence of large beverage companies in the space could cast a shadow over the traditional ‘craft’, while at the same time giving the industry (at least some of it) the potential to be produced on a larger scale and tap into export markets.

Yet the consumer desire for the tangible, authentic and local experience of local breweries with regionally-sourced ingredients is difficult to replicate en masse. The total number of regional micro-breweries still has a long way to go to catch up to the total number of wineries – suggesting potential for further regional growth. Whether the craft beer industry will continue to grow at the rapid rate observed in recent years will depend on support from the entire supply chain – from ingredient suppliers to distributors, and ultimately the consumer.

Authors

Dr Daniel Terrill

Robert Leith

Sources

1 IBIS world, Craft beer manufacturing in Australia, November 2015
2 Roy Morgan Research: Nothing Bitter about craft beer’s rising popularity, 2014
3 Good Food: Craft beer boom means heady days for Victorian hop growers, 24 February 2016
4 Choice Magazine (2014), Craft Beer: Who owns your favourite brew?
5 Australian Financial Review: Craft Brewers say ACCC’s gone flat, 18 July 2016 
6 Craft beer boom means heady days for Victorian hop growers, Good Food, 24 February 2016
7 ABC Rural, The expansion of the hop industry continues in Tasmania and Victoria, 20 April 2016 
8 http://www.theland.com.au/story/3604167/crafty-brewers-boost-barley/ 
9 The Australian, Graincorp shares fall as profit slides, May 2016
10 AEGIC, The Australian Craft Beer Revolution, February 2015

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