Niche Market Potential in the Craft Brewing Industry
By Chris Bastian, Debbie Oakley-Simpson, Dan Alsup, Dale Menkhaus,
Keywords: malt barley, processing, transportation, brewpubs
The Coors Brewing Company announced, in November of 1993, that it would no longer be contracting for malting barley in the Riverton area of Wyoming. This left approximately 95 growers with the need to find financially attractive crop alternatives to plant. Coors, since that time, also has changed the contract specifications, which made this crop less attractive to many Wyoming growers. Such changes have had a significant impact on the profits earned by irrigated crop farmers in Wyoming. Malting barley, particularly that contracted with Coors, has been a relatively profitable alternative that provides both cash flow in early fall and works well in sugar beet rotations. Contracts with major brewers reduced producers' risk compared to open market alternatives. Recent changes in contracts with major brewers, coupled with reduced demand for contracted barley, has left many Wyoming producers searching for production and marketing alternatives.
The Department of Agricultural and Applied Economics, along with the Wyoming Department of Agriculture and the Wyoming Business Council's Agriculture and Timber Marketing Division, cooperated to secure a USDA Federal-State Marketing Improvement Project grant to investigate the niche market potential of craft brewers for Wyoming malting barley. Specifically, the purpose of the project was to investigate the feasibility of marketing alternatives that would allow producers to target craft brewer preferences for malt made from Wyoming produced barley. The study was conducted in two phases. The first phase was a national survey of craft brewers eliciting their preferences for malt in the preparation of specialty beers. The second phase investigated the feasibility of selected marketing alternatives, which could capitalize on the needs and preferences of the craft brewing industry.
Craft Brewing and Malting Industries
Small establishments focusing on creating unique flavors or styles of beer characterize the craft brewing industry. Emphasis is on offering diverse products to a local customer base. Three categories of brewers typify the craft brewing industry - regional brewers, microbreweries, and brewpubs. The mass production of homogeneous products by megabreweries (production of more than 500,000 barrels per year) provides craft brewers with opportunities for niche marketing of differentiated beers.
Domestic per capita consumption of malt beverage declined from 24 gallons in 1990 to 23 gallons in 1992, while sales of specialty brews increased during the same period. Craft brewers hold a small share of the beer market - 1.2 percent of the beer market in 1994, increasing to about 3 percent in 1996. The share held by craft brewers is expected to reach 7 to 10 percent by the turn of the century. The total number of domestic specialty brewing companies exhibited a growth rate of 28.2 percent in 1996.
During 1997 we conducted a national malt needs and preferences survey of the craft brewing industry. Results reveal that craft brewers overwhelmingly prefer two-row malting barley to six-row malting barley. Important characteristics to craft brewers include a minimum amount of foreign matter and broken or damaged kernels, amount of extract yielded from malt, consistent kernel size, uniform grind, low moisture content, unique malt color, availability of technical support, an accurate malt analysis, recourse for poor malt, and malts unique to the craft brewing industry. These results suggest that niche marketing opportunities may exist for firms selling malt and malting barley. Large malt barley processing firms (maltsters) likely will not want to cater to the craft brewing segment. Unique marketing or coordination schemes between malting barley producers and maltsters (perhaps small) may be required to meet the specific needs of craft brewers.
The U.S. malting industry initially grew to meet the demands of megabrewers by building large scale facilities designed to produce mass quantities of malt that was often generic in nature. Currently the US malting industry is in the mature stage and has experienced consolidation. The number of malting firms went from 26 to 13 during 1980 through 1992. It has been estimated that there is an 81 percent utilization of US malting capacity according to a phone survey conducted by the Department of Agricultural and Applied Economics. Recent consolidation in the malting industry and excess capacity suggest competition is keen.
Three marketing alternatives, which might allow producers to capitalize on niche marketing opportunities, were explored in this study. These alternatives were building a malting plant in Wyoming, producers selling a custom malted product, and producers selling directly to a malting firm that is catering to the craft brewing industry.
A plant of 500,000 bushels annual capacity was determined necessary to capture a market share of 12.6 percent, based on information from our needs and preferences survey. The construction cost for this plant was estimated to be $6.2 million. The current craft brewing demand for malt will not support an optimum size plant (2.75 million bushels). Competition in the malt barley processing industry, potential market share, and the cost structure of the proposed plant suggest that offering a price premium to producers under this alternative will be unlikely.
Custom malting Wyoming barley and selling it as a Wyoming produced product has a potential of earning a comparatively favorable price for producers ($7.09/cwt. for the best case scenario analyzed and $4.15/cwt. under the worst scenario). These prices take into account added expenses including cleaning and grading the barley, transportation from the malt house to the bagger and the cost of bags. This alternative provides an opportunity to create a brand identity for Wyoming produced malt, which could result in a higher price. Selling malting barley directly to a malt house catering to craft brewers that would market the malt as their premium product would not bring as much to producers as the custom malting alternative, $5.92/cwt to $1.92/cwt., depending on the type of transportation used to get the barley to the processing facility. This alternative, however, reduces the complexity of the operation by placing the responsibilities of bagging and delivering the malt to the distributor on the malt house. This alternative would have the least amount of risk associated with it, which is offset by a lower price for the malting barley.
The changing nature of the brewing industry has created both problems and opportunities for Wyoming malting barley producers. The problems have occurred from the low cost competition of the megabrewers. This has caused a reduction in the lucrative contracts for premium malting barley. However, the sudden emergence of the craft brewing industry has given Wyoming malting barley producers possible marketing alternatives to earn a premium price for their product as compared to cash market prices. This premium price could be earned by meeting the needs of the craft brewers.
Chris T. Bastian is the Agricultural Marketing Specialist in the Department of Agricultural and Applied Economics at the University of Wyoming and a member of the Western Extension Marketing Committee. Debbie Oakley-Simpson, Dan Alsup, Dale Menkhaus, Donald McLeod are former graduate research assistants, Professor and Assistant Professor, respectively, in the Department of Agricultural and Applied Economics at the University of Wyoming.
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