Should Craft Brewers Get Packing?

Beer consumption is falling in many markets as the Covid-19 virus spreads across the world. For brewers, this is causing problems, but it could open doors for contract manufacturers. On-premise beer sales have almost completely dried up, and sales that are occurring are happening in the off-trade. As a result, brewers that focus on the on-premise channel and only sell in draft formats (kegs, etc.) are at risk of being hit by both declining market volumes and loss of market share. To survive, they may need to reconsider packaging formats. Outsourcing packaging to contract manufacturers could provide a quick short-term solution during the current crisis, as well as help in the longer term with changing underlying market conditions.

European brewers of all sizes are struggling with changing market conditions and the effects of Covid-19 on their business. The disappearance of on-premise volumes can partly be mitigated through the off-trade channel, but for small brewers, this may require investments to change the packaging mix. That might be difficult, as the room for investments is currently limited. Brewers must also keep in mind that the effects of changes they make today are likely to have an impact on their business far beyond the duration of this crisis.

For some beverages, it is fairly straightforward to shift from on-trade to off-trade, as packaging is similar. For beer, the problem is more severe, as formats differ. In western Europe, 21% of total beer volume is distributed in tanks, kegs, or casks, but in Ireland and the UK, it is almost 50% (see Figure 1). While brewing giants are able to reorganize their packaging operations and shift significant volumes to cans and bottles, this is not possible for their smaller competitors. According to SIBA, the UK craft beer association, 80% of its members’ volume is packaged in kegs and casks. Their single-serve packaging capacity would have to increase fourfold if they want to sell all beer in cans and bottles.

Many brewers operate the entire downstream value chain, from brewing to distribution, in-house. Sometimes, they use partners, such as licensees or distributors. In either case, brewing and packaging are done by the same party at the same location. In the soft drinks industry, however, brand owners have been outsourcing their packaging to independent contract manufacturers for years. There are important benefits from outsourced packaging:

-Flexibility when volumes are unevenly distributed through time (e.g. Christmas or sport events)

-Cost efficiencies through economies of scale

-Improved company focus on core activities, outside packaging

Within soft drinks, the predominance of private label products has supported the growth of vibrant contract manufacturing platforms. Independent contract manufacturer Refresco, who initially created critical mass through its private label business, is today the largest soft drinks bottler in Europe. In the beer industry, however, the absence of significant private label volume has held the co-packing model back. Major brewers have economies of scale and have little need for contract manufacturers. Small craft brewers are still inefficient but have not felt the need to optimize their costs structures, as the sector was attracting massive inflows of investment. There were also technological challenges in the bulk transport of beer from brewery to bottling plants that limited the use of co-packers, but this is changing.

While the current crisis will eventually pass, it highlights a structural weakness of the craft beer industry. The segment is already underexposed to retail, and this could get worse. Retailers are now less eager to introduce new brands, and consumers are holding back on premiumization. While on-trade has served the craft industry well, it is susceptible to the risks of saturation, recession, and a ‘staying-in’ trend. Even before the crisis started, craft beer volume growth was slowing and brewers were advised to work together to improve their profitability.

By outsourcing packaging, craft brewers can focus all their efforts on increasing sales to retail. They won’t have the fixed costs associated with operating a large bottling operation, and they will be able to react quickly to opportunities and threats, rather than face delays when bottling capacity needs to be adjusted.

The bottling line must come to beer, or beer must come to the bottling line.

There are two ways in which brewers can outsource their packaging:

-Bring mobile canning lines to their brewery

-Transport beer to a contract manufacturer

Mobile canning lines are specifically designed to offer flexibility to craft brewers, and they are readily available. But operational risks (e.g. availability of cans, personnel, etc.) are high during this crisis. For brewers, mobile canning is also an expensive solution in the long term.

Contract manufacturing, meanwhile, is more established in the overall packaging industry and could provide a financially attractive long-term solution for craft brewers, provided it can adapt quickly to the demands of a new industry.

As the Covid-19 crisis temporarily shifts most beer consumption to the off-trade, craft brewers find themselves poorly positioned. Not only do they have high exposure to the on-trade, their main packaging formats are not transferable to retail. Rather than only focus on the crisis at hand, craft brewers are also advised to think about the longer term, as a recession and a continuation of the ‘staying-in’ trend could delay the on-trade rejuvenation. Apart from directing sales efforts to the off-trade, craft brewers must increase their single-serve packaging capacity. Investing in equipment will, however, be both time consuming and difficult, as financial resources are limited. High volatility means also that the risk of over- or underinvestment is high. Working with contract manufacturers could immediately help with the shift to the off-trade and also provide long-term flexibility to deal with the market uncertainty after the crisis abates.