Cheers

Today we're breaking down the future of beer

May 22, 2022 Read in Browser TOGETHER WITH Hello and welcome to another Sunday Deep Dive. There’s plenty to cover today, but before we get into it, let’s talk about one of our favorite (and most popular) topics:  Investing. There are clearly many different ways to go about it. You, as a loyal Daily Upside subscriber are likely familiar with many of them. But one whose potential you might not fully appreciate is StartEngine.  For the uninitiated, StartEngine is a preeminent crowdfunding platform that’s revolutionizing the way startups raise capital. Thanks to what can only be described as a massive groundswell of interest from individual investors — the type we’ve written about for the last two years — StartEngine is on a roll:   The platform more than doubled its revenue profile in 2022 Nearly doubled its user base to 760,000 users* StartEngine has helped companies raise $550 million since it was founded** For a limited time, you have a chance to become an investor in StartEngine itself. Join Kevin O’Leary and other prominent founders and invest here.*** Now, on to the main event. The Business of Beer, Explained After water and tea, the third most popular drink in the world isn’t coffee or Coke or juice. And no, despite what you might see on Instagram, it’s definitely not White Claw. The third most popular drink in the world is beer. When the summer heat soon arrives, no one will be asking why. Short of a glass of cool, pure water, there is arguably no better way to refresh oneself on a sweltering afternoon than cracking open a cold one. Chemical tests by archeologists show humans have been brewing beer — steeping cereal grains in water and fermenting the sweet liquid they produce with yeast — for 7,000 years. It’s not just your grandpa’s favorite drink — it was likely your two-hundred-times-great-grandpa’s favorite drink — the younger one sipping his in comfy slippers, the older in Sumerian sandals.   (A Sumerian tablet recording beer rations given to workers in 3000 BC / The British Museum) The beer industry has had a cracking few years lately. While, at first, Covid seemed a crisis, some big firms have gone on to post record sales. Still, inflation and supply-chain woes are beginning to weigh heavily on craft brewers, the small-but-trendy up-and-comers favored by beer’s equivalent of wine snobs. And that’s what we’ll be looking at today — the state of the beer industry and its future potential. We won’t be going back as far as ancient Sumeria: if you want a class on beer’s long and winding history, feel free to audit college courses at Cornell, Vanderbilt, or the University of California Davis, and recapture the feeling of drinking a warm PBR at a dorm party. The Beer-Backed Economy Even if you think beer is the preferred beverage of boors, the economic punch of a pint is undeniable. Twenty-three million jobs — or 1 in every 110 jobs on earth — in industries as varied as farming, delivery, and retail are supported by the beer sector, according to a February report from Oxford Economics, one of the very first to attempt to assess beer’s global economic footprint. Only 9 million of those jobs were direct beer-industry jobs, showing how large beer’s footprint is across other segments. As for the industry’s contribution to the economy, it’s practically the size of a giant Heineken glass: Accounting for brewing, marketing, distribution, and sales of beer, the beer sector directly contributed $200 billion to global GDP in 2019 (slightly above the GDP of Hungary). Meanwhile, beer’s total economic impact — accounting for ancillary processes in farming and sourcing aluminum for cans — added $555 billion to global GDP.  “Our findings reveal that brewers are highly productive businesses that help raise average productivity across the entire global economy, meaning they have an extensive economic footprint that can make significant contributions to the recovery,” Pete Collings, Director of Economic Impact Consulting at Oxford Economics, wrote. Perfecting the Craft Okay, so beer is a big and important industry for the global economy. That’s not in doubt. But is it a growing industry? That’s slightly fuzzy, kind of like your brain the morning after one too many Modelos. Pre-pandemic, the US beer industry was in a bit of a slump. Consumption declined 2.8% from 2015 to 2018 as people sought to eliminate carbs, turned to popular diets like Whole30, or embraced teetotaling altogether. That led to a sales realignment of sorts: Sales of Bud Light, America’s most popular beer, fell 17% from 2012 to 2017, to $14.5 billion, according to Euromonitor International. Budweiser, Coors Lite, Miller Lite — three other leaders — also lost momentum.  But sales of low-carb beers soared — Michelob Ultra, which has 95 calories per 12-ounce bottle, shot up by 80% from 2014 to 2017 to $4.7 billion — as healthier options became more popular across the board. Sales of craft beer — that’s a premium product brewed in smaller batches, generally by smaller or independent breweries — rolled into the pandemic on a high note, growing 15% from 2015 to 2018, according to alcohol industry analytics firm IWSR, which studies global alcohol trends. But then came the sobering reality. In 2020, total beer sales by volume fell 3% — sales in the craft beer segment fell 9%. An economic analysis by the Beer Institute concluded that the pandemic led to a $20 billion drop in retail beer sales. While many were quick to stock up their home fridges, that rush couldn’t make up for the bars, taprooms, clubs, concert venues, and myriad other sales points. A record 346 craft breweries closed in the US in 2020. Before the pandemic, there were already concerns of oversaturation in the trendy space; the previous record of 294 closures was set in 2019. Recovery with a Grain of Salt: While 2021 saw a turnaround of sorts, with craft beer sales by volume rising 8% — compared to a 1% rise in overall beer sales — many of America’s 9,000 craft breweries are operating on slim margins as inflation has sent their material costs through the barrel’s roof. "Even with a bounce-back year, many breweries are still struggling," said Bart Watson, the Brewers Association’s chief economist, last month. "2022 is going to be a make-or-break year for many breweries." Watson said early data suggests closures are increasing this year, as rising costs, rising rents, and supply chain snarls weigh heavily. Avoiding a Nightmare: Flat Beer  While the story of craft beer is an inspiring one to the entrepreneurial spirit, the story of the beer business is about concentration and power: per Euromonitor, the top-five largest beer companies control 54% of the world’s market share. Beer consumption may rise and fall, and global economics may throw all kinds of haymakers at businesses, but the power these companies hold has afforded them the flexibility that craft brewers — and many other big corporations — simply don’t have. The power of consolidation has given big brewers the ability to raise prices to offset inflation, quickly pivot to capitalize on fast-moving consumer trends, or simply weather major economic hurdles (war, inflation, pandemic). As just one example of their collective might, brewers have raised prices at nearly twice the rate of the far-less-concentrated liquor industry, where the top five companies control only about a quarter of the global market. While consolidation is dandy for beer’s biggest players, the US Treasury asked the Justice Department earlier this year to study whether acquisitions of craft breweries by big brewers has hurt prices or stifled innovation in the country’s beer market. Companies to Watch No surprise, the companies to watch here are the beer giants. And in a year of economic turmoil, they’re doing… pretty darn well. Earlier this month, Belgium-based AB InBev — owner of Budweiser, Corona, and Stella Artois — reported 8% growth in revenue per hectoliter for the first three months of 2022, beating Wall Street expectations. In a year when markets are down big time, the company’s stock has fallen a negligible 3%. Netherlands-based Heineken — owner of Red Stripe, Sol, and, obviously, Heineken — also beat analysts’ estimates in the first quarter, posting a whopping net profit of €417 million ($450 million) compared to €168 million a year earlier. Like AB InBev, Heineken attributed the success to hiking prices, revenue growth, and recovery of the hospitality sector in Europe. At the same time, Heineken shares are down 7% this year. Last month, Denmark’s Carlsberg reported sales growth of 24%, double the rate analysts expected, to $2.1 billion in the first three months of the year. Like its competitors, the company shifted higher costs onto consumers, and suffered no discernable blowback. Carlsberg’s stock, however, is down 17% this year, mostly because it's the brewer most exposed to the Russian market. Carlsberg expects to record a $1.4 billion writedown as it exits the country. Chicago-based Molson Coors also handily walloped investor expectations in the first quarter, beating estimated earnings by 52% when it reported earnings per share of $0.29 earlier this month. Revenue of $2.2 billion topped analysts’ expectations. In 2021, the company notched its first annual revenue growth in a decade; since 2016, it has slashed debt by more than 40%. Molson’s stock is up 17% this year, a rare upward arrow in a sea of red. The Takeaway: In every case where beer companies have weathered financial turmoil better than the broader market this year, one common strength has emerged: the beer consumer, willing to pay extra in the face of record inflation. Beer remains the most popular alcohol among Americans, with 4 in 10 calling it their drink of choice, according to Gallup — a number that has held mostly steady for over 15 years. Overall, the global beer market is expected to grow at a compound annual growth rate of 3.7%, to $989 billion in 2028, according to Fortune Business Insights. That steady growth is a testament to a sector that is as mature as it gets. After all, how many industries can say their product has outlasted the Sumerian and Chinese dynasties, the Roman and British empires, as well as all 22 seasons of Cheers and Frasier? Brewers can. ***** A message from our sponsor: How Do Startups Actually Start Up? 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