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Economics of the Craft Beer Revolution: A Comparative International Perspective

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Economic Perspectives on Craft Beer

Abstract

This paper summarizes key insights that derive from a comparative analysis of the craft beer developments and the beer industry transformation in the various countries. Our paper starts with a discussion on the definition of craft beer (and microbreweries). First, we document when the craft beer movements started in the various countries, and how they have evolved. Then, we discuss the role of changes in demand, the role of pioneers in craft brewing, and what factors determined the re-emergence of small brewers. Some of the factors we discuss refer to the role of information, networks, regulation, capital, and technology markets. The last part of the paper concentrates on the reaction of the macro-brewers to the growth of the craft beer market.

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Notes

  1. 1.

    Pasteurization is a heat treatment during the packaging phase, which kills pathogens such that the beer is sterile. Micro-filtration is the phase in which the yeast particles in the fermenting mixture are removed. The purpose of these treatments is to increase the beer’s shelf life and to guarantee product consistency. On the other hand, these processes are responsible for flattening some organoleptic characteristics of “fragrance,” with a reduction in the beer’s flavor and aroma, thus contributing to the loss of a distinctive taste. Therefore, differently from craft beers, industrial beers tend to have a more homogeneous and less distinguishable taste (Eén 2010; Madsen et al. 2011).

  2. 2.

    The vast majority of TI beers started out being brewed by a “real craft” brewery, but not all. For example, in the USA, Blue Moon was developed at a small scale by Coors. In Belgium, some surviving smaller lager brewers reinvented themselves in the 1990s and 2000s as craft brewers by launching new beers.

  3. 3.

    In Italy, for example, there has been a discussion of whether contract brewers are craft brewers (i.e., birrificio artigianale) or not. The discussion reached the political arena, and according to a recent definition by the Italian Parliament, contract brewers are not considered “artisanal” (Garavaglia in Chap. 9).

  4. 4.

    Elzinga et al. (2015) and Tremblay and Tremblay (2005) discuss reasons for the decline in numbers and the increase in plant size of the surviving macrobrewers. See also Gokhale and Tremblay (2012).

  5. 5.

    Most of the takeovers were by Belgian company Interbrew, which later merged with Ambev and Anheuscher-Busch to form AB InBev.

  6. 6.

    The dotted line on the US graph in Fig. 1.1 is an extrapolation of the number of breweries just before (1912) and after prohibition, since brewing was banned during prohibition.

  7. 7.

    Many studies in the economic and marketing literature investigate how firms rely on consumers to develop new products and innovations. Prahalad and Ramaswamy (2004) claim that the role of the consumer in the economy has changed: consumers are connected, more informed, and active, rather than isolated and passive like years ago. The conventional process of value creation, where companies and consumers have distinct roles of production and consumption, has changed toward a co-creation interaction. Ahonen and Moore (2005) believe that consumers and their connected community activity “is the biggest change in business in 100 years.” Studies point to the role of experimental users and lead consumers in the development of new products. Lead consumers act as opinion leaders (Schreier et al. 2007).

  8. 8.

    Elzinga et al. (Chap. 2) explain that this was accomplished by using fewer hops and by replacing malt with adjuncts. In 2000, a barrel of beer in the USA was produced with 62% fewer hops and 21% less malt than in 1950. Craft brewers started using greater quantities of hops and barley malt.

  9. 9.

    Through the consumption of goods, consumers satisfy their wants and needs, but they also express themselves. Maslow’s famous hierarchy of needs pyramid describes how consumers are motivated by the satisfaction of needs in purchasing decisions (Maslow 1954). The largest and lowest levels of needs are related to physiological requirements for human survival (physiological and safety needs). With their physical needs satisfied, consumers move to the satisfaction of higher-order needs (love and belonging, esteem), toward the need for self-actualization. Through consumption of food, as well as other consumer goods, individuals aim at satisfying their needs: individuals use products to express who they are and the consumer–product relationship reflects crucial life themes and identity concerns (Fournier 1998). In this sense, consumers’ needs and values are “deflected” into consumption activities (Nicosia and Mayer 1976).

  10. 10.

    The growth of the California wine industry has similar characteristics. Delacroix and Solt (1988) claim that entrants to the wine industry in California were driven by a niche formation process. Swaminathan (1995) shows that in the American wine industry between 1941 and 1990, a gradual shift in consumer demand was initially satisfied by increasing imports of differentiated wine from continental European countries, and by the entry of microwineries, which started to produce specialized products.

  11. 11.

    For example, Chai and Moneta (2012) and Chai (2011) empirically investigate these effects and show that as household income rises, total household expenditure is distributed across different goods in an increasingly even manner, and over time there has been an acceleration in the rate at which household expenditure patterns become diversified as household income rises.

  12. 12.

    The evolution of industries through stages from a fragmented to a concentrated structure has been analyzed by different approaches in the economic literature. Among others, the “industry life cycle” explanations (Utterback and Suarez 1993; Klepper 1996, 1997; Horvath et al. 2001) refer to the emergence of a dominant design, the occurrence of technological innovations, and the exploitation of increasing returns in R&D as the main determinants in predicting a non-monotonic time path of the number of firms in an industry, thus explaining the dynamics of industry structures that from infancy mature and concentrate.

  13. 13.

    This “resource partitioning” explanation has found empirical support in many other industries, like the newspaper industry in the USA (Carroll 1985), the evolution of the US wine industry (Swaminathan 1995), the early American feature film industry from 1912 to 1929 (Mezias and Mezias, 2000), and the evolution of auditing firms in the Netherlands (Boone et al. 2000).

  14. 14.

    The best-known definition is from Porter (1979): “a strategic group is a group of firms in an industry following a similar or identical strategy regarding relevant dimensions.” Firms of the same strategic group are similar in terms of cost structure, organizational structure, marketing strategies, degree of product diversification, and the perceptions and preferences of individuals (McGee and Thomas 1986). McGee and Thomas report that the emergence of strategic groups may be related to some market-specific features, among which is the stage of the product life cycle.

  15. 15.

    The economic literature about the role of capabilities, knowledge, and prior experience of the founders of a new firm is vast. Helfat and Lieberman (2002) discuss the importance of pre-entry experience and knowledge in determining the mode and timing of entry, as well as the likelihood of survival of firms. Important sources of knowledge of new firms may come from the relation with incumbent firms, which often translates into a spin-off entry. Also, the founders of new firms have histories (Freeman 1986; Aldrich 1989) and the pre-entry experience of the founders determines the degree of similarity between the pre-entry firm’s resources and the required resource in the industry, thus influencing the success of entry (Helfat and Lieberman 2002).

  16. 16.

    Moreover, craft brewers complain in some countries (e.g., Italy, Slovakia) that wine producers benefit from an excise duty equal to 0, which represents discrimination against beer production.

  17. 17.

    One could argue that the craft brewers followed the so-called Judo economics strategy (Gelman and Salop 1983). Capacity limitation and small-scale entry signal friendly behavior to incumbent firms, which therefore may accommodate entry. Later, when the craft sector grew, the craft brewers had established themselves as a strong force within the market.

  18. 18.

    Probably the most famous case of conflict among craft and macro producers is related to the AB InBev advertising during the Super Bowl in the USA in 2015, when AB InBev used its marketing dollars to promote Budweiser at the expense of craft beer. The ad asserted that Budweiser is proud to be a macro beer that is brewed “the hard way” and compared Budweiser drinkers, played by young, attractive male and female actors, to craft beer drinkers, represented negatively as bearded snobs who sniff and sip “pumpkin peach ale,” rather than real beer (Elzinga et al. in Chap. 2). This ad caused a great deal of internet buzz. AB InBev’s strategy of intensifying rivalry was unusual, both because negative advertising goes against an industry tradition which refrained from negative advertisements on other companies’ beer, and because it criticized craft beer, at a time when the company had acquired several craft brewers and established a substantial portfolio in its “craft and specialty beer network.”

  19. 19.

    See Wall Street Journal (2015) at http://www.wsj.com/articles/craft-brewers-take-issue-with-ab-inbev-distribution-plan-1449227668.

  20. 20.

    See: http://www.cbc.ca/news/business/beer-craftbeer-bigbeer-brewery-hops-barley-labatt-molson-1.4202758 and http://www.beeradvocate.com/articles/16054/south-african-hop-importer-greg-crum-owner-of-ta-hops-on-ab-inbevs-monopoly/

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Appendix 1

Appendix 1

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Table 1.5 Number of Breweries, 2000–2015 (annual data)

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Garavaglia, C., Swinnen, J. (2018). Economics of the Craft Beer Revolution: A Comparative International Perspective. In: Garavaglia, C., Swinnen, J. (eds) Economic Perspectives on Craft Beer. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-58235-1_1

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