The Craft Brewery Boom Is Over

SEE ALSO: Sunday Summary: Gearing Up for 55 Million Square Feet of Renewals

Trade organization the Brewers Association found that more than 385 breweries closed around the country in 2023, a record number that surpassed even the pandemic year of 2020.

“That’s a shock for the industry where we had extremely low closure rates,” Bart Watson, the chief economist for the Brewers Association, said during a recent webinar. 

Aside from offering drinkers an alternative to mass-produced lagers like Budweiser and Coors, these smaller, independent breweries were seen as a major shot in the arm to urban areas. They brought a hipness factor to an up-and-coming neighborhood — Brooklyn Brewery set up shop in Williamsburg, Brooklyn, long before do-it-yourself warehouse venues were replaced by multibillion-dollar media companies — and researchers have found breweries a key component in the revitalization of any downbeat downtown. That has led many deep-pocketed landlords to specifically seek out breweries as tenants for office or residential developments.

Now, many of these same breweries struggle to keep the mash tuns running as they face a myriad of issues, from the rising costs of ingredients to the changing habits of American drinkers. What’s more, some got saddled with onerous triple-net leases that put them on the hook for rising real estate taxes.

“There’s a variety of market forces happening all at once, but almost in slow motion,” said Laura Dierks, the co-founder and CEO of Interboro Spirits & Ales. “The patterns that might have played out from 2019 into 2021 were delayed by the impact of the pandemic.”

Interboro has been going since 2016, but it barely held on during the pandemic and eventually decided to close its East Williamsburg, Brooklyn, taproom and production facility at the end of December. And it wasn’t alone.

Big aLICe Brewing shuttered its taproom in its namesake neighborhood of Long Island City, Queens, in October. That same month in Rochester, N.Y., Roc Brewing completely went out of business after 12 years in operation. (Big aLICe and Roc did not respond to requests for comment.)

Even some of the biggest players in New York City were impacted. Coney Island Brewery, owned by the Boston Beer Company of Samuel Adams fame, closed its 1904 Surf Avenue taproom on Nov. 9 after nearly a decade in business.

“Given the seasonality of the area and the high costs associated with running a taproom, we have been unable to turn a profit at the Coney Island taproom for several years and we don’t see a path to profitability in the future,” a Boston Beer spokesperson said in a statement.

Similar tales have played out across the country — mainly in cities with an abundance of breweries — with stories in 2023 lamenting the loss of Pontoon Brewing in Atlanta; Tattered Flag Brewery & Still Works in Middletown, Pa.; and Dangerous Man in Minneapolis.

“The difference between the setting today and the setting pre-pandemic was that when a brewery closed in the pre-pandemic era, beer geeks usually assumed there was something fundamentally wrong with their product and their business model,” said Jim Vorel, a beer and spirits writer for the website Paste. “Now when one closes you cannot make that assumption. There are places closing that are making excellent beer. They don’t deserve to close.”

Perhaps the biggest shock to the industry was in July when the historic Anchor Brewing Company closed after 127 years in operation. The San Francisco brewery was the oldest craft beer maker in the country and a pioneer in the industry, but its Japanese owner eventually pulled the plug, citing the pandemic, inflation and the extremely competitive beer market.

“The bottom line is that Anchor ran out of money, and it ran out of time,” Anchor spokesperson Sam Singer told The New York Times in July. 

While Anchor’s closing was a blow to the city of San Francisco, its troubles weren’t all that different than the ones brewing in the rest of the industry.

“They’re not unique. There’s a lot of breweries in America that went through the pandemic and came out not very healthy,” Ken Grossman, co-founder of Sierra Nevada, another California brewery pioneer, said on a recent podcast. “The handwriting was on the wall.”

Many agreed, too, that the challenges confronting craft beer started to ferment before the pandemic but really kicked into high gear afterward. One of those challenges was craft beer’s stratospheric growth in recent years.

“The biggest challenge, candidly, has been overexpansion, and all of a sudden the market got saturated,” said John Coleman, the CEO of Artisanal Brewing Ventures, which owns brands like Sixpoint Brewery, Southern Tier Brewing Company and Victory Brewing. “The barriers to entry to be a craft brewer are pretty low. If you want to start, you can do it with a couple of hundred thousand dollars and you can set up a pretty good system.”

That complaint wouldn’t be one made in the late 1980s and early ’90s. After smaller, regional breweries around the country shuttered in the 1920s thanks to Prohibition, most beer that survived was churned out by giants such as Anheuser-Busch, Miller Brewing and Coors Brewing.

The craft beer revolution began in spurts with Anchor’s repositioning in 1965, followed by the openings of operations such as Sierra Nevada in 1978, Samuel Adams’ Boston Beer in 1984 and Brooklyn Brewery in 1988. The industry started to really grow in the 1990s before blowing up in the 2000s.

In 2006, the United States had just 1,460 breweries to its name, but that number jumped to 8,530 in 2019, according to the Brewers Association. Even after the brutal 2023, the country still boasts 9,500 beer makers.

For a spell, that number of breweries didn’t impact the industry much. There were still plenty of beer drinkers to go around, new customers picking up pints, and innovative styles of beers being discovered or rediscovered to keep longtime drinkers interested. However, with the industry’s growth stagnating, the motto of drinking local became a curse.

“A brewery that opened five to 10 years ago was a beneficiary of an attitude that they had stressed to their clientele to drink small, drink local,” Vorel said. “That benefits you for a time until one day there’s half a dozen smaller and more local breweries that are closer to your regular client than you are.”

The Brewers Association’s Watson said during the December webinar that the double-digit growth of 2014 and 2015 has ended. 

“The new normal is one — at least in volume sales — that craft has moved into a negative growth category,” Watson said.

Dwindling sales led to the production of craft beer falling for the first time starting in 2022, according to the Brewers Association. And shipments of all beer fell 5 percent in the first nine months of 2023 and were estimated to hit their lowest level in a quarter century by the end of the year, according to the Wall Street Journal. Some of that is due to an oversupply of suds sitting in warehouses, since brewers jump-started production in 2021 after choked supply chains hampered them in 2020.

A lot of it, too, has to do with the shifting habits of Americans. Fewer younger adults now appear to be regular drinkers, a shift from previous decades when they made up the majority of regular drinkers, according to a Gallup poll. And many of them aren’t reaching for more traditional beer styles such as German pilsners to quench their thirst.

“There’s not a lot of people coming to beer for the first time,” Vorel said. “The breweries that are trying to reach new customers are usually trying to do so with hazy IPAs, fruited sours, pastry stuff. They’re trying to reach people that think they don’t like beer.”

The breweries that have been able to survive in this have pivoted a bit. They no longer simply sling pints of their brews in taprooms but now offer wine, ciders and spirits, along with more food, to turn their taprooms into destinations. Call it experiential retail with a kick.

“It’s not enough anymore to just make great beer. The younger consumer is looking for other options,” said Paul Leone, executive director of the New York State Brewers Association (NYSBA). “Breweries need to adjust that in their taprooms.”

For craft beer drinkers, Vorel has seen many — including himself — start to expand out to other beverages. What attracted them to craft beer in the first place was the plethora of new styles to try. But as most breweries just rely on the hits, their customers have increasingly turned with an open mind to a burgeoning craft spirits industry, especially whiskey. Hard seltzer, too, barely existed as a beverage category 10 years ago. It’s a $6.5 billion market in the U.S. now, and is expected to nearly quadruple in the next several years, according to consultancy Precedence Research. 

“The core craft beer constituency that presumably still drinks beers also has slowly splintered off into wine, into spirits, into cocktails,” Vorel said. “I spend more time as a spirits writer today than I do as a beer writer.”

Aside from the stagnation of beer, Vorel also said it was an economic decision since the price divide between a four-pack of India pale ale and a bottle of bourbon has shrunk recently.

Part of that is simply the rising costs of doing business, Interboro’s Dierks said. Prices of ingredients and labor have shot up since the pandemic, and smaller breweries can’t buy grains and hops in enough bulk to get discounts. Another problem, Dierks said, is that many people who still regularly reach for beer started to shift away from high-alcohol, high-calorie beers like double IPAs, which also tend to have a better margin for brewers than other styles.

“We had a good margin on things like double IPAs and the market started to shift a little bit,” Dierks said. “People are drinking Skinnygirl Seltzer, they’re drinking different things with less calories.”

From the start, Interboro has produced canned cocktails, gin, amaro and whiskey. Even jumping into that growing market has been a challenge since the spirits industry has been dominated by massive players, with shelf space in liquor stores at a premium, and state and federal rules making it difficult to distribute around the country, Dierks said.

Then there’s the green elephant in the room. More and more cities and states have decriminalized cannabis in recent years and set up a legal way for people to buy weed without a medical marijuana card.

New York’s first legal dispensary opened in 2022 and the state closed out 2023 with $150 million of marijuana sold, Crain’s New York Business reported.

There’s been plenty of fear in the brewing industry that people will drink less alcohol as they smoke pot more — with some larger brands eyeing getting into the cannabis market themselves — but the Brewers Association has maintained the drug is not a bigger threat than wine or spirits.

The NYSBA’s Leone agreed with the Brewers Association and said New York breweries haven’t noticed cannabis sales cutting into their profits.

“The folks that choose to consume cannabis aren’t going to say, ‘I’m not going to have a drink,’ ” Leone said. “They tend to go hand in hand. And, in other states I’ve spoken to where it’s been legal for a long time, they’ve not seen it affect the industry.”

What has been an undeniable threat to the industry is real estate and debt.

With the average retail lease spanning 4.5 years and many ranging from five to 10 years, a number of breweries that signed deals during the boom times have been facing renewals for the first time in their history. For some, that has been the final nail in the coffin.

“Rent has gone up a lot in the past five to 10 years,” Watson said, who added that many of the breweries in his organization that closed blamed a lease renewal as the final straw. “Basically, the numbers work, and then they didn’t when the lease came due.”

Plus, plenty of breweries got saddled with expensive triple-net leases that made it even harder to stay afloat once times got tough, Dierks argued. A triple-net lease means the tenant has to foot the bill for real estate taxes as well as property maintenance and insurance.

Dierks had one for her 942 Grand Street location, but it became an albatross as the industry began to show signs of problems, with Interboro having to shell out more than $50,000 a year in real estate taxes on top of its rent and other business costs.

“That was manageable in 2018 and 2019,” Dierks said. “It got a little tighter in 2020 and 2021. Then you’re at 2023, and it’s just not feasible anymore.”

Also, ironically enough, the very urban renewal that breweries helped bring to their neighborhoods sometimes contributed to them later closing by making their areas that much more desirable, Leone said.

“If you look at certain neighborhoods in Brooklyn where breweries opened several years ago, nothing was happening and now all of a sudden there was a booming economy,” Leone said. “It becomes more difficult for them to pay a higher rent cost.”

The craft brewery boom coincided with a time when money was fairly easy to borrow, too, due to historically low interest rates, and there were plenty of private equity firms and bigger investors who wanted in on the growing industry.

That has shifted with interest rates rising and the beer industry cooling. Artisanal Brewing’s Coleman said his company often gets approached by smaller breweries looking to be acquired by his own, yet the deals quickly fall apart once he starts looking under their fermentors.

“You have a lot of folks that are in the marketplace and they’re not making a profit,” Coleman said. “They also have a lot of expenses, and you look at what’s going on with interest rates, they have to spend more of their free cash flow in dealing with their debt.”

While Coleman said it’s relatively inexpensive to start a small brewery, scaling up gets pricey fast. From hiring more staff and buying larger capacity brewing equipment to getting canning and packaging lines up and running, the costs add up.

“You have some folks out there that make really, really good beer, but that’s only part of it,” Coleman said. “You got to make great beer if you want to have a chance. There’s also the business of beer that can be very, very challenging.”

Dierks agreed. She said breweries where the owner basically does everything and pulls in about $1 million in revenue annually can be pretty sustainable for the entrepreneur to live on. However, once you get into the $1 million to $5 million revenue range, you need to hire staff to distribute more product, and that becomes an uphill battle.

“You’re sort of in this gulf where you need more than you have and you have to grow past and you have to get bigger,” Dierks said. “I think the growth opportunities are largely gone because scaling is hard.”

But plenty of people are still hanging on or getting into the industry.

Dierks’ Interboro won’t completely disappear from tap handles as it will move production to a shared facility upstate and eventually try to reopen a taproom in the city. Big aLICe still has locations in Brooklyn and Geneva, N.Y. 

The Brewers Association found that openings still outpace closures in the country, with more than 420 breweries debuting in 2023. In New York specifically, the numbers have remained relatively flat, despite a few well-known closures, Leone said.

“What we’re seeing now is not some sort of collapse or bubble bursting, but part of the overall development of our industry,” Watson, the Brewers Association chief economist, said. “[We’re] starting to see an evening out in the spike of breweries around the country.”

He also pointed out that visits to taprooms — where breweries can directly interact with customers and pull in the most profit — are still on the rise, although the number of return visits is down.

That’s one reason why Artisanal Brewing decided to expand Sixpoint’s retail reach. The brewery was founded out of a tiny spot in Red Hook, Brooklyn, in 2004 and Artisanal Brewing acquired it in 2018 for an undisclosed amount.

Since then, Sixpoint opened a small taproom inside the City Point BKLYN food hall in 2022 and ended 2023 by debuting a new, 7,500-square-foot taproom inside the Financial District’s Brookfield Place complex.

“We look at the opportunity to open these taprooms as building the brand in metro New York,” Coleman said. “From a foot traffic standpoint, there’s a tremendous amount of exposure [at Brookfield Place]. The folks that are living in the city have an opportunity to sample the beer, and then they go out and go home and go into Key Food or a local bodega and they decide to pick up our beer to share.”

Leone said more New York brewers have been following similar tactics. They’ve opened multiple taprooms and have focused heavily on offering more experiences inside, including events and games. Plus, the spaces are designed to draw passersby who might not even want a beer. “That’s really where they make their most revenues,” Leone said. “Distribution and retail are not growing at all, so breweries are looking to really focus on what they can control in their own taproom.”

Even with all the bitterness, and the acknowledgment that the United States might not reach past 10,000 breweries any time soon, Leone said that what’s happening now could be read as craft brewing getting in better shape.

“We’re seeing a stabilization of the industry,” he said. “It was never sustainable for an industry to grow 10, 8 or 5 percent every single year. At some point it’s going to stabilize, and I think that’s what’s happening.”

Nicholas Rizzi can be reached at nrizzi@commercialobserver.com.