THE ISSUE (ON THE LEFT): World trends favour market fragmentation
Is the proposed takeover of Banks Holdings Limited a threat to Barbados’ treasured Banks beer brand?
In the 2015 world of craft brewing, every week seems to bring news of a new acquisition or merger. Given this recent flurry of deals in the craft beer community, I’ve begun to hear a lot of musing about how consolidation of craft brewing is inevitable in the long run.
While forecasting the future is notoriously difficult, I think there are as many structural factors pushing against consolidation as there are factors pushing toward it. The larger brewer end of the beer market is already ridiculously consolidated. According to the Economic Census, the top four manufacturers in the brewing industry control 89.5 per cent of the market and the top eight control 91.5 per cent. Everyone is so used to concentration that it’s easy to forget that a concentration level like that is actually an anomaly, whether you’re talking about beer across the world or manufacturing in the United States (US).
For instance, the top eight firms currently control about 30 per cent of the German beer market. Looking within the US, if you use the Economic Census, the average for manufacturing industries is 48 per cent for the top eight firms, and the median is 46 per cent. For the top four, the average is 36 per cent and the median is only 34 per cent. This extreme brewery consolidation has caused what is known in the social sciences as an opportunity structure: large firms became so consolidated and focussed on the centre of the marketplace that it was inevitable smaller firms would come along to succeed in niches they were forgetting (localised products, diverse styles etc.).
Most of the academic literature about the genesis of craft brewing focuses on these niches, either from a social movement perspective or from a resource-partitioning viewpoint. In either case consolidation leads to commoditisation and commoditisation opens market spaces for businesses that differentiate.
The point of acquisitions by the large brewers is to try to close those niches, but that may be more difficult than they can imagine. Up to a certain point, getting bigger makes things more efficient. Economies of scale only work like they do in an economics textbook when every product is the same, regardless of the size of production. In the end, we can boil down the pushes and pulls of consolidation into two different (and somewhat opposing) factors: the value added of brewers remaining small, independent and local line up against the scale efficiencies from consolidation.
I believe that the advantages of being small – both in terms of value added and in terms of nimble market action – will lead to an increasingly fragmented rather than an increasingly consolidated industry. None of this considers secondary factors like wholesaler consolidation, regulatory changes, anti-trust concerns, or retail structure.
Although all of those matter, in the end, the beer lover is the final arbiter of the market, and the aggregated micro decisions about small and local versus scale will be the difference. Given the current trend in those decisions, I think fragmentation rather than consolidation is going to be the order of the day for quite some time.
Dr Bart Watson is chief economist, United States Brewers Association.