JAMES MAPOSA: Is the party over for craft beer industry?

In 2019 we published a report on SA’s craft beer industry with the fundamentals pointing towards modest growth (five-year compound annual growth rate of 3%-4%) and a possible increase in the number of microbrewers during the 2019-24 period.

It was a time when consumers were fed up with the larger commercial brewers and were spending more on beer brewed by small, independent brewers.

However, even though the industry was growing at 40%-50% a year from 2015-2018, it still accounted for less than 2% of SA’s total beer market. From the larger commercial brewer’s perspective, there was an appreciation of changing purchasing trends, but from an actual numbers standpoint, it was not a threat that was being taken seriously. Still, microbrewing and brands such as Cape Brewing Company, RedRock, Jack Black, Mad Giant, Soweto Gold and Darling were now a part of some of the beer industry’s mainstream conversations.

That picture has changed drastically based on a few things. The Covid-19 national lockdown and four alcohol sales bans devastated the industry. Research by the Craft Brewers Association of SA in 2021 reported that about 7,400 jobs and R14.2bn in sales revenue were lost by the craft brewers’ industry due to lockdowns.

It was stated in another 2021 report that because of the alcohol bans, 70% of the country’s craft brewer’s industry were in danger of closing due to accumulated bad debts, inability to service loans, depleted savings and being unable to afford to pay rent for their brewing facilities. Due to the crisis, it is fair to assume that many microbrewers either closed their doors or sold what they could salvage (including entire business) to the larger commercial brewers — a commonly used industry tactic to maintain or gain market share.

The operating environment for craft brewers has continued to worsen over the last two years due to the energy crisis. Due to the increase in load-shed hours, sector production is being adversely affected. According to the Beer Association of SA (Basa), brewers need at least nine hours’ uninterrupted electricity supply to brew beer. This implies that above stage 3 load-shedding renders it impossible for beer brewers to run their operations successfully (per the standard).

Overall, Basa reported that craft beer production is down 25%-40%, while operational costs have increased 15%. For microbrewers that can afford it, one solution has been to invest in alternative energy sources but this too has added to the brewers’ financial strain as this additional cost is not passed on to the consumer, who has become increasingly price sensitive due to the country’s current economic environment.

Customer access

The industry is clearly under pressure, and it is the macroeconomic environment that is affecting the outcomes of the industry. Overcoming the macroeconomic challenges requires engagement with policymakers and other relevant stakeholders to facilitate first saving and then progressing the industry over the next few years.

The Western Cape now accounts for just more than half of the country’s microbrewers. Cape Town bylaws to a certain extent permit microbreweries to be set up in nonindustrial areas. Some of these microbrewers operate a pub and store at the front of the brewery.

This in a way benefits the brewer in terms of customer access and reduced distribution and operating costs (selling from source through the pub and restaurant plus bottled beer from the store). However, across other provinces the same does not apply and brewers need to invest in distribution and beer dispensing costs, which adds to operating costs and places pressure on margins.

A more harmonised and nationwide policy that benefits microbrewers across the various provinces should be considered. However, development of this policy should be well thought out and take all aspects into consideration (for instance, microbreweries with storefronts should not be established within a given distance from schools).

Consolidation

Consolidation is another aspect that industry participants should consider. Some of the microbrewers produce near break-even volumes of beer and a slight change in the economic environment could place them on the brink of closure. However, merging with other microbrewers could provide these brewers with the scale that enables them to collectively reduce unit operating and distribution costs.

Other benefits that could come with the consolidation include improvements in quality of product based on sharing and perfecting of brewing methods, working with a bigger balance sheet to secure financing to invest in upgrading plants to be more energy efficient, procuring backup power solutions and leveraging the larger business to reduce unit raw material costs. Consolidation in a way also contributes to a reduction in competition and avoids price wars that adversely affect business profitability.

Future sector growth will also be centred on raising awareness and market share within the mass market. Through innovative marketing, craft brewers should invest more in converting this segment into their main customers. Strategies can include running promotions that introduce and position respective brands, bottling beers in pour and share packages (660ml to 1.25l bottles) and investing in refrigeration units that are distributed across well-patronised establishments (within townships.

Strategic co-branding is another aspect that microbrewers can consider, including microbeers being associated with establishments, influencers and cuisine. Establishing a “cult” mass market following comes with the benefit of producing volumes that enable offering product at a more affordable price, which ultimately contributes to the business’ sustainability.

• Maposa is MD at strategic research and advisory consultancy Birguid.