A Cascade of Hop Innovation

At the American Hop Convention back in January 2018, conversation centered on an oversupply in the market. In visiting hop growers in Washington in late September, I was met with a significantly more positive assessment of the market, with an improving view of end-user demand and room for further investment in capacity. Drought conditions in Germany (especially lower alpha production) and the Czech Republic were widely cited as providing solid support to the US market.

Craft beer growth has been a major driver of demand growth for hops, but has settled into a mid single-digit volume growth range since 2016. While this is a decline from the double-digit growth earlier this decade, it is still one of the strongest-performing beverage categories. This craft volume growth provides a great base for hop grower expansion, as does the explosion in the number of brewers in the US and the degree to which innovation is necessary to stand out in such a crowded marketplace.

Innovation is the lifeblood of the entire beverage industry – and craft beer may exemplify this best. The number of entries and the excitement around the first year of the Hazy IPA category at the Great American Beer Festival is a recent example of how quickly things change. On the upstream end, the hop farm is positioned well to fuel the constant brewer/consumer need for innovation in two ways.

First, there is a direct innovation side, built around the cultivation and marketing of new, often exclusive, hop varieties. Hop growers and brokers have explicit programs to develop new hops – involving interplay between testing ‘grow-ability’ on the farm and ‘brew-ability’ for the potential customer. We saw that this effort is becoming increasingly professionalised and aided by a tighter feedback loop from brewers and consumers.

It is interesting to think about a beer market where hops play an even more central and visible role in beer industry innovation. Consumers that can identify hops are rare – likely because finding beers that loudly advertise its hop varieties are rare. Consumer appreciation of wine varietals, however, illustrates the fundamental consumer demand for knowledge of their drinks.

A more explicit connection between brewers and hop grower (with a direct sales relationship) can speed up this consumer education process. It’s a way to burnish brewing credentials, provide innovation, and highlight the natural aspects of beer. Hop growers understand the opportunity for hop innovation to drive beer innovation.

Equally noticeable from a trip around Yakima valley are the hop farms with their own branding, logos and merchandising, and prominently placed certifications (like Global GAP). For now, this branding is mostly just aimed at brewers, but it represents a strong move away from hops as a commodity, and we see room to bring this farm/hops branding to the consumer.

The second way that hops could potentially support beer innovation is by highlighting not just the variety of hop, but the region/farm/field where it was grown, both as a point of differentiation and to highlight its natural attributes. Playing up the hop farm side of beer plays well to so many consumer trends, understanding where ingredients come from, terroir, traceability.

Hops should be an equal partner in driving innovation, and the evidence we saw of tighter relationships between grower/broker/brewer are laying a good foundation. Little was mentioned of the large macrobrews in Washington, as the last ten years of hop expansion have been driven by craft beer. We detail the woes of the largest light lager brands in our recent note (Who can rescue mainstream US beer) and wonder if a beer market with increased hop and farm brand visibility could present any opportunity for macrobrewers to reorient their core lager brands towards more positive and natural imagery.