Why are so many craft breweries closing?

So this article right here came into my inbox yesterday, and I was kind of shocked. This is the most, most high-profile craft brewery here in San Antonio, and it is declaring bankruptcy. And I was like, well, okay, maybe that's kind of a one-off. But then I thought back over some of the recent articles I've read, and there's a lot of these craft breweries closing down. They're either going bankrupt or just giving up the ghost or selling for pennies on the dollar. And there's been some high-profile ones as well. Anchor Brewing, which was kind of one of the original craft breweries out in San Francisco, very famous, basically had to sell out to a rich billionaire who bought it as a hobby. He's the Greek entrepreneur, Greek-American entrepreneur who started Chobani, you know, that funky yogurt that you can get in little plastic cups. Anyway, so I saw this and I was like, man, this is weird. Like, what's going on in this industry? And I went and looked at the numbers and 2024 was an interesting turn in the craft brewing industry. And if you think about craft brewing, think about it as the opposite of Budweiser, right? It's small batch, flavorful, done by, you know, folks with beards in Portland, right? Like in and around you. Like that's what craft brewing is. And for the first time in the craft brewing industry, we saw more brewpubs close than open and more craft breweries close than open. So last year, by the numbers in 2024, 399 of these breweries closed versus only 335 opening up. I said, well, okay, like the industry is turning and going down. Then I went and looked at another number, which was what does consumption and purchase of craft brewing look like? And it turned out the volume was actually flat year over year, like the same number of barrels or bottles of craft brews were sold as year over year, and revenue was just down slightly. So super weird, like Why are so many craft breweries closing when the industry is relatively flat? Like, what's going on? Like, that's a weird dichotomy that we're suddenly seeing a big turn in what's going on with the industry. So this video is about what we can learn from this as entrepreneurs. I'll tell the story about how we got here and why this is happening. Turns out this is a really weird situation with what's going on in the industry, and a lot of it ties back to the history of craft brewing and how the whole industry works. So that's what this video is about. Stay tuned. Hey, my name's Michael. Uh, I have a channel here where I go through and talk about concepts in the world of business. Uh, I am a business nerd. Uh, I have started multiple businesses, hired hundreds of people, uh, had wins, had some L's, and learned some lessons along the way. Uh, and hopefully these videos help other folks who are on the same journey that I've been on for the past 30 years to be entrepreneurs and making stuff, all that other people want to buy, and it helps the world make a bit of a better place through commerce. So if you're interested in that sort of stuff, uh, I'd love it if you could subscribe. And I also send out a weekly newsletter that's totally free that teaches you stuff about business and that sort of thing, uh, all in a fun package that, uh, hopefully is as entertaining as it is educational. So do me a solid and, uh, subscribe to one or both. So what's happening today dates back to some stuff that happened in the 1970s, believe it or not. And before 1978, the vast majority of beer production and therefore consumption in the US came from kind of what you imagine from the Budweiser, Anheuser-Busch, Coors Miller Lite model of brewing, right? They would build these huge giant factory brewing operations. They would bottle beer, put it in cans, Call it, you know, Miller Lite or Budweiser. And they all were kind of just boring, basic American-style tasteless lagers. And before 1978, this was the way things worked, mostly because of regulatory things. You know, 93% of the market before 1978 was cornered by the top 10 producers of beer, and everything went along really well there. Until President Jimmy Carter came along and changed the rules by pushing through a bill that basically allowed small-scale and homebrewing to exist as a thing. And what that did was it started an explosion of people who suddenly understood how the ideas of brewing and that sort of thing could happen, and they were doing it at their house. So what this rule did was unleash upon the United States society thousands of kind of nerds and hobbyists who were suddenly, well, very good at brewing beer. And like most hobbyists do, they're a curious bunch and they start to explore the world of brewing and how beer is made and all that kind of stuff. Many of them went to Europe and Europe had a very different history and different set of kind of brewmaking and beer making than we did here in the US. A lot of the beers there were very flavorful. They had all kinds of different hoppy kinds of things going on, all the way to the extremes of drinking a Guinness. If you've had one of those kind of meals-in-a-can beer, you understand how different beer can be from a typical Budweiser. And so, these hobbyists upon discovering the ideas of how beer could be made kind of differently than tasteless, as my French friends call it, call our beer American piss, of— came back to the US and brought some of these ideas they had discovered from Old World brewing and brought those things here to the US and started businesses around them and started small brewery operations, brewpubs, and all that kind of stuff. And from that idea in the 1980s, the idea of kind of craft brewing, which was flavorful, small batch, and interesting beers, it was born and started to become a real business. And so in the 1980s, you saw the founding of brands like, well, like Sam Adams, right, in Boston, and Bell's Brewery up in Michigan, and a famous one from me remembering my days of living in California, Sierra Nevada, which started out in Chico, California back in 1980. And craft brewing continued on as, well, just kind of a niche industry for a period of time until something magical happened. And in the early 2000s, an absolute boom in craft brewing, microbrews, nano-breweries, all these different types of aspects of building, you know, basically small batch interesting beers. Things went absolutely crazy. And we went as a country in 2010 from there being 1,500 craft breweries around the United States to 9,500 of those just a decade later by 2020. For those of you keeping score at home, that's a 500% increase. 5 times was the growth in just a decade. And money rushed into the space. I mean, even the old school American piss purveyor, Anheuser-Busch, the company that does Budweiser, they purchased a brewery called Goose Island for $38.8 million in 2011. And it continued on. Other big consolidators of spirits brands— whoop, there's some glass on the ground. Constellation Brands famously bought Ballast Point for a $1 billion in 2015. And craft beer, well, it had finally arrived as a really big business, and money flowed in. So why did this happen? Well, the reasons for the boom were twofold. One is we made supply really easy, and the other end of the— the other cause was that changes in demographics and consumer behavior made demand really high. So let's talk about supply. Supply of beer is an interesting one because if you think about the beer business, if you want to go brew beer, it is hugely capital intensive. It's like running a food manufacturing operation, except it's even worse. What you have to do is you have to go buy all this equipment, you have to buy a facility, you have to design your beer, you have to design your label, you have to buy the bottles, you have to buy the hops, you have to buy the grain, you have to get the water, you have to get the permits. And you do all of that stuff, you bring it in, and put it in and go brew your beer. You bottle it and you get it out to consumers. And then hopefully within a few months after deploying all that capital, uh, you sell enough beer to cover your original costs and make some money. In other words, it's a hugely capital-intensive business. And you know what fuels capital-intensive businesses? Cheap capital. And the era of the 2010s was absolutely that. We had a perfect storm over that decade of first and foremost, low interest rates, meaning it was cheap and easy to borrow money. Secondarily, we had a situation where baby boomers, uh, had a bunch of capital and they were still at an age where they wanted to deploy it into somewhat risky things. So you saw a lot of these basically brewpubs, microbreweries, and all that kind of stuff being funded by wealthy individuals, uh, in the background who were looking for returns on their money. They couldn't find it in the stock market and they couldn't get it by just depositing in a CD or a bond, uh, so they would go put it into something they could actually enjoy. And a lot of them did that with brewpubs and breweries. So that was the supply side. Cheap capital made it really easy to get into the brewery business. And we had made it super legal. And on the other end of the spectrum, we had a perfect storm of the second biggest generation of people since World War II, the millennials come along. If you think about the millennials, they're the kids of baby boomers, uh, and they have a pretty interesting perspective on life. What they're hungry for is community and uniqueness. And what better way to do that kind of stuff than by bonding with other people at a brew pub or at a small brewery over a pint of very unique beer. And, you know, when I look at the craft brewery industry, it is like the perfect storm of things that a millennial person generationally on average would want to go do and buy. And similarly, you look at who started a lot of these brewpubs and microbreweries and craft brewers along the way. There are a lot of millennials and it spoke entirely to who they are and what kind of things they like to do. And so you have these two things happening. You have cheap capital creating tons of supply on the market, people opening brewpubs left and right and craft breweries left and right. And the other side, you have this generation coming in right at the perfect time, peak brewing or peak beer buying age for millennials. Remember, most of them were born 1980 to 1996, and their peak drinking age is right around 2010 to 2020. And everything went great. Like, we saw this huge explosion in the market. All this money came in. Some people got rich and other people, well, they stayed around until something happened. And in 2020, that's when the music stopped. The COVID pandemic showed up and changed everything. So you'd probably think that when COVID happened, the big hit on craft breweries and that sort of thing would have been just basically beer consumption. I mean, people can't come in and, and hang out and buy beer. But the thing that we don't talk about a lot is how COVID in retrospect has 100% changed people's consumer habits. Uh, I did a video and we'll link to it here below on this channel about how there's a loneliness epidemic now because people just aren't leaving their homes. And if you run a brew pub or a microbrewery or craft brewery and you're making money just not on beer, but also on people coming in and buying food and being parts of events and buying merchandise, well, just even a small percentage decrease in the number of people coming into your space when you run one of these brew places, uh, can be devastating. And look, that's changed permanently because of the COVID epidemic. Secondarily, the pandemic basically, you know, forced the U.S. government and all these other governments to print a lot of capital and print a lot of money and inject that into the system to keep the economy from shutting down. And what has that done? Well, It's created massive inflation and put a ton of pressure on, well, frankly, millennials and folks across the board who are trying to find dollars to spend on, well, basically fun. And that kind of inflation has hit craft breweries incredibly hard because if you look at it, basically they're dependent upon the supply chain, the labor chain, the equipment chain, like all of those things, the prices have gone up incredibly high. Depending upon what numbers you look at, just the food inputs, so like the hops and grains and stuff like that, that goes into crafting beer over the past few years is up 20 to 40%. And that puts the craft brewers in a really tough position where suddenly like their input costs are way, way up and they have to stay profitable. Well, the only way to do that was to raise prices. Hey, I'm part of the problem here. I'm not a beer drinker. I quit drinking 18 months ago and I really like it. But I was like, hey, I wonder what like, you know, just a 6-pack of a craft brew costs. And I went and looked at it on the internet before recording this video, and I found that a 6-pack of a like craft, a favorite kind of craft IPA that I've heard about before called a hazy IPA was for sale for $55 for a 6-pack. I was like, that's a lot of money. So we have the COVID pandemic. Changing people's behavior, number one. Number two, we have massive inflation driving up the cost of craft brew— craft brewing and therefore the prices for consumers. But we also have a third problem, which is a demographic problem for craft brewing. And the problem is, is that millennials, they're getting old. The oldest ones as of the time of recording this video are getting ready to turn 45 years old. You know what you learn when you're 45? You can't drink a lot of beer anymore and beer makes you feel like crap. Uh, that is just one of the things about getting old. Uh, and so millennials are having kids, they're getting busy, they're having to spend money on raising their family. They're feeling all these inflationary pressures and they're seeing these big pressures to try to stay healthy. So now that these millennials are aging out of prime beer drinking age, like that's really bad for the industry. And so historically, you know, in any industry, you would expect there to be new young people to come in and replace the millennials as they age out. But here's the problem. The generation behind millennials, they don't really want to have much to do with craft brew. Like, they don't find it interesting. They are not— they're not looking at craft brewing as something cool and expressive of individuality the way the millennials did. They're looking at it as something kind of just fake, like they don't have anything to do with it because it just seems like a contrivance of, well, why would I even want to drink in the first place? And why would I even want to have a special beer? And the Gen Zs I talk to, like, they really don't give a crap about craft brewing. So even with these headwinds happening, craft brewing is still doing okay. Like, consumption is just down a few percent. The total volume is actually up, right? The dollars are down, the volume is up. Like, how come all these people are going bankrupt? It's not like the industry is doing what we're seeing with wine or some of the other things that are just in total freefall in terms of their consumption. Well, the problem is because of the way brewing works, right? It has what I call and like to describe as airplane economics. So if you think of an airplane, you have to fly that airplane up in the sky. It takes off at a given time and you either use that capacity that you have in the airplane or you don't. And the difference between your airplane being 70% full or 80% full can be the difference between you making money or losing money. And what's happening is These breweries are the same thing. They have these high fixed costs that they have to cover: rent, insurance, all the equipment, the loans they took out, all that kind of stuff. Well, if your demand goes down just a few percentage points, it can make the difference between you making a ton of money or totally going bankrupt. So look, is craft beer dead? It's not dead, but the good times are over, right? The days in which it was growing 500% in a decade, like, that's not going to happen anymore. And what I'm seeing with this industry is that all the things that were tailwinds before and really helping, like demographics, the change in consumer taste, and specifically the cheap capital, like those days are over. And the tailwinds they had before, well, they're all turning into headwinds. And the smart entrepreneurs I've seen, they recognize these tailwind to headwind shifts, right? By the way, I've missed some in my career, but they see these shifts and they recognize when the tide is about to turn against them. And they get out and they get out towards the top as much as they can. But I've talked about a few of those examples here on this channel. So check out my other videos if you're curious about how that works. Party City was one. Look, every industry goes through these types of early-on growth cycles and then many of them end up where craft brewing is, which is frankly just overbuilt. There's too much supply for the level of demand out there. And, you know, you're seeing breweries close because of it. And with higher interest rates, it's forcing the issue for many of them. And look, it's just perfectly normal. And I think if you're going to be somebody that wants to go into this business, just understand what you're getting into. It's not going to be easy anymore and it's going to be damn hard for a while going forward. So nothing wrong with it. Just the way— just the way capitalism and the economy works. Sometimes you get lucky and sometimes you don't.