Micro Beers Brew Up Big Business

The brewing industry is becoming more consolidated, but for aficionados in the U.S. there has never been a better time to drinkor makebeer

Adam Smith was right—markets do work over time. At least when it comes to beer.

Throughout the 20th century local and regional breweries in the U.S. closed by the thousands as improved transportation and the economies of scale led to increasing consolidation. Today the business is dominated by a handful of industrial-scale giants including Anheuser-Busch (BUD), Molson Coors (TAP), and InBev (INTB).

While this development might warm the hearts of investment bankers and shareholders, it hasn't done much to advance the art of beermaking. As with wine, cheese, bread, or any other food or drink, the more mass-market beer becomes, the less distinctive the taste. And while millions of Americans regularly enjoy Kraft cheese, Bud Lite, and Wonder Bread, these are prime examples of what happens when recipes are determined by accountants, not cooks or brewmasters.

The Rise of Microbreweries

The U.S. beer industry probably reached its post-World War II nadir in the late 1960s or early '70s, at which point Smith's "invisible hand" started to work its inevitable magic. Slowly at first, then in ever-increasing numbers, small, craft breweries began popping up. Started by people who were passionate about real beer—and who knew the difference—perceived a market opportunity. Many of these early craft breweries were inspired by beers their owners may have tasted in Europe, such as Belgium's lambics, Britain's bitter, and Germany's weissbier, but couldn't find stateside.

Since then, the microbrewery business has grown and begun, in fact, to thrive. In 1978 there were a total of 42 breweries in the U.S., including industrial breweries. Today there are 1,390 craft breweries, microbreweries, and brew pubs. They produced 6.736 million barrels in 2006, an increase of 31% over 2003, according to industry group the Brewers Assn. While that's only 3.6% of the 210-million-barrel total production of beer, craft brewing generates 5.5% of the industry's $5 billion revenue.

Craft brewing was originally a West Coast phenomenon. The beginning of the movement is usually dated to 1971, when Maytag Corp. heir Fritz Maytag's Anchor Brewing in San Francisco released its first bottle of Anchor Steam Beer. But initial growth was slow, and the game didn't really take off till the mid-'90s. (This was also the same period when Americans began to take to single-malt whiskey, single-batch bourbons, and other more refined spirits.)

Rapid Growth in the '90s

Rich Doyle, CEO of Harpoon Brewery in Boston has been in the business since 1986 and has seen several cycles come and go. "There was tremendous growth across the board in the craft beer industry" in the 1990s, he says. "We went from 5,000 barrels to 60,000 barrels in five years. Businesses went from being a little workshop with five employees to a real business with 60."

But, adds Doyle, it also became a fad. "There were charlatans in the business. They weren't interested in the beer. They were just there to make a quick buck. They're all gone now, but they tarnished the image because they weren't concerned with things like quality control."

Following that boom, growth flattened for a while, there was a shakeout in the business, and brewers who were in for the long haul improved their product. Margins also began to strengthen.

A 21st Century Renaissance

Now, Doyle says, in the last three years the industry has enjoyed another period of rapid growth, and one only has to look at the numbers for the Great American Beer Festival held each fall in Denver for confirmation. The fest is an annual gathering of true believers—yes, craft beer does inspire a quasi-religious, if easygoing, fervor amongst both brewers and consumers.

According to Julia Herz of American Brewers, which runs the festival, attendance rose from 28,000 in 2004 to 46,000 in 2006, the first year tickets sold out in advance. The number of breweries exhibiting went from 334 to 408, and they poured 1,884 different beers.

What accounts for craft beer's current popularity? Perhaps Doyle is right when he points out that "As people's palates have developed they demand more, and we can give it to them."

It appears that this is part of a larger movement, especially among younger, more affluent consumers, of people becoming more discerning about what they eat and drink, and seeking out products with authenticity and flavor rather than being content with mainstream brands.

"Twenty years ago, you'd go into a bar, there'd be eight taps—but they'd all pour the same beer with different tap handles," expounds Doyle. "Now there's all this variety and choice. It's the best place in the world to drink beer, at least in terms of variety."

Variety? I should say so. Despite a valiant effort, I did not get close to sampling all 1,884 of them. But I did manage to find 10 absolutely top-notch winners, in a wide range of styles, described in the BusinessWeek.com slide show. (Please note that indicated prices will vary greatly from state to state.)

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