All About Beer Magazine

Do you know what a SKU is? In the consumer goods industry, it is an abbreviation for stock keeping unit, and we pronounce it “skew.” A stock-keeping unit is just a very unfancy way of referring to a specific brand and package combination. In the beer industry, a brand would be Lagunitas IPA. A package would be a six-pack. A SKU would be a Lagunitas IPA six-pack, and it is assigned a specific bar code for scanning at the supermarket. Now you can bask in the glory of lording a new term over your friends at the bar. You’re welcome.

One of the greatest things about the craft beer renaissance is the almost endless variety of beers that are available in bars, restaurants, supermarkets, and liquor stores around the country. In most forward-thinking establishments, the choices of flavors and brands and styles is dizzying. It is a testament to the ability of the industry to adapt to what beer drinkers want today. It is also—for the industry—a royal pain in the ass.

Within the industry, the explosion of new brands and packages is called “SKU-mageddon.” Here’s why: The beer industry consists of the three-tier system: brewer, distributor and retailer. For all three, it is remarkably simpler and cheaper to brew, package, ship and retail 100 cases of Bud Light 12-pack cans than it is to ship 25 cases of Bud Light 12-packs, 25 cases of Blue Moon 12-packs, 25 cases of Fat Tire 12-packs and 25 cases of Corona 12-packs. That’s a vastly simplified example. Multiply that times 100 and you get my drift.

And the vast acceleration of SKUs is not the only change in the industry. We have gone from an industry of 4,000 distributors and 100 breweries selling 100 million barrels a year to an industry of 1,000 distributors and over 2,500 breweries selling over 200 million barrels (a barrel is the equivalent of two kegs, or 31 gallons). The top five brewers and importers currently sell over 90 percent of industry volume. The remaining 2,500-plus brewers share 10 percent. We have gone from a very limited number of SKUs to over 8,400. Meanwhile, as large grocery chains and big-box centers like Wal-Mart and Costco gain more and more of the nation’s grocery sales, we’re seeing a reduction in the number of independent outlets as well as a reduction in the number of bars.

So to reiterate: Many more breweries, many more brands and packages, selling much more volume of beer, through fewer distributors to fewer but larger retail outlets. Within that structure, we’re seeing more brewers coming out with more packages—craft brewers adding more brewing capacity like crazy as well as an average of one new brewery opening every day—but we’re not seeing the supermarket chains expand refrigerated shelf space at anywhere near the same rate. However, on the bar and restaurant side, we are seeing them add draft tap handles furiously to keep up with (and possibly exceed) the growth in keg varieties offered.

And then you have distribution. Distributors are mostly independently owned businesses that have been consolidating over the last 20 years and continuing to this day. There’s a common perception in the craft beer community that distribution capacity has not kept up with the pace of new craft brewers and brands. However, from where I sit, that simply does not reflect reality. As distributors have grown, they have become more technologically adept at being able to handle the tsunami of new SKUs. In addition, several craft-only niche distributors have popped up in certain markets to take up the slack.

Consider that one of the country’s largest beer distributors, Houston-based Silver Eagle Distributors, handled 400 SKUs five years ago. Today, the company handles over 1,300 SKUs among eight different distribution centers and is adding more every day.

As I mentioned before, one of the major bottlenecks in getting all those delicious brews into the consumers’ hands is the limited refrigerated shelf space in supermarkets and convenience stores. Thanks to Einstein’s law, two objects cannot occupy the same space at the same time, more’s the pity, so something has to give. And remember, keeping all the beer on the shelf fresh and rotated is an additional challenge.

Some retailers have opted to place slower-moving craft brands on the warm shelf, like red wine. The problem with that is many craft brands are unpasteurized, and storing them in ambient temperatures for any length of time can alter the taste of the beer, and not for the positive.

On the bar and restaurant side, we have the opposite problem. Many establishments have added so many draft taps—20, 50, 100 taps in one establishment is now not uncommon—that it becomes almost impossible to keep the beers that fill those taps fresh. And don’t get me started on keeping the lines clean. And in draft beer, it’s nearly all unpasteurized. Data firm GuestMetrics recently issued a report that while the number of craft beer brands sold in bars and restaurants grew about 22 percent in the first quarter 2013, craft beer volume grew only about 5 percent. In other words, we’re selling less beer per brand, which means less beer flowing per tap. That’s great for diversity and choice, but could be a red flag for beer quality on tap if the volume falls below a threshold.

“While we don’t necessarily see a shake-out in the near term, looking out at the next three to five years, the question will be the sustainability of the economics of a lot of the new entrants given the declining volume per available brand,” writes Bill Pecoriello of GuestMetrics.

It’s not just the explosion of new brewers and brands coming down the pike to watch out for, but also the amount of brewing capacity that is being built. You may have read about Sierra Nevada Brewing Co., New Belgium Brewing Co. and Oskar Blues Brewery building new breweries in Asheville, NC. Or Lagunitas building a new brewery in Chicago. Those are just the tip of the iceberg. Hundreds of other smaller breweries are a-building and expanding brewing capacity at a furious pace, not to mention the number of new breweries being built and coming online nearly every day.

If you slept through your Economics 101 class in college, here’s the one thing you need to know about excess manufacturing capacity in any industry with high fixed costs (like the beer industry): When demand doesn’t keep up with the building of manufacturing capacity, you end up with oversupply, and prices fall. You may say, “Hey, that’s a good thing.” But in the long term, it means many breweries will start losing money. The result is a flood of bad or old beer showing up in the market. It happened in 1998. Will it happen again? It all depends on whether beer demand keeps up with the fast pace of supply creating.

But hey, let’s not end on a sour note. The facts as they are today suggest that, yes, consumer demand for local, tasty, hand-crafted beer will meet or exceed supply. So far, so good. But the jury is out for 2014 and 2015.