Over the past few months, two of the largest craft brewers, Sierra Nevada and New Belgium, both announced plans to begin construction on new breweries in North Carolina. While many people view these expansions as large breweries getting larger, the breweries themselves feel the same way that the smaller brewers feel: like they are just trying to keep up.

Since the recent boom in craft beer began over five years ago, the market share of the large craft breweries has been declining. IRI Symphony recently reported that the first and second tier craft breweries lost 3.3% market share to the third and forth tier craft breweries in 2011, with the most coming from the first tier and the most going to the fourth tier. Therefore, from the perspective of the large breweries, they are growing but not in line with the rest of the industry.

The move to construct new breweries is a way to combat the declining share growth. As the chart below shows, which is based on estimates of publicly available data, both Sierra Nevada and New Belgium will see a declining market share over the next few years.

However, for Sierra Nevada in 2014 and New Belgium in 2015, the opening of new breweries will allow them to regain lost market share. Currently, both breweries are near capacity constraints, which prevents them from entering into new markets and seeking to rapidly increase sales. However, by building 300,000 and 400,000 annual capacity breweries, respectively, both companies have the ability to seek new opportunities for growth. In the mean time, look for small, start-up breweries capitalizing most on the industry expansion.

This is exactly at the heart of the nano brewery movement.

While there is no clear definition of a nano brewery, for the purpose of this post I will describe it as a brewery that produces less than 10 barrels per batch. Nano breweries spend a small amount of capital on brewing equipment and marketing. They tend to constantly brew new styles of beer, often experimenting with new ingredients and flavors. Basically, a legal homebrewing operation.

Just like a lean tech startup, nano breweries test out new recipes, figure out what customers like, and get rid of what doesn't work. With small batch sizes, this is a controlled risk that provides the brewery with real-time information of what customers want. Similarly, a nano brewery is a way to test out a brand and determine its wider appeal.

There are many benefits to launching a brewery with this type of model. First off, it is a low cost way of testing out a new brand or beer. Secondly, it can be done with limited personnel in a reasonable amount of time. Lastly, it is a great way to prove a concept before taking on outside investors or  debt, which is exactly what the nano brewery will have to do if it wants to reasonably expect to stay in business over a long period of time.

Outside capital is necessary because nano breweries are either not profitable or earn very little profit, making it nearly impossible to grow by reinvesting gains into the business. For a brewery to survive through business cycles it needs to establish a relatively stable customer base, which is hard to do while producing so little beer.

The idea of the Lean Startup is that it is a process for launching a company. Once a tech product is optimized, then additional capital should be spent on scale and marketing. This should be the same for nano breweries. Once a brewery proves out its concept, it needs to be prepared to take the business to the next level.

This is a much harder challenge for production breweries. First off, the biggest constraint is access to capital. It is very hard for craft breweries to grow organically, meaning reinvesting profits into expansion. While possible, it takes a much longer amount of time than an infusion of capital, whether that is an investment into the company or taking on debt. Secondly, production breweries face space constraints. At some point there will no longer be room for new fermentation tanks, and a brewery may have to move to a larger location. This process can take over a year to execute, requiring foresight on the part of the brewery. That bet, which is the third challenge of scale and expansion, really is the key issue faced by a brewery.

This is where a brewery’s strategy and goals really come into play. Every brewery should understand its mission before making a decision about scale and expansion. To continue to meet demand requires taking on added risk. If a brewery has the goal of expanding its distribution, has a long-term time horizon, and sees a realistic path for continued growth, then this risk probably make sense. If a brewery’s goal is to serve its local community, then it probably does not. This strategy should be understood well in advance: waiting too long to expand could lead to lost opportunities and missed sales, while spending precious capital if not part of the strategy will put a drag on the business. Managing growth is a difficult challenge, but one that brewers would rather face than not.

Source: 3floyds.com

Ever wonder why Sam Adams can charge $200 for a 24oz bottle of Utopias? Why Russian River beers fly off the shelves? And why thousands of people travel to Munster, Indiana every year to buy a beer called Dark Lord? While each of these breweries make unique and high-quality brews, the success of these beers relies upon the powers of influence.

Robert Cialdini is a Professor of Psychology and Marketing at Arizona State University, where he authored a book called “Influence: The Psychology of Persuasion.” In this work, Cialdini describes six principles of persuasion that lead people toward certain acts, including, spending a lot of time and money obtaining certain beers. Several of the principles apply to high-end craft beers:

1) Social proof: when people do things that they witness other people doing. In the case of craft beers, consumers see “beer geeks” spending time and money chasing certain beers; this leads more people to do the same. Sites such as ratebeer.com offer forums for reviewing  and discussing beers, enabling other beer consumers to quickly determine which beers are in high demand.

2) Scarcity: limited resources. Simply put, people want what they can’t have (or what is hard to get). By limiting production of certain beers, breweries are able to charge more and create hype about certain releases.

3) Authority: people respect authority figures. People like the Alstrom brothers of Beer Advocate are known for their knowledge of craft beer, and consumers tend to respect their opinions about beer. Thus, when they write on their site that Pliny the Elder is “one of the best DIPAs on planet Earth, ever,” it is no coincidence that consumers gain interest in purchasing the beer.

While these principles can be controlled to a varying extent by breweries, there are certain steps breweries can take to increase the demand for certain beers. Social media and grassroots marketing can lead to social proof. Limiting production provides a sense of scarcity. Highlighting positive reviews from known critics demonstrates validation of a product. Although these actions do not guarantee success, they do encourage increased demand, which of course can only be sustained with a great product.

There are three key implications for brewers regarding the seasonality of beer. First, prepare now for the summer rush. Last summer is still fresh on the mind, and there are key lessons that can be learned about what good decisions were made and what improvements should happen next year. Secondly, the winter is a great time to test out new recipes, hire employees, and expand capacity. Each of these proactive actions allows a brewery to capitalize on the peak selling-season by managing through complicated transitions before the summer chaos begins.

Finally, maximize the winter sales and hang onto valuable retail real estate. In total, winter and spring seasonals do not sell as well as summer and fall ones. However, the holiday season is a great time for the release of a winter seasonal beer. According to IRISymphony’s supermarket data, craft brands had dollar sales around the holiday season equivalent to dollar sales around Memorial Day and the 4th of July. Coupled with the fact that seasonals are the number one selling “style” of craft beer (outselling IPAs followed by Pale Ales), a well planned winter strategy enables brewers to maximize sales during the slow season.

Data Source: Brewers Association

Since 2005, once again, the craft volume and the number of craft breweries has taken off and new breweries are following. As of June 2011, the Brewers Association reported that 725 breweries were in the planning stages. If all of them open for business that is a 42% increase in the number of craft breweries. Now the key question is whether all of these craft breweries will survive.

On the positive side, this boom is different from 15 years ago. First off, consumer demand looks like it is hear to stay. Craft beer only makes up 5% of volume of the U.S. beer market – industry insiders predict that this can easily increase to 10 or 15% in a reasonable amount of time. Secondly, these new breweries are being started by homebrewers, people passionate about beer and who are dedicated to the industry.

The main challenge is what I call the Retail Real Estate Problem: even if demand continues to rise, there is a limit to the number of brands the market can handle. Bars only have a certain amount of room for new taps and supermarkets/convenience stores only have so much shelf space. Therefore, as consumer demand increases, the volume increase will come primarily from the breweries who can gain access to the existing real estate. With more and more breweries, that is going to be a tough challenge, especially for newer breweries. Of course new bars will open and beer stores will expand their shelving, but breweries need to develop business models and strategies based around this challenge.