Jordan: Do you know how far away from you your nearest brewery is? I have no idea where you live, of course, but I’m willing to bet the answer is a lot closer than it used to be. No matter where you live in Canada, and this goes for small towns of like 300 people in cities of more than 3 million, there is a craft brewery around the corner. Over the past decade, the rise of craft beer has actually been one of Canada’s biggest entrepreneurial success stories, but how long can that really last. As an example, there are four cool little indie breweries within walking distance from my house, and I love it, but I would have to be stupid to expect them all to still be thriving in five years, wouldn’t I? I mean, there has to be a limit to how much Canadians love their beer, right? I’m Jordan Heath-Rawlings. This is The Big Story. Stefanie Marotta writes for The Globe and Mail’s Report on Business. Hey, Stefanie.
Stefanie: Hi. Thanks for having me.
Jordan: No problem. We’re talking about one of my favorite topics. We had to do it.
Stefanie: You know, it’s something that– when I picked up the phone and said, I’m calling you to talk about beer, no one’s hung up on me.
Jordan: Amazing. Um. So start by putting into perspective, I guess, cause we’re going to talk about this whole industry, just how fast and big the rise of craft beer in Canada has been.
Stefanie: It’s been incredible. I think one of the reasons the story is resonating so much with people is because no matter where you are in the country, it seems like there’s a new craft brewery opening every month almost. It’s just skyrocketed. So the number of breweries over the last five years has more than doubled. So in 2015 we had 380 breweries across the country that is now at almost a thousand.
Jordan: That’s crazy.
Stefanie: It’s been astronomical. And really that growth looks very different depending on where you are in the country. So in Ontario, British Columbia, and Quebec, those have the most mature craft brew industries at the moment, and the between those three provinces, they make up more than 75% of all the craft breweries in the country. But that growth has really caught up in other regions as well. So last year, New Brunswick and Nova Scotia saw some of the fastest rates of new brewery openings in the country, but really Alberta led the charge on that. They saw a 60% increase from 70 breweries to 112 breweries.
Jordan: Year over year.
Stefanie: Year over year. So it’s been an incredible amount of growth. And when you have so many players coming into the market over just half a decade, the growth is just astounding.
Jordan: So how does that happen?
Stefanie: A part of that, a small part of it maybe is the cool factor.
Jordan: Sure.
Stefanie: You know, we all know that episode of How I Met your Mother, when Ted and Barney say that they want to open up a bar. It seems like a really fun place to be. But what’s really interesting is that when you actually get to go and speak with these brewers, they have the most incredible stories. These are lawyers and engineers and nurses and former labour workers who are leaving their careers to come into this burgeoning industry, and they’re starting off by brewering in their garages before they scale up to larger brick and mortar institutions. And they’re starting off in these communities that are really hungry for some economic development. So they’re creating jobs and they’re bringing money into the area. And that’s attracted a ton of investment. So from government investment arms, like the BDC, to private equity investors, a ton of money has been flowing into this because everyone wants a piece of this pie of on one end, the success story of of creating jobs in an economy that looks like what we’re in right now. And then on the other side, being able to say, that I own a piece of a brewery. That’s something really fun to say.
Jordan: Right, and so the government gets into it then because these breweries are popping up in neighborhoods that could use sources of jobs and economic development, and so they will give them startup money, essentially?
Stefanie: Yeah. Through a couple of different methods. So we’ve seen a lot of investment from, from governments into the sector. So last year we saw the federal government and the government of Ontario invest $1 million into 20 craft breweries in Ontario, and that’s in addition to a one point $6 million investment from 2016. Now, while that sounds like small amounts in isolation, we’re seeing a number of provincial governments across the country do exactly the same thing. And further that we’re seeing economic development arms like the BDC and the Atlantic Canada Opportunities Agency investing in craft breweries and providing them with startup loans. So when you put all of that together with a national scope, that’s a ton of money going into opening new breweries. And then on the flip side, we’ve seen a lot of private equity go into this as well. So oftentimes when breweries can no longer access government funding for whatever reason, it seems like a pretty easy thing to go out and find an angel investor or venture capitalist who, who wants to throw, you know, $1 million into, into a brewery.
Jordan: So this growth is kind of still happening this year as we’re talking?
Stefanie: Yeah. So the growth is expected to continue to climb. I was chatting with the Canadian Craft Brewers Association, and they expect another 200 craft breweries to open up this year alone. That’s a 20% increase year over year compared to the thousand that we currently have. So it’s, it’s just going to continue to rise.
Jordan: But there’s gotta be a tipping point, right? Like how much beer can Canadians reasonably consume. And I mean, that seems like a funny question, but it’s not like at some point we’re going to saturate the market, right?
Stefanie: Now I don’t doubt the Canadians can drink their fair share of beer at all. Um, but I’ve seen a number of industry watchers try and predict this tipping point and this moment where we’re going to hit peak craft beer. And I’ve had a lot of conversations with brewers. The people who fund them and brewery associations, and what I’m hearing across the board is that we are at this tipping point. So we’re seeing a number of craft breweries close get put up for sale or diversify away from craft beer altogether. And a large part of that is because Canadians are drinking less beer. We’re seeing it in the numbers. So 15 years ago, Canadians drank so much beer that beer sales made up for 50% of all alcohol sales in the country. Now it’s at a point where that’s only at 39% and that gradual decline is quickening. Now it’s not all doom and gloom. Canadians are still drinking beer just in different ways. So one bright spot is that Canadians do seem to be drinking more craft beer, even though beer sales are declining overall. So if we look at the LCBO, just to isolate that as an example, last year, craft beer sales increased 27% year over year. Now that is slower than the 40% increase that they saw the year before in 2018. So while they’re still seeing a spike, it’s beginning to slow down. And despite that big surge in people buying craft beer, it still only accounts for 10% of total beer sales at the LCBO.
Jordan: It certainly accounts for more than 10% of the shelf space now.
Stefanie: It does. Luckily for craft brewers, it does. A lot of liquor boards have been increasing their shelf space for craft breweries, little bits every year. Like the Nova Scotia Liquor Corporation, they’ve increased their craft beer shelf space from 27% last year to 32% this year. So we are seeing marginal increases. Um, and even at the LCBO, I think it’s about eight years ago, they, they, uh listed 33 different craft breweries, and now that’s increased to 180. The issue is that that falls far short from the 300 breweries that are in Ontario alone. So there are 120 breweries that can’t get listed. And even if you are listed, that doesn’t mean that you’re in every store across Ontario. Depending on how much beer you produce, you might only be able to get listed in two or three LCBOs within a certain distance from your store.
Jordan: So that speaks to something that I wanted to get at, because you talk about how startups for craft breweries are exploding and everybody wants to get into it, and it’s not that hard to get funding and get going. How difficult is it to sustain a craft brewery as a business? You know how many of these, uh, new breweries actually break even, make money?
Stefanie: Statistics Canada says that only 50% of the small to medium sized breweries in the country are profitable. And from speaking with brewers, it takes about five to seven years to start turning a profit. Now we’re at an interesting point in Canada’s beer industry because craft beer really started to grow about five years ago. So we’re just now hitting that point where craft brewers are starting to figure out whether they’re able to make ends meet. And what I’m seeing a lot of, something that I’m hearing their craft brewers are trying to do is they’re trying to get in on different segments that are growing faster than craft beer. So we’re at a point where consumers are moving away from beer and drinking more wine. They’re drinking more spirits, more ready to drink products. So I’m hearing brewers are getting into distilling. They’re getting into some of those fun seltzer products that are more low calorie and speak to a healthier lifestyle. So you’re starting to see little tweaks and you’re also seeing some brewers start to realize that maybe they can’t make this work after all.
Jordan: If part of the reason the government is so eager to invest in this industry is to sort of offer that jobs and local economics boost to so many of these places, what happens if that momentum stalls and you start to hit the point where it’s been five years for a number of these breweries and they’re not turning a profit, like how quickly could things turn downhill?
Stefanie: The beer industry in Canada creates 150,000 jobs, and it contributes $13 billion to Canada’s GDP. At the end of the day, that’s less than 1% of Canada’s economy, so not huge scale numbers, but in the communities and the neighborhoods where these breweries operate, that really matters. It’s a big deal. I spoke with a brewery out in Newfoundland and they, it’s called Port Rexton. It’s based in its namesake town, and it’s a town of only 340 people. But that region sees 80,000 tourists come into it every single year. So this brewery is growing just based off of the tourism that it sees us alone. And last year they were able to hire another 15 employees to help expand their operations. So in a town of 340 people, 15 jobs is a lot of jobs, especially when you don’t want to leave your community and you don’t want to leave your family. The numbers, while they may not be a huge part of Canada’s economy, for a lot of these communities, they’re incredibly important.
Jordan: Does that mean that the government will keep offering these opportunities to craft brewers, or is there a point at which that no longer makes sense given how many of them they’ve already, uh, helped get into business across the country?
Stefanie: I think it depends on where you’re putting the money. So if you are investing in opening new breweries, maybe that’s not the wisest place to be putting that funding at the moment. But if you’re using that money to help brewers expand their operations, like add new canning lines, diversify out of beer, and introduce new distillery products, or to invest in tax incentives such as the markups, which is the taxes that are charged to brewers for every liter of beer that they sell. By investing in those types of initiatives, you’ll be able to help the breweries that they’ve already helped open. So rather than seeing the number of breweries continue to climb, let’s see some regulatory changes that help the breweries that exist, grow and flourish and expand.
Jordan: How do they do that in terms of trying to take a bigger market share? Because as you mentioned, it sounds like a ton of breweries, but it’s still not that high a percentage of the beer that Canadians drink. Um. Is the end goal to siphon off more of the big breweries’ drinkers or to join them?
Stefanie: So this is where things get really interesting in this industry because it is full of people who put so much passion and care into their product. And it’s not like a tech startup or a software company who would love to be bought out by an Amazon or a Facebook.
Jordan: Sure. I made an app, give me some money and I’ll move on.
Stefanie: Exactly. Exactly. And in the craft beer industry, there’s a real loyalty to the idea of craft, and what being craft means. So what we’re seeing is a lot of these larger players like Molson Corps as an AB InBev, purchasing craft breweries. And being smart enough to let them stand on their own and keep their image and continue to market themselves as craft. But the consumers and the bar owners are recognizing that maybe they’re not really craft anymore.
Jordan: Give me a couple of examples for people who don’t follow this closely and might not know what they are now drinking.
Stefanie: This actually a couple of years ago, was even a surprise to me because I was a big fan of one of these beers. Um, so a couple of examples of Canadian craft breweries that have been bought up over the last little while. Um, Labatt which is owned by AB InBev, purchased, uh, Mill Street, which was a Toronto based brewery. Molson Coors purchased Le Trou du diable, which was a microbrewery in Quebec, and I believe it was two years ago, Sleeman’s, which is owned by Japanese giant Sapporo purchase Wild Rose, which is out in Calgary. Now in the case of Mill Street, I’ve heard so many interesting stories about how there were a lot of very passionate Toronto fans of Mill Street. We all know the brand. You recognize the can, you’ve probably seen it, a party or out at dinner, and once it was purchased, there were a lot of loyal craft drinkers of Mill Street who abandoned the product.
Jordan: Explain how that might happen because this is the other thing, right? Does it change how the beer is actually made? Or is Mill Street still Mill Street it’s just somebody else making the money from it?
Stefanie: It sounds like for the most part, they allow the brewery to continue to operate in silo. So they continue their operations as existed before they were purchased by the large brewery. But the concern that I’m hearing from the craft industry is at the end of the day, you don’t know what’s behind the curtain.
Jordan: Yeah.
Stefanie: Are they still getting the same quality hops? Are they still investing the same type of care and quality and take into the product as they were before? Or is there new owner telling them that they need to cut costs, see larger margins, they need to turn a bigger profit. That can all affect the quality of the beer. And you maybe wouldn’t even realize it over time. So it’s, it’s this idea, one of the quality of the beer, but then on the other end, it’s the acknowledgement that when you purchase one of those beers, that paycheck isn’t going to the local economy. It’s not going to a local entrepreneur, it’s going to Denver or it’s going to Belgium. And instead, craft beer loyalists would rather take that funding, take their wallets and turn them towards people who they know are craft brewers and that they know that if you’re going to that brewery down the street, the person who owns that brewery lives a few blocks away.
Jordan: Is there anything that’s being considered or anything, uh, other breweries are trying beyond the, uh, spirits and wine that you mentioned to kind of prepare for an inevitable slowdown or a drop in beer consumption?
Stefanie: Hmm. There have been a few breweries that I’ve heard of who they’ve closed down their brick and mortar operations, but they’ve just moved them to contract brewing sites. So these are our large warehouses where you’ll have a number of different breweries sharing the, the equipment to produce their products. That way you’re reducing your overhead. You’re not paying for this very large lease of space somewhere in a city or in a community. And it’s one way for you to continue to produce while reducing your costs. The unfortunate thing is that takes away this element of craft beer that makes it so desirable. So something that makes you want to go to a craft brewery is you get to walk in and you get to see the barrels where it’s produced, and you get to talk to the brew master and ask them for recommendations about what type of dish that that beer would go well with. It’s all part of that experience of feeling like you’re really getting to know the product. And when you take that away, it removes a little bit of the element of why people are so passionate about craft beer. Um, but it’s one of those things that some brewers are finding they just, they have to do it. There’s no other choice.
Jordan: What about legal pot? What’s that done to the industry? Cause I know we’ve talked about it on this show before, that almost every, uh, recreational consumption product has been impacted by the legalization.
Stefanie: It’s something that craft brewers are telling me, hasn’t really hit them yet. But when you look at some of the larger players, you’re seeing that they’re definitely taking it into consideration. So Molson Coors and AB InBev both reported earnings in, in October. And AB InBev interestingly, they reported flat beer sales, but they started reporting other that other segments, we’re going to be key parts of their growth, and part of that is cannabis products. And more so Molson Coors, they reported a pretty stark decline in beer sales. So it was, I believe it was a 3% decrease worldwide, but that decrease in Canada was almost 6%. So Molson ended up restrategizing, restructuring their corporate format. They’re going to be laying off almost 500 people in their North American operations. And even more interestingly, they’ve rebranded their name. So instead of being Molson Coors brewing company, as of this month there now Molson Coors beverage company, and that’s to emphasize their shift away from just beer to other products. And both Molson Coors and AB InBev have recently launched a partnerships with Canadian cannabis companies to start making things like cannabis infused drinks and, and different products. So you’re starting to see the large players make very large strategic investments in shifts towards that. So it may just be a matter of time before that trickles down to the craft brewers.
Jordan: Is that something that craft brewers are kind of nimble enough or have the infrastructure enough to do? I mean, I always wonder how businesses that are very small and often family owned and scattered across the country can compete with kind of these seismic shifts in consumption or in the products that people are choosing.
Stefanie: It’s very cost intensive to be able to make a shift like that. It’s not easy to just purchase the equipment that you would need to, to start distilling spirits or to start making cannabis products. So while you may be able to have enough nimbleness and agile on us to be able to shift away to one product, you can’t possibly be able to, to jump into every growing segment and have a piece of wine and ready-to-drink products and cannabis. Whereas these larger companies, at the end of the day, with their economies of scale, they can take the time to, to try out different options and invest in different endeavors. And I don’t know that a craft brewery would easily be able to pivot.
Jordan: Did you get a sense, as you were doing this reporting, of where is a reasonable place for the number of breweries or the scale of craft breweries in Canada to end up? What’s an actual healthy a craft brew industry look like?
Stefanie: You know, it’s, it’s interesting that you ask me that because when you speak to craft brewers no one wants to comment on, you know, the number of breweries opening up. Cause at the end of the day, they’re all friends. They’re all neighbors.
Jordan: Sure, you don’t want to say that half of these are going to be failing.
Stefanie: Exactly. You just don’t want to say that. And same thing with the associations. A lot of them say it’s a great thing that we have so many craft breweries because at the end of the day, consumers have more access to different types of amazing beer than they ever have before. And that’s true. And no one really wants to say we can’t have any more breweries open. I think it’s a little bit of, once you say, we don’t need that money anymore, stop investing in us, you worry that it’s going to go away completely. So you don’t want to completely disparage your industry, but that definitely conflicts with the narrative that everyone’s saying about how they’re concerned about market share and they’re not able to grow their own products.
Jordan: Right. And presumably, um, it’s when you stop seeing the willingness of angel investors and the government to back new breweries, that you start to feel like, okay, the people in charge of the money feel like this is unsustainable.
Stefanie: Yeah. And there are some really interesting things happening in the industry in regards to that. So one piece of this on the government side is I heard stories about, um, you know, for example, one brewery that wanted to open up in Nova Scotia. And I believe this was in 2016 and at the time there were only 30 breweries in that province, and they went to ACOA, the Atlantic Canada opportunities agency, to ask for funding. And at the time, a Koa said, the market is already oversaturated for craft breweries in the province. We’re not going to be lending much more money out for new breweries. Now that province has 60 breweries. So already in 2016 ACOA was saying there are too many breweries here for the province, and still that continue to increase. Then those same people who wanted to open a brewery there for reasons outside of brewing, they moved out to Newfoundland and once they got to Newfoundland where there were only four breweries, they thought, you know what? Let’s try this brewing thing again. And they ended up getting funding from ACOA and opened up their brewery. Now in Newfoundland, there are 19 breweries. So it really depends on where you are in the country and if there’s an opportunity. If you’re providing something new to the region that you’re in, if you’re adding value to the region that you’re in, that’s going to sway whether or not you get some of the government funding. Then on the private equity side, I’m hearing that a lot of craft brewers actually don’t want anything to do with private equity. It’s really interesting. It’s this hilarious idea of, no, no, I don’t want your money to help me with my business. I heard one story, I was out in, um, I was out in on the East coast in may, and I’m speaking with this one brewer and he, I got on the topic of private equity and he ended up making this comment of saying, you know, I can smell a venture capitalist from a mile away. And when I do, I tell him to get out of my brewery. But it’s this idea that external investment is going to change the quality of your product or it’s going to change how you’re able to do your business in the way that you think it should be done.
Jordan: That’s almost the last thing I wanted to ask you about. Cause you’ve kind of painted a great picture of these independent brewers who have principles and who believe in the future of their industry. They don’t want to say anybody’s going to fail because you know, the, it’s all a family and et cetera, et cetera. How close did any of them come to grappling with the reality of a saturated market? Because there are four craft breweries within a 10 minute walk of my house in the East end of Toronto, and for the same reason, there’s never going to be four grocery stores within a 10 minute walk of my house, or the city will not open four libraries within a 10 minute walk in my house, there’s a limited amount of business for these and surely they know that like 10 years from now, two of these guys are not going to be here.
Stefanie: There is, there’s this sense in the industry that there are those who are getting into it to create really high quality, unique products. And then there are those who are getting into it just because the money’s available, and just because it seems like a fun thing to do and the beer that they’re creating actually isn’t any good. Now that’s all up to opinion. But what’s really interesting is you’re seeing craft brewers who say that they’re in it for the artistry of the industry. You’re seeing them point to other brewers that are accepting a lot of external investment, are growing very, very quickly, are pushing out a ton of beer, but maybe that beer isn’t the highest quality product. So you’re seeing this little tension amongst craft brewers themselves of this divide between those who say that they are true craft brewers and those that would be identified as people who got into the industry just because it looked like fun.
Jordan: Thanks, Stefanie.
Stefanie: Thank you so much for having me.
Jordan: Stephanie Marotta’s report appeared in the Globe and Mail. That was The Big Story, if you would like more, including a startling lack of episodes about beer, you can head to thebigstorypodcast.ca. You can tell us what you think and name your favourite craft brew at @thebigstoryFPN on Twitter. You can also rate us and review us as long as you’re nice in whatever podcast player allows you to do so. Claire Brassard is the lead producer of The Big Story. Ryan Clarke and Stefanie Phillips are our associate producers. And Annalise Nielsen is our digital editor, and I’m Jordan Heath Rawlings. Thanks for listening. Have a great weekend. We’ll talk Monday.
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