I quote a close friend: “Craft brewers must have a license to print money.” It was a statement uttered shortly after informing said friend about Cincinnati’s Fifty West Brewing’s $1.5 million expansion, which includes volleyball courts and a cycling business. It seems like every week we announce an exotic expansion or a how-is-that-even-possible success story — from the posh, new pub/restaurant/music venue/brewery that the folks at SLO Brew are building (replete with rentable lofts) to SweetWater Brewing’s announcement that it’s looking for not just one, but TWO new breweries to expand westward.

Sometimes, to the public, it must certainly appear that craft brewers are riding an unstoppable beer train of success (totally different from this snowpiercer), but is that perception a reality?

Just last week, San Diego-based Abnormal Beer Co., which has been brewing for only a whopping six months, announced a $1 million expansion investment to fulfill its growing demand, expanding its brewing facility and creating a private event space. In contrast to its nameplate, Abnormal Beer’s type of success doesn’t appear to be abnormal at all in the American brewing industry. Even historically, breweries have had an abnormal rate of success (perhaps a testament to our love of beer), according to what little info we could dig up on historical success and failure rates for breweries. We quote Bart Watson from the Brewers Association:

Here are the long term figures. Based on the 2013 data, 51.5 percent of the brewpubs and 76 percent of the microbreweries that have opened in the modern era (since 1980) are still open (so failure rates of 48.5 percent and 24 percent respectively). At first glance, this is a remarkable success story, far higher than rates for comparable industries/new businesses. One of the best studies I have seen on the restaurant industry found a 60 percent failure rate over a three-year period. These numbers also hint at the added complexity of running a brewpub, which essentially means running two businesses plus the synergies between them.

Let’s give that some perspective. According to the U.S. Bureau of Labor Statistics: About half of all new establishments (i.e. small businesses) survive five years or more and about one-third survive 10 years or more. After that, the probability of survival increases with a company’s age. So, that makes the numbers above exceedingly impressive — a little too impressive really.

“I might make the point that these historical rates are a guarantee of nothing, and that new entrants will have to work harder than ever to differentiate — particularly in places that already have a high density of breweries,” said Watson (when we asked for his latest insights). “I still agree with the statement that, for a while, openings actually created more opportunities — by introducing beer lovers to the concept of fully-flavored local beer and growing the market — but there are certainly some signs that era is ending in certain markets and that competition is increasing. I still think we have a lot of run room nationally. There are over 8,000 wineries in the United States, and Americans drink a lot more beer than wine.”

To give us perspective, Watson talks about “lagged rates” — comparing openings a few years back to closings a few years down the road. He gives us an example of a three-year lagged rate, and crunches all the numbers in this excellent chart, which takes total openings in 2010 compared with total closings in 2013:

Let’s start with the basics: Using this three-year lag period, the current lagged success rate of the brewpub category drops below 50%, to 43.9% … What about the micros? Interestingly, although the current three-year lagged success rate is still higher than brewpubs (57.5% versus 43.9%), the long-term average is virtually identical (53.5% vs 53.8%). … If we use the current success rate to think about future closures, the numbers are somewhat astounding. 836 breweries that we know of opened between 2010 and 2013. That means at a 57.5 percent three-year lagged success rate, you could use this to predict 356 micro closures by 2016.

Of course, that hasn’t happen yet, and growth continues while we wait (so grab a beer).

The new abnormal?

In September, the Brewers Association announced that the industry was now boasting 4,000 breweries in the United States. Those beautiful breweries are now located in more than 2,000 unique cities across all 50 states. That’s great, but how many have closed recently? Looking at info from the Craft Brewers Conference this year, there were 615 openings in 2014 vs. only 46 closings; 2013’s closings number was revised to 68. That’s crazy considering Watson’s insights above. Openings, in fact, are happening so quickly that we’re about to break the historical high of 4,131 breweries operating in the United States — a feat not broken since 1873 — a damn good year to drink beer. Is that sustainable? We point to a different CBB article:

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.

Depending on your market competition, there actually may be still plenty of room to open up a craft brewery. If we broke down craft brewing into two segments for argument’s sake — 1) brewpubs (restaurants that produce and serve over 25 percent of their beer on-site over the counter) and 2) microbreweries (which by contrast sell over 75 percent of their production in bottles or kegs that are distributed to restaurants, bars and retail vendors) — we might find where some market potential lies. We quote this interesting article on Priceonomics

The success of brewpubs over the last few decades has made it harder to launch a new brewpub. The success of brewpubs and microbreweries, however, appears to have made it easier to open a microbrewery. Bart Watson explained to us, “In the nineties if you went to a major retailer, they’d probably laugh in your face if you told them you had a microbrew.” Today though, “people have paved the path.” The establishment of craft beer culture by its pioneers has created a market of restaurants and retailers looking to sell the wares of new microbreweries. Without the distraction of running a restaurant, microbreweries can focus on their product. But as they sell at least 75% off-site, their success or failure revolves around distribution — their ability to get their beer to market in kegs for serving on draft in bars and restaurants, or sold in bottles or cans wholesale to retailers.

Interesting side note: The brewpub segment is up 20 percent recently. Wonder why? Click this link.

But economic trends (largely localized for new breweries) are tough to categorize. Take the case of aforementioned Abnormal Beer Co., which is not just a brewery, but also the Abnormal Wine Co. and The Cork & Craft Restaurant, based in Rancho Bernardo. Basically, it’s San Diego’s first craft brewery, urban winery and restaurant under one roof. We’re talking San Diego here — one of the most competitive beer/restaurant markets in the world. How are they succeeding?

“Our strategy and success stems from learning what makes the world’s craft beer market tick and applying that locally in San Diego,” said Elvin Lai, co-founder of Abnormal Beer. “We use that information to hone our skills to brew our own unique beers, engage the community we sell to and follow industry trends and large-scale investments. Essentially, we believe that if a company sets out to be the best and works to do so, that will be the outcome — and that’s what we’re in the process of doing. Playing to the advantage of being located in a business park, we have become the all-encompassing, one-stop shop that local beer enthusiasts, foodies, families, business professionals and locals alike are looking for.”

Success is certainly easier with a thorough plan, good product and untapped market. Speaking of which, let’s take a second to go over the numbers of this expansion. Abnormal Beer’s current fermentation capacity will grow from 80 barrels (bbls) to 440 bbls, increasing production by 550 percent. The expansion will add 2,000 square feet on to the existing 5,000-square-foot building, which also houses Abnormal Wine Co. and The Cork & Craft Restaurant. With the added space, Abnormal Beer Co. is enhancing its brewing facility with the following:

A hot liquor tank and cold liquor tank to increase the rate of production;

11 additional 30- and 40-bbl fermenters to keep up with demand and expand their reach of customers; and

A barrel-aging program for both sour and spirit barrel maturation.

It sounds like an awesome endeavor, and it’s already a successful one (for now). It’s just another example of how the dynamics behind the successes and failures of craft breweries in America have dramatically changed in the last 10 years. We hand the mic over to Watson in finale, who gives us two scenarios to think about for homework:

Scenario A. The new era of craft brewing is different and openings will no longer predict closings very well, this could be due to: Increasing consumer demand

More friendly regulatory environments

Breweries leaning the lessons from the 1990s

All of the above Scenario B. There is still a lagged relationship between openings and closings, but the timing has changed (i.e. breweries will close at similar rates but with a longer time period in between openings and closings).

Big ole thanks to Bart Watson for his help with this article. The guy’s clearly a rare beer brainiac, and we’re thankful he’s on our side.