CRAFT BREWING IN AUSTRALIA, 1979-2015 André Sammartino, Department of Management & Marketing, University of Melbourne, Parkville, AUSTRALIA [email protected] Forthcoming chapter in C. Garavaglia & J. Swinnen (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan Do not quote without permission of the author. Introduction Craft brewing is booming in Australia. The number of independent beer producers has leapt from just less than 100 in 2005 to over 350 by 2015.1 The path to this boom was slow and punctuated however. The mid-to-late 1980s saw an initial rush of craft beer start-ups, with 34 firms operating by 1990. Yet this was followed by a lull, such that the firm count had only crept up to 43 by 2000. As I will argue, partially this delay reflects a correction to the over-exuberance of the first wave of entrants. Only a small number of firms developed a viable business model, and even fewer a model for sustainable growth. What is particularly distinctive about Australia in the early days of craft, is that macro brewers often acquired the rare successful market entrants. In doing so, they also laid a key foundation for the eventual boom by easing mainstream access to gateway pseudo craft beers. The lull in craft beer start-ups from 1991 served an important purpose, as the smaller number of new players carved out more sustainable niches and set about building a community of co-evolving firms and consumers. The scene was set for the subsequent boom in a number of ways. As a result of the innovations of the pioneering craft brewers, and also greater exposure to imported beers, drinkers became more sophisticated and adventurous. This community of consumers and prospective entrepreneurs was nurtured and inspired through festivals and industry associations. Those willing to make the entrepreneurial leap faced a more amenable start-up environment. The skills and resources were more readily available in the form of employees within the early generations of breweries. A viable distribution system of retail outlets and sales agents slowly developed. Innovations also occurred in the entry form. While the initial entrants were a mix of small brewing operations and brewpubs, this second wave of start-ups includes a large number of gypsy operations – firms using excess capacity of fellow brewers – and this strategy appears to be facilitating much greater ease of access. This chapter explores this evolution by first setting the scene of the broader Australian beer industry. Extensive data are then introduced showcasing the entire 1 I use the term craft brewers to refer to smaller scale, independent beer-producing firms. These contrast with large scale macro beer companies. The term craft beer is a recent affectation (Hieronymus, 2015). Through much of the period of this study, such Australian firms have been known as mini-breweries, microbreweries or boutique brewers. The key defining characteristic is the independent ownership and control of the firm. 1 population of entrants into the craft segment over the period 1979-2015. Three distinct periods are examined with mini-case studies of various path breaking ventures. I draw lessons regarding the nature of entrepreneurial motivations, the interaction of various contextual factors in both eliciting and constraining growth, and demonstrate the diversity of viable business models that have emerged in this vibrant but still small segment of the Australian beer market. 2 The Broader Australian Beer Industry Beer was introduced to Australia with European settlement, and has been a persistent presence in the nation’s culture and economy ever since. Australia was the fourteenth largest beer market in the world by volume in 2000 (Euromonitor, 2015), bigger than the Czech Republic and Italy.3 The geographic isolation of the country, in particular the costliness of shipping beer across oceans to Australian drinkers, has historically precluded engagement with international markets. And for over 150 years the immense size of the continent and distances between major cities prevented even the emergence of national brewers. The Australian brewing industry did undergo considerable consolidation through the second half of the twentieth century however. While almost 1200 breweries, excluding the craft brewers discussed herein, have operated during the period since colonisation (i.e. the arrival of Australia’s first European settlers in 1788), by 1979 there were only eight breweries still in business (Deutscher, 2012: 353). These breweries were predominantly regional monopolists or duopolists, served principally their home state.4 The surviving firms had achieved economies of scale in production and transportation such that all smaller brewers had been either acquired by their bigger rivals or simply shut down over the preceding century. The remaining players had sustained and reinforced their advantages through 2 Estimates of the market share of craft beer in Australia in 2015 vary widely – from 4 to 8 percent. This discrepancy reflects (1) uncertainty about how to delineate the product from the producer (i.e. no requirement of independent ownership is consistently applied); and (2) a lack of any cooperative collection of aggregate data from across the beer market (unlike in the US, for example, where the Brewers Association collects and reports a league table of brewers). There is consensus that the segment is growing at the same time that overall beer sales are in persistent decline. 3 By 2014, Australia’s market ranking by volume had dropped to 22 (Euromonitor, 2015). Australians are typically ranked number one outside Europe in terms of per capita beer consumption (Colen & Swinnen, 2011), but this consumption has been in decline since the 1970s. Between 2009 and 2014, the per capita beer consumption dropped from 108 to 92.4 litres, the lowest level in over 50 years (Australian Bureau of Statistics (ABS), 2015). 4 Australia is made up of six states and two territories plus several small administrative regions. The eight brewers and their respective home states/dominant markets in 1979 were Carlton & United (Victoria), Cascade (Tasmania), Castlemaine Perkins (Queensland), Coopers and South Australian Brewing (both South Australia), Swan (Western Australia), Tooheys and Tooths (both New South Wales). Carlton & United did have also footholds in southern Queensland and the Northern Territory (Merrett, 1998). 2 continued expansion and modernisation of production, but equally important was the practice of tied pubs. Hotels, by far the biggest outlet for beer sales, were often locked into exclusive sale contracts with a single brewer. This practice coupled with price maintenance schemes encouraged a détente on encroachment across state borders and served as very effective barrier to new entrants (Merrett, 1998; Stubbs, 1999). Beer drinkers were typically exposed to very few choices, and presumed to be intensely loyal to state brands. This ecosystem became unstable however. Beer consumption had plateaued by the mid-1970s as cultural norms changed, and drinkers faced increased regulatory imposts and ever-rising sales taxes.5 New competition laws from 1974 on broke the ties binding pubs and the price maintenance schemes (Merrett, 1998). Relaxation of liquor licensing laws meant beer purchases were also increasingly through retail stores rather than pubs. The brewers were under pressure to sustain growth through grabs for market share. This opened up the prospect of cross-border incursions. An attack on Carlton & United Brewers’ (CUB) home market of Victoria by British brewer Courage, who set up a Melbourne brewery in 1968, had triggered an unprecedented investment in branding and advertising by the incumbent, crucial weapons for a national battle. This all set the scene for the consolidation to follow. 1979 saw the first of several interstate mergers and acquisitions, many fuelled by ambitious corporate raiders building debt-laden conglomerates. When the dust settled in the early-to-mid 1990s, there were two very large national players – CUB (known internationally as Foster’s Brewing) and the New Zealand-owned Lion Nathan.6 These two players often accounted for over 90 percent of national beer sales by volume for following two decades, with fortunes swinging back and forth between the two in terms of market predominance. Each firm had a full portfolio of mainstream beers, but was highly reliant on sales of barely distinguishable bland euro-lagers and, increasingly, low 5 Excise on beer is especially high in Australia. It represented the second largest source of indirect tax revenue in Australia after petrol taxes in 2008. For lower priced packaged macro beers, taxes can constitute almost half the retail price (IBISWorld, 2008). 6 Carlton & United (Victoria) had acquired Tooths by 1983 and Cascade in 1993. Tooths had acquired Courage in 1978. Castlemaine Perkins, Swan and Tooheys were merged by 1985 and acquired by Lion Nathan in 1990. Their Australian portfolio expanded to include South Australian Brewing in 1993. A secondary Tasmanian brewer Boags was spun out of Cascade in 1994 and run independently until acquired by Filipino brewer San Miguel in 2000. In 2007 Boags was sold to Lion Nathan. 3 alcohol variants.7 Through the 1990s and 2000s each also secured licensing deals to brew and import various international brands such as Stella Artois, Corona, Heineken, Budweiser, Carlsberg and Grolsch. Both also expanded internationally, with Foster’s at one point