Thursday, February 21, 2013

The Microbrew and Brewpub Bubble

On my lengthy great western motorcycle ride, I noticed something in pretty much every Colorado town I stopped in - "brewpubs" or "microbrews."

Couldn't pull into town without seeing one or having the hotel desk clerk tell me about "the new brew house that opened down the street."  Heck, even in Wyoming there was a new micro-brew being built.

Yes, yes, microbrews this, brewpubs that.  How "cool" would that be?

Naturally my cynical and (though incredibly down to earth and realistic, but still) evil nature kicked in and I have come to an epiphany.  An epiphany nobody will like because I'm once again the party pooper, raining on everybody's parade.

The brewpub is the next bubble.

Not as big as the housing bubble or the education bubble, and it certainly won't affect the larger economy, but if my experience in looking at hundreds of utterly craptastic business models, not to mention my economic spidey senses, are worth anything the microbrew is going to collapse.

The reason for my suspicion is that a brewpub has all the makings of a failed business.

First, it's what the PROPRIETOR wants to do, NOT what the market demands.

Do people want a brew pub in their town?  Sure.

Will people buy beer?  Of course.

But if the market is flooded with a billion micro-brews and brewpubs, their margins will be too low to be profitable.  Besides, there already is a place that sells beer.  It's called a "bar."  And it doesn't have all that nasty overhead that brewpubs do.

Second, admit it.  You thought it would be cool to start a brewpub.  And that's the second dead give away.  Like a middle aged man starting a "sports bar" or a trophy wife starting a "horse hobby farm" none of you have ever given a consideration as to whether or not the damn thing will be profitable.  It's like "Restaurant Impossible" (which I LOVE) where the guy goes in to help the people who have a failing restaurant and ALWAYS ALWAYS ALWAYS ALWAYS they;

1.  Never have done any accounting.
2.  Don't know how much they're losing
3.  Are in debt, mortgaging their house and selling their 401k's
4.  Never had any experience running a restaurant.
5.  Cite such galactic stupidity as "it's always been my dream to run a restaurant."

Hobbies are not businesses.  They are money-losing fun things you do.  Not something you throw your retirement fund at.

Third, permit me a bit of discrimination - too many young man are starting them.  Men who still wear their hats backwards and say "hawt" instead of "hot."  Yes, yes, I've seen plenty of the proprietors be the aging, desperate to do something with their lives and their measly 401k balance, "hey brewpub!  That'll save us during our retirement."  They are out there.  But nearly half I've ran into are young men in their 20's and early 30's simply making the mistake their middle aged trophy wife counterparts do with horse farms.  They are once again blinded by "dreams" and not reality.

Fourth and finally, brewpubs are cool.  And bankers like "cool" more than profit.  I know a score of small, community banks and their retarded legions of aging male bankers who will be so enamored with the idea of financing a brewpub, that the young, naive entrepreneurs pitching the idea could have the world's worst projections and worst presentations and it won't matter.  Desperate middle aged bankers will fall in love with the idea of a self-brewing Sam Malone, remember Cheers fondly, and finance it anyway.  This provides the final ingredient for a classical "bubble" - an extension of credit.

Of course after Chip and Tad fail to file their tax returns for the 3rd year in a row and need to have their perpetually maxed out line of credit extended and increased for the 12th time, even moronic community banks will tire.  And maybe, just maybe, saner heads will prevail at the bank and foreclose on the now-aged and decrepit property and equipment.  That or the FDIC will come in, audit that file and make the bank foreclose.

Now, do I have any empirical data?

Actually, I do.  But it isn't conclusive yet.  I'm making a bet that in the future this bubble will burst.  That cool micro-brew down the road will be no longer in about 3-5 years.  The charm it brought to your village will be forever lost and you'll just have to go to the regular bar to get your more-than-ample microbrews.  Of course I could be wrong too.  Maybe there is a ton of demand.  Maybe the brewpub is the next evolution that will replace the bar.  But if I know my naive American dreamers faking it as serious entrepreneurs, and the community bank industry that is only more than happy to do their best to finance failing business models, we have a nice little boondoggle ahead of us. 

29 comments:

Eric Mueller said...

I've wondered similar things about microbrew in general. I enjoy microbrew, but with an uncertain economy, I can't justify $10 on a 6 pack anymore. A friend of mine loves buying microbrew, but since he's been a homebrewer for years, plans to stop buying much beer from the store and just rely on his own production.

I get the feeling a lot of microbreweries are going to get caught in the crosshairs of an uncertain economy. I'll miss them.

Ras A Ghul said...

It eats itself, that I've noticed.

A new microbrewery opens, and the one before it starts to lose business rapidly because its not the newest and best.

And then you hear plans for a new one in about a year and the cycle repeats itself.

Eric Mueller said...

I also love to watch Restaurant Impossible. Hotel Impossible is good too, and Ramsay's "Kitchen Nightmares". I always get a kick out of the "Nope, I knew nothing about restaurants, but I saw one for sale and thought 'how hard can that be!' So here I am, hundreds of thousands in debt. What do you mean I'm doing it wrong and my food sucks? It's the economy. I need you to fix the economy so I can have business."

Revo Luzione said...

You're grossly underestimating market demand for beer that doesn't taste like watered down horsepiss.

People are tired of commercial mass produced crap. The brewpub industry is very sustainable, it's growing rapidly in response to consumer demand, which is in turn growing because beer drinker's tastes are evolving away from.. piss.

Personally I don't drink beer, but I'm glad to see that people who do are drinking local stuff instead of mass produced swill.

I think your cynicism against hipsters has gotten the better of your economic judgment this time, instead of looking at actual statistics in the industry. Heck, even the homebrewing industry is booming. What does it say about mainstream beer when people are not only willing but enthusiastic about brewing their own?

Breaker Morant said...

The bubble I predict/predicted is the indoor Waterpark bubble. I haven't followed it closely enough to see if it has popped yet.

BTW-In your housing book, you talk about a waterpark in "Adrian". I am guessing that it was not really in Adrian. The park I think it was is listed as somewhere in the foreclosure process in our local paper. The park I think you meant is in "Rattail."

Anonymous said...

Methinks you may be wrong here.
The brewpubs were already going full speed ahead in Colorado in the 1990's so they've been around a while.

Second, most of these enterprises are run as businesses, not hobbies. The owner's are very keen on their capital expenses and overhead. Money isn't quite so easy to obtain as it was a few years ago.

Finally, there is a demand. Budweiser makes shitty overpriced beer for one, and most bars cater to 22 year olds without money.

A brewpub bubble will probably occur as more idiots get involved, but the model isn't going away. There is a good economic lesson here, though. When you think you can monopolize a market and dictate to the consumer what they can purchase you create opportunity for those willing to serve the customer. Enter the brewpub.

Bronan The Barbarian! said...

You must have stopped in Fort Collins. That whole place is microbrewery la-la land. I would joyfully swim in the flood of tears from shithead FC microbrew elitists when it all comes crashing down.

Anonymous said...

Horse hobby farm hater!

Fine, Well...I'll just start a hobby horse farm instead of a horse hobby farm then, smartboy.

Cogitans Iuvenis said...

Interesting idea captain, I wonder if this might be the same sort of bubble that existed for video games in the late 70s and very early 80s. I don't think brewpubs will ever disappear.

As for restaurants I have always asked

a) if your not going to manage it then do you know someone who can i.e that has experience doing so?

b) Why not do a food truck first? A food truck bombing isn't going to be as financially murderous as a resturant going under.

Mike said...

In reality, micro-brew pubs pay less in overhead than traditional bars.
The initial capital investment is higher, though.
The make/break issue is whether or not the beer they brew is any good.
There are many here in Canada that have lasted more than 20 years.

CBMTTek said...

Brewpubs become successful for their food as much as for their beer. To be honest, most folks that considert themselves beer connesieurs (sp?) really could not tell the differnece between any three different beer types, all the know is it has more flavor than Bud.

And, I think you are absolutely right. The pubs that will be successfull will be so not because of the beer, or the food, but because they properly position themselves for the market. I could definately see a lot of brewpubs crashing.

John Henry said...

One brew pub in my town of about 90K. It is successful. Has been around now for about 7 years. If you do it right, it will work. Hard to believe someone can go broke selling beer.

I suppose when someone brews a plan to start an operation making beer, if the financial arrangements are not done correctly, then things may come to a head and a big hangover will ensue.

It's usually about bad management whereby insufficient finances are in place to allow for success. I agree that many of the types who would want to have a micro brewery are more interested in the beer than the business.

Jim Riley said...

Re brewpubs:
Not so fast my friend!
There's free moolah in those hops.
Check out this moronicy: http://muskegonpundit.blogspot.com/2013/02/why-not-grow-hops-near-beer-city-usa.html

ar10308 said...

I'm in my late 20s and based on the sheer number of guys I know who are getting into micro-brewing I can only see most of these brewpubs going out. I can't swing a dead cat in Yuppie world without hitting a group of dudes getting into micro-brewing. The guys who are really making out are the beer equipment supplies. The brewpubs that will succeed will be brewpubs as restaurants that would have succeeded anyway. At least those are the ones that I frequent. They could could take their home brewed beer off the menu and I would still show up for their Cheesy Crab-Pretzel, Calimari and Arizona Burger (burger with bacon, gouda and chipotle aioli).

The only legit way to start one would be to grow one slowly over time (start with one beer, a few solid menu items) or to start a restaurant and then add in brewing over time. Investing massive amounts of capital in the brewing equipment up front is a sure-fire loser due to over-extension without any demonstration of success.

Anonymous said...

Cap'n. I live in Denver (aka "Menver") and have enjoyed the swelling ranks of brewpubs because I enjoy a good ale and have a low tolerance for most PBR-and-a-shot joints, which happens to be the other crowded segment of the Denver market. But I agree, this bubble will burst too.

As for bubble indicators, I'd add all the feverish accolades they get in the local rags; the self-congratulatory press and "buzz" helps propagate the image over integrity necessary to fuel future growth in the already saturated sector. Denver is Beer City USA; Beer Capital of the World; more beer per capita, and on...

What I don't like is when all of that results in the kind of elitist, hipster snobbery that is rapidly approaching the likes of the Napa crowd. That and the $7 12-oz pour.

"Craft" Brewing is just one more annoying offshoot of the hyper-crafty-localism that continues to separate the most evolved and socially/globally "aware" from their $ for the opportunity to rise above the unwashed masses in their self-indulgence. These products have taken over the famer's markets here - where I can't find a decent apple, but I can buy (for a cool $20) a jar of hand-crafted back-yard foraged organic berry preserves from 30-something SAHM with an MA in communications in a clever hemp hat who then takes that $20 and buys 2.5 crafty barleywines down at xyz brewco.

In any case, my personal consumption of these micro-crafty beers is falling off as these places continue to play around with their pours and their prices. They sell what the market will bear I suppose, but at some point when image and novelty wear down I'm hoping all this competition will result in better pricing so I can enjoy more than one beer per session. I don't see that happening anytime soon though. All of the larger craft breweries are in expansion mode and we've yet to see any significant neighborhood brewpub go tits up.

Matthew Walker said...

Went to a brewpub in Missoula, MT back in the fall. Pretty dismal: Looked nice, but the beer I had was overhopped to the point of madness. I guess if you're selling into a market that demands quality but can't identify it, you have to go for gimmickry instead.

I also saw a car there with a "Keep Missoula Weird" bumper sticker. Jesus, what the hell, as far as I could see it hasn't GOTTEN weird yet! I appreciate the sentiment as an aspirational thing, but you can't keep it that way until it gets there!

Nice little town, though. We liked the Greek Gyros and Pastry Shop.

Dad Bones said...

Micro-brew sounds like something you would do in your basement. I've seen many government employees, I'm sorry to say, that have better money and business sense than a lot of so-called entrepreneurs.

Herr Wilson said...

As an brewing hobbyist you totally burst my bubble. Actually, it makes perfect sense. How many varieties of IPAs, blonde ales and Hefeweizen can the market sustain? Not that many. Here in Portland,we have loads of brewpubs. I suspect the only thing that keeps them all in operation is the large numbers of hipsters and foodies here.

Pat Sullivan said...

I agree, there will be a consolidation in the brew pub business. This happens with almost every new business craze. There is a mad rush, to get into the business. In 1905, there were over 1000 automobile companies in North America.

On a similar note, this was also recently demonstrated in the wine business. Many rich people started their own vineyard and winery. After a while, many of the owners sold out to larger vineyards.

But lets hope people will still be able to purchase, some high quality non-pasteurized beer. The regular mass produced stuff, leaves much to be desired.

Anonymous said...

I would like to start by saying you will be right, in most cases. But I can think of a few exceptions to this prediction 1)good beer people will pay for and seek out good beer the cream will rise to the top 2) there are some savy business people that will be sucessful but they will be in the minority. The paddockwood brewery in saskatoon comes to mind ( they have secured shelf space in the provincial liqour stores which carry a limited amount of craft beer) I will reiterate that you will be right in most cases though

Captain Capitalism said...

Breaker,

It was "Thumper Pond." Right there in Otter Tail county I believe.

I can mention them now because they went belly up.

Again, I am the world's greatest fucking credit analyst.

Anonymous said...

Actually, the home brewing bubble burst about 10 or 15 years ago here in Denver. I used to homebrew, but it's hard finding supplies any more.

I love the taste of microbrews, hate the watered down lagers that large breweries put out. But I spent a good portion of my youth growing up in Germany, the land of beer. More on that later.

I think to be successful, they have to think retail. If they can get their products on shelves, they might have a chance. It would subsidize their bars, unless their restaurant is good enough to hold it's own.

The Germans have a saying: In wine there is wisdom, in beer there is strength, and in water, there is bacteria.

Breaker Morant said...

Yep-figured it was "Thumper Pond." As is often the case-the 3rd owner might make money, because he can buy it cheap.

DonnerDerien said...

On the lighter side, if there is a glut of production, with competition up it should keep the prices down.

Anonymous said...

You are probably right that a lot of new businesses of this type will not survive. But that is true of all businesses. This is the way the brewing industry worked before artificial refridgeration was invented. It was refridgerationa ndtransportation that killed the model. There are a few brew pubs in Toronto that have been around for twenty plus years and have advanced from microbrewery to mainstream brands. here in Canada the price difference between mass market brands and craft brews in not as big as you would think. i for one have not drunk mass market beer in twenty years. As the average age of the beer drinking population increases there are more people who drink quality rather than quality. (I mail order rum from a "craft distillery). Craft beer in the increasing part of the overall shrinking beer market. I would look long and hard at a potential borrower before lending them money to start a brew pub, because I think what you are talking about could kill a lot of them but in general it is a very viable business model.

Anonymous said...

Here in Wisconsin the brew pub bubble has burst. Now the next big thing is distillaries!

Steve

Anonymous said...

But But if you do what you love you'll make money at it. Follow your passion

Srlsy if you're passion isn't running a business you won't make money at your passion.

beta_plus said...

Huh - I thought the Brew Pub bubble happened back in the 90s. Here in DC, around 2003 most of them consolidated.

HolmesIV said...

@Eric Mueller The US version of "Kitchen Nightmares" is, IMO, poor compared to the UK version. It seems to focus much more on family drama than on running a sound business. If you're able to get the UK version, I tend to think it's better.

(NB- I do not argue this is generally true of US vs UK shows; these days the US seems to have a relative golden age of TV compared to a generation ago).

As to microbrews, I believe they date back to at least the 70's, thanks to CAMRA (the Campaign for Real Ale in the UK). They are enjoyable, and I'm mildly skeptical that we have a genuine bubble in them (though fair enough, I haven't recently journeyed through the parts of the US that Captain Capitalism has).

I think a more interesting (though equally dangerous) business might be a gastropub. Still not huge in North America, they seem to have relatively simple menus, but still need a solid team of business/finance background; kitchen execution, and front house execution. Most ventures lack at least two of those.

-HolmesIV