Brewers Association economist pops all the ‘bubble’ talk

Bubble? No bubble? The Brewers Association tries to end the debate.

Bart Watson, Brewers Association (BA) economist, posted a blog on the BA website to make a fairly convincing argument against the so-called craft beer bubble debate. The potential for a craft beer bubble gets brought up a lot, inevitably, because the industry is, to use another buzz term, booming. So, if an industry is starting to take off, there must be another shoe to drop at some point, right?

According to Watson that’s wrong, at least insofar as what’s happening in the craft beer industry isn’t a bubble by the standard definition of the term:

A bubble is a period of overinvestment where asset prices aren’t aligned with reality.  In other words, people are betting on a future that won’t exist. What evidence is there that craft is in a similar situation; that brewers and investors are betting more than they should on a future that won’t exist?

Be sure to head to the blog to check out the chart showing the rise of the industry, which is essentially a fairly slow, steady rise, in contrast to the trendline of a “bubble” that shoots up.

There are definitely a lot more breweries now than even five years ago, but who is to say how many is too many, or when there has been an overinvestment in the industry? What would these numbers be based on?

There’s plenty of evidence that America can support a ton of new breweries.  Germany has 1,300 breweries, with a heck of a lot less people.  If the United States had the same number of breweries per capita (our population is over 3.8x bigger), that would mean 5,000 breweries.

And then there is the capacity point:

In 2009, production was at 66% of capacity.  In 2011, it was 78%.  If anything, this means there should be less fear of a bubble than in the late 2000s.

And what about how much market share the industry is starting to take? Watson does some interesting math there as well. Be sure to head to the BA website for the full argument.

Slowing growth or a rising rate of closings doesn’t mean a bubble has burst.  At a certain point, a growing base means that 10 or 15% volume growth becomes more and more difficult, as the same percentage rate requires a greater growth in barrels produced every year.  Similarly, a slowing rate of openings or increased closings should not be taken as a sign that the craft market is collapsing.  Think again about restaurants, how many close every year — does that mean we are in a restaurant bubble?  Although it is likely craft will reach a point (hopefully many years) down the road where volume percentage growth slows and closings equal openings, this is a sign of a mature marketplace rather than a bubble.