Tuesday, August 3, 2010

Beeronomics: Craft Brewers Alliance Buying Kona

The Portland Business Journal is reporting that the Craft Brewers Alliance (Read: Widmer/Redhook) is buying Kona Brewing Company.  Interesting.

This type of consolidation is not unexpected given the economics of the beer industry (read: economies of scale).  The economies are both internal to firms (brewhouse volume) and external to firms (distribution and marketing).  Obviously CBA believes that the latter will help both companies.  But is not just external economies.  Kona has made pretty amazing inroads in the mainland beer markets, and they do so by the way by contracting with US brewers to brew their beer and, you guessed it, Widmer is the contract brewer (and the Redhook facility is Portsmouth, NH is the other apparently).  So both internal and external economies of scale are huge drivers of the economics of beer and will continue to shape the craft brewing industry.

Which is why I anticipate the continued shake out of the industry.  Small packaging breweries are going to be constantly faced with pressure to expand or die.  It is just economics.  So I think you'll see that the only small brewers that remain are the brewpubs - who can package as well but it is the pub itself provides the stability.

Should be an interesting decade.


Sam said...

Is there room for the small "botique" brewery? Does it always have to be about growth? Can a compnay stay small and prosper? I guess the Anchor Steam sale was death knoll for the small but great company...

Patrick Emerson said...

Hair of the Dog is still going strong so the answer is yes. What I am saying is that the forces of scale economies are ever-present and will always make it hard for a small scale brewery to compete.

Unknown said...

While a small brewery might be able to survive due to premium pricing for outstanding quality, a very large percentage of the costs (relative to other industries) in brewing are fixed, so getting bigger will be the trend for a long time. Being able to continually lower the fixed cost per production item leads to increased profitability (all other factors equal of course).

That's right, isn't it Patrick?

PS - hope your mom gets well soon.

Patrick Emerson said...