Aluminum Tariffs, Aftermarket Equipment, and Packaging Trends in Maturing Craft Brew Market

Bart Watson, president and CEO of the Brewers AssociationPackaging World: What has the packaging equipment market looked like in an era where, for the first time in a while, we’re seeing consolidation and contraction?

Bart Watson, president and CEO of the Brewers Association: There are a lot of different factors at play. One of the clearest trends is that it's a tougher time to be an equipment manufacturer, that the secondary market for equipment is stronger, and people are looking there because there's a lot of value there right now. That takes multiple forms. We've long seen breweries “hermit crabbing,” where one leaves [a production and packaging location], and another one comes in [to take advantage of the existing equipment]. That trend continues. A lot of breweries look to just take over a space, and breweries with established brands do that a lot. They look for new spaces, but they don’t want to do full build outs anymore. They identify an area, wait for brewery to go out of business, and then they can move in. They can still customize to their own needs, but they don't have to go in with all new equipment. More operators have the patience to just wait to take over a space, rather than building everything custom.

What are these established breweries doing with their increased capacity, having taken over that capacity from an outgoing brewery?

At production breweries, the desire to build out new capacity is pretty low. When people are expanding, often they're doing so via contract or partner brewing, finding ways to gain that capacity with lower risk and lower capital expense. There’s just more secondary equipment out there, since closings have risen somewhat, and those prices have stayed low. When openings outpaced closings, you saw stainless was still holding its value incredibly well. There were times where banks would insure the stainless at low cost, because they knew they could get that back what people paid for it. Today, I hear there are some screaming deals out there of very cheap equipment. People are looking at the secondary market as opportunities for breweries who do want to expand, because there is a lot of equipment out there, and you can get at much better pricing.

That’s an interesting equipment dynamic. But even if the total number unique brewery brands or businesses is decreasing, the number of locations might be more static, and the total volume of beer sounds to be flat. Do I have that right?

Yeah. Most of the closings are still really small breweries. One of the transformations we've seen over the last decade or two is most of the breweries that open now are small tap rooms, brew pubs, and hospitality folks. In the grand scheme of capacity, they don't move the needle much. I think that's another reason we're seeing breweries, when they want to scale up, go with a partner [as private label brewer or contract packager] as opposed to building out their own big production brew house. That capacity exists already. It's much cheaper to test the market that way, than to build out a major facility and hope for the best. But generally, I don't think we've seen capacity change that much. There have been a few bigger facilities that have come off-line, but often their equipment disappears into the secondary market and reemerges with growing breweries. The capacity has been pretty stable in recent years.

Sounds like co-man, co-pack, and private label is a growing trend in craft brew. What does that landscape look like?

There are two flavors of contract brewing. There are breweries that are speciality-built for it. We saw a wave of that over the last five to 10 years. With breweries like Sleeping Giant here in Denver or Brew Hub in Florida, contract is their main market. But we've also seen breweries that have a lot of capacity lean into that fact, realizing they can use that capacity to produce for other people. And sometimes you see hybrids. Prost Brewing here in Colorado just built a big second facility, and it was built with the idea that they were going to make their own beers, but they were also going to have capacity to contract brew. A lot of the regional craft breweries who have had excess capacity have been looking for people to bring in, looking for partners, looking for people for whom they can brew. I think that's going to increasingly be part of the landscape going forward.

We’ve been beating the “shift to cans” drum for a few years, and now, cans are king. Some breweries have transitioned entirely away from bottles. Meanwhile, aluminum has been topsy turvy lately on several fronts. For starters, minimum order quantities (MOQs) for printed cans hit all-time highs during the pandemic. But now, those MOQs seem to be falling to more attainable quantities, even for smaller brewers. Is that the case, and if so, what do you make of this shift?

A lot of breweries had already found workarounds when those minimums (MOQs) went up. They might go through a broker, who might meet an MOQ, but the brewer only buys a chunk of that inventory. So really, brewers adapted their supply chains as those MOQs went up, and I don't think they’ve necessarily moved them back. Brewers have long memories, and when they get burned with the supply chain, they're wary to buy back in. But this coincided with craft brewers seeing some of the most challenged sales on package distribution. So you have winners and losers. There are brewers who have leaned back into getting printed cans where they can. It drives cost efficiencies, if you can do that versus a shrink or digitally printed can. But we've also seen brewers who have come down in volume with the overall market, so they don’t need as many cans. I remember telling this to can suppliers at the time [when their MOQs were high during the packaging-reliant pandemic years], ‘this is short-sighted, because you're reacting to a [pandemic era] blip in what the industry looks like, at least in terms of package sales. That's going to go back down.’ And that's exactly what happened. Suddenly, there was a lot of capacity available, and craft brewers have seen those package sales also decline. So that’s something else that has re-equilibrated.