Craft Beer and Wine at a Crossroads

Craft Beer and Wine at a CrossroadsI recently co-authored a research report on the craft beer industry with the good people at Frank Rimerman + Co.  It was published today (see press release below).

Our goal was to write about the craft beer industry from our perspective as wine industry advisors in order to provide an “outsider” perspective to people in the beer business and to educate wine industry people about the craft beer market. Hope you enjoy!

Click here to download the full report.

FOR RELEASE IMMEDIATELY:

Craft Beer Emerges as a Force
Frank, Rimerman + Co. LLP publishes a comprehensive research report on the craft beer industry: “Craft Beer and Wine at a Crossroads.”

St. Helena, CA, November 12, 2013

Frank, Rimerman + Co. LLP, a leading regional accounting and consulting firm, has teamed up with investment banker Ian Malone to publish a comprehensive research report on the emergence of craft beer as a force in the U.S. beverage alcohol market entitled “Craft Beer and Wine at a Crossroads.”

beer will change the world

From the authors’ perspective as experienced advisors to the wine industry with an emerging practice in craft beer, the report examines the parallels and key differences between the craft beer and ultra-premium wine industries and brings new perspectives to both industries. The report compares and contrasts craft beer and wine across a variety of dimensions including industry growth phases, market structure and dynamics, product, merchandising and marketing, packaging, distribution and production and raw ingredients.

Craft beer has grown dramatically over the past ten years. Not only has it become a direct category competitor to wine, but at $12 billion in retail sales, it is also now the same size as the ultra-premium ($14+/bottle) wine market. Other highlights from the report include:

  • Key factors contributing to craft beer’s growth include shifting demographics (the rise of the Millennials), consumers’ desire for quality, diversity and authenticity as well as unprecedented innovation in brewing, marketing and packaging.
  • Traditional domestic lager brands like Budweiser are experiencing massive volume declines, creating opportunities for craft beer (and wine) to increase market share as consumers seek more flavorful alternatives.
  • Beer is at least 15 years behind wine in “premiumization.” Given the immense size of the total U.S. beer market ($100 billion retail sales), there is room for tremendous growth in craft beer and wine if they can continue converting light lager consumers to more flavorful beer and wine.
  • The craft beer market in the U.S. should at least double in size from current levels since we believe it is still early days in beer’s “premiumization” cycle.
  • A number of factors combine to create an industry dynamic that is quite favorable to craft breweries, allowing them to effectively compete against the Big Two (Anheuser-Busch InBev and MillerCoors).
  • However, we also expect the Big Two to significantly expand the volume and variety of their “crafty” beer offerings.
  • If the wine industry is any indication, we believe there is substantial room for growth in the number of craft breweries and SKUs.
  • Craft brewers have many more packaging options than wine producers, giving them greater flexibility in how they position and price their products.

“Despite growing competition between craft beer and wine, we believe that both will thrive in the coming decade. Although they are fundamentally different in important ways, craft brewers can learn from the experience of the wine industry, and in turn, wineries can learn from the dynamic changes taking place in the beer industry, craft beer in particular,” says co-author Rob Morris, Director of Wine Business Services at Frank, Rimerman + Co. LLP.

For additional information and to obtain a free copy of this report, please visit
www.frankrimerman.com/industries/wine-industry-research.asp

we want beer

About Frank, Rimerman + Co. LLP
Frank, Rimerman + Co. LLP is one of the largest, locally-owned providers of accounting and consulting services in Northern California. The company’s clients range from individuals to some of the pioneering businesses in Silicon Valley, a spirit which Frank, Rimerman has embodied for over 60 years. With offices in Palo Alto, San Francisco, San Jose, and St. Helena, California, and in New York City, Frank, Rimerman partners with today’s innovators and leaders to meet its clients’ short-term needs and long-term financial goals. Frank, Rimerman has a dedicated Wine Business Services industry-focused practice which lists many wineries, vineyards, industry suppliers and industry trade organizations as clients. Frank, Rimerman produces original research on the business of wine and wine market trends, publishes a number of industry studies and provides business advisory services and conducts custom business research for individual companies, trade organizations and investors. For more information, visit www.frankrimerman.com.

About Ian Malone
Ian Malone specializes in advising companies in the wine and craft beer industries on mergers and acquisitions, corporate finance and other strategic matters. Most recently, Ian was a Senior Vice President at Global Wine Partners (GWP), where he advised numerous wine companies on mergers and acquisitions, corporate finance and other strategic matters. Ian was a key member of the team at GWP that advised Boulevard Brewing Company on its pending acquisition by Duvel Moortgat, one of the largest M&A transactions in the craft beer sector to date.

Contact:
Valerie Hensley
Frank, Rimerman + Co. LLP
(408) 279-5566
FAX: (408) 279-8284
vhensley@frankrimerman.com
www.frankrimerman.com

Is Income Inequality Good or Bad for the Wine Industry?

What will the wine industry look like in 50 years?

The first in a (potential) series of posts about the long-long-term future of the wine business.

Old sport, try this..

What will our society and economy look like in 50 years?1  That was the question posed in a recent public radio piece.  According to MIT professor Erik Brynjolfsson, the best case scenario is the average American will have most of their material needs provided for by advanced technology. But in the worst case scenario, 90% of Americans won’t be able to make a living wage, and they’ll be angry, while the top 0.1% gains enormous wealth.

So either we’ll live a life of leisure off the fruits of robot labor, or… most everyone will be destitute and rioting while our plutocrat masters2 keep us down.  Quite the range of outcomes!

Picture2

According to Brynjolfsson, if we find a way to fairly distribute the wealth created by advanced technology, everything will be OK (oh NPR!).3

But income inequality has been front and center in the public consciousness of late.  Obama says it is fraying our social fabric.  It’s the subject of vigorous debate between economists (actually The Economist and Greg Mankiw) about the “Great Gatsby Curve” (see below), among other things.

And it raises a serious question: is greater income inequality good or bad for the wine industry?

You might think greater income inequality is good for the high-end wine industry, the Harlans and Ch. Lafites of the world and not so good for the Barefoots and Cupcakes at the low to medium-end.  I don’t think it’s that simple.

The wine industry can grow by selling more volume or increasing price (or both).  Consider a thought exercise: income inequality at its most theoretical (and unrealistic) extreme, where all the wealth is concentrated in the hands of one person, would obviously be very bad for the wine business since that one lucky SOB who can afford wine can only consume so much of it.  Your bank account can be thousands or millions of times larger than mine, but your appetite for drinking wine probably isn’t and certainly just because you’re rich doesn’t mean you’ll necessarily want to spend ungodly amounts on wine.4

The other theoretical (and equally unrealistic) extreme, where everyone has the exact same income, probably wouldn’t be good for the wine business either, but it depends on the overall level of wealth.  If everyone were sufficiently wealthy to afford wine as an “everyday luxury”, it might be a great thing for wine revenues.  On the other hand, some amount of inequality is necessary to market luxury and ‘aspirational’ products.  In this world, like any other (former) luxury good, wine would no longer indicate social status but rather personality, eccentricity, culture.5

Clearly neither extreme will happen. The tricky part is finding the right balance.

What does the data show?

As one would expect, overall wine consumption is highly correlated (99%) to the overall level of income in the U.S.6

chart1

The overall wine industry in the U.S. and globally will most likely be significantly larger in 50 years than it is today.7  As long as the economy is significantly larger than it is today, the wine business will likely be too.

As for the high-end of the wine business, the reality is that its bread and butter is not billionaires or even 100 or 10 millionaires, it’s the professionals with expense accounts, the highly-paid tech workers Zuck employs, business owners celebrating a life event or accomplishment…

As long as the number of people who can afford high-end wine continues to grow, the fine wine industry will be in good shape.

The data seem to bear this out.  High-end wine consumption is highly correlated (99%) with the number of households earning over $150,000 a year.8

chart2

So let’s all root for more upper middle-class households who buy Sonoma Pinots and Napa Cabs!  However, the slowdown in the growth of $150K+ households since 2000 is worrisome.

The question then becomes, is the U.S. economy poised to create many more modestly-affluent households in the future? 

Income mobility is certainly one important factor that will help to grow the ranks of the modestly-affluent.  The children of poor families that reach the middle and upper class will probably drink more wine than their parents did.  Some argue that increasing income inequality in the U.S. is OK since income mobility is still strong.

Enter the “Great Gatsby Curve.”9

chart3

Unfortunately, as the curve illustrates, countries with high income inequality also have lower income mobility between generations, which is only logical really.  In the words of journalist Timothy Noah, “it’s harder to climb a ladder when the rungs are farther apart.”  The rung the high-end wine industry should care most about is probably that $150K / modestly-affluent rung, but it’s unclear what exactly this analysis means for the number of people who will rise above it.10

Further academic research is needed on the dynamics at the high-end of the wine business (it’d also be great if reliable data were captured at higher price segments), but if I had to guess, increasingly extreme income inequality would be, on balance, a bad thing for the wine industry.

Picture2So, what do you think the wine industry will look like in 50 years?


  1. Let me first say that if you were choosing a time period over which to prognosticate, 50 years is just about ideal.  Accountability?  Zero (I might still be alive, but by then who cares?!).  The possibilities?  Endless! 

  2. Who hopefully won’t be robots…                                

  3. I oversimplify. It’s a complex question about who the winners and losers will be in the economy of the future and the best set of policies to balance overall economic growth with economic equality. It pits capital vs. labor; high-skill labor vs. low-skill labor; “superstars” vs. the rest of us. Our institutions will play an important and delicate role balancing overall economic growth vs. evening the playing field between winners and losers. 

  4. Don’t know about you, but a lot of wealthy people I know drink a lot of cheap wine (Clos du Bois by the pallet!). 

  5. Your neighbor might collect first-edition comic books. You might collect Persian rugs or Vicuna sweaters. But you’d have to really be into those things because you’d have to forgo other “luxuries”. 

  6. Chart sources: Gomberg Fredrikson & World Top Incomes Database (http://topincomes.g-mond.parisschoolofeconomics.eu/). I use California producer revenue as proxy for U.S. wine sales. 

  7. For now let’s set aside Malthusian concerns about our ability to simply feed the world’s growing population.  Of course climate change has the potential to have major impacts on the wine industry, but that’s another topic entirely.   

  8. Sources: Gomberg Fredrikson & US Census Bureau ($150K in constant 2009 dollars).  

  9. Source: http://en.wikipedia.org/wiki/Great_Gatsby_Curve#cite_note-krueger1-1 

  10. In other words, if rising inequality mostly affects even higher rungs—if it becomes harder to climb from $300K to $1M or $1M to $10M, but no harder to rise from $50K to $150K, that would have a much different effect on the wine industry than the opposite.