New Developments in the Brewing Industry: The Role of Institutions and Ownership 0198854609, 9780198854609

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New Developments in the Brewing Industry

OUP CORRECTED PROOF – FINAL, 1/4/2020, SPi

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New Developments in the Brewing Industry The Role of Institutions and Ownership EDITED BY ERIK STRØJER MADSEN, JENS GAMMELGAARD, AND BERSANT HOBDARI

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Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Oxford University Press 2020 The moral rights of the authors have been asserted First Edition published in 2020 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2019955805 ISBN 978–0–19–885460–9 Printed and bound in Great Britain by Clays Ltd, Elcograf S.p.A. Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

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Preface The brewing industry provides a perfect setting to study the role of institutions and ownership. The beer market is one of the oldest markets of all, and has been more exposed to public regulation than most other markets. Regulation has involved all kinds of means, from taxes and regulation of marketing and places of sale to a total ban on production and sales. The book consists of 13 chapters covering different aspects of the relationship between institutions and the breweries’ owners and managers. Part I of the book contains chapters mainly focusing on the institutional aspect of the relationship, whereas Part II mainly focuses on aspects related to ownership and management of the breweries. The idea for this book arose after the fifth Beeronomics Conference held in June 2017 at Carlsberg’s conference venue in Copenhagen. We acknowledge the support of Oxford University Press, which approved our concept for the book and put it through refereeing processes, and we are grateful for the constructive and useful comments from four referee reports. We also acknowledge all contributing authors of the book, who revised their initial submissions in light of a double peer-review process.

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List of Figures 0.1. Industry dynamics

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1.1. Distribution of preferred beer brands according to their origin

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2.1. The growth of craft breweries in the United States, 1966–2017

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2.2. Zoning map together with existing and planned craft breweries in Charlotte, NC

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2.3. Zoning map together with existing and planned craft breweries in Chicago, IL

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2.4. Zoning map together with existing and planned craft breweries in Cincinnati, OH

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3.1. World beer production 1910–2018 in billion hectoliters

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3.2. World Hops production in 1,000 metric tons

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3.3. Amount of hops for different beer styles

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3.4. Great American Beer Festival (GABF) entries, by style

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3.5. Cultivated hop acreage in hectares (world)

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3.6. World ratio of hops (kilograms) per hectoliter of beer

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3.7. Number of hop farms

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3.8. Hectares of specific hops versus the overall US hop hectares

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3.9. US production of high alpha acid hops (tons)

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3.10. World demand for high acid hop variants (tons)

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3.11. Estimated % contracted US hop sales

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4.1. Representation of topics at the first 30 years of EBC Congresses (1947–1977)

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4.2. Panorama of topics at the 36th EBC Congress in 2017

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4.3. EBC Congress participation by countries represented (selection 1947–2013)

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4.4. Number of delegates at EBC Congresses

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4.5. Number of meetings and subjects matters share worldwide

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5.1. ZIP codes for Germany

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5.2. Beer production of top brands in Germany 2017 (in mio. hl)

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6.1. Numbers of Breweries in New South Wales, Victoria, and Queensland, 1870–1935

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6.2. Example of a Tasmanian colonial beer duty stamp

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   7.1. Destinations of beer brewed at Whitbread’s Chiswell Street Brewery, 1898–1914 (barrels)

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7.2. Comparative spending on advertising by Bass and Whitbread, 1893 to 1913

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8.1. Number and value of M&A in the brewing industry in the period 1997 to 2017

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8.2. Increasing concentration of ownership in the brewing industry in the period 2002 to 2017

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8.3. Regional development in concentration in the brewing industry in the period 2002 to 2013

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8.4. National development in concentration in the brewing industry in the period 2008 to 2017

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8.5. Higher income elasticities in emerging countries for beer

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8.6. Development in price premium for different types of beer

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8.7. Development in concentration, marketing share and EBIT share

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9.1. Number of breweries, 1930–2017 (selected countries)

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9.2. Evolution of the number of breweries per capita, 1980–2017 (selected countries)

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10.1. Minimum efficient scale

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12.1. Comparison of the internationalization timelines of Suntory and Kirin

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12.2. Comparison of entry strategies (establishment and ownership modes) between Suntory and Kirin

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12.3. Summary of findings and differences between Suntory and Kirin

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List of Tables 0.1. Political motives for regulation

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0.2. Summary of chapters in this edited volume

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1.1. Top ten companies in beverage industry in Croatia in 2016

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1.2. Beer export and import—data for Croatia in 0000 hectoliters

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1.3. Sample characteristics

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1.4. Answers to the question: “Do you have a preferred beer brand?”

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1.5. Influential factors when making a decision on a beer brand in a retail store

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1.6. Ranked motives to buy a certain brand in a store

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1.7. Proportion of preferred beer brand in the total beer purchase in retail stores

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1.8. Preferred brand characteristics ranked by importance

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1.9. Statements on process of retail purchasing and preferred beer brand 1.10. Statements on social aspects regarding preferred beer brand

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3.1. Hop acreage in hectares, selected years 1913–2018

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3.2. Hop production in 1,000 metric tons, selected years 1913–2018

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3.3. Hop varieties over 400 hectares in 2017

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3.4. Reported percentage of hops already sold, by year

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4.1. EBC general management

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4.2. EBC presidents

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4.3. Major pioneering works of brewing science presented at the first 20 years of EBC congresses

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4.4. EBC Congress schedule

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4.5. Association meetings worldwide

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4.6. Beer production evolution worldwide

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5.1. Some statistics on the German beer market

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5.2. Average promotional prices in euro per liter for the national brands

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5.3. Estimation results for the random effects panel estimation of promotional prices

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5.4. Estimation results for the random effects logit panel estimation of promotions

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6.1. Beer excise legislation in the Australasian colonies, 1880s and 1890s

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6.2. Beer produced, population, and breweries in the Australasian colonies, 1899

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7.1. Visits to different railway companies and wharfs from Gray’s Inn Road, 1891 (LMA, 1891, Jan 24–Jan 31)

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8.1. Market share of a selection of large beer brands in the period 2002–13

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8.2. Number of brands and market share for the largest breweries in 2013

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8.3. World consumption of different types of beer in 2016 and growth since 2000

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8.4. Regional consumption of three types of beer in 2016 and growth since 2000

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8.5. Income elasticities of different types of beer

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8.6. Prices for different types of beer on the global market, 2016

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8.7. World market share and marketing and sales expenses as share of revenue

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8.8. Development in market concentration in a number of countries from 2008 to 2016

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8.9. Influence of national owner concentration on the price premium for branded lager

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8.10. Development of the price premium for branded lager beer, 2000–16

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8.11. Development in sales of branded lager beer, 2000–16

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10.1. Minimum efficient scale. MES output level measured in million barrels, MES market share measured in the needed market share to reach the MES

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12.1. Selected research on corporate governance and internationalization

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12.2. Suntory board member composition

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12.3. Kirin board member composition

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12.4. Comparison of approaches to distance (political stability and economic development)

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12.5. Comparison of approaches to distance (geographic and cultural)

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13.1. Craft Brew Alliance Inc. ownership data, 2008–17

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13.2. Craft Brew Alliance Inc. Board of Director data, 2008–17

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13.3. Craft Brew Alliance Inc. executive data, 2008–17

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13.4. Craft Brew Alliance Inc. operations and A-B data, 2008–17

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13.5. Craft Brew Alliance Inc. production and product data 2008–17

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List of Contributors John Brauer, Executive Officer, European Brewery Convention at The Brewers of Europe Mia Delic, Assistant Professor, Faculty of Economics and Business, University of Zagreb Jens Gammelgaard, Professor MSO and Head of the Department of International Economics and Management, Copenhagen Business School Christian Garavaglia, Assistant Professor, University of Milano-Bicocca Thomas Glauben, Director, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO) Bersant Hobdari, Associate Professor, Copenhagen Business School Sven Van Kerckhoven, Assistant Professor, Vrije Universiteit Brussels Kanako Kitayama, Durham University Blazenka Knezevic, Professor, Faculty of Economics and Business, University of Zagreb Matthew Lehnert, PhD Candidate, University of Toledo Jan Marian Lichota, PhD Candidate European Studies, Universidad Nacional de Educación a Distance Jens-Peter Loy, Professor and Director of the Department of Agricultural Economics, Christian-Albrechts-University Erik Strøjer Madsen, Associate Professor, Aarhus University Neil Maltby, Associate Professor, St. Francis Xavier University Michelangelo van Meerten, Adjunct Professor, Vesalius College, Brussels Amelie Mongrowius, Research Assistant, Christian-Albrechts-University of Kiel Isabelle Nilsson, Assistant Professor, University of North Carolina at Charlotte Neil Reid, Professor, University of Toledo Petra Skrobot, Research and Teaching Assistant and PhD Candidate, Faculty of Economics and Business, University of Zagreb Martin Stack, Professor, Rockhurst University Brett J. Stubbs, independent scholar, Australia Johan Swinnen, Professor and Director of the LICOS Centre for Institutions and Economic Performance, University of Leuven (KUL)

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Seijiro Takeshita, Professor, University of Shizuoka David Turner, Associate Lecturer, University of York Casey Wellman, Independent Beer Guide and Beer Server and Instructor Christopher Williams, Associate Professor, Durham University

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Introduction Interactions Between Institutions and Governance Management in the Brewing Industry Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari

The brewing industry is among the oldest and most dynamic industries, and as such provides a rich setting to investigate a variety of problems from business and management perspectives. In this edited volume, we look at developments in the brewing industry with a special focus on interactions between the industry’s institutions and the breweries’ corporate governance systems and strategies. We have divided the book into two parts: Part 1 investigates institutions in the brewing industry, while governance management is the focus of Part 2. To the best of our knowledge, this is the first publication to examine the link between institutions and governance management in this industry. Weak and unstable institutions create risk, uncertainty, and transaction costs, which affect breweries’ decisions regarding governance strategies. Informal institutions, such as societal norms and values, and individuals’ cognitions, such as consumer habits or industry traditions, also play important roles in the brewing industry. This notion is of particular importance as informal and formal institutions also exist at the industry level. In other words, the industry operates under its own rules of the game. As such, this book also investigates the infusion of external societal changes into the industry and the resulting changes in the rules of the game. The type of ownership is an important element of breweries’ overall corporate governance structures. It plays a key role in the development of brewers’ market strategies, especially in relation to internationalization and M&A activity. Due to rapid developments in brewing technologies and consumer preferences, breweries must continuously adapt their strategies. Therefore, the chapters in Part 2 deal with different aspects of these transitions, including ownership structures, board compositions, management strategies, and the degree of market concentration. The aim of the book is to analyze the various elements and relationships from different points of view in the context of the brewing industry. A key issue that is

Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Introduction: Interactions Between Institutions and Governance Management in the Brewing Industry In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0001

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 ø ,  ,   

strongly emphasized is the role of changes in institutions—regardless of whether those institutions are formal, informal, or a combination of the two—as well as the outcomes of those changes for the sector as a whole. One overall hypothesis is that successful breweries and successful markets are those that can efficiently adapt to changes in institutions. In this respect, the link between ownership structures and related management strategies, along with the ways in which they facilitate adaptations to changing institutions, gives rise to several interesting questions. In this Introduction, we first outline the historical impacts of changes in institutions. Thereafter, we discuss the findings presented in the book. In so doing, we connect various analyses and elaborate on the interaction effects between institutional setups and changes on the one hand, and management strategies on the other.

1. Institutions and Corporate Governance Brewing is an ancient form of production involving the fermentation of grain containing some sugar. The first evidence of brewing dates from around 9000  in China and 6000  in Mesopotamia. However, the bitter taste and flavor typically associated with beer were introduced with the addition of hops to the brewing process in the early Middle Ages (around 900 ). At around the same time, brewing became a business activity in which local craftsmen produced products for sale. In the bigger towns, brewing activities were organized into guilds, similar to the guilds for butchers, carpenters, and other professions seen in the Middle Ages (see Poelmans and Swinnen, 2011, and Swinnen and Briski, 2017, for more information about the history of beer). The medieval guilds acted as cartels for each profession. They had the freedom to regulate every aspect of the business, from sales prices to entry into the sector to the amount and mode of production. They even controlled the use of raw materials and staffing practices. The local town halls approved the guilds and, in some cases, their rules were dictated by legislation. For instance, in Bavaria, a purity rule was introduced that required brewers to only use barley, hops, yeast, and water when brewing beer. This purity rule, which later became national law in Germany, remained in place until 1987, when regulations regarding the EU’s internal market made it inapplicable to imported beer (Swinnen and Briski, 2017). The guild institution limited brewers’ flexibility in terms of innovation throughout the Middle Ages, and the restrictions increased over time within the craft-brewing sector (Unger, 2011). The institution survived until the Industrial Revolution at the beginning of the nineteenth century. In fact, the breakdown of the guild institution and national trade monopolies was an important precondition for the Industrial Revolution. The question of why the Industrial Revolution began at that particular time in Europe is a complicated one, without a clear answer. However, the economic revolution was rooted in radical changes in

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institutions, which points to the weak and fragmented national political systems in Europe at the time. The new, conflicting monarchies could no longer suppress the emergence of novel and controversial ideas and, consequently, the Enlightenment emerged. This age bought significant progress in the areas of science and innovation, with the introduction of steam-powered machines and railways as important breakthroughs. At the same time, economics emerged as a branch of science and the ideas of Adam Smith (1776) gained prominence as the deregulation of the guilds took hold in Western Europe (see, e.g., Snowdon, 2007). Of course, the restrictive institutions of the Middle Ages applied to most professions, but there is some evidence that brewing was subject to particularly strict regulation. Britain introduced an excise tax on beer and malt, which brought in an increasing share of total tax revenue throughout the Middle Ages and paid the cost of building up the British military to make it a dominant power (Nye, 2011). To protect against smuggling, fraud, and other forms of tax evasion, restrictions were enforced on the retail trade of beer and brewery production. Central European governments also introduced beer taxes, often in the form of a tax on flavoring additives. The breweries were forced to use the taxed additives, whose ingredients were kept secret, while the use of hops was prohibited. This delayed the use of this innovation for centuries. Another example of special regulation of the brewing industry was the introduction of Prohibition in the United States in the twentieth century. The ban started as a spiritual movement against alcohol, which emerged in the early 1900s, at which time several states introduced restrictions on alcohol consumption. The movement spread across the country, eventually leading to a federal prohibition of the production and sale of alcohol from 1919 to 1932 (Poelmans and Swinnen, 2011). The regulation had a dramatic effect on breweries in the United States— half of the breweries went bankrupt and the rest had to fight for their survival. The demand for alcohol did not simply disappear when the ban was introduced. As such, the ban created an incentive for the development of an illegal alcohol industry, which flourished under the ban and created a criminal environment and widespread corruption within legal institutions that continued for many years after the ban was lifted. Few other industries have experienced such radical changes in the institutions that regulate their activities. Institutions determine the external environment of the firm through both the introduction of formal requirements and the public’s informal acceptance of these companies’ operations. In what follows, we elaborate on the effects of institutions for the business environment and for economic progress.

1.1 Institutions The emphasis on institutions is not a new story. Adam Smith recognized the importance of institutions for the wealth of nations, as the following quotation

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 ø ,  ,   

shows: “Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government” (Smith, 1776). Douglass North, an economic historian, was a pioneer in analyzing the importance of institutions for economic development. He saw institutions as a human device used to ensure order in economic life, not only by creating the right incentives for economic agents but also by reducing risk and uncertainty, thereby lowering transaction costs. In his initial work, North (1961) focused on formal institutions, including national constitutions, laws, property rights, and the enforcement of those rights. Later, he focused on the importance of informal institutions, such as norms, values, traditions, and customs, that are rooted in the culture of the population (North, 1990). Good values reduce not only transaction costs but also the need for formal rules and regulations. In some countries, the correspondence between formal and informal institutions is transparent, which leads to strong institutions. North’s work has triggered a great deal of research focused on measuring the quality of institutions through surveys. As institutions change over time and across regions, it is possible to analyze their effects on economic performance. An analysis of the decline in maritime transportation costs from 1600 to 1850 led North to conclude that improvements in institutions were more important for the falling freight rates then technological developments (North, 1958, 1968). He accounted for developments in ship size and capacity, seamen’s wages, the costs associated with shipbuilding, ship speed, and time spent idle in port, and found that these factors only contributed part of the reduction in maritime freight rates over the focal period. The main contribution to growth in productivity came from a decline in piracy and privateering, which reduced manpower and armament requirements, and lowered insurance costs. This institutional evidence from maritime transportation may not exactly mirror developments in the brewing industry. However, significant security problems also existed on land in the Middle Ages. In addition, as discussed previously, the brewing industry was subject to strict regulation by the guilds, through which institutional improvements could take place. North’s findings triggered a stream of new empirical research on the impact of institutions, which has generally proven that institutions remain important for modern economic development. In a study of 137 countries, Rodrik, Subramanian, and Trebbi (2004) find that institutions explain a greater proportion of the value added per capita in 1995 than the traditional geographic variables or countries’ openness measured in terms of foreign trade. This is a key result, as geographical location is normally viewed as an important predictor of productivity (e.g., tropical countries generally have significantly lower income per capita (Sala-IMartin, 1997)). These authors measure institutional quality using a composite indicator that captures the protection afforded to property rights as well as the strength of the rule of law. The indicator is calculated based on a survey covering 120,000 households and 3,800 experts in 126 countries. Capital accumulation and

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innovation are the main growth factors in traditional growth models, and these authors interpret their results as offering a deeper explanation of growth in which effective institutions restrict the arbitrary exercise of power by subordinating it to well-defined and established laws. These laws, in turn, promote saving and innovation and, thereby, economic growth. Tabellini (2010) digs even deeper and examines the influence of culture or social capital on economic progress. He uses a survey on trust in which participants are asked to indicate where most people can be trusted in their area. He finds a significant effect of trust on value added per capita. Tabellini (2010) uses data from sixty-nine regions in eight European countries, which allows him to control for country fixed effects and, thereby, the formal institutions of law and order, which are the same across nations’ regions. He finds that trust facilitates market exchange at the regional level, as it reduces the need for formal contracts and the external enforcement of contractual agreements. Therefore, informal institutions of individuals’ values and beliefs are founded in their cultures, and a high level of trust reduces the need for formal institutions in such contexts. There is also evidence from company studies that social group values affect individual behavior. For instance, Ichino and Maggi (2000) find that the prevalence of shirking within a large Italian bank is higher in southern Italy, which exhibits significantly higher rates of absenteeism and misconduct. This remains true even when controlling for individuals’ backgrounds and company management. The importance of institutions may apply for business in general, but there is some evidence that the brewing industry is more exposed to formal regulation than other industries (e.g., Prohibition in the United States in the early twentieth century). Table 0.1 lists the four main political motives for regulation: consumer protection, producer protection, tax revenue, and regulation of competition (for a more detailed discussion of the regulation of brewing, see Swinnen and Vandemoortele, 2011). To the best of our knowledge, studies that compare regulation across industries are not available. However, the brewing industry is probably one of the most heavily regulated industries with regard to excise taxes, marketing methods, production methods, and restrictions on consumption based on consumer age and sales locations. Beer has been subjected to more regulation than soft drinks, cars, textiles, and many other goods, owing to, for instance, health concerns and a Table 0.1 Political motives for regulation Consumer protection

Producer protection

Tax revenue

Market competition

Total ban Age regulation Excise tax Advertising regulation

Trade restrictions Production method Production capacity

Excise tax Duties

M&A approval Price regulation Vertical relationship

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 ø ,  ,   

desire to protect others from the negative effects of alcohol consumption. However, such regulation represents a relatively new political agenda, as beer was an important element of nutrition in the Middle Ages and in earlier eras. It was also considered healthier than water at the time, as the brewing process killed the bacteria in the water. In addition to consumer protection, many of today’s technical regulations in the industry concern the protection of the environment and labor. Notably, in their survey of Danish microbreweries, Bentzen and Smith (2018) find that rules and regulations are the primary barriers to entry in this industry. The new political motive of consumer protection has been added to the desire to raise revenues for the government that has been evident since the Middle Ages. The industry has also been subjected to an increasing amount of competition regulation, especially efforts to avoid vertical integration. Breweries normally have their own distribution systems. In some countries, they are even engaged in forward integration with restaurants and pubs. The vertical integration of the supply chain reduces double markups (i.e., by the distributor and the local retailer) and thereby increases efficiency by reducing consumer prices (Slade, 2011). However, the government has often intervened due to the exclusion of competitors’ brands from the controlling outlets. Following the repeal of Prohibition in 1933, the US government introduced a three-tier system in which breweries were not allowed to sell to retailers. Instead, they had to sell to distributors, who then had to sell to retailers. As distributors often have regional market power and offer exclusivity to large breweries, the effects of this regulation on market efficiency are unclear. Recently, institutional changes have affected the brewing industry. Edman and Ahmadjian (2017) describe the emergence of the craft beer industry in Japan in terms of formal regulation. The establishment of the Japanese microbrewing industry was initiated by governmental deregulation in 1994, which lowered the minimum production volume required to be approved as a brewery from two million liters to 60,000 liters. In the next fifteen years, nearly 350 new microbreweries were established. Informal institutions imported from Japan’s sake industry also played a key role. Values associated with a local identity were adopted by the first wave of small brewers. However, these brewers were not successful because they failed to focus on quality. Breweries established in the second wave, which were more like today’s microbreweries with a focus on quality and the local community, were much more successful. Here, it is interesting to note that the emphasis on the local community was verbalized and emphasized by local politicians and public servants, who spoke of the benefits of local development. In addition, the Japanese government did not introduce regulations on quality (in contrast to Germany’s purity law). Instead, quality standards were an outcome of the norms and values of the microbrewers. This tendency is confirmed by Sammartino (2018).

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In Australia, it also took several waves of microbrewery development before sustainable business models, such as gypsy brewing, were introduced. In general, beer consumption in Australia was affected by regulation. More specifically, sales taxes and the removal of ties, binding pubs to price maintenance schemes, meant that beer purchases were pushed towards retail stores. Brewpubs emerged as a counter-reaction. These examples suggest that informal institutions built around norms, values, and cognitions play a role among both the multinational brewing companies and the microbreweries. In this regard, Hatch and Schultz (2017) show that authenticity and organizational historicizing were important for Carlsberg and its strategies. One of Carlsberg’s original mottos—semper ardens, which was translated as “always burning”—was used to unify the company following a wide range of international M&A activity. It was easier, for instance, for Carlsberg’s Kronenbourg subsidiary, which was 400 years old, to associate with this motto than with the founder’s charismatic leadership. Likewise, Kroezen and Heugens (2019) demonstrate how informal institutions have been created by microbrewers attempting to replicate the norms and values of old monastery pubs and small local breweries. Subsequent to the extensive period of M&A during which small local breweries basically died out, microbreweries emerged and old traditions were replicated, such as traditions regarding community-specific beer styles, brewery buildings, and roles in the brewery, such as brew masters (i.e., the view that brewing is a skill and the brewer is “the master of a mystical craft” (Krowzen and Heugens, 2018, p. 9). In this regard, quality is associated with the status of the producer. Beermaking is a craft in which the materials used depend on, for instance, local availability. In a sense, formal institutions, such as regulations, significantly influence the industry in terms of the number of operators and their performance, while informal institutions influence such aspects as quality and branding.

1.2 Recent Changes in Institutions and Corporate Ownership In the 200 years following the Industrial Revolution and the deregulation of the guild institution, most industries experienced a significant transformation. With the introduction of steam engines and, later, electricity, economies of scale took off in transportation and production. These innovations restructured most industries, such that the larger, more efficient firms outcompeted or took over smaller, more inefficient firms. The brewing industry also experienced this type of restructuring and the number of breweries decreased dramatically over time (Tremblay and Tremblay, 2005). Initially, each town had its own brewery, but following this transformation, each country only had a few. However, a new revolution has emerged in brewing—the return of the craft brewer. The number of microbreweries has increased tremendously in the western

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 ø ,  ,   

countries since the turn of the century. This revolution is rooted in institutional change. The craft brewer is known for brewing top-fermented beer, which has more taste and is more heterogeneous than the bottom-fermented lagers produced by the large breweries. Demand for craft beer is rising sharply and craft beer now accounts for more than 10 percent of beer consumption in many western countries (Garavaglia and Swinnen, 2018). One driver of this revolution is the change in drinking culture. With increasing income per capita, consumers’ desire for variety has increased and beer has become one way for individuals to profile themselves in social groups. The rising demand for variety in tastes and brands has been satisfied through a surge in imported beer and local craft beer. Notably, Moore, Reid, and McLaughlin (2016) studied the density of brewpubs and microbreweries in the United States. They found a significantly higher density in larger urban areas with young, creative populations. Formal institutions have also contributed to the competitive advantages of craft breweries. The heavy taxation of beer has led many countries to reduce the excise tax on small breweries. The European Union has even introduced legislation on minimum taxation in this area. Loretz and Oberhofer (2016) study M&A in the EU member states and find a significantly lower risk of takeovers for small breweries and breweries located in countries with high tax rebates, as the tax advantages cannot be transferred to new owners. They also examine the effect of the excise rebate on industry concentration and find a significant negative effect, while a high excise tax seems to increase concentration. In the United States, many states offer small craft breweries an exemption on the federal ban on distribution, which allows them to distribute their own beer. The craft breweries also have other advantages. They often receive permission to settle in business-light areas close to shopping streets on the condition that they do not expand beyond a certain capacity. As such, they face a lock-in effect in terms of their size. In addition, many craft brewers are subject to production constraints resulting from their membership in the Brewers Association. When the craft brewing revolution began, the macrobreweries adopted an expansive M&A strategy on the global beer market, where the concentration of ownership increased dramatically. Most of the large M&A deals were cross-border and the global market shares of the largest breweries doubled in the period following the turn of the century. Institutional change was probably the most important factor behind this restructuring of ownership in the brewing sector. These changes included more liberal rules for cross-border FDI within the WTO, the establishment of a single market in the EU, the open door policy in China, and the fall of the Iron Curtain in Eastern Europe (see Pedersen, Madsen, and LundThomsen, 2013). The privatization of the brewing industry in Eastern Europe led to a disruption in the supply chain. Moreover, gaps in quality and efficiency relative to western countries created an opportunity for western FDI. By 2000,

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the four largest western breweries already held more than 50 percent of the East European market (Swinnen and Herck, 2011; Jakobsen, 2013). The western breweries found it difficult to export their own main brands to Eastern Europe due to strong consumer preferences for local brands. They therefore adopted a strategy of acquiring local brands—although consumers prefer their own local breweries and brands, they do not care about who owns those brands. Macrobreweries then switched to an internationalization strategy that included a portfolio of local brands. As a result, for the top 20 beer brands in the world, sales outside their home markets average only 6 percent (Stack, Gartland, and Keane, 2016). They argue that people develop deep-seated attachments to certain foods throughout their lives. Therefore, beer brands become path dependent on historical consumption, which acts as an informal institution and results in a lock-in effect. As the large breweries have learned how to integrate regional breweries by keeping their regional brands, the question is whether they can handle the craft brewing sector in the same way. The large breweries have penetrated the craft market in two ways: by brewing craft-style beer themselves and by acquiring craft brewers. In fact, under certain definitions of craft brewing, AB-InBev is now the largest craft brewery in the world (Garavaglia and Swinnen, 2018). The size of the small, independent craft brewery segment in the longer term will depend on the existence of sustainable competitive advantages compared to large breweries. A recent survey by Sammartino (2018) found that only a small number of microbreweries entering the Australian market survived and managed to develop sustainable business models. Sammartino (2018) also found that those breweries that were unique and successful were typically acquired by the established breweries, including foreign breweries like Asahi and Kian. One sustainable competitive advantage is the tax advantage offered to small brewers mentioned previously. Another is found in consumers’ preferences for local brands and breweries—an area in which the large breweries might struggle. Before 1986, the United States required that the location of bottling be disclosed on the label, but the government canceled that rule after a petition from Anheuser-Busch (Calkins, 2019). The emerging reliance on trademark with location protection should also strengthen the competitiveness of small craft breweries.

1.3 Corporate Governance Corporate governance can be broadly defined as the control and direction of companies through ownership, boards, incentives, company regulations, and other mechanisms (Thomsen and Connyon, 2012). Different streams of research focus on specific aspects of corporate governance, which gives rise to different definitions of the concept. For instance, in the management literature, corporate

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 ø ,  ,   

governance is primarily about various aspects of boards, such as their activities and their composition. In economics and finance, corporate governance is mainly about investors’ perspectives and the relationship between the company and its shareholders. If we bring all of these perspectives under one umbrella, corporate governance can be defined as “the system by which companies are directed and controlled” (Cadbury, 1992, p. 14). Direction and control are achieved through several mechanisms, such as informal instruments (e.g., norms, codes of conduct, reputation, trust), the roles played by owners and boards, incentive structures, and pressure from stakeholders (e.g., creditors, competitors, analysts, auditors, society at large). Some of the corporate governance mechanisms are logically more important than others. For instance, the owners elect board members, who then hire and fire members of top management and determine incentive structures. As such, ownership takes priority over other forms of governance (Thomsen and Connyon, 2012). The role of owners is often discussed in relation to dispersed versus concentrated ownership structures. The prevailing view is that when ownership is widely dispersed, there is a risk that managers will run firms in a way that fulfills their own interests rather than those of the owners. Therefore, the design of corporate governance mechanisms is largely focused on aligning the interests of managers and shareholders in order to mitigate conflicts between them. Under dispersed ownership structures, shareholders have little incentive to involve themselves in monitoring activities. Instead, they prefer monitoring to be handled by others, such as independent boards or external disciplinary forces (e.g., stock markets, auditors, or analysts). The shareholder–manager conflict is clearly reduced in the presence of large shareholders (often referred to as blockholders) who have the resources and the motivation to monitor and supervise managers. However, these concentrated ownership structures entail other conflicts, especially between majority and minority shareholders, which are referred to as principal–principal conflicts (Young et al, 2008). Another common form of ownership, particularly among small, medium, and entrepreneurial firms, is family ownership. Firms owned by family members and firms in which a family is able to influence important decisions are found in almost all economies. Family ownership has both positive and negative elements. For instance, family firms generally adopt a long-term perspective, which ensures the continuity of the firm under the family’s control. They also tend to implement diversification strategies aimed at reducing the risk of concentrating too much family wealth in a few activities. However, they are also reluctant to seek external financing or hire external personnel, and they generally prefer to perpetuate family values and maintain the status quo. Another important governance mechanism, especially in the context of dispersed ownership, is the board of directors. The board creates a balance between managers and shareholders. The traditional view of corporate governance sees boards as monitoring and supervisory bodies with a primary duty of disciplining

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management and ensuring that it acts in accordance with shareholders’ interests. A more complex and realistic perspective views boards not only as monitoring mechanisms but also as resources useful for creating a competitive advantage in terms of innovation and value creation. According to this view, directors should work in collaboration with the firm’s top management to establish a company’s vision and mission, and determine its strategy and structure. The collaborative view emphasizes that different perspectives need to be incorporated into the board’s decision-making processes in a way that can add genuine value to the firm’s operations. Given the diversity in the brewing industry’s product range, firm sizes, and governance arrangements, it offers a rich setting for investigating the impact of corporate governance arrangements on a variety of outcomes. Unfortunately, there is little extant research on corporate governance in the brewing industry, although there are a few exceptions. First, in a large-scale study, Ogbonnaya et al (2016) find that CEO and managerial ownership positively affect earnings management in Nigerian breweries. Second, in a multi-case study, Geppert et al (2013) provide evidence that strong family and foundation owners increase the chances of survival and prosperity following large acquisitions in the industry, while dispersed ownership leads to less successful acquisitions. Finally, in a case study of AB-InBev, Bertrams et al (2019) provide evidence of how strong familycontrolled ownership managed to drive two small Belgian breweries to become the world’s biggest brewer. The family kept control of the board and the acquisition policy, but hired a professional management team to integrate the acquisitions of subsidiaries in the multinational corporation.

1.4 Recent Changes in Ownership and Governance in Relation to Institutions In China, some breweries are owned by the state or a provincial government. Guo (2007) outlines how state regulations and subsidies affected the development of breweries, especially the Tsingtao Brewery. In 1985, the Chinese state regarded the food industry as one of the country’s core industries. As such, it enjoyed a number of preferential policies. Notably, the development of the beer industry was prioritized. The intention was to not only facilitate growth in general but also to establish a few large indigenous brewers to take on a role as industry leaders. One initiative was a USD 200 million investment in advanced technologies associated with manufacturing equipment. Simultaneously, Tsingtao was chosen by the state as the company that would lead the development of the Chinese brewing industry. As such, it directly benefited from the state’s investments. Given the state’s support, Tsingtao initiated a number of technologyimprovement projects in the 1980s and early 1990s, which increased its

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 ø ,  ,   

production capacity from 50 million liters to 130 million liters. The company also received governmental support for R&D, as well as a tax deduction. During this period, changes in ownership structures from unitary state ownership to collective ownership (e.g., town ownership) led to the emergence of a large number of small breweries in China. These new breweries enjoyed a number of benefits, including no income tax for the first year, lower tariffs on imported equipment, VAT deductions on cross-province sales, and VAT reductions for breweries that recycled glass bottles. Furthermore, the state’s allowance of foreign ownership led to inward FDI, while a revision of the interest-rate scheme considerably reduced cost of borrowing rates. Companies such as Tsingtao were also allowed to join domestic and international stock exchanges. In fact, Tsingtao was the first Chinese state-owned enterprise to be listed on the Hong Kong Stock Exchange. In addition, the company was only subjected to an income tax rate of 15 percent, while the norm was 33 percent. All in all, the case of the Chinese brewing industry demonstrates how governance and institutional issues interact. Another example can be found in the growth and internationalization of Carlsberg. Tamm (2018) analyzes how the Carlsberg Foundation and its interaction with the Danish state affected the speed with which Carlsberg grew and internationalized. The Carlsberg Foundation has long had an unusual and distinct character, as its members are mainly scientists—usually experts in the natural sciences or the humanities—rather than specialists in business administration or economics. In fact, “professors” held the majority of votes on the board. Starting in 1970, it became an issue that the need for growth and internationalization, not necessarily was addressed by the foundation, while outlining the conditions of the foundations. In principle, the challenge was translating these original intentions in a way that fit the modern world. In particular, concerns revolved around strategic decisions regarding acquisitions and internationalization given globalization and concentration patterns within the industry. With regard to the latter, the issue was the need for capital to use for investments in order to keep up with the large players like Heineken and Interbrew. According to the founder’s original intentions, Carlsberg was to remain Danish and under the control of the Foundation. In other words, control over the majority of the shares and the majority of the voting rights was expected to remain with the Foundation. Negotiations with the Ministry took forty years and resulted in the Foundation giving up its share majority in order to gain access to capital while it maintained its control of voting rights. Consequently, but also due to managerial preferences for making acquisitions, which associate to risk taking, the delays in negotiating the needed changes regarding shares and voting rights, did affect the ability to make acquisitions, to negotiate the “merger” with Heineken around Scottish and Newcastle, and the geographical focus for investment. Consequently, Carlsberg became a regional player, with its focus on Europe, Russia, and Asia. In this respect, it is worth noting that Heineken was also

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family-owned. However, Alfred Heineken could make decisions on his own, making him a driving force behind the company’s expansion.

2. Chapter Contributions The book is organized in two parts: chapters in Part 1 primarily focus on the role of institutions in developments in the industry, while those in Part 2 mainly adopt a governance management perspective. The thirteen chapters address many of the issues discussed in this Introduction. All the chapters are empirical, and they employ a range of empirical methods, including the use of large-scale econometric modeling as well as single longitudinal case studies. Chapters also focus on different resources, also reflecting broad geographical scope and institutional diversity, including developed countries (United States, Japan), emerging markets (Croatia), and multi-country settings. In Table 0.2 we list each chapter and summarize its major theme and conclusions. Each chapter is also classified by topic using the I/G classification, where I stands for institutions and G for governance. For example, an article denoted by [I, G] addresses both institutional and governance issues. The chapter summaries in Table 0.2 clearly suggest the important role of institutions in the dynamics of the industry, where they set the external agenda for the breweries. The owners and their managers, on the other hand, adapt to these external challenges, but they also follow their own agendas in setting up their strategy for innovation, marketing, takeover, and so on, and thereby have effects on the brewing industry. Figure 0.1 shows this dynamic interaction between the actors in the industry, which shapes developments over time, and the resulting differences across time and space as an industry outcome. Several chapters deal with informal institutions such as consumers’ habits and tastes for beer, and how their tastes are affected by breweries’ advertising. Gender differences in attitude and perception towards beer brands exist in Croatia where label design and social aspect of beer brand are more influential on females, while the German consumer indicates a strong affinity for local beer brands; brand loyalty has dynamic effects too, where consumers’ market search is more intensive in periods of peak demand. The craft beer revolution reflects a radical change in consumer preferences toward more flavorful and hoppy beer in the developed countries, and this has led to change in formal regulation for microbreweries, as well as a surge in demand for special flowered hops, which has exposed the hop industry to vulnerable challenges in the value chain. Formal institutions affect the breweries in many ways, as illustrated by the common excise tax across Australasian colonies that imposed administrative costs on the breweries, increasing the concentration of the whole beer industry, or the zoning regulations in many municipalities in the United States that challenges the

Title Beer brands from the perspective of young consumers in Croatia, with an emphasis on gender differences

Navigating the regulatory environment in American urban areas: the case of American craft breweries

The dynamics of the hop industry

Science knowledge exchange in brewing: The case of the European Brewery Convention Congress

Authors

Blazenka Knezevic, Petra Skrobot, and Mia Delic

Neil Reid, Matthew Lehnert, and Isabell Nilsson

Sven Van Kerckhoven, Michelangelo van Meerten, and Casey Wellman

Jan Marian Lichota and John Brauer

Table 0.2 Summary of chapters in this edited volume

The chapter describes the position and role of the beer industry and retail in Croatian national economy, and provides an overview of brands and brand management and evidence of gender differences in preferred beer brands and brand loyalty elements among younger adults. [I] In a multi-case study setting, the chapter examines the relationship between craft breweries and municipalities, as they navigate the zoning challenges caused by the growth of craft breweries. The case analyses show that zoning laws are central to the question of a brewery’s location, implying a role for city planners in further development of craft breweries. [I] The chapter provides an historical account of how hops were gradually introduced into the brewing process, then demonstrates the dynamics and fluctuations in the hops market in recent decades, with particular focus on the rise in demand and the shift in supply and an analysis of the market and the pricing of hops. The chapter ends with a look at the uncertainty about the future and its implications for the hops market and prices. [I] The chapter investigates the role of a specific institution, that is, the EBC Congress, established after the Second World War, in stimulating exchange and creating a brewers’ network for scientific and industrial cooperation in Europe. The Congress became a forum, where various segments within the sector—brewers, breweries, research institutes, publishers, technical equipment and

Major Theme

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Price promotions in space and time: some evidence for the German beer market

Brewing industry concentration and the introduction of the beer excise in Australia and New Zealand in the late nineteenth century

The “largest beer bottler in the world”: developing Whitbread & Co’s bottling operation, 1869–1914

Jens-Peter Loy, Thomas Glauben, and Amelie Mongrowius

Brett J. Stubbs

David Turner

Continued

service providers—came together to discuss scientific and technical exchange, as well as checks on expected quality and new trends in consumer and beer production. [I] This chapter investigates to what extent German beer brands employ spatially and temporally differentiated promotional strategies. The authors do so by estimating the impact of the (regional) origin of brands, temporal shifters of demand on promotional prices, and control for brand-specific and retail chain-specific variations of pricing strategies. They find spatial and temporal variations of pricing strategies over retailers and brands on the German beer market. Further, the spatial pricing strategy is used to promote more aggressively in the home market and less in distant markets. [I, G] The chapter attempts to disentangle the effects of the various factors operating simultaneously to promote concentration in the brewing industries of the several Australasian colonies. Although difficult to do so, it is found that the beer excise, with its associated costs and obligations, was too much of a burden for the brewers to carry, and was undoubtedly the “straw that broke the camel’s back” for a number of the smaller, insufficiently established or inadequately financed business. [I] By 1914 Whitbread was a market leader in the bottled beer segment. This success came via a combination of organizational change and the role of supply chains, distribution, and transport networks. From the organizational perspective, what contributed to Whitbread’s success was the adoption of a mixed corporate form; on the one hand, the brewery and public house trade remained a family firm, but on the other the bottling department developed distinctly Chandlerian characteristics. [G, I]

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Title Branding and consolidation in the global beer market

Industry concentration and the entry of craft producers into the global beer market

Contract brewing and its implications for the beer industry

The internationalization of craft beer

Authors

Erik Strøjer Madsen

Christian Garavaglia and Johan Swinnen

Sven Van Kerckhoven, Michelangelo van Meerten, and Casey Wellman

Martin Stack

Table 0.2 Continued

The chapter looks at the motivations behind and ways in which M&A strategies have affected the concentration of the industry and thereby the ability to exercise market power. What is peculiar to the beer market is that while ownership concentration increased dramatically globally, it remained on average unchanged nationally. The analysis points to both push and pull effects as a motivation behind the large breweries’ merger and acquisition strategies during the period under investigation. [G, I] This chapter documents and explains the transformation of the beer market through the rise of craft brewers, providing key insights that derive from a comparative analysis in various countries. An especially important part of the analysis is of the role of governments that have influenced the craft beer market through regulations and the reaction of the macrobrewers to the growth of the craft breweries. [G, I] This chapter investigates in depth the usage of contract brewing as an important provider of leeway for young and innovative breweries. The authors highlight the advantages and disadvantages of contract brewing compared to brewing on acquired equipment. Further, they discuss the wide variety of contracts drafted with regard to contract brewing. To illustrate the usage and potential of contract brewing, they present a few case studies of different breweries which have significant experience with contract brewing. [G, I] This chapter analyzes the internationalization of craft beer through a two-stage model outlining the wide-ranging ways in which domestic craft beer producers and consumers have interacted with key actors in other countries. While the relative timings of stages 1 and 2 vary

Major Theme

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Corporate governance and internationalization in Japanese brewing companies: the cases of Suntory and Kirin breweries

Corporate governance, the Craft Brew Alliance and A-B

Christopher Williams, Kanako Kitayama, and Seijiro Takeshita

Neil Maltby

across markets, most craft beer markets go through this two-stage process of awareness (and importing) followed by domestic imitation and innovation (and import substitution). The most significant way in which the culture of craft beer has been internationalizing is through the diffusion of ideas, styles, and techniques. A detailed analysis of the US craft beer market corroborates the model. [G, I] This chapter compares the internationalization patterns of Japanese beer producers Suntory and Kirin with a particular focus on how their internationalization affected changes in corporate governance of the companies back in Japan. The analysis reveals the coevolution of heterogeneous nationalities and international experiences of the top management team and of overseas expansion. The experience of the two companies is quite different. While in the case of Suntory internationalization led to the introduction of non-Japanese board members, breaking away from the traditional management style, and improvement in CSR ranking, none of these elements were observed in the case of Kirin. [G] The chapter explores the role of corporate governance of one publicly traded craft beer producer and how over time it put the company at odds with the culture of the industry in which it operated. The analysis reveals that craft companies in the process of growth—itself spurred by fierce competition—need to address professionalization of management and governance. On the other hand, the case also illustrates the uneasy journey of craft and commerce when it comes to corporate governance. Governance that maximizes shareholder value at the expense of the cultural values of a craft industry in which the company exists fails, to some degree, to uphold the trust or fiduciary responsibility to key stakeholders. [G]

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INFORMAL INSTITUTIONS INDUSTRY OUTCOME FORMAL INSTITUTIONS

OWNERSHIP

 ø ,  ,   

MANAGEMENT

18

Figure 0.1 Industry dynamics

entrant of microbreweries and their way of making business and their growth possibilities. The global move in trade liberalization represents another change in formal institutions, which changed the breweries’ takeover strategies and lead to a dramatic rise in concentration in the global brewing industry. To foster knowledge exchange pertaining to the technology of beer production, the industry set up its own institution: the European Brewery Convention, which contributed to the dynamic development of the industry. Corporate governance issues and the breweries’ strategies are the focus in several of the chapters. One topic covered is the ownership structure, which is a challenge for publicly traded firms operating in a craft culture as the craft brewer association’s equity policy questions ownership if a minority stake belongs to a macrobrewery. For the macrobreweries, on the other hand, the deregulation of international ownership has led to a globalization strategy for breweries’ ownership and this may affect the corporate governance structure, as happened in Japan, where rejuvenation of the firms’ corporate management system even seems to be a motive for expanding abroad. Other topics covered are the organizational forms, where a large family-owned British brewery had success by structuring its large network of bottling depots and stores in Britain and Belgium as an independent business, and thereby overcome the non-professionalization of family management. Chapters also deal with entry barriers, where investment in the necessary brewing equipment is a sizable cost barrier to the industry for small startup breweries but a strategy of outsourcing by contract brewing provides an alternative that allows breweries to start producing beers without a brewing facility. Further, the craft breweries also practice internalization through flow of ideas and inspirations, and lately a stronger corporation, as a type of two-way web communication throughout the global craft beer community.

References Bentzen, J. and Smith, V. 2018. Entry, Survival, and Profits: The Emergence of Microbreweries in Denmark in Garavaglia, C. and Swinnen, J. F. M. (eds),

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Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 161–82. Bertrams, K., Del Marmol, J., Geerts, S., and Poelmans, E. 2019. Becoming the World’s Biggest Brewer: Artois, Piedboeuf, and Interbrew (1880–2000), Oxford University Press, Oxford. Cadbury Commission. 1992. Code of Best Practice: Report of the Committee on the Financial Aspects of Corporate Governance, London: Gee and Co. Calkins, S. 2019. Remarks Intended for Delivery on the Acceptance of The American Antitrust Institute’s 2019 Award for Antitrust Achievement, available at: https:// www.antitrustinstitute.org/wp-content/uploads/2019/08/Calkins_201-AntitrustAchievement-Award.pdf, pp. 1–8 (accessed October 20, 2019). Edman, J. and Ahmadjian, C. L. 2017. Empty categories and industry emergence: the rise and fall of Japanese Ji-Biru. Research in the Sociology of Organizations, 50, pp. 109–40. Garavaglia, C. and Swinnen, J. F. M. 2018. Economics of the Craft Beer Revolution: A Comparative International Perspective in C. Garavaglia and J. F. M. Swinnen (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 3–51. Geppert, M., Dorrenbacher, C., Gammelgaard, J., and Taplin, I. 2013. Managerial risktaking in international acquisitions in the brewery industry: institutional and ownership influences compared. British Journal of Management, 24 (3), 316–32. Guo, 2007. Global Big Business and the Chinese Brewing Industry. Routledge, Abingdon. Hatch, M. J. and Schultz, M. 2017. Toward a theory of using history authentically: Historicizing in the Carlsberg Group. Administrative Science Quarterly, 62 (4), pp. 657–97. Ichino, A. and Maggi, G. 2000. Work environment and individual background: explaining regional shirking differentials in a large Italian firm. The Quarterly Journal of Economics, 115 (3), pp. 1057–90. Jakobsen, K. 2013. Market Leadership, Firm Performance and Consolidation in the Central and Eastern European Brewing Sector in Gammelgaard, J. and Dörrenbächer, D. (eds) The Global Brewery Industry: Markets, Strategies and Rivalries, Edward Elgar, Cheltenham, pp. 47–76. Kroezen, J. J. & Heugens, P. M. A. R. 2019. What is dead may never die: institutional regeneration through logic reemergence in Dutch beer brewing. Administrative Science Quarterly, 64 (4), pp. 976–1019. Loretz, S. and Oberhofer, H. 2016. When Helping the Small Hurts the Middle: Beer Excise Duties and Market Concentration in Cabras, I., Higgens, D., and Preece, D. (eds), Brewing, Beer and Pubs: A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 97–199. Moore, M. S., Reid, N., and McLaughlin, R. B. 2016. The Locational Determinants of Micro-breweries and Brewpubs in the United States in Cabras, I., Higgens, D., and

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 ø ,  ,   

Preece, D. (eds), Brewing, Beer and Pubs: A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 182–204. North, Douglass C., 1958. Ocean freight rates and economic development 1750–1913. Journal of Economic History, 18 (4), pp. 537–55. North, Douglass C. 1961. The Economic Growth of the United States 1790–1860. Prentice-Hall, New York. North, Douglass C. 1968. Source of productivity change in ocean shipping, 1600–1850. Journal of Political Economy, 76 (5), pp. 953–70. North, Douglass C. 1990. Institution, Institutional Change, and Economic Performance, Cambridge University Press, Cambridge. Nye, J. V. C. 2011. Brewing Nations: War, Taxes, and the Growth of the British Beer Industry in the Eighteenth and Nineteenth Centuries in Swinnen, J. F. M. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 62–78. Ogbonnaya, A., Ekwe, M., and Ihendinihu, J., 2016. Effect of corporate governance and ownership structure on earnings management of brewery industry. European Journal of Accounting, Auditing and Finance Research, 4 (7), pp. 35–45. Pedersen, K., Madsen, E. S., and Lund-Thomsen, L., 2013. How Mergers and Acquisitions Restructured the International Brewery Industry 2000–10—And Why? in Gammelgaard, J. and Dörrenbächer, D. (eds), The Global Brewery Industry—Markets, Strategies and Rivalries, Edward Elgar, Cheltenham, pp. 21–46. Poelmans, E. and Swinnen, J. F. M. 2011. A Brief Economic History of Beer in Swinnen, J. F. M. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 3–28. Rodrik, D., Subramanian, A., and Trebbi, F. 2004. Institutions rule: the primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9, pp. 131–165. Sala-I-Martin, X. 1997. I just ran two million regressions. The American Economic Review, 87 (2), pp. 178–83. Sammartino, A. 2018. Craft Brewing in Australia, 1979–2015 in Garavaglia, C. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 397–424. Slade, E. M. 2011. Competition policy towards brewing: rational response to market power of unwarranted interference in efficient markets in Swinnen, J. F. M. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 173–95. Smith, A. 1776. An Inquiry into the Nature and Causes of Wealth of Nations, London. Snowdon, B. 2007. The power of ideas: Joel Mokyr on the intellectual origins of the Industrial Revolution and modern economic growth. World Economics, 8 (3), pp. 53–110. Stack, S., Gartland, M., and Keane, T. 2016. Part Dependency, Behavioral Lock-In for Beer in Cabras, I., Higgens, D., and Preece, D. (eds), Brewing, Beer and Pubs—A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 54–73.

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Swinnen, F. M. and Herck, K. V. 2011. How the East was Won: The Foreign Takeover of the Eastern European Brewing Industry in Swinnen, J. F. M. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 247–64. Swinnen, J. and Briski, D. 2017. Beeronomics—How Beer Explains the World. Oxford University Press, Oxford. Swinnen, J. and Vandemoortele, T. 2011. Beeronomics: The Economics of Beer and Brewing in Swinnen, J. F. M. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 3–28. Tabellini, G. 2010. Culture and institutions: economic development in the regions of Europe. Journal of the European Economic Association, 8, pp. 677–716. Tamm, D. 2018. De Klogeste og Skarpeste . . . Historien om Carlsbergfondet, bryggeriet og vores øl, Gyldendal, Copenhagen. Thomsen, S. and Conyon, M. 2012. Corporate Governance: Mechanisms and Systems, DJØF Publishing, Copenhagen. Tremblay, V. J. and Tremblay, C. H. 2005. The US Brewing Industry: Data and Economic Analysis, The MIT Press, Cambridge, MA. Unger, R. W. 2011. Beer Production, Profits, Public Authorities in the Renaissance in Swinnen, J. F. M. (ed.) The Economics of Beer, Oxford University Press, Oxford, pp. 3–28. Young, M. N., Peng, M., Ahlstrom, D., Bruton, G. D. & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management, 45(1), pp. 196–220.

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1 Beer Brands from the Perspective of Young Consumers in Croatia, with an Emphasis on Gender Differences Blazenka Knezevic, Petra Skrobot, and Mia Delic

1. Introduction The beverage industry is an important part of the manufacturing sector in all European countries. For example, according to the Institute of Economy (2018), in 2015 the food and beverage industry in Croatia generated 27 percent of total value in manufacturing (6 percent of which came solely from the beverage industry). Moreover, 21 percent of employment in the manufacturing industry came from the food and beverage industry, 2 percent of which was from the beverage industry (Institute of Economy, 2018). The strength of the brewing industry’s contribution to the national economy can be illustrated by various members’ positions in the list of the ten leading companies in the beverage industry in Croatia. Moreover, six of the ten largest beverage producers in Croatia are beer producers (breweries) or companies directly connected with the brewing industry, generating 62.85 percent of total income in the beverage industry (Institute of Economy, 2018). There are several trends in the brewing industry that influence brand management in many different ways (Hedja et al, 2018; Smith and Harlow, 2018), including massive growth of microbreweries, a greater variety of major foreign brands available in the domestic market, and a greater variety of flavors and packaging offered by major beer brands. The growth in consumer choices makes brand management in the beer industry more and more complex, and fostering brand equity is becoming a challenging task. Brand equity can be defined via two components (Su and Tong, 2015): brand awareness and brand image. Both components are associated with a consumer’s perception of a certain brand (Alwi et al, 2016; Low and Lamb, 2000). Therefore, this chapter focuses on consumer perception toward beer brands in order to observe what influences beer brands from the perspective of

Blazenka Knezevic, Petra Skrobot, and Mia Delic, Beer Brands from the Perspective of Young Consumers in Croatia, with an Emphasis on Gender Differences In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0002

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 ,  ,   

younger adults. In addition, there are research studies that confirm the existence of gender differences in consuming and choosing beverages (Allamani, 2008; Makela et al, 2006; Smith and Harlow, 2018). However, there is a literature gap when it comes to analysis of younger adults for a beer category as a specific product group. Therefore, the aim of this research is to identify the existence of gender differences in preferred beer brands and brand loyalty elements among young retail consumers. We tackle this research by focusing on younger adults in the Croatian market, examining the following research questions: Is there a difference between male and female consumers in: (RQ1) preferred beer brands; (RQ2) motives in decision on beer brands when purchasing in retail stores; and (RQ3) elements influencing beer loyalty? The chapter first introduces the position and role of the beer industry and retail in the Croatian national economy. It then provides a theoretical overview of brands and brand management based on secondary sources, and finally discusses the results of the primary research on beer brands among young retail consumers in Croatia.

2. Beer Industry and Beer Retail in Croatia Within Croatia’s manufacturing sector, the food and beverage industry makes the largest contribution to GDP and total employment. According to the Institute of Economy (2018), the food and beverage industry generated 27 percent of total value in manufacturing in Croatia in 2015 (of which 6 percent came from the beverage industry) and 21 percent of all manufacturing jobs in 2015 were in the food and beverage industry (of which 2 percent came from the beverage industry). One of the strongest segments of the beverage industry is that of beer producers, that is, brewers. The strength of the brewing industry’s contribution to the national economy can be illustrated by various members’ positions in the list of the ten leading companies in the beverage industry in Croatia (Table 1.1): in 2016, six of the ten largest beverage producers were breweries. In 2015, annual inflow to the state budget from the brewing sector amounted to more than 2.8 billion kunas (note: 1 EUR is approximately 7.40 kunas). This amount is three times higher than the national allocation for culture, or nearly half of the total annual allocation for agriculture (Croatian Chamber of Economy, 2019). More than 23,500 people are employed across all branches of the beer industry, comprising 2 percent of total employment in 2015 in the Republic of Croatia (Croatian Chamber of Economy, 2019). According to Brewers of Europe (2016 and 2019), total beer production in Croatia in 2015 was 3,379,000 hectoliters and total beer consumption 3,322,000 hectoliters. Therefore, production covered total consumption in 2015. On the other hand, in 2017, production was

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Table 1.1 Top ten companies in beverage industry in Croatia in 2016 Company name

Dominant production

Total income (million kunas)

Zagrebačka pivovara Coca-Cola HBC Hrvatska Heineken Hrvatska Carlsberg Croatia Badel 1862 Slavonija slad Maraska

Beer Non-alcoholic beverages

1.000 890

24.0 4.6

Beer Beer Other alcoholic drinks Hops Other and nonalcoholic Beer Non-alcoholic beverages Beer

680 350 280 160 140

10.0 0.5 14.9 8.8 5.2

Prvo hrvatsko pivo 1664 JIL Istarska pivovara Top 10 Beer and hops % Beer and hops

Gross margin (% of income)

87 65 49 3701 2326 62.85%

5.4 1.7 6.1

Note: 1 EUR = 7.40 kunas. Source: Adapted from Institute of Economy, 2018

Table 1.2 Beer export and import—data for Croatia in 0000 hectoliters Year

Export (% to EU)

Import (% from EU)

2011 2015 2016 2017

625 (9.60%) 768 (21.22%) 815 (23.19%) 783 (23.75%)

570 (79.65%) 700 (80.43%) 693 (78.64%) 827 (82.35%)

Trade surplus 55 68 122 44

Source: Own compilation in 1000 hectoliters according to Brewers of Europe, 2019

3,395,000 hectoliters and consumption 3,398,000 hectoliters. This means that consumption in 2017 exceeded production and indicates that beer imports grew significantly in the given period. Beer import for Croatia in 2015 was 700,000 hectoliters and export was 768,000 hectoliters, meaning that the foreign exchange balance was positive in this particular industry (see Table 1.2). In 2017 Croatia’s beer exports grew to 783,000 hectoliters, but imports grew faster, to 827,000 hectoliters. The consequence was that in 2017, for the first time in a decade, the Croatian beer industry had a negative foreign exchange balance. We have to note that more than two thirds of Croatian beer exports are to non-EU countries in the area of the former

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 ,  ,   

Yugoslavia (Bosnia and Herzegovina, Serbia, and Slovenia), where Croatian beer brands are well known and have long been accepted. Beer imports to Croatia are predominantly from EU countries (Table 1.2). Increased beer imports increase the variety of brands available at retail stores and influence consumer decision making and brand equity building in a given market. According to analysis by Statista (2019a) for thirty-one European countries (EU 28 plus Norway, Switzerland, and Turkey), Croatia’s beer consumption in 2017 amounted to 79 liters per capita annually, equal with Latvia and Ireland in the lower half of the top ten. Croatia is ranked even higher in terms of beer sales per capita. By this indicator Croatia is placed in sixth position on a global scale (see Statista, 2019b), at 81.19 liters of beer sales per capita in 2017 (only the Czech Republic, Germany, Poland, Austria, and Lithuania have higher indicators than Croatia). A significant amount of total beer quantity in Croatia is sold via retail channels; data varies from 50 percent (Ernst & Young, 2009) to 60 percent of total quantity (Brewers of Europe, 2019). Five leading brands in beer retail in Croatia hold 61 percent of the total retail market share: Ožujsko, Karlovačko, Pan, Löwenbräu, and Osječko (according to GfK research presented in InStore Magazine, 2015). In terms of consumer loyalty to leading brands, in 2015, 45 percent of consumers claimed that they are loyal to a leading brand; Ožujsko had the highest expressed loyalty (InStore Magazine, 2015). As previously noted, this chapter focuses on beer as an important product category in retailing.

3. Theoretical Overview of Brand Management and Brand Equity Ward et al (1999) define “brand” as a distinctive identity that differentiates a relevant, enduring, and credible promise of value associated with a product, service, or organization and indicates the source of that promise. According to Healey (2008, p. 6), the brand is the promise of satisfaction because in practice it represents an unwritten contract between producers and consumers, sellers and buyers. By definition, brands perform several important functions for the company (Kotler and Keller, 2008, pp. 274–5): (1) simplify the process of handling and routing products; (2) provide legal protection of the unique aspects of the product; (3) show a certain level of quality, enabling the customer to make faster and easier buying decisions; (4) ensure customer loyalty; (5) allow the company to charge higher prices (up to 25 percent more than products that have no clearly developed or strong brand). On the other hand, from the perspective of consumers, a brand can simplify choice, ensure a particular quality level, reduce risk, and improve trust (Keller and Lehmann, 2006).

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It is hard to say in what form brand comes. Barwise (2003) emphasizes that “brand” may be: • the name of the product, service, or company (just to mention a few names from the beer industry: Carlsberg, Heineken, Paulaner, Stella Artois, Budweiser, etc.); • a trademark in pictorial form (we all know beer trademarks: a letter B for Budweiser; a small key for Becks; a friar for Paulaner; a star for Heineken; a crown and the upper-case letters “HB” for Hofbräu); • a phrase or slogan used to build customer loyalty (for instance, “Reassuringly expensive” for Stella Artois in the United Kingdom; “Probably the best beer in the world” for Carlsberg; “the King of Beers” for Budweiser; “Gut, besser, Paulaner” for Paulaner in Germany). In addition, Farhana (2012) states that packaging is an important brand element, and that for the majority of consumer products, package design is an effective way to communicate a brand’s identity. Name, logo, slogan, and packaging design are called brand elements (see Kotler and Keller, 2008, pp. 282–3). However, brand primarily resides in the minds of consumers, and it is often a synonym for reputation. Parameswaran (2001, pp. 2–3) highlights that brand is a merged combination of the physical product and the notional images related to the product that are stored in the minds of a customer. We can say that brand is a symbol to which is added the context, that is, associated meaning. Brand is what the customer thinks it is, and the brand manager’s job is to ensure that customers are thinking in the right way. Farhana (2012, pp. 2–3) claims that the value and equity of a brand is ultimately derived in the marketplace as an outcome of the words and actions of consumers. Brand equity has a psychological and a financial component. The psychological component of brand equity arises from the way in which customers feel, think, and make decisions related to the brand, while the financial component is expressed in the brand price, its market share, and the share in the overall profitability of the company. The psychological component of brand equity is derived from functional, emotional, and self-expressive benefits perceived by customers (Ghodeswar, 2008). Functional benefits refer to product attributes that provide functional utility to consumers; emotional benefits are positive feelings related to owning or using a brand, while self-expressive benefits mean that by owning and using a brand the customer can express his/her attitudes and build or improve self-image in his/her community. Healey (2008, p. 6) claims that brand management is a process of continuous battle between producers and consumers in order to define the meaning, because people make their own decisions about what will be done, how to live, and what to buy, but under conditions that are shaped by advertising, marketing, and publicity brands.

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 ,  ,   

Brand management (or branding) is the process of maintaining, improving, and supporting the brand in such a way as to associate it with positive results. Brand management includes a number of important aspects, such as price, customer satisfaction, presentation in-store, and attitude toward competition. Brand management is built on the principles of marketing, but focuses directly on the brand and answers the question of how a brand can remain desirable for customers. Proper management of one brand may result in an increase in sales of other products bearing the same brand (adapted from Business Dictionary Online, 2013). For example, if the customer was satisfied with the experience of drinking beer, he would probably be inclined to buy the same brand next time, or even try out other types of beer that are promoted under the same brand name (in different packaging, with more or less alcohol content, with additional flavors, etc.). Research studies have shown that companies with positive brand equity have better market outcomes and better product-market outcomes (Chaudhuri and Holbrook, 2001; Su and Tong, 2015; Wang et al, 2008). Therefore, brand equity has been widely discussed and researched in the contemporary literature. Brand equity can be defined via two components (Su and Tong, 2015): (1) brand awareness and (2) brand image. Alwi et al (2016) suggest that brand has behavioral elements in addition to brand awareness as another component of the brand equity. Similarly, Hakala et al (2012) claim that brand equity exists when a customer is familiar with the brand and it holds a favorable, strong, and unique association in their memory. Brand awareness refers to a consumer’s ability to recall and retrieve the brand from the memory and ability to link some information to a certain brand. On the other hand, brand image is associated with a symbolic meaning of the brand and it concerns the emotional perception that consumer attaches to a certain brand (Alwi et al, 2016; Low and Lamb, 2000). In addition, the behavioral part of the brand equity is expressed through brand loyalty and brand commitment (Alwi et al, 2016). Brand loyalty reflects the willingness of a consumer to continuously purchase a certain brand and the willingness of a consumer to advocate and recommend a brand to other consumers (Assael, 2001; Ferreira and Coelho, 2015; Gaunaris and Stathakopoulos, 2004; Lu and Xu, 2015; Wallace et al, 2014). Practical experience shows that the best principle in the development of brand equity is the evolution principle. It is recommended (Healey, 2008, pp. 18–20) that the brand’s essence remains constant, and that only its display is changed. Thus, brand factors important to retain customer loyalty, such as the meaning, promise, value, and satisfaction that brand gives, should be permanent, while other brand factors should change in response to changing customer expectations, but also in accordance with the development of competing brands. These factors include packaging design, production of beer with different proportions of alcohol and additives to improve taste, advertising methods, presentation in the media and online, and so on. With a positive tendency toward a preferred brand, customers indirectly determine the success of retailers and manufacturers in a certain market.

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However, manufacturers are predominantly interested in maximizing the profits of their own brands, while retailers focus on maximizing product category profits, including profits realized on the basis of the producer and under its private labels (Agic and Alic, 2013; Pauwels and Srinivasan, 2004). Even though the introduction of private labels into a retailing chain can cause a decline in the value of producer brands (Meza and Sudhir, 2008); some manufacturers actively support private retailers’ labels due to the possibility to create entirely new conditions and strategic development directions (Tarzijan, 2004). LaTour and LaTour (2009) claim that consumers’ attitude toward a brand is largely determined by what the consumer feels about the brand (e.g. their affection or reflectivity), as well as the overall evaluation of the brand (e.g. is the brand generally perceived as good or bad). Therefore, regardless of the complexity of the brand management process, consumers and their attitudes will determine the outcome and duration of the process of brand building, and thus affect the business performance of producers and retailers in the beer supply chains. Therefore, for all beer supply chain participants it is essential to learn the methods and stages of the consumer decision-making process when purchasing beer, and the factors that influence consumer preference for a particular brand of beer. Moreover, some recent research studies point to social influences when choosing brands, especially in the population of younger consumers, where the influence of family, friends, and social groups can contribute to decision making on brand selection for various products (e.g. see Lu and Xu, 2015; Taute and Sierra, 2014; Trudeau and Shoebeiri, 2016). To achieve a better understanding, this chapter focuses on beer retailing and attitudes toward beer brands in one particular consumer group in a particular retail market, in order to identify the existence of gender differences in preferred beer brands and brand loyalty elements among younger adults. It analyzes young consumers’ attitudes toward basic beer brand elements such as product characteristics per se (quality, taste, availability, etc.); labels, packaging, and design; ease of preferred brand recognition in a retail store; brand loyalty in terms of aspects of repeated purchases and brand advocacy; and social aspects of beer brand selection.

4. Research Methodology Numerous studies on consumer behavior address the young population as a specific consumer group (Brown et al, 2000; Kaur and Singh, 2007; Spero and Stone, 2004; Xu, 2008). As stated, the main objective of this study is to analyze the preferences and attitudes of younger adults toward beer brands in retail shopping in one particular market—Croatia—and scrutinize the differences between genders. Therefore, the sample included students from various universities in Croatia, as a significant section of the population of young consumers. All respondents were aged over 18.

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The survey was taken at the beginning of 2019. The survey instrument was improved according to a previous survey carried out in 2014 on a similar sample. The results of 2014 survey have been discussed in several published papers from the aspect of attitudes and characteristics of the beer as a retail product category in general and from the gender perspective (see Knezevic et al, 2014; 2016; 2017; 2018). The research questionnaire in 2019 focused on branding issues related to beer brands in retail shopping. The questionnaire items were adopted from the available literature in the field of brand management and brand equity (Alwi et al, 2016; Ferreira and Coelho, 2015; Frank and Watchravesringkan, 2016; Hakala et al, 2012; Hedja et al, 2018; Lu and Xu, 2015; Smith and Harlow, 2018; Su and Tong, 2015; Wallace et al, 2014). The questionnaire consisted of nine questions grouped into the following sections: 1. Sample description variables (age, gender, beer consumption, and existence of preferred beer brand) – three one-choice questions. 2. Purchases of preferred beer brand in a retail store (occurrence of preferred brand in total beer purchases, preferred beer characteristics compared to other brands in stores, social impact on preferred beer brand purchases, and claims on the beer purchasing process in retail) – one one-choice question and three questions in the form of a 5-rank Likert scale. 3. Relevant decision motivators regarding beer brands (motivators to purchase more beer within a retail store and effects of various promotional efforts regarding brand building in beer retail) – two questions in the form of a 5rank Likert scale. The structure of the sample is shown in Table 1.3. The majority of the sample were aged between 18 and 30 (86.5 percent) and the distribution was in favor of females. The most represented group of examinees is those aged from 21 to 24 (35.8 percent of the sample). Regarding beer consumption, 89 percent of Table 1.3 Sample characteristics Variable

Option

Absolute frequency

Relative frequency

Gender

Male Female 18–20 years 21–24 years 25–30 years Over 30 years No, never Yes

133 177 73 111 84 42 34 276 310

42.9% 57.1% 23.5% 35.8% 27.1% 13.5% 11.0% 89.0% 100.0%

Age

Beer consumption Total (N) Source: Own survey 2019

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examinees said they consumed beer at least occasionally. In further data analysis we included responses from 276 beer consumers.

5. Discussion of Results This chapter discusses several aspects of the research results. First, the existence of preferred beer brands within younger adults as a retail consumer group in Croatia in 2019 will be presented. Secondly, the perceived ease and motivation of beer brand choice in a retail store will be elaborated. Thirdly, the chapter will analyze whether younger adults have a preferred beer brand, and the key elements influencing beer brand loyalty within this particular group of consumers. All results were tested for gender differences.

5.1 Existence of Preferred Beer Brands The majority of respondents had a preferred beer brand, but differences were found between 2019 and 2014. In 2019 the proportion of respondents who claimed that they do not have a preferred beer brand was 48.9 percent (see Table 1.4), higher than that which we observed and described in our previous research in 2014 (see Knezevic et al, 2014; 2016; 2017). The results shown in Table 1.4 show that more male respondents than female have a preferred beer brand. Furthermore, for female respondents with preferred beer brands, distribution is equal regarding the origin of the beer producer; however, male respondents are more oriented toward foreign beer brands (see Figure 1.1), and we can observe that more than half of them prefer beer brands from foreign producers. In addition, we applied Chi-squared test and obtained a Table 1.4 Answers to the question: “Do you have a preferred beer brand?” Option

Males

Females

All

I do not have a preferred beer brand I have a preferred beer brand, it is a brand of a domestic producer in my region I have a preferred beer brand, it is a brand of a domestic producer outside my region I have a preferred beer brand, it is a brand of a foreign producer Total Observations

38.28% 7.03%

58.11% 13.51%

48.91% 10.51%

23.44%

14.86%

18.84%

31.25%

13.51%

21.74%

100% 128

100% 148

100% 276

Source: Own survey 2019

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 ,  ,   

100% 90% 32,26%

80% 50,63% 70% 60%

35,48%

50% 40% 30%

37,97%

20% 10% 0%

32,26% 11,39% Males

Females

Foreign producer Domestic producer outside my region Domestic producer in my region

Figure 1.1 Distribution of preferred beer brands according to their origin Source: Own survey in 2019

Chi-squared test value of 33.5832 and p-value of 0.0000. Therefore, we can conclude that observed differences in preference toward beer brands between males and females are statistically significant at level 0.05.

5.2 Ease and Motivators of Beer Brand Choice in a Retail Store The second part of the questionnaire aimed to answer two questions: (1) Does having a greater number of beer brands available in a retail store influence the decision process? (2) Does it create a sense of insecurity when choosing a beer brand? In Table 1.5, statements on the decision-making process in retail purchasing are given together with calculated average rate and frequency of agreement of respondents. We can observe that a high level of agreement is expressed with the first statement, that is, respondents are influenced by others (expected guests) when deciding what brand will they purchase in a store. For other claims, males did not express a high level of agreement. For females, the statement “In front of shelves with beer, it is more difficult to make a decision what to buy because the choice of brands is getting wider and wider” had an average rate of higher than three (Table 1.5). Therefore, we can conclude that enrichment of beer brands in the assortment causes doubts and difficulties in purchasing decision making (at least for one third of younger adults: 32.03 percent of males; 39.86 percent of females). Moreover, one quarter of males and one third of females find it difficult

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Table 1.5 Influential factors when making a decision on a beer brand in a retail store Statement

If I expect guests, in the selection of beer in the store I care about their wishes regarding beer brands In front of shelves with beer, it is more difficult to make a decision what to buy because the choice of brands is getting wider and wider In front of shelves with beer, it is more difficult to make a decision what to buy because there are more and more different flavors of beer In front of shelves with beer, it is more difficult to make a decision what to buy because there is more and more different beer packaging available

Males

Females

Chitestpvalue

Average grade

Agree (4+5)

Average grade

Agree (4+5)

3.6875

66.41%

3.9392

70.27%

0.0176

2.6563

32.03%

3.0405

39.86%

0.0616

2.4219

25.00%

2.9459

33.11%

0.0005

2.4063

18.75%

2.8243

27.70%

0.0239

Note: N=276 (only beer consuming respondents); 1 – fully disagree, 2 – disagree, 3 – neutral, 4 – agree, 5 – fully agree. Source: Own survey 2019

to decide what to buy when there is an enriched assortment of various beer flavors. In addition, more than a quarter of females express that differing packaging also makes decision making more difficult. There are also statistically significant differences between males and females (Table 1.5, column “Chi-squared test p-value”). For all tested statements, females expressed a higher level of agreement than males. Of the four statements, the observed difference is significant at level 0.05 for three (see p-values < 0.05), while for one statement the observed difference can be accepted at the significance level 0.10 (see p-values < 0.10). Therefore, we can conclude that greater choice creates more difficulty for females than for males when shopping for beer in retail stores. Table 1.6 shows ranked motives of beer brand choice in retail shopping in descending order according to average grades of male respondents. We can observe that for both females and males, quality difference, friends’ suggestions, preferences of expected guests, action price, and promotional packaging are stated as influential motives to choose a certain beer brand. For all other statements, our respondents expressed low influence in the decision-making process. Similar findings were observed in our 2014 survey, in which quality, friends’ suggestions, and beer price were ranked as important drivers to change the preferred beer

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 ,  ,   

Table 1.6 Ranked motives to buy a certain brand in a store Motives

Noticeable difference in quality The suggestion of friends to try something new Arrival of guests who ask for a specific brand of beer Possibility of buying promotional packaging Action beer price Beer tasting in the store An interesting advertisement in the mass media A complimentary gift offered in the store New and/or different taste of beer (e.g. elderberry, cherry, added tequila . . . ) Awareness that a beer brand is sponsoring a sports or concert event

Males

Females

Chitest pvalue

Average grade

Influence (3+4+5)

Average grade

Influence (3+4+5)

3.8750

88.28%

3.6790

87.84%

0.9758

3.6016

89.06%

3.7432

93.24%

0.0655

3.5156

78.91%

3.7365

89.19%

0.0144

3.2266

71.88%

3.3311

80.41%

0.1968

3.1797 2.8672 2.3750

75.00% 65.63% 42.97%

3.3581 2.7297 2.8446

83.11% 58.11% 62.84%

0.3779 0.0413 0.0036

2.3516

41.41%

2.6541

56.08%

0.0321

2.2891

39.06%

3.0405

69.59%

0.0000

1.9688

26.56%

2.1757

37.84%

0.1168

Note: N=276 (only beer consuming respondents); 1 – there is no influence, 2 – has negligible influence, 3 – has a certain influence, 4 – has influence, 5 – has a significant influence. Source: Own survey 2019

brand, while action prices and promotional packaging were additionally isolated as important reasons for unplanned beer purchasing (see Knezevic et al, 2016). Unexpectedly, in-store promotional activities and advertising efforts in mass media are not observed as influential factors by our respondents. From a marketing point of view, one can conclude that it is not worth investing in such activities when targeting a younger adult population. This is in line with some previous studies done for other types of products where it was found that marketing campaigns do not bring satisfactory results when aimed at a younger population. This may be due to the identified problem of information overload in the digital era (see Cheng et al, 2010; Eppler and Mengis, 2014; Meyer, 1998). Therefore, for beer producers it would be better to focus on improving beer quality and emphasizing the social aspects of beer consumption when planning and performing marketing activities.

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However, there are certain statistically significant differences between males and females. At the significance level of 0.05 we can claim that for females there is a stronger influence of: 1. 2. 3. 4.

guests who ask for a specific brand of beer; an interesting advertisement in the mass media; a complimentary gift offered with beer in-store; a new and/or different flavor of beer (e.g. elderberry, cherry, added tequila, etc.).

At a significance level of 0.10, we can say that compared to males, females express stronger influence of: (1) friends’ suggestions to try something new and (2) beer tasting in the store.

5.3 Beer Brand Loyalty Elements in Retail Shopping The final part of the survey examined behavioral characteristics of respondents who declared that they have a preferred beer brand. The sample included 141 respondents with a preferred beer brand. First, we asked respondents to evaluate the occurrence of purchases of the preferred beer brand in the total amount of beer bought in retail stores. In Table 1.7, frequencies of the estimated occurrence are shown. We can see that the majority of respondents buy their preferred beer relatively often, very often, or almost always (around 60 percent of respondents). Moreover, more than 40 percent of respondents estimate that they buy their preferred beer brand often or always. Therefore, we can draw a conclusion that the majority of beer purchases include the preferred beer brand when it comes to younger adults, that is, that there is expressed beer loyalty within the sample. Considering the occurrence of the preferred beer brand from the gender Table 1.7 Proportion of preferred beer brand in the total beer purchase in retail stores Observed occurrence

Males

Females

All

Rarely (up to 25% of the total quantity I buy) Medium (25–50% of the total quantity I buy) Relatively often (50–75% of the total quantity) Very often (75–90% of the total quantity I buy) Almost always (more than 90% of the total quantity) Total (of those who have preferred beer brand)

20.25% 17.72% 17.72% 13.92% 30.38% 100.00% (of 79)

3.76% 36.84% 6.77% 22.56% 30.08% 100.00% (of 62)

24.1% 16.3% 19.1% 18.4% 22.0% 100.0% (of 141)

Source: Own survey 2019

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 ,  ,   

perspective, we can see that there is no great difference in frequency of estimated occurrence. Chi-squared test statistic was 4.9405 and p-value was 0.21346, confirming that the difference between genders is not statistically significant. Second, we asked respondents to express the importance of the characteristics of the preferred beer brand in comparison to other brands available in stores. Table 1.8 ranks brand characteristics upon observed importance from the gender perspective. We can see that taste, quality, and availability are observed as brand characteristics with the highest importance for both male and female respondents. This supports findings presented in Table 1.6 and in previous research (see Hedja et al, 2018; Knezevic et al, 2014), where taste and quality are also ranked as the most important beer brand characteristics for males and females alike. Chisquared test proved that there are several statistically significant differences between males and females (Table 1.8, column “Chi-squared test p-value”). At a significance level of 0.05 we conclude that females place more importance on the following characteristics: continuous availability of preferred beer in store; greater variety of packaging; design; innovation in advertising; proximity of a beer producer. These findings are in line with previous research in this topic (see Table 1.8 Preferred brand characteristics ranked by importance Brand characteristics

It has better taste It has better quality It is always available in store It has lower price It has a long history and tradition It has more beautiful and better packaging It offers a greater variety of packaging It has outstanding design It is more innovative in advertising Producer is closer to the place where I live

Males

Females

Chi-test p-value

Average grade

Importance (4+5)

Average grade

Importance (4+5)

4.5443 4.2911 3.2785

91.14% 83.54% 51.90%

4.5968 4.1613 3.6774

95.16% 87.10% 66.13%

0.5386 0.6418 0.0202

2.7975 2.7089

24.05% 34.18%

2.8065 2.8709

24.19% 27.42%

0.9995 0.0535

2.2532

11.39%

2.7581

24.19%

0.0541

2.1899

12.66%

2.7742

24.19%

0.0058

2.1772

8.86%

2.6774

20.97%

0.0520

2.1139

15.19%

2.7903

25.81%

0.0074

1.8354

12.66%

2.3225

15.52%

0.0202

Note: N=141 (Only respondents who have preferred beer brand); 1 – Absolutely irrelevant, 2 – Irrelevant, 3 – Neutral, 4 – Important, 5 – Extremely important Source: Own survey 2019

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Hedja et al, 2018). At a significance level of 0.1 we can conclude that attractive and better packaging is more important for females than for males. On the other hand, at the significance level of 0.1 we can conclude that males pay more attention to a long history and tradition of their preferred beer brand than females do. This is the only variable where the tested and confirmed difference is (in proportion of importance or proportion of agreement) greater in favor of males. Third, we asked respondents to express their level of agreement on familiarity and recognition of their preferred beer brand in retail shopping. According to the findings in Table 1.9 we can conclude that the majority of our respondents have strongly engraved brand images in their minds. They can instantly recall their beer brand and they can easily recognize their preferred beer brand when entering a store. This probably results from the fact that the majority of them (especially female respondents) know what beer brand they are searching for, that is, they express high beer brand loyalty, which was the case in our last survey as well (see Knezevic et al, 2016). Also, the results show that the majority of respondents prefer the location of their preferred beer brand within the store to remain the same over time. Therefore, we recommend that store managers take this finding into account when they are drawing up floor plans. Finally, promotional activities within stores influence up to one third of the respondents (with slightly higher importance in female population), while advertising activities are again least important for both male and female respondents, also with a slightly higher importance in the female population. In addition, in Table 1.9 (column “Chi-squared test p-value”) we can observe that there is a statistically significant difference at a significance level of 0.05 between males and females for only two of seven variables. Those variables are: (1) “At the entrance to a store, I always know exactly what beer brand I want for myself” and (2) “Mass media advertisements related to my preferred brand usually drive me to more frequent purchases and purchases of larger quantities of my preferred beer brand.” In both cases, females expressed a higher level of agreement compared to males. Several studies in the field of consumer behavior and brand equity suggest that social impacts can form attitudes toward brands and influence consumer behavior (Roper and Shah, 2007; Ruane and Wallace, 2015; Ruediger Kaufmann et al, 2012). Therefore, we asked respondents to evaluate social aspects of their preferred beer brand by expressing their level of agreement with the statements available in Table 1.10. Respondents claimed that they usually consume larger quantities of beer when they are in company. This finding is in line with our 2014 survey (see Knezevic et al, 2014). Respondents are willing to recommend their preferred beer brand to others, that is, they express a positive commitment to a preferred beer brand and they are willing to advocate for their preferred beer brand. A relatively large proportion of respondents claim the majority of their friends consume the same preferred beer brand (46.8 percent). More than one

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 ,  ,   

Table 1.9 Statements on process of retail purchasing and preferred beer brand Statement

I instantly recognize my preferred beer brand among other brands on the shelf My preferred beer brand is easily recognizable in relation to other brands in the store At the entrance to a store, I always know exactly what beer brand I want for myself I love when my preferred beer brand is always at the same place in the store When someone mentions beer, I immediately remember my preferred beer brand Promotional activities related to my preferred beer brand often encourage me to buy more (e.g. free products, action prices, action quantities, bulk sales) Mass media advertisements related to my preferred brand usually drive me to more frequent and larger purchases of my preferred beer brand

Males

Females

Chi-test p-value

Averagegrade

Agree (4+5)

Averagegrade

Agree (4+5)

4.2025

79.75%

4.2419

87.10%

0.5145

3.5823

50.63%

3.6129

59.68%

0.5488

3.5696

56.96%

3.9839

77.42%

0.0246

3.4557

51.90%

3.7097

59.68%

0.3979

3.4431

48.10%

3.8387

64.52%

0.1409

2.9620

36.71%

3.1613

41.94%

0.9017

2.2785

13.92%

2.7742

25.81%

0.0260

Note: N=141 (Only respondents who have preferred beer brand); 1 – fully disagree, 2 – disagree, 3 – neutral, 4 – agree, 5 – fully agree Source: Own survey 2019

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         

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Table 1.10 Statements on social aspects regarding preferred beer brand Statement

When I have company, I usually consume larger quantities of beer I like to recommend my preferred beer brand to others The majority of my friends consume my preferred brand when they drink beer I like when the majority of people drink my preferred beer brand in my company The majority of my family consumes my preferred beer brand I started drinking my preferred beer brand because the majority of my friends drink that particular brand We often comment on advertisements of the leading beer brands I appreciate people who consume my preferred beer brand and I understand them better

Males

Females

Chitest p-value

Averagegrade

Agree (4+5)

Averagegrade

Agree (4+5)

4.0127

72.15%

4.0162

82.26%

0.2399

3.8988

68.35%

3.8065

66.13%

0.9569

3.1519

45.57%

3.3065

48.39%

0.8654

3.0000

37.97%

2.8387

33.87%

0.8611

2.5199

15.19%

2.9032

37.10%

0.0061

2.2152

20.25%

2.6129

38.71%

0.0411

2.1646

12.66%

2.4839

24.19%

0.1741

2.2152

20.25%

2.0968

16.13%

0.7815

Note: N=141 (Only respondents who have preferred beer brand); 1 – fully disagree, 2 – disagree, 3 – neutral, 4 – agree, 5 – fully agree

third of respondents agree with the statement “I like when the majority of people drink my preferred beer brand in my company.” For other statements, the majority of respondents expressed disagreement. Considering the levels of agreement from the gender perspective, we can see that there is no big difference in frequency, except on two variables (Table 1.10, Chi-squared test p-value): (1) “The majority of my family consumes my preferred beer brand” and (2) “I started drinking my preferred beer brand because the majority of my friends drink that particular brand.” For both variables, females

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 ,  ,   

expressed a higher level of agreement than males and the difference is statistically significant at the level of 0.05 (p-value < 0.05).

6. Conclusions The aim of this chapter was to identify the existence of gender differences in preferred beer brands and brand loyalty elements among younger adults. The empirical research has answered the proposed research questions as follows. There is a statistically significant difference in preferred beer brands (RQ1) between males and females. Males express a considerably higher presence of preferred beer brand, and this is more commonly a brand from a foreign producer than is the case for females. Taste, quality, and availability are observed as the most important brand characteristics for both males and females. However, females express a higher level of agreement on the majority of tested variables when discussing ease of the retail purchasing process and motives to buy a certain brand in retail stores (RQ2). Regarding building brand loyalty to preferred beer brands (RQ3), we tested key elements of preferred beer brands and concluded that females consider the following characteristics more important: continuous availability of preferred beer in store; greater variety of packaging; design; innovation in advertising; and proximity of a beer producer. In addition, we examined seven variables on familiarity and recognition of preferred beer brand in retail shopping. We observed high awareness on preferred beer brand in retail stores. The minds of young consumers are set on a preferred beer brand even as they reach the store. We observed a statistically significant difference between males and females on only two of seven variables. Finally, we tested eight variables regarding social aspects of brands. Both females and males drink larger quantities of beer in the company of other people, they are willing to recommend their preferred brand to others, and the majority of their friends consume the same beer brand. Of eight tested variables, there is a statistically significant difference between males and females for only two. Several limitations to this research should be highlighted. The first is the sample per se, which involved mainly students. Therefore, the results are relevant for younger adult consumers where students are a significant part of the population, while the results for other consumer groups could be significantly different. The second limitation is related to the narrow geographical focus on only one country, that is, the Croatian market. Therefore, in future studies on this topic it would be advisable to conduct surveys in other markets and to conduct comparative analysis of behavior and attitudes in various geographic markets among different consumer groups based on their socioeconomic status. In addition, discussion of results could be improved by applying methods of inferential statistics in order to

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         

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explain correlations of influential factors in forming beer loyalty among groups not only by gender, but by age as well.

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Ernst & Young. 2009. The Contribution Made by Beer to the European Economy, available at: www.thebrewersofeurope.org (Accessed on June 23, 2016). Farhana, M. 2012. Brand elements lead to brand equity: Differentiate or die. Information Management and Business Review, 4 (4), pp. 223–33. Ferreira, A. G. and Coelho, F. J. 2015. Product involvement, price perceptions, and brand loyalty. Journal of Product & Brand Management, 24 (4), pp. 349–64. Frank, P. and Watchravesringkan, K. T. 2016. Exploring antecedents and consequences of young consumers’ perceived global brand equity. Journal of Product & Brand Management, 25(2), pp. 160–70. Gaunaris, S. and Stathakopoulos, V. 2004. Antecedents and consequences of brand loyalty: An empirical study. Journal of Brand Management, 11 (4), pp. 283–306. Ghodeswar, B. M. 2008. Building brand identity in competitive markets: A conceptual model. Journal of Products & Brand Management, 17 (1), pp. 4–12. Hakala, U., Svensson, J., and Vincze, Z. 2012. Consumer based brand equity and top of mind awareness: A cross country analysis. Journal of Product & Brand Management, 21 (6), pp. 439–51. Healey, M. 2008. What Is Branding? RotoVision, Switzerland. Hedja, M., Valdec, D., Hajdek, K., and Miljkovic, P. 2018. Influence of beer label design on making decision about choosing and buying product, 9th International Symposium on Graphic Engineering and Design, pp. 509–18. Institute of Economy. 2018. Sectoral Analysis—Food and Beverages (in Croatian: Sektorska analiza—hrana i piće), available at: https://www.eizg.hr/userdocsimages/ publikacije/serijske-publikacije/sektorske-analize/SA_hrana-2018.pdf (accessed on February 13, 2018). InStore Magazine. 2015. Beers and Radrers (in Croatian: Pivo i radleri), 4 (25), available at: http://instore.hr/onlinemagazine/2015/36D/ (accessed on December 22, 2016). Kaur, P. and Singh, R. 2007. Uncovering retail shopping motives of Indian youth. Young Consumers, 8 (2), pp. 128–38. Keller, K. L. and Lehmann, D. R. 2006. Brands and branding: Research findings and future priorities. Marketing Science, 25 (6), pp. 740–59. Knezevic, B., Skrobot, P., and Delic, M. 2014. Adjusting category management towards younger consumers—the key factors of a beer as a retail product category in Croatia, in EBES 2014 Anthology, Istanbul, pp. 15–27. Knezevic, B., Skrobot, P., and Delic, M. 2016. Attitudes of younger consumers towards beer as a retail product category from the gender perspective, in Tome, E. (ed.), Proceedings of the International Conference Theory and Applications in the Knowledge Economy—TAKE 2016, Lisbon, pp. 258–74. Knezevic, B., Skrobot, P., and Delic, M. 2017. Beer as a retail product category from perspective of young adult consumers—the gender analysis. Handel Wewnetrzny, 2 (367), pp. 156–69.

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Knezevic, B., Skrobot, P., and Delic, M. 2018. Brand loyalty of younger adults in beer retail shopping—case of Croatia, Proceedings of the International Conference Contemporary issues in economy and technology—CIET 2018, Split, pp. 125–37. Kotler, P. and Keller, K. L. 2008. Upravljanje marketingom (edition in Croatian), Mate, Zagreb. LaTour, K. A. and LaTour, M. S. 2009. Positive mood and susceptibility to false advertising. Journal of Advertising, 38 (3), pp 127–42. Low, G. S. and Lamb, C. W. 2000. The measurement and dimensionality of brand associations. Journal of Product & Brand Management, 9 (6), pp. 350–70. Lu, J. and Xu, Y. 2015. Chinese young consumers’ brand loyalty toward sportswear products: A perspective of self-congruity. Journal of Product & Brand Management, 24 (4), pp. 365–76. Makela, P., Gmel, G., Grittner, U., Kuendig, H., Kuntsche, S., Bloomfield, K., and Room, R. 2006. Drinking patterns and their gender differences in Europe. Alcohol & Alcoholism, 41 (1), pp. i8–i18. Meyer, J. A. 1998. Information overload in marketing management. Marketing Intelligence & Planning, 16 (3), pp. 200–9. Meza, S. and Sudhir, K. 2008. Do private labels increase retailer bargaining power? Quantitative Marketing and Economics, 8 (3), pp. 333–63. Parameswaran, M. G. 2001. Brand Building Advertising: Concepts and Cases, Tata McGraw-Hill, Noida. Pauwels, K. and Srinivasan, S. 2004. Who benefits from store brand entry? Marketing Science, 23, (3), pp. 364–90. Roper, S. and Shah, B. 2007. Vulnerable consumers: The social impact of branding on children. Equal Opportunities International, 26 (7), pp. 712–28. Ruane, L. and Wallace, E. 2015. Brand tribalism and selfexpressive brands: Social influences and brand outcomes. Journal of Product & Brand Management, 24 (4), pp. 333–48. Ruediger Kaufmann, H., Loureiro, S. M. C., Basile, G., and Vrontis, D. 2012. The increasing dynamics between consumers, social groups and brands. Qualitative Market Research: An International Journal, 15 (4), pp. 404–19. Smith, A. and Harlow, L. 2018. The Gender Pint Gap—A Study into GB Female Attitudes and Behavior towards Beer. Report by Dea Latis project, available at: https://dealatisuk.files.wordpress.com/2019/09/4dec5-86c7b-gender-pint-gapreport_dea-latis_may-2018.pdf (accessed on June 27, 2019). Spero, I. and Stone, M. 2004. Agents of change: How young consumers are changing the world of marketing. Qualitative Market Research: An International Journal, 7 (2), pp. 153–9. Statista, 2019a. Volume of Beer Consumed Per Capita in Europe in 2017, available at: https://www.statista.com/statistics/444589/european-beer-consumption-percapita-by-country/ (accessed on February 8, 2019).

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 ,  ,   

Statista, 2019b. The Countries Drinking the Most Beer (beer sales per capita), https:// www.statista.com/chart/12510/the-countries-drinking-the-most-beer/ (accessed on February 8, 2019). Su, J. and Tong, X. 2015. Brand personality and brand equity: Evidence from the sportswear industry. Journal of Product & Brand Management, 24 (2), pp. 124–33. Tarzijan, J. 2004. Strategic effects of private labels and horizontal integration. International Review of Retail, Distribution and Consumer Research, 14 (3), pp. 321–35. Taute, H. A. and Sierra, J. 2014. Brand tribalism: An anthropological perspective. Journal of Product & Brand Management, 23 (1), pp. 2–15. Wallace, E., Buil, I., and de Chernatony, L. 2014. Consumer engagement with selfexpressive brands: Brand love and WOM outcomes. Journal of Product & Brand Management, 23 (1), pp. 33–42. Wang, H., Wei, Y., and Yu, C. 2008. Global brand equity model: Combining customer base with product market outcome approaches. Journal of Product & Brand Management, 17 (5), pp. 305–16. Ward, S., Larry, L., and Goldstine, J. 1999. What high-tech managers need to know about brands. Harvard Business Review, July–August 1999, pp. 85–95. Xu, Y. 2008. The influence of public self-consciousness and materialism on young consumers’ compulsive buying. Young Consumers, 9 (1), pp. 37–48.

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2 Navigating the Regulatory Environment in American Urban Areas The Case of American Craft Breweries Matthew Lehnert, Isabelle Nilsson, and Neil Reid

1. Introduction Starting in the mid-1980s, the United States has experienced growth in the number of craft breweries.¹ By 2017, there were more than six thousand such establishments in the United States (Figure 2.1). Two factors are driving this growth. First, compared with large-scale macrobreweries, craft breweries provide consumers with a greater diversity of beer in terms of styles and flavors. Second, many individuals are attracted to craft beer because it is produced in small-scale, locally owned breweries (Nielsen, 2015). This contrasts with the large-scale production of bland-tasting American pale lager (e.g. Budweiser) that is the staple of multinational corporations such as AB InBev. As the number of craft breweries increased across the American landscape, a growing number of municipalities recognized their potential to contribute to neighborhood revitalization within their jurisdictions (Reid, 2018). Seeking inexpensive real estate, many American craft breweries locate in old industrial neighborhoods that, for several decades, have been experiencing economic decline. In many cases, craft brewery entrepreneurs have acquired abandoned buildings (old warehouses, factories, churches, etc.) and adaptively reused them for brewing beer. Other breweries are seeking space in downtown areas and are contributing to the economic vitality of those areas. Many craft breweries have a taproom, which attracts individuals eager to sample a brewery’s unique beer. The individuals who ¹ A craft brewery is a brewery that produces 6 million barrels (~7 million hectoliters) or less of beer per year, and is independently owned (less than 25 percent of the brewery is owned by a beverage alcohol industry member, that is not a craft brewer) (Brewers Association, 2018a). Others have proposed a more nuanced differentiation of craft breweries in categories of “real craft,” ex-craft,” “big-craft,” and “craft-like” (Garavaglia and Swinnen, 2018). For the sake of this chapter we adopt the Brewers Association’s definition while recognizing the sub-categories should be explored in a future analysis.

Matthew Lehnert, Isabelle Nilsson, and Neil Reid, Navigating the Regulatory Environment in American Urban Areas: The Case of American Craft Breweries In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0003

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 ,  ,   

6000 5000 4000 3000 2000 1000 0

1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Number of Craft Breweries

7000

Year

Figure 2.1 The growth of craft breweries in the United States, 1966–2017 Source: Brewers Association, 2018c

frequent craft breweries tend to be younger people (22–37 years old); this is the demographic cohort driving the segment’s growth. In seeking space for their brewery, many craft brewery entrepreneurs have faced the challenge of finding a building that sits on land that is appropriately zoned. Craft breweries often represent a hybrid between light manufacturing and commercial land uses. This is particularly the case with brewpubs, which depend upon foot traffic for at least 25 percent of their sales and sell food in addition to beer.² Municipalities were, to some extent, caught off-guard by the growth of the craft beer sector and did not anticipate the positive economic impact that craft breweries could have on their local economies. As a result, municipalities are scrambling to modify zoning ordinances to better accommodate this growing industry. As noted by Peters (2013), zoning restrictions “create serious obstacles for brewers.” Our purpose in this chapter is to examine the relationship between craft breweries and municipalities, as both try to navigate the zoning challenges caused by the growth of the former. We do so by presenting three case studies—Charlotte, NC; Chicago, IL; and Cincinnati, OH. As noted by Williams (2017, 11), “across the country . . . cities, counties and towns are battling to show they are the most craftfriendly, by passing new pro-craft brewing regulations.” The creation of regulations that are friendly to craft breweries is critical if cities want to remain competitive in

² The Brewers Association make a distinction between brewpubs and microbreweries. A brewpub is a restaurant-brewery that sells 25 percent or more of its beer on site. A microbrewery sells 75 percent or more of its beer off-site by distributing it to bars, restaurants, and retail outlets. Both brewpubs and microbreweries produce less than 15,000 barrels (~17,600 hectoliters) of beer per year (Brewers Association, 2018b).

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this fast-growing and highly desirable small-business sector. The three cities presented in our case studies have all experienced significant growth in the number of craft breweries in the past decade, but they represent different types of economic and regulatory environments. Chicago is an old, established city in the Midwest region of the country and is the third largest city in the United States. Cincinnati is a mid-size, shrinking city in the Midwest region that, after six decades of population decline, is finally experiencing population growth (Wetterich, 2018). Finally, Charlotte is a rapidly growing city in the United States’ “Sunbelt” which has made the transformation from a regional manufacturing and textile center to one of the nation’s premier banking and financial cores (Graves and Smith, 2010). We divide the remainder of this chapter into four sections. In section 2, we provide a brief overview of the regulatory environment within which the brewing industry has operated since the end of Prohibition in 1933. In section 3, we examine specifically the issue of zoning with respect to the brewing industry and ways in which the emergence of craft breweries has challenged established practices. In section 4, we present our three case studies. Finally, in section 5 we summarize our findings and gaze into our crystal ball to predict what the future might hold for the relationship between craft breweries and municipal zoning practices.

2. The American Brewing Industry: An Overview of the Regulatory Environment The alcohol industry in the United States is highly regulated. The modern regulatory environment has its genesis in the period immediately following the end of Prohibition in 1933. Prior to Prohibition, it was common for breweries to own retail establishments. The beer sold by those retailers was produced by the breweries that owned them. For retailers not owned by a brewery, the latter were often able to exert enough influence on retailers that they would carry their brewery’s brands (Anhalt, 2016). Following the end of Prohibition, to eliminate abuses associated with the pre-Prohibition system, the federal government introduced the three-tier system. Under this system, a brewery could not sell beer directly to a retailer. Breweries had to sell their beer to distributors, who would in turn sell it to retailers (Mitchell and Koopman, 2014). The three-tier system was accompanied by an assortment of franchise and permitting laws. These laws varied from state to state and, among other things, regulated the relationship between brewers and distributors. Each state created an alcohol control board to assist with enforcement of alcohol laws. The increasing consolidation of the brewing sector and the emergence of national breweries during the second half of the twentieth century increased the bargaining power breweries had in relation to distributors, many of which were small in scale and family-owned. Despite the asymmetric power balance in the relationship between

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 ,  ,   

breweries and distributors, the system seemed to work for both segments of the industry. The emergence of craft breweries, beginning in the mid-1980s, resulted in new challenges for the three-tier system. For example, the growing craft beer sector demanded retail shelf space—space that large breweries would prefer to keep for themselves (Williams, 2017; Trax-Nielsen, 2018). From a distributor’s perspective, they have little incentive to distribute and promote relatively obscure craft brands (Anhalt, 2016). Furthermore, distributors have little knowledge about the nuances of craft beer and have little interest in acquiring that knowledge (Williams, 2017). To assist craft brewers in what is a hostile regulatory environment, states have enacted laws that provide exemptions to the restrictions imposed by the three-tier system. For example, thirty-six states allow craft breweries to distribute their own beer directly to retailers. Some states (e.g. Alaska) allow unlimited selfdistribution; others (e.g. North Carolina) allow self-distribution up to a volume limit. For example, in North Carolina breweries can self-distribute up to 25,000 barrels of beer per year. Beyond 25,000 barrels, all a brewery’s beer (not just that distributed above 25,000 barrels) must go through a distributor (Williams, 2017). This in effect prevents a craft brewery from distributing more than 25,000 barrels of beer a year, unless they are willing to use a distributor. Entering a contractual relationship with a distributor is an important decision for a craft brewery. In many states, once an agreement is entered into, it can be very difficult for a brewery to release itself (Williams, 2017). Beer franchise laws tend to favor distributors (Anhalt, 2016). With respect to the craft brewing industry, the effects of regulations have posed a challenge to brewers. For example, regulatory restrictions have raised the barriers to entry for potential new craft breweries, while restricting the growth of existing craft breweries (Burgdorf, 2016; Anhalt, 2016). As observed by Mitchell and Koopman (2014, 4), “the costs of compliance tend to be particularly burdensome for newer and smaller operators.” This has led Malone and Chambers (2017, 470) to suggest that the brewing industry may be “experiencing some form of regulatory capture,” with larger brewers conspiring to prevent smaller breweries from maximizing profits. Several studies have demonstrated that states that allow self-distribution have significantly more breweries than states prohibiting the practice (Burgdorf, 2016; Gohmann, 2016). Malone and Lusk (2016) found a positive correlation between allowing craft breweries to self-distribute and the number of craft breweries in a county. Regulations that effectively put caps on firm size could potentially dampen industry productivity and growth, and inevitably restrict brewers from taking advantage of economies of scale. In addition, with more than 7,000 craft breweries, the competition for tap handles and shelf space is intensifying. This also poses a challenge to growth and market expansion. It is unrealistic to think that every craft brewery will become Sierra Nevada. For newly opening breweries (and for many existing ones), focusing on local (perhaps even hyperlocal) markets will provide the best pathway to success in many cases.

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In addition to getting their beer into the hands of retailers, another option for craft breweries is to sell directly to the consumer. These sales typically occur at a taproom, owned by the brewery. As with direct sales to retailers, direct sales to consumers violate the original intent of the three-tier system. However, all states allow craft breweries (with some restrictions in some states) to sell their beer onsite, directly to the consumer. The location of a brewery is critical to the success of on-site sales. At the municipal level, more regulatory restrictions come into play, the most important of which is zoning. It is to zoning that we now turn our attention.

3. Zoning in the United States Zoning regulations are an instrument used by local authorities to separate one set of land uses from another (e.g., residential, commercial, industrial, etc.). The primary purpose of zoning is to protect residential areas from commercial and industrial land uses. In addition, there are often more detailed regulations regarding the types of residences, industries, or commercial activities permitted on specific parcels of land (Nilsson and Smirnov, 2018). Local jurisdictions have the power to adopt and adjust zoning laws. The local legislative body (e.g., town or city council, or the county supervisors) is responsible for overseeing zoning, while administration and minor adjustments are delegated to the zoning board of adjustment. Their authority to regulate land is derived from the legislatures and constitutions of the states, not the federal government. However, zoning laws are similar from state to state because of the continuing influence of the Standard State Zoning Enabling Act published by the US Commerce Department in the 1920s (Fischel, 2015). The establishment of zoning and major alterations to zoning laws is the function of the local governing body; this makes it a political process. Planners can exercise some control over zoning decisions through master plans, etc. However, many suburbs, particularly newly developing ones, do not employ full-time professional planners. In an attempt to keep partisan politics out of zoning decisions, early authors of zoning acts tried to get as much citizen input as possible. This practice continues to this day. Most states require at least two public hearings in the establishment of new zoning laws, or when major amendments to existing zoning laws are proposed. When landowners have plans to change the use of their property, they must apply for rezoning of their land. In the case of rezoning, public hearings are required. In many states, a petition by 20 percent of the neighbors of a tract proposed for rezoning requires that three quarters of the local legislature must vote in favor of the change for it to pass. Furthermore, most zoning laws allow pre-existing uses to stay if they are not overly noxious. The zoning board of adjustment may also grant exceptions to the ordinance. This does not include major rezonings (which are done by the legislature). There are

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 ,  ,   

two types of exceptions. A variance is an exception to the strict application of the zoning ordinance to a specific parcel. A special permit can also permit uses. Special permits and variances may be issued with conditions attached to them (e.g., apartments may be authorized only if there is screening and garage parking). The use of special permits has been growing and resulted in the Planned Unit Development, where the developer and community authorities negotiate every feature of a project (Fischel, 2015).

3.1 Zoning and Craft Breweries Craft breweries pose a challenge to cities as their businesses represent a hybrid of restaurant, manufacturer, and entertainment. In some municipalities, craft breweries are zoned based on their principal use, which could be processing and distribution, or a restaurant; accessory uses such as tasting rooms may require special permits (Peters, 2013). For craft brewers the challenge is to find affordable manufacturing space that does not conflict with neighbors but at the same time is located close to neighborhoods that have a large share of potential customers (e.g. young adults with higher socio-economic status) and access to public transportation. Many municipalities are investigating how to change their zoning ordinances to better accommodate this growing industry. For example, Dallas, TX, recently relaxed their zoning rules for alcohol production, in response to requests for rule changes made by craft breweries (Appleton, 2012). Denver, CO, has also updated its zoning regulations back in 2014 to proposed amendments to allow craft brewers in commercial mixed-use zone to locate outside industrial districts (Klemaier and Murray, 2014). In Asheville, NC, which has one of the highest numbers of breweries per capita of any US city, the zoning ordinance allows breweries in office, central business, and resort districts under certain conditions (Peters, 2013). In 2013, San Diego City Council relaxed their ordinance by adopting code amendments to allow microbreweries to develop a restaurant or tasting room accessory as an addition to their manufacturing activity to better feature their product. While the San Diego ordinance classifies microbreweries as manufacturing, brewpubs are regulated as eating and drinking establishments (City of San Diego, 2015). Another concern for microbreweries is that zoning restrictions have often imposed a tradeoff between being close to demand (foot traffic) and size requirements, as light industrial zones only allow for a certain square footage (Peters, 2013). Zoning restrictions are usually based on production capacity. The city of Orlando, FL, is looking to lure more craft breweries by allowing a 50/50 split between manufacturing and retail instead of only allowing 25 percent of the floor area to be used for manufacturing, as is currently allowed in commercial zoned districts (Weiner, 2016). Zoning can have a significant effect on the location and

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hence market potential of craft breweries by effectively restricting their location options. While zoning is generally thought of as reducing competition by acting as a barrier to entry (Suzuki, 2013; Nishida, 2014, 2015), it may also increase competition by forcing firms to locate closer to each other than they otherwise would (Ridley, Sloan, and Song, 2011). However, if zoning “forces” breweries into clusters, this is potentially a good thing, as it gives the breweries the opportunity to market themselves collectively as a brewery district. This can be beneficial to a municipality that wants to promote beer tourism, while also bringing the advantage of agglomeration economies into play. Brewery clusters tend to be a win-win for both producers and consumers. We now turn to an examination of zoning and craft breweries in three US cities—Charlotte, NC; Chicago, IL; and Cincinnati, OH. From the above discussion, it should be clear that zoning regulations vary from city to city.

4. Case Studies 4.1 Charlotte, NC Charlotte has a vibrant craft brewing scene. As of January 2019, there were thirtythree craft breweries operating in Mecklenburg County, of which Charlotte is the county seat and constitutes most of the county. The first (still operating)³ brewery, Rock Bottom Brewery,⁴ opened in 1998, followed by Olde Mecklenburg Brewery (OMB) in March of 2009.⁵ The growth of craft breweries has been particularly impressive since 2013, with twenty-five out of the thirty-three operating breweries in Mecklenburg County opening between 2014 and 2018 and an additional nine breweries planning to open during 2019. Of the thirty-three currently operating breweries, twenty-seven are within the Charlotte city limits, as are seven out of the nine planned ones. As new breweries opened around Charlotte, patterns started to become apparent. As shown in Figure 2.2, many breweries are located in the same or adjacent neighborhoods. This has created a couple of distinct clusters of breweries to the southwest (e.g. Clanton Park and Brookhill) and northeast (e.g. North Charlotte, Villa Heights, and Tryon Hills) of downtown Charlotte.

³ Charlotte’s first modern-day craft brewery was Dillwoth Brewing Company, which opened in 1989. During the 1990s, a number of other breweries (e.g. Mill Bakery, Eatery and Brewery, Johnson Beer Company, and Southend Brewery and Smokehouse) opened in the city. For a variety of reasons, including distribution and debt-servicing issues, all closed. The one survivor was Rock Bottom Brewery (Williams, 2017, Hartis, 2016). ⁴ While Rock Bottom Brewery may be considered a chain, it is considered a brewpub by the Brewers Association since CraftWorks Brewery (which is a craft brewer) has greater than 25 percent ownership of the company. ⁵ The data on all currently operating craft breweries were obtained from the Brewers Association. Date of opening was obtained from brewery websites and news articles.

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 ,  ,   

Figure 2.2 Zoning map together with existing and planned craft breweries in Charlotte, NC

One reason for this pattern is the strict zoning regulations guiding breweries in Charlotte prior to June 2013. Twenty of the twenty-seven breweries currently operating in Charlotte are microbreweries. Microbreweries and brewpubs tend to have different space requirements. Brewpubs prefer a retail setting, while microbreweries prefer industrial buildings (single or multi-tenant) (ColliersInternational, 2015). In Charlotte, breweries were traditionally defined as alcoholic manufacturers

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for zoning purposes and microbreweries were therefore only allowed to locate in light and heavy industrial districts, with limitations regarding size and proximity to residential properties. Brewpubs on the other hand faced less strict zoning restrictions and were, for example, allowed in mixed-use districts (Peters, 2013; Williams, 2017). However, the post-industrial areas around downtown Charlotte, where many of the early breweries are located, have experienced major public and private investment during the past two decades, including light rail, luxury condominiums, etc. The post-industrial parts of the southwest corridor (also referred to as South End) and the northeast corridor (also referred to as NoDa) close to downtown Charlotte have both experienced revitalization, where affordable, but rising, home prices have attracted millennial buyers, young professionals, and investors. Part of the reason why these areas have been attractive to investors and residents is their proximity to the city center, but the LYNX Blue Line (announced in 2000, opened in 2007, and running from downtown to south-west Charlotte) and its extension (announced 2011, opened in 2018, and running from downtown to UNC Charlotte’s campus in north-east Charlotte) has also brought with it considerable investment as the city has designated many of the underutilized industrial parcels around it as transit-oriented and mixed use development. In 2013, new rules to ease zoning regulations surrounding craft breweries were implemented, allowing microbreweries to locate in mixed-use zones. In 2014, additional amendments to the zoning laws were introduced which reduced the required distance between residential areas and eating, drinking, and entertainment establishments (Williams, 2017). Many of the breweries in Charlotte have taken the opportunity to locate in these zones, especially around the light rail, as these areas have attracted the demographic that fits in with the breweries’ main target market. Heist Brewing Company opened its doors in 2012 in a historic building that used to be a textile mill, on a parcel that was rezoned from industrial to mixed use in 2001 (Acerni, 2012). The site at which Free Range Brewing is located was rezoned from industrial to mixed use in 2008; shortly after the opening of the brewery in 2015 it was rezoned to transit-oriented development (City of Charlotte, 2018a). Bold Missy (opened in 2016) and Divine Barrel Brewing (established in 2018) are both located in an area that used to be zoned industrial but that was rezoned to mixed use in 2016 (City of Charlotte, 2018b). These are only a few examples of where both microbreweries (Free Range and Divine Barrel) and brewpubs (Heist and Bold Missy) have taken advantage of the easing in zoning regulations. While changes in local zoning regulations have given breweries more freedom in terms of location choice, state distribution laws have been, and still are, a contentious topic among Charlotte brewers, as the laws impede them from growing production. According to North Carolina state law, once a brewery produces more than 25,000 barrels of beer in a calendar year, it must give its marketing and distributions rights to a third-party wholesale distributor to

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distribute all their beer. The distributor gains control over all sales, distribution, delivery, and quality control during transportation. State law also makes it difficult for breweries to fire a distributor (Craft Freedom, 2019). The origins of North Carolina’s three-tier system were created after Prohibition in the 1930s, in part to keep large breweries from limiting competition and consumer choice by locking up distribution. However, while in the 1980s and 1990s distribution companies were mostly small, family-run businesses, they have since grown bigger through consolidation to become the major distributors found in North Carolina today (Dalesio, 2018; Sands, 2018). Current law has left many craft breweries with essentially two choices: (1) keep barrel production under the annual limit; (2) go over the barrel limit and be forced to give up distribution and, with that, much of the control over the product (Craft Freedom, 2019). In 2017, lawyers for Charlotte’s two largest microbreweries, Olde Mecklenburg Brewery and NoDa Brewing Company, filed a lawsuit after failing for years to get state legislators to change the beer distribution law, arguing that the current law is unconstitutional. The complaint reads: “They punish small business owners for their hard work by stripping them of their businesses when they achieve ‘too much success’, forcing them to hand over their businesses to private parties who reap the profits” (Sands, 2018). If successful, the lawsuit will bring about a change that has been opposed by beer wholesalers who represent one of the state’s most powerful political interest groups. The North Carolina Beer & Wine Wholesalers Association gave more than $500,000 in contributions to candidates of both major US parties in the five years leading up to the 2018 midterm elections (Dalesio, 2018). In April 2017, language was included in a house bill that would increase the barrel limit from 25,000 to 200,000. The bill passed but the cap increase was removed at the last minute after a house Alcohol Beverage Control (ABC) Committee meeting (Sands, 2018). Initial discovery in the case has uncovered potential illegal activity in form of a “secret agreement” between Anheuser-Busch and distributor R.A. Jeffreys that gives sales of those brands priority over all other products, which is illegal under a 1989 state law. During a deposition of ABC Commission⁶ Administrator Bill Hamilton, Hamilton acknowledged that the agreement appeared to be illegal (Thomas, 2018). In March 2019, legislation was introduced to the North Carolina General Assembly that comprised a compromise between the craft brewers and the wholesalers. Under the Craft Beer Distribution and Modernization Act (Senate Bill 246), craft breweries would be allowed to self-distribute up to 50,000 barrels annually (double the past 25,000-barrel limit). Breweries that exceed the 50,000⁶ North Carolina is one of 17 control states and a member of the National Alcohol Beverage Control (ABC) Association. As an agency under the Department of Public Safety, its overall objective is to provide “uniform control over the sale, purchase, transportation, manufacture, consumption and possession of alcoholic beverages in the state” (North Carolina Alcoholic Beverage Control Commission 2019).

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barrel limit but produce less than 100,000 barrels would be allowed to selfdistribute the first 50,000 barrels but required to work with a wholesaler for the remaining barrels (General Assembly of North Carolina, 2019; Kendall, 2019; Thomas, 2019). The bill passed the North Carolina House in a 104–8 vote in April of 2019 and the Senate in a 38–3 vote on May 20, and was signed into law by Gov. Cooper on May 30, 2019, ending the years-long dispute regarding the state’s selfdistribution cap (Trump, 2019). There are also other challenges facing Charlotte breweries. The City of Charlotte is perhaps most known as a southeast hub for banking headquarters and other large businesses. This focus on big business may perhaps have left small businesses behind. In an interview with Charlotte Five, Birdsong Brewing Company’s co-founder Chris Goulet noted: it’s challenging to start a business in Mecklenburg County. They’re not small business oriented. When we sat down as a partnership group three years ago and said we were going to do a second brewery and add capacity, I was probably the one most adamantly opposed because I just didn’t want to go through the whole process of building another business in Charlotte. (Hartis, 2016)

4.2 Chicago, IL In 2019, Chicago became America’s brewing capital in terms of absolute number of breweries. Chicago was able to leapfrog historic craft brewing cities such as Denver, Seattle, and San Diego with its 167 breweries that lie within the city and its accompanying suburbs (Watson, 2018). Chicago is no stranger to the beer scene, with early players such as Goose Island residing in the city along with newer market movers such as Revolution, which was founded in 2010. Lagunitas was also attracted to Chicago. With an original brewery in Petaluma, CA, it expanded its brewing operations with the opening of a second brewery in Chicago in 2014. Locals have not been surprised by the growth of craft breweries in Chicago: “the numbers confirm what we already know: Our community of brewers, access to locally grown crops and fresh water from Lake Michigan, and the support from our fans across the state make Chicago—and Illinois—a great place to operate a brewery, brewpub, or taproom” (D’Alessandro in Noel, 2018). In addition to Chicago’s strategic location on one of the largest sources of fresh water, the growth of breweries in the city is related to the fact that the largest growth in brewery numbers in 2018 was found in metropolitan regions with more than five million people (Watson, 2018). Despite impressive growth, establishing a craft brewery in Chicago is challenging, particularly when it comes to working with government at all levels. In 2018, Governor Bruce Rauner signed legislation that allowed larger breweries to serve

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beer made by other breweries (“guest” beers) at their own locations (Selvam, 2018). While bigger craft brewers were happy about the development, bar owners specializing in tasty beers on the fringes of the craft beer scene saw a potential disruption to their bottom line. The owner of one of Chicago’s most revered craft beer bars, Hopleaf, noted that big craft beer companies already enjoy “a leg up on traditional taverns and bars” (Roper in Selvam, 2018). Furthermore, “many, many bars like mine have seen dramatic downturns in business . . . the taproom explosion is an existential threat to a lot of us” (Roper in Kendall, 2018). Others noted how House Bill 4897 was transforming taprooms into something previously unseen. “Taprooms are going from a place to grab a pint after a tour to enticing a customer to spend the whole evening there . . . To me, that’s why we have brewpub licenses. If you want to be a full service, one-stop shop to the consumer, then you should be subject to the same laws and zoning rules as the rest of us” (Berger in Kendall, 2018). Berger’s words perhaps underscore the greatest challenge to brewing in Chicago: zoning regulations. Chicago’s alcohol zoning regulations have similar restrictions to other cities. Zoning dictates proximity to libraries, schools, and elderly homes, along with a restriction on proximity to other taverns: “no new tavern licenses can be issued to any location that is within 400 feet of existing tavern business in certain zoning districts” (City of Chicago, 2019a). Furthermore, the city also has “dry areas” in place, along with moratoriums on the issuing of new liquor licenses in certain areas. Dry areas are a remnant from the Illinois Liquor Control Act of 1934 which “permits voters in any precinct in the City of Chicago to vote an entire precinct ‘dry’ through a local option referendum. If a precinct has been voted ‘dry’, no liquor licenses can be issued” (City of Chicago, 2019a). Forbidden Root was affected by such a dry area of the city. As a result, they hired a zoning attorney, in addition to holding a town hall meeting in January of 2014 at their proposed brewery location on W. Chicago Ave, an old movie theatre (McEwen, 2014). By May of 2014, the East Village Association, a powerful neighborhood stakeholder, was onboard with Forbidden Root’s proposal. They voted 24–11 in support of the brewery, highlighting Forbidden Root’s “willingness to compromise and engage the neighborhood” (McKnight in Morris, 2014). The vote lifted the moratorium in the dry district, along with approving a zoning change that allowed the brewery to manufacture beer. Forbidden Root is still brewing in the old East Village movie theatre to this day. The Forbidden Root story is not an isolated incident. Originally located in a brick warehouse near an industrial park on W. Montrose Ave, Lake Effect Brewing outgrew their space and wanted to relocate. They chose an old fire house which, with the help of a developer, they proposed to transform into a taproom with an extra two floors added for residential space (Nitkin, 2018). The parcel would also undergo a zoning change from a community shopping district to a neighborhood commercial district. Lake Effect owner Clint Bautz was met with great fanfare at the community meeting which decided the fate of the

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property. However, detractors were also present with signs reading “No Extra Floors” and “Save our historic firehouse” (Nitkin, 2018). As of January 2019, Lake Effect is still operating at its W. Montrose Avenue location. Breweries such as Goose Island, Like Minded Brewing, Lagunitas, and Revolution (among others) avoided the zoning challenge by locating their operations in planned manufacturing districts (Figure 2.3). Chicago has fifteen such districts, which prohibit residential development and can provide ideal locations for brewing operations, particularly microbreweries. “It’s nice because you feel like it was intended for you and you belong there and you don’t have to fight with neighbors” (Deth in Trotter, 2016). However, planned manufacturing districts do not always work to a brewery’s advantage. When Lagunitas opened for business in Chicago it chose to locate in a planned manufacturing district, but soon realized it would need to get zoning approval to expand its facility to accommodate a concert venue that would hold up to 650 people, along with the construction of a rooftop bar (Samples, 2016). It seems brewers are often put in confrontational situations with municipal planning and development departments. While breweries like Forbidden Root met this challenge head on, some have opted to avoid this conflict by relocating to the suburbs (Robb, 2017; Placek, 2018). One example is Une Anee Brewery, which originally opened in the Kinzie Industrial Corridor in Chicago, 2012. Une Anee Brewery wanted to sell its beer onsite, which would have required a separate license due to Chicago zoning regulations. Instead it decided to locate its new taproom in Niles, becoming the first microbrewery in the village. Niles has since approved new zoning codes favorable to microbreweries: “Microbreweries do not need a special use permit to open in Niles’ manufacturing district or the newly created cultural/entertainment mixed-use district in the Touhy Triangle area” (Studenkov, 2016). Arlington Heights is another suburb which has approved zoning changes to accommodate microbreweries. Microbreweries are allowed to locate in manufacturing districts as long as they are no larger than 20,000 square feet and can also locate in mixed-use zoning districts if they are 2,500 square feet or less (Placek, 2018). Other breweries, such as Baderbrau, saw potential for collaboration with municipal planning and development departments. The Small Business Improvement Fund (SBIF), managed by the planning and development department of Chicago, has an objective “to help local industrial companies expand and create employment opportunities for Chicago residents” (City of Chicago, 2019b). Baderbrau utilized the SBIF to the tune of $150,000 to revamp its brewing capabilities (Chicago Planning & Development, 2017). “SBIF helped us build out a beautiful facility in a neighborhood that has lacked that kind of investment” (Sama in Chicago Planning & Development, 2017). Regardless of the challenges and opportunities breweries face in regard to governmental oversight, Chicago presents a unique case of how brewers have to challenge policy-makers at the municipal level.

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 ,  ,   

Figure 2.3 Zoning map together with existing and planned craft breweries in Chicago, IL

4.3 Cincinnati, OH Ohio breweries performed well at the 2018 Great American Beer Festival. Among the winners were two Cincinnati breweries: Brink Brewing and MadTree Brewing. Brink stood out as it took home a gold and a silver medal along with the 2018 Very

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Small Brewery of the Year award, and MadTree won gold in the “Extra Special Bitter” category (Folk, 2018). These successes are symbolic of the larger craft beer movement within the city. Such is Cincinnati’s reputation as a center of craft breweries that some have suggested that it is an ideal destination to enjoy a “beercation” (Koenig, 2016). Indeed, city planners are challenged to keep up with the growing market and have tapped breweries for their help in the booming industry (May and Monk, 2015). In Cincinnati, discussions around the city’s future mixed-use codes indicate an impact-based approach that accommodates living, working, and playing in the same city blocks as breweries (May and Monk, 2015). This line of thinking was adopted in the Over the Rhine neighborhood through a process unique to Cincinnati’s history. This was “the first citizen created zoning district in the city’s history” and was enacted in 2006 (Over the Rhine Brewery District, 2019b). The urban mix zoning designation would: 1. Provide a balance of uses and amenities fostering a vital economics, livable and cultural area and enhance its urban, aesthetic qualities. 2. Protect and enhance historic, cultural, economic, and architectural resources. 3. Preserve, create and enhance pedestrian-oriented streets to encourage retail, entertainment, residential and office vitality and improve the quality of life for district residents, visitors and workers. 4. Provide quality public space, such as urban street corridors, by maintaining the physical continuity of the street edge created by buildings. 5. Bring most daily activities within walking distance, giving the elderly, young and disabled increased independence of movement. 6. Reduce the number of automobile trips; minimize congestion, consumption of resources and air and noise pollution. (Over the Rhine Brewery District, 2019b)

Part of the success of the Over the Rhine story can be attributed to “leveraging brewing history” (Reid, Gatrell, and Lehnert, 2020). In 1850, Over the Rhine had 43,000 residents, accounting for roughly 37 percent of the entire population of Cincinnati (Over the Rhine Brewery District, 2019a). The predominantly German-immigrant neighborhood had a thriving brewing industry, where brewing and drinking beer was a central part of forming the neighborhood’s identity between 1860 and 1900. By 1889, Over the Rhine had thirteen breweries and around 300 saloons (Morgan, 2010). Of course, much of this was lost over the next century with major events like Prohibition, World War II, and out-migration to other neighborhoods. By the year 2000 the population had declined to 7,638 residents and was littered with blight (Reid, Gatrell, and Lehnert, 2020). However, the new zoning designation that was developed by the city’s Department of Community Development and Planning, with input from local citizens and the Over the Rhine

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Brewery District, has been largely successful for brewers. There has been a more mixed reaction from residents of Over the Rhine, though. As some low-income residents have been displaced, activists have highlighted gentrification, while others have highlighted the successes of the neighborhood’s transition (Woodard, 2016). As of 2019, Cincinnati had thirty breweries operating within its city limits with at least nine more in planning. Of these thirty breweries, twenty-seven have opened since 2010, and fifteen have opened since 2016 (Figure 2.4). There is a distinct cluster of eleven breweries in and around the Over the Rhine neighborhood. These include Christian Moerlein Brewing Co and Moerlein Lager House, Rock Bottom Brewery, Boston Beer Co, Rhinegeist Brewing, Taft’s Ale House, Northern Row Brewery, Revel Urban Brewery, Off Track Brewing Company, Three Points Urban Brewery, and Platform Cincinnati. It goes without saying that the re-zoning of Over the Rhine, and the leveraging of its brewing past, is contributing to the overall success of brewing operations in Cincinnati. While many past and present brewers have found success in Over the Rhine, others have found success (and failure) in the suburbs. March First Brewing opened in Sycamore Township in 2017 and met such rousing sales that it decided to expand. March First wanted “to add a patio and more parking outside the building and convert storage and office space inside the building into manufacturing and taproom space” (Houck, 2018). However, the zoning situation is not as favorable as in Over the Rhine and March First had to go through a zoning change with the Sycamore Township Zoning Commission. Paradise Brewing Company experienced a similar situation in Anderson Township when it upgraded from a ten-gallon brewing system to a five-barrel system (Foltz, 2016). Another brewery, Tap & Screw, moved its operations outside of Cincinnati to Madisonville to increase distribution (Mains, 2017). Its original location was an old sports bar in Westwood, which could not accommodate expanded brewing operations due to its small size. However, the brewery did not find success in Madisonville and eventually went out of business (Mains, 2018). The success of the Cincinnati beer scene does not appear to be approaching an end. Indeed, it is even supporting new businesses not directly involved in the brewing process. One interesting case is the law firm of Bruns, Connell, Vollmar, and Armstrong, located in Cincinnati, which also goes by the name of “Ohio Beer Counsel.” Auxiliary beer businesses such as Ohio Beer Counsel help breweries navigate the complex legal issues at the federal, state, and local levels. The firm sees most of its business tied to “providing breweries and distilleries the legal ingredients to assist with employment matters, forming corporate structure, raising money through private placement memorandums, obtaining federal and state permits, registering and defending trademarks, negotiating commercial leases, vendor contracts and equipment purchases, and when necessary, litigating in court” (Ohio Beer Counsel, 2019). However, it does not only assist brewers in

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Figure 2.4 Zoning map together with existing and planned craft breweries in Cincinnati, OH

navigating the local legal landscape. In 2018, it helped Michael Amann launch Adena Distributing, which was the first new beer distributor in the state of Ohio since 1992 (Brownfield, 2018). Amann’s business will be solely focused on distribution in Cincinnati.

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5. Conclusion Decisions and regulations at all levels of government affect brewers. At the broadest level, the federal governmental shutdown of 2018–19 affected breweries nationwide, as the Alcohol and Tobacco Tax and Trade Bureau was furloughed and breweries seeking approval for new labels of beer had to wait until the government re-opened for business. While this development affected brewers across the country, Chicago brewers were quick to note the problem and how it could affect the future for the summer of 2019. The early part of the year is a good time to plan ahead for the spring-summer beer drinking season . . . I was seeing winter beer labels being approved in August—to give a converse example—so if breweries have to push back those beers for any reason, it could represent a large amount of beer that they might not be able to sell in the busiest part of the year. (Klockars in CBS Chicago, 2019)

In Cincinnati, Mike Stuart of MadTree Brewing observed: “The shutdown definitely impacts our workload, so we don’t know sometimes when we can actually brew that beer” (Stuart in Mitchell, 2019). In Charlotte, Philip McLamb of Resident Culture noted how “it’s a frustrating process to go through for our bills to be going up and the current government shutdown to be affecting the timing of label approval” (McLamb in Hagerty, 2019). Despite this pressing concern, more localized governmental decisions have had an even bigger impact on the beer scene in Charlotte, Chicago, and Cincinnati. Cincinnati, Charlotte, and Chicago—which represent one mid-sized midwestern city; one new south, growing city; and one of the largest, most established cities in the United States—offer an opportunity to highlight differences but, more importantly, similarities in brewers’ struggles with local municipalities. By exploring these three cities on a case-by-case basis we see common trends and best practices for breweries when deciding upon a location. For example, in all three cities, locating in post-industrial spaces gave microbreweries that were early entries into the market certain advantages. In Charlotte, this took shape in light and heavy manufacturing districts around downtown. Chicago, on the other hand, provided opportunities in planned manufacturing districts. Cincinnati also had such locations in the Over the Rhine neighborhood. As the brewing industry has matured, city planning departments have adapted and provided new opportunities for brewers. Cincinnati has showcased adaptation by giving the Over the Rhine neighborhood a complete zoning overhaul with the urban mix zoning designation. Post-industrial spaces in Charlotte have also received major public and private investments, similar to Over the Rhine, along with new rules to ease zoning regulations on microbreweries locating in mixed-use

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zones. Chicago is also adopting these principles as zoning changes are being enacted in planned manufacturing districts. Property owners are bringing residential, office, and retail projects into these areas. It would appear that the once homogenous manufacturing areas are transitioning towards mixed-use spaces. This could have serious advantages for brewpubs as they have closer proximity to residential areas, and therefore the foot traffic which generates some of their clientele. However, on the flip side, brewers might be limited in their production capacity, and must consider the pros and cons before locating in such an area. Brewers have also shown a willingness to take on the challenge of a zoning change. We have seen this in Charlotte, Chicago, and Cincinnati. While this can be a long and arduous task, including hiring legal representation and holding community meetings, it can also be a way to rally local residents to support a brewery before it even opens. If things do not go a brewery’s way in this process, it may be relegated to the suburbs, where it could find a more favorable zoning situation. However, if it is successful, it has a way of projecting a brewery as caretaker of a neighborhood, with foci on all things local. We have shown how zoning laws are central to the question of location by exploring the cases of Charlotte, Chicago, and Cincinnati. The origin of the phrase “there are three things that matter in property: location, location, location” has a contested history, but still rings true today for brewers deciding on where to place their operations in a city (Safire, 2009). As the craft beer market continues to grow and mature, city planners and brewers will continue to find themselves at the same table (possibly sharing pints?) trying to reach a consensus on what works for the city and brewery alike. As we project the future of craft beer, perhaps a new phrase is in order: zoning, zoning, zoning.

References Acerni, A. 2012. Heist: The Rise of the Brewpub. Charlotte Magazine. October 25, available at: http://www.charlottemagazine.com/Charlotte-Magazine/November2012/The-Rise-of-the-Brewpub/ (accessed on January 2, 2020). Anhalt, Brian D. 2016. Crafting a model state law for today’s beer industry. Roger Williams University Law Review, 21 (1), pp. 162–218. Appleton, Roy. 2012. Council Relaxes Zoning Rules for Alcohol Production; Fourth Brewery Seeking City Approval. The Dallas Morning News. June 27, available at: https://web.archive.org/web/20120630234148/http://cityhallblog.dallasnews.com/ 2012/06/council-relaxes-zoning-rules-for-alcohol-production-fourth-breweryseeking-city-approval.html/ (accessed on January 2, 2020). Brewers Association. 2018a. Craft Brewer Defined, available at: https://www. brewersassociation.org/statistics/craft-brewer-defined/ (accessed on January 2, 2020).

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 ,  ,   

Brewers Association. 2018b. Craft Beer Industry Market Segments, available at: https:// www.brewersassociation.org/statistics/market-segments/ (accessed on January 2, 2020). Brownfield, A. 2018, June 8. Craft Beer Veteran Opening Distributor in Cincinnati, available at: https://www.bizjournals.com/cincinnati/news/2018/06/08/exclusivecraft-beer-veteran-opening-distributor.html (accessed on January 2, 2020). Burgdorf, J. 2016. Trouble Brewing? Brewer and Wholesaler Laws Restrict Craft Breweries, available at: https://www.mercatus.org/system/files/burgdorf-troublebrewing-mop-v1.pdf (accessed on January 2, 2020). CBS Chicago. 2019, January 9. Government Shutdown Brews Trouble for Chicago Beer Makers, available at: https://chicago.cbslocal.com/2019/01/09/governmentshutdown-breweries/ (accessed on January 17, 2019). Chicago Planning & Development. 2017, April 28. SBIF Spotlight: Near South’s Baderbrau Brewery Gets Cooking. Available at: https://medium.com/ @ChicagoDPD/sbif-spotlight-near-souths-baderbrau-brewery-gets-cookingd7a9ae3a443b (accessed on January 2, 2020). City of Charlotte. 2018a. 2015 Rezoning Petitions. Available at: https://charlottenc.gov/ planning/Rezoning/RezoningPetitions/2015Petitions/Pages/2015–001.aspx (accessed on January 2, 2020). City of Charlotte. 2018b. Rezoning Petition 2016–063. https://charlottenc.gov/plan ning/Rezoning/RezoningPetitions/2016Petitions/Pages/2016–063.aspx (accessed on January 2, 2020). City of Chicago. 2019a, January 17. Business Affairs and Consumer Protection. Available at: https://www.chicago.gov/city/en/depts/bacp/supp_info/liquor_ license_restrictionsandspecialregulations.html (accessed on January 2, 2020). City of Chicago, 2019b, January 17. Small Business Improvement Fund (SBIF). Available at: https://www.chicago.gov/city/en/depts/dcd/supp_info/small_busi ness_improvementfundsbif.html (accessed on January 2, 2020). City of San Diego. 2015. Microbreweries. Available at: https://web.archive.org/web/ 20180305064658/https://www.sandiego.gov/development-services/microbreweries (accessed on January 2, 2020). ColliersInternational. 2015. Craft Beer Pours into Commercial Real Estate, Colliers International, New York. Available at: http://www.colliers.com/-/media/files/mar ketresearch/unitedstates/2015-brewery-report/breweryreport2015-11-2-optimized. pdf?la=en-US (accessed on January 2, 2020). Craft Freedom. 2019. About. http://craftfreedom.org/about/ (accessed January 2, 2020). Dalesio, E. P. 2018. Craft Breweries Sue over NC Law that Takes Away Sales Control. U.S. News. March 20, available at: https://www.usnews.com/news/best-states/northcarolina/articles/2018-03-20/craft-brewers-sue-over-nc-law-requiring-losing-salescontrol (accessed January 2, 2020).

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Fischel, William A. 2015. Zoning Rules! The Economics of Land Use Regulation, Lincoln Institute of Land Policy, Cambridge, MA. Folk, J. 2018, September 22. Cincinnati Brewers Win Big at Great American Beer Festival. Available at: http://www.cincyweekend.com/cincinnati-brewers-win-bigat-2018-great-american-beer-festival/ (accessed on January 2, 2020). Foltz, A. 2016, June 15. Good Beer, Word of Mouth—and New Anderson Zoning—Help Jeff Graff Expand Paradise Brewing. Available at: https://www.wcpo.com/news/ insider/good-beer-word-of-mouth-and-a-new-anderson-zoning-law-help-jeffgraff-expand-paradise-brewing (accessed on January 2, 2020). Garavaglia, C. and Swinnen, J. (eds) 2018. Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry. Springer, Thousand Oaks, CA. General Assembly of North Carolina. 2019. Craft Beer Distribution & Modernization Act, available at: https://www.ncleg.gov/Sessions/2019/Bills/Senate/PDF/S246v0.pdf (accessed on January 6, 2020). Gohmann, S. F. 2016. Why are there so few breweries in the South? Entrepreneurship Theory and Practice, 40, pp. 1071–92. Graves, William and Smith, Heather A. 2010. Charlotte, NC: The Global Evolution of a New South City. University of Georgia Press, Athens, GA. Hagerty, A. M. 2019, January 7. Local Breweries Impacted by Government Shutdown, available at: http://www.wbtv.com/2019/01/07/local-breweries-impacted-bygovernment-shutdown/ (accessed on January 2, 2020). Hartis, Daniel, 2016. Birdsong Brewing Is Celebrating Five Years, So We Asked CoFounder Chris Goulet Five Questions. Charlotte Five. December 8, available at: https://www.charlottefive.com/5-questions-birdsong-brewing/ (accessed on January 2, 2020). Houck, J. 2018, April 3. New Sycamore Township Brewery Says It Needs to Expand Already, available at: https://www.cincinnati.com/story/news/2018/04/03/newsycamore-township-brewery-says-needs-expand-already/479907002/ (accessed on January 2, 2020). Kendall, J. 2018, August 20. Illinois Bar Owners Voice Opposition to Law Allowing Taprooms to Sell Other Companies’ Beer and Cider, available at: https://www. brewbound.com/news/illinois-bar-owners-voice-opposition-law-allowingtaprooms-sell-companies-beer-cider (accessed on January 2, 2020). Kendall, J. 2019, March 14. North Carolina Brewers, Wholesalers Reach Franchise Law Reform Compromise, available at: https://www.brewbound.com/news/northcarolina-brewers-wholesalers-reach-franchise-law-reform-compromise (accessed on January 6, 2020). Klemaier, J. and Murray, J. 2014, April 23. Colorado’s Booming Beer Taprooms Experience Some Growing Pains, available at: https://www.denverpost.com/2014/ 04/23/colorados-booming-beer-taprooms-experience-some-growing-pains/ (accessed on January 3, 2020).

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 ,  ,   

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Nishida, M. 2014. The costs of zoning regulations in retail chains: The case of the City Planning Act of 1968 in Japan. Journal of Regulatory Economics, 45, pp. 305–28. Nishida, M. 2015. Estimating a model of strategic store network choice: The convenience-store industry in Okinawa. Marketing Science, 34, pp. 20–38. Nitkin, A. 2018, March 9.Lake Effect Brewing Unveils Taproom Plans for 112-Year-Old Jefferson Park Firehouse, available at: https://chicago.curbed.com/2018/3/9/ 17100106/lake-effect-brewing-apartments-firehouse-jefferson-park (accessed on January 2, 2020). Noel, J. 2018, December 12. Cheers, Chicago! You’re Home to the Most Breweries in the U.S., available at: https://www.chicagotribune.com/dining/ct-food-chicago-mostbreweries-in-us-20181210-story.html (accessed on January 2, 2020). North Carolina Alcoholic Beverage Control Commission. 2019. About the ABC Commission, available at: https://abc.nc.gov/About (accessed on January 2, 2020). Ohio Beer Counsel. 2019. Ohio Beer Counsel, available at: http://www.ohiobeercounsel. com/ (accessed on January 2, 2020). Over the Rhine Brewery District. 2019a. History of the Brewery District, available at: http://www.otrbrewerydistrict.org/history_district.php (accessed January 2, 2020). Over the Rhine Brewery District. 2019b. Urban Mix Zoning District, available at: http://www.otrbrewerydistrict.org/projects_zoning.php (accessed January 2, 2020). Peters, Corbin. 2013. Beer: Is It Zoned Out? PlanCharlotte.org, February 6, available at: http://plancharlotte.org/story/beer-it-zoned-out (accessed on January 2, 2020). Placek, C. 2018, June 5. Microbreweries Could Be Coming to Downtown Arlington Heights., available at: https://www.dailyherald.com/business/20180605/microbrew eries-could-be-coming-to-downtown-arlington-heights (accessed on January 2, 2020). Reid, Neil. 2018. Craft breweries, adaptive reuse, and neighborhood revitalization. Urban Development Issues, 57, pp. 5–14. Reid, Neil, Gatrell, Jay D., and Lehnert, Matthew. 2020. Leveraging Brewing History: The Case of Cincinnati’s Over-the-Rhine Neighborhood, in Thakur, Rajiv, Dutt, Ashok K., Thakur, Sudhir K., and Pomeroy, George (eds), Urban and Regional Planning and Development: 20th Century Forms and 21st Century Transformations, Springer, Cham, pp. 453–66. Ridley, D. B., Sloan, F. A., and Song, Y. 2011. Retail Zoning and Competition. Working paper, Duke University, available at: https://faculty.fuqua.duke.edu/~dbr1/res earch/zoning-competition.pdf (accessed on January 2, 2020). Robb, Tom. 2017. Niles’ First Microbrewery Opens, available at https://www.journaltopics.com/articles/niles-first-microbrewery-opens/ (accessed on January 2, 2020). Safire, W. 2009, June 26. Location, Location, Location, available at: https://www. nytimes.com/2009/06/28/magazine/28FOB-onlanguage-t.html (accessed January 2, 2020). Samples, J. 2016, December 2. Lagunitas Reveals Plans for Rooftop Bar, Music Venue at Chicago Brewery, available at: https://www.timeout.com/chicago/blog/lagunitas-

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 ,  ,   

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(accessed

Sands, Alexandria. 2018. Local Brewers Put Plans on Hold While Awaiting Craft Freedom Decision. Creative Loafing Charlotte, April 25. https://clclt.com/ charlotte/local-brewers-plans-on-hold-while-awaiting-craft-freedom-decision/ Content?oid=9340488 (accessed on January 2, 2020). Selvam, A. 2018, August 21. New State Law Has Craft Beer Owners Fearing for Their Futures, available at: https://chicago.eater.com/2018/8/21/17764458/illinois-statebrewery-taproom-law-craft-beer-bars (accessed on January 2, 2020). Suzuki, J. 2013. Land use regulation as a barrier to entry: Evidence from the Texas lodging industry. International Economic Review, 54, pp. 495–523. Thomas, Jennifer. 2018. Craft-Beer Lawsuit Uncovers “Illegal Activity,” Attorney Says. Charlotte Business Journal, June 4, available at: https://www.bizjournals.com/char lotte/news/2018/06/04/craft-beer-lawsuit-uncovers-illegal-activity.html (accessed on January 2, 2020). Thomas, Jennifer. 2019. Olde Mecklenburg Brewery Founder Touts Value of Local Beer at CBJ’s Business Person of the Year Event, Held in His Honor. Charlotte Business Journal. January 18, available at: https://www.bizjournals.com/charlotte/ news/2019/01/18/photos-olde-mecklenburg-brewery-founder-touts.html (accessed on January 2, 2020). Trax-Nielsen. 2018. The Changing Face of Beer Retailing in the U.S., available at https:// www.nielsen.com/us/en/insights/news/2019/in-the-crowded-us-beer-market–shelfspace-is-key-to-maximizing-sales.html?utm_source=sfmc&utm_medium=email& utm_campaign=newswire&utm_content=01-16-2019 (accessed on January 2, 2020). Trotter, G. 2016, June 6. Zoning Trouble Brewing? Beer-Makers, Distillers Fear Review May Push Them Out, available at: https://www.chicagotribune.com/business/ctbreweries-chicago-pmd-0605-biz-20160603-story.html (accessed on January 2, 2020). Trump, J. 2019, May 30. Cooper Signs Bill Letting Craft Brewers Distribute More of Their Own Beer, available at: https://www.carolinajournal.com/news-article/ cooper-signs-bill-letting-craft-brewers-distribute-more-of-their-own-beer/ (accessed on January 6, 2020). Watson, B. 2018, December 11. Brewery Growth Is Both Urban and Rural, available at: https://www.brewersassociation.org/insights/brewery-growth-both-urban-andrural/ (accessed on January 2, 2020). Weiner, Jeff. 2016. Hoping to Lure Craft Brewers, Orlando Eases Zoning Rules. Orlando Sentinel, May 29, available at: http://www.orlandosentinel.com/business/ consumer/os-orlando-microbrewery-rules-change-20160530-story.html (accessed on January 2, 2020). Wetterich, Chris. 2018. Greater Cincinnati’s Growth Rate Rises in Latest Census Numbers, But Population Rank Drops. Cincinnati Business Courier. March 27,

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3 The Dynamics of the Hops Industry Sven Van Kerckhoven, Michelangelo van Meerten, and Casey Wellman

1. Introduction Today, the hops industry seems to be enjoying previously unseen levels of popularity. The craft beer revolution, resulting in a higher number of brewers and a more varied product offering, has heralded the end of decades of consolidation in the beer industry. At the same time, it has brought hops back to the center of the brewing process, as craft and specialty brewers use hops to diversify their product offerings to a much larger extent than macrobrewers. The popularity of some of the current popular beer styles, such as IPAs (India Pale Ale) and New England IPAs, which require a vast quantity of bittering and/or aromatic hops in comparison with other beer styles, is testament to this evolution. Hops (Humulus lupulus) are known to be one of the most essential and characteristic ingredients in beer production as they make several contributions to the final product. Among these are: bitterness, aroma, flavor, mouth feel, foam and lacing, flavor stability, and anti-microbial characteristics which inhibit the growth of organisms that could produce off flavors or aromas, or spoil the beer entirely. Hops are a member of the Cannabaceae family, which includes a wide variety of crops, such as Humulus cannabis (hemp/marijuana) and Humulus celtis (hackberry). The bines wrap their shoots around nearby structures and climb up as they grow as high as 6 meters in a single season. From their bines, hops plants produce either male or female flowers, relying on wind for pollen distribution. The male, pollen-producing plants are removed from commercial fields, as their wind-borne pollen would cause seed growth in the female, flowering plants. The result is that as much as 97 percent of the world’s hop cultivation consists of the female flower cones, mostly produced to be used in the beer brewing process (Almaguer et al, 2014). These female, green cones are used as a spice, while their isomerized acids protect the beer from the staling effects of oxygen. At the same time, hops can inhibit the development of certain unwanted bacteria in beer (Simpson, 1993). Hops are known to grow in the wild across Europe, North America, and Asia as bines. They require winter frosts, wet springs, and dry summers. These climatic conditions allowing their growth and cultivation are found between the latitudes of 30 and 55 on both sides of the equator (Kopp, 2011). Sven Van Kerckhoven, Michelangelo van Meerten, and Casey Wellman, The Dynamics of the Hops Industry In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0004

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Admittedly, hops do not provide a very pleasant taste on their own, as their bitterness is quite intense. However, due to their ability to help preserve the shelf life of beer, which allowed the transport of beer over larger distances, they slowly managed to become a core ingredient of today’s beers. At the same time, hops offset the sweetness of the grains in beer. Previously, beer was also made with other herbs and spices, such as gruut in Medieval Europe, used mostly for flavoring purposes. These spices would have varied based on where beer was produced, but certainly added interesting flavor elements to the beverage (let us keep in mind that medieval technology, based mainly on trial and error, may not have allowed for the industrial consistency of a modern brewery). A lot has been written in recent years about the beer industry from an economic perspective (see Swinnen, 2011; Cabras et al, 2016; Garavaglia and Swinnen, 2018). However, the well-documented changes in the industry have also had an impact on the markets of the different inputs into the brewing process. Far fewer studies have covered these. Since hops are one of the major ingredients of contemporary beers, this chapter aims to address this gap in the literature. The chapter starts with a historical account of how hops were gradually introduced in the brewing process, and how the use of hops spread throughout the world from medieval times onward. The chapter further demonstrates the dynamics and fluctuations in the hops market in recent decades. It then looks into the types of hops that exist and their particular features that contributed to the push for their introduction into the beer brewing process. As is discussed next, the wide variety of hops that have been developed and that are currently commercially available allowed craft brewers to produce more exotic and hoppy beers. Since the craft and special beer segment of the market has witnessed remarkable growth in recent years, and these markets use more hops in their beer production, hop growers witnessed increased interest in their products. The rise in demand and the shift in supply are discussed next, and are followed by an analysis of the market and the pricing of hops. The hops market, which uses a lot of forward contracting, has consequently expanded in recent years. Uncertainty about the future outlook for the beer market and about the growth potential of the craft beer segment may have a profound impact on the hops market, with high fluctuations in demand and supply, and, consequently, in hop prices. We end the chapter with some concluding remarks.

2. The Introduction of Hops in the Brewing Process Hops were already known in Europe in antiquity, but not in connection to brewing beer. Plinius the Elder cited above all the virtues of hop shoots and hops for medicinal purposes (Biendl and Pinzl, 2013). Modern hop variants may, however, have been introduced from China by migratory waves to Central

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  ,     .

and Northern Europe in the Early Middle Ages (Meussdoerffer, 2009). In the eighth century the Carolingian ruler Pepin the Short donated a herbal garden, in which hops were grown, to the Saint Denis monastery in Paris (Papin, 2004). Several sources seem to warrant the use of hops in at least some French monasteries in the eighth and ninth centuries (among others Meussdoerffer, 2014). In Germany as early as 830, a description of the brewing process mentions the use of hops in beer, and there are several indications of brewing with hops in Germany, Austria, and Hungary in the ninth and tenth centuries (Doorman, 1955). However, it was not until the twelfth and thirteenth centuries that hops were used in a systematic way as an ingredient of beer. Sometimes taste is invoked as a reason for the delay in the spread of the use of hops (Swinnen and Briski, 2017). Malted barley itself would yield a rather sweet taste. The addition to medieval beers of mixtures of herbs and spices known as Gruut, Gruit, or Grout would, according to some authors, not fundamentally change the sweetness of beer (Ruis, 2016; Mulder, 2017). This is not the case with hops, whose introduction resulted in more bitter beers (Behre, 1999). This might explain why it would have required time for hops to be adopted in the brewing process. This argument is, however, countered by other authors who claim that one of the ingredients often added to gruut was gale (gagel), which also provided bitterness (Verberg, 2018). Though taste may have been an element, there is clear evidence that the appearance of hops in beer is related to economic growth in the Middle Ages and to subsequent changes in trade, prices, and taxation. Prior to the introduction of hops in the late Middle Ages, population densities in North-Western Europe (where beer was the drink of preference) were low and beers were mainly produced for the local market. This implied that storage and transport were not of significant importance in the beer production process. Since beer was an important element in daily consumption, its production was quite regulated and a source of taxation. The right of taxation of beer initially resided with monasteries, local rulers, and the church; gradually it would become an important element in the revenue for cities and rulers over larger areas. In the Low Countries (present-day Belgium, Netherlands, and the North of France), brewers were obliged to use a mix of herbs and spices called gruut or gruit in the brewing process. The distribution of gruut was organized as a monopoly—the Gruutrecht—and it provided the tax base on brewing. Brewers were obliged to purchase gruut and add it to their beer. The composition of gruut was often a wellkept secret, in order to prevent copying. The gruut monopoly brought considerable wealth and prestige to its owners, such as for instance the Gruuthuuse family, who obtained the gruut right in Flanders in 1190. The economic power of such families provided a strong check to changes in the brewing process. The Gruuthuuse family used their influence with the Counts of Flanders to preserve their monopoly (Papin, 2004). Thus existing regulations and monopolies, and the power of families benefiting from them, slowed the spread of hopped brewing.

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After the year 1000, the European economy entered a phase of growth. The population grew and economic growth was sustained by the development of trade and the introduction and spread of technologies. This growth would enhance the creation of cities, and stimulate specialization of production and trade. This would provide the right conditions for the development of hopped beers (Van der Wee, 1965). Hops provided the preserving ingredient that would allow beer to be stored over a longer time and to be traded. An additional advantage of the use of hops was that hopped beers required less input of barley (Wubs-Mrocewicz, 2005). With population growth, grain prices showed an upward trend. Lower inputs of barley thus presented a cost advantage to brewers using hops (Aerts, 1996). The first area to adopt the use of hops in beer production in a systematic way was Northern Germany, and in particular the cities of the trade network of the Hanse: Hamburg, Bremen, Lübeck, Gdansk, and Wismar. Toll registers on traded goods for the city of Lübeck indicate the presence of hops as a tradable commodity as early as 1227. The demand for hops grew, as indicated by the trade agreement signed in 1248 by the Duke of Bavaria, Albrecht I, allowing the export of hops from Southern Germany to several cities of the Hanseatic League in Northern Germany (Papin, 2004). The product innovation of adding hops in the brewing process created a clearly superior product (Unger, 1992; Aerts, 1996). But, somewhat surprisingly, it would take more than two centuries for the new process to spread throughout North-Western Europe. Only by the end of the fifteenth century had hops replaced gruut in the brewing process in the Southern Low countries (Aerts, 1996). In the UK, it would be the early 1600s before hops took over (Unger, 2004). The slow diffusion of the new technology was related to the efforts of the hopped brewers and the Northern German cities to limit the adoption of hops in the brewing process in other areas in order to protect their innovation and dominant position in beer trade. At the same time import substitution in the Low Countries and England was slow to develop due to vested interests in non-hopped gruut based beers and their importance as a tax revenue. Evidence of imports of hopped beers from Northern Germany is found in Damme, the port of Bruges, the most important trading city of the Low Countries¹ at the time, as early as 1252 (Papin, 2004). Imports of hopped beers were obviously a threat to the position of local brewers. They also threatened the tax revenue from local beer brewers accruing to the cities and local rulers. But German brewers were increasingly successful in exporting their hopped beer to the Low Countries. The new brewing process would remain a virtual monopoly of German brewers until well in the fourteenth century. Gradually, however, brewers in the Low Countries tried to imitate the new process and revert to import substitution. Through

¹ Sources for the Belgian city of Alost, which would become an important producer of hopped beer, indicate that in the early fourteenth century all hops and hopped beers in the city are from Germany (Papin, 2012).

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  ,     .

industrial espionage, Dutch brewers were able to copy the German producers and the production of hopped beers began to spread in the province of Holland. In 1321, the Count of Holland forbade imports into Holland of hopped beer from other areas. The production of hopped beers became a privilege of local Dutch brewers, on the condition that they were to pay same amount of taxes as brewers using gruut (Mulder, 2017). Dutch brewers thus entered competition with the German hopped beer producers, and started exporting their beers to Flanders and Brabant, in the Southern Low Countries, and to England. The German cities initially reacted by trying to protect their beer exports and, most of all, by prohibiting the export of hops (Papin, 2012). When this proved unsuccessful, they tried to regulate the hops market and counter the fraud present in hops exports by introducing a quality label.² Despite these efforts, Dutch brewers were able to supplant their German competitors in the Low Countries. The history of bans on imported hopped beers and import substitution repeated itself for the Southern Low Countries and England. The city of Ghent in Flanders prohibited imports of German and Dutch hopped beers at the end of the fourteenth century, allowing only local brewers to brew hopped beers (Papin, 2012). England, which by 1430 was importing hopped beers and hops from the Low Countries, had banned imports of hopped beer and was favoring local hop production by the end of the sixteenth century (Papin, 2012). Nonetheless, it was Flemish and Dutch migrants in England who introduced the brewing process of hopped beers and the production of hops in Kent, allowing England to compete with imports of hopped beers (Mead and Simons, 2015). Around 1500, hopped beers clearly came to dominate the beer markets in North-Western Europe. In Germany, regulations even stipulated that hops are one of the four necessary ingredients for beer. This is the famous Reinheitsgebot, which is first introduced for the city of Munich in 1487 and decreed by Duke Wilhelm IV for the whole of Bavaria in 1516 (Van Tongeren, 2011). When climate change in the sixteenth century posed a threat and, eventually, brought an end to local wine production in most of North-Western Europe, those of the lower classes, who could not afford the more expensive imported wines from France, switched to locally produced beer, resulting in an increasing demand for beer and consequently a surge in hop production (Aerts, 1996; Meussdoerffer, 2009). Hops were then already part of contracts concluded long before the actual harvest (Papin, 2012), making this one of the earliest future markets.

² Fraud in hop trade consisted by putting leaves of hop plants or other crops in the bags with hop flowers, or by mixing young and old hops. The Hanseatic cities introduce measures to fight fraud as early as 1410. The use of hops older than three years became explicitly forbidden (Papin, 2012). In 1452, German traders complained about unfair competition from Polish hop producers who were accused of adding sand and even stones to increase the weight of their hop bags (Papin, 2004). Fraud and forgery remained an issue: the English Parliament voted a bill in 1603 imposing penalties on merchants selling adulterated hops (see https://www.britishhops.org.uk/hops/history/)

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Wars between European powers also played a role in prohibiting beer imports and promoting import substitution and local hop production. The Thirty Years’ War (1618–48), for instance, virtually put an end to hop exports from Northern Germany (Papin, 2012). However, by the eighteenth century, trade and specialization had established England, Bavaria, and Bohemia as the main world centers of hop production (Kopp, 2011).

3. The Spread of Hopped Brewing The European overseas expansion in the sixteenth and seventeenth centuries and overseas migration from Europeans introduced hopped brewing and the use of hops to the rest of the world. A particular chapter in this history was the development of the so-called IPA. British control over the Indian subcontinent created a demand for beer by British civil servants and troops stationed in India.³ In the second half of the eighteenth century, a local brewer, Hodgson, situated at the Thames, was able to capture this growing overseas demand in India by granting up to eighteen months’ credit to overseas beer importers. Though Hodgson would also sell porter to the East India Company, it was most of all his more hoppy pale October beer that proved to be increasingly popular, as it proved able to resist the havocs of the long journey through the tropics (Cornell, 2003). By the early nineteenth century, this hoppy October beer had become the standard for exports to India, and other breweries would start to imitate the brew that became known as India Pale Ale. Due to the suitability of their water wells for brewing pale ale, the Burton brewers Allsopp and Bass would eventually take over the market and set the standard for IPA in the 1820s. European settlers would introduce hops to North America in the late eighteenth century,⁴ and to Australia,⁵ New Zealand, and Argentina in the nineteenth century. The influx of migrants from the British Isles and from Germany ensured an interest in hopped beers. Hop production in North America would initially be a feature of the East Coast, the state of New York, and Quebec in Canada. The settlement of the North American West Coast and occurrence of diseases like mildew would move hop production westward to the States of California, Washington, Idaho, and Oregon,⁶ as well as Ontario in Canada, where the climate also proved to be very favorable for hop growing (Sulerud, 1931; Roy, 1991;

³ Already in 1638, there is mention of a ship of the East India Company well provided with English beer (Cornell, 2003). ⁴ Beer production in New Amsterdam (New York) was already a feature in the seventeenth century. ⁵ Already in 1803 efforts were made to grow hops in Tasmania from seeds brought over from England. But hop cultivation would only take off after the careful shipment of real hop plants from England in 1822 (Miller, 1980). ⁶ The first hops were planted in Oregon in 1865 (Kopp, 2011).

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  ,     .

Hieronymus, 2012). By the beginning of the twentieth century the American West Coast had become the dominant hop-producing area in North America. Local hop production outside Europe would then be stimulated by the world wars in the first half of the twentieth century, as naval blockades and labor shortages limited the possibilities of harvesting and made overseas exports from Central Europe and the UK virtually impossible. Rising labor costs would induce efforts to mechanize the harvest of hops in the 1930s. But the introduction of harvesting machines would mostly take place in the 1950s and 1960s.⁷ The twentieth century would also see coordinated and scientific research into new hop varieties that were selected for their capacities and alpha-acid contents and their resistance to diseases like mildew:⁸ According to Darby, by 1900, trial and error had resulted in the development of twenty hop varieties in England and sixty varieties on the European continent (Darby, 2013). The recovery from the devastating war years would result in growing world demand for beer in the 1920s. This stimulated the increase of hop acreage and production, as hop producers were barely able to meet demand. The hops market also faced two major shocks in the 1920s. The first was an outbreak of mildew disease in Europe, which would devastate hop production in Central Europe and England. This stimulated hop production and the expansion of hop acreage in other parts of the world (Kopp, 2014). The second shock was the Prohibition period in the United States, which would last till 1933. This stimulated hop producers in the United States to find new markets. The period of high demand for hops in the 1920s would come to an end with the Wall Street crash and the subsequent crisis of the 1930s. The economic crisis pushed many hop farmers out of business, with prices falling below production costs (Zeyl, 1930). After World War II, both the acreage of hop cultivation and the amount of hops produced would be characterized by an upward trend till the 1970s (see Figures 3.2 and 3.5 below). The triumph of lager beers and the movement toward high concentration and consolidation, whereby only a small number of very large producers survived, would affect the hops market after World War II.⁹ One of the effects of the increasing concentration was the evolution to lighter beers with a less pronounced taste that would be acceptable to as large a number of consumers as possible: “mass market American beers—those that define the ‘American’ style of beer— have very low levels of hops and very little color” (Stack and Gale, 2007, p.68). The triumph of lager and pilsner beers implied a trend toward lower quantities of hops per keg (Reid, 2018). For hop production, this would set in motion a trend of ⁷ Previously it took as many as ten workers per acre per day to harvest hops (Miller, 1980). ⁸ Several high-alpha hop variants such as bullion and brewer’s gold were introduced in the US in the 1930s because of their resistance to mildew: see https://hort.purdue.edu/newcrop/afcm/hop.html. ⁹ At the same time, the split of Europe into West and East by the Iron Curtain would also affect the integration in the world market of traditional hop-growing countries like Czechoslovakia, Poland, and Yugoslavia.

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lower demand for hops and for aromatic hops in particular, resulting in a decline of hop production in historical areas of hop growing like Kent (Harvey, 1963; Ilbery, 1982). Hop producing historically had had a reputation as a rather hazardous activity, or the gambling of farmers, with excellent profits but also a risk of high losses (Cordle, 2011). Hop producers were confronted with relatively high start-up costs and a market characterized by a lack of substitutes and inelastic hop prices, resulting in relatively large price fluctuations (Folwell et al., 1985; Gabrielyan and Marsh, 2012; Dasso, 2015).¹⁰ At the same time, hop breeding programs in different countries aimed to increase the productivity of hop fields by developing variants with higher alpha-acid contents. Several new varieties with high alpha-acid contents (8 percent and more) were developed in the 1970s, and the development of the use of pellets and hop extracts to be used in the brewing process, rather than hop bells, has also stimulated the development of high-acid varieties which are more suitable for processing into pellets (Darby, 2013). As a result, the average amount of hops needed for the production of a hectoliter of beer steadily fell in the second half of the twentieth century.

4. Types of Hops According to Hop Growers of America, the hop development process takes approximately nine years, and takes place in four phases.¹¹ Over this time period, the hop is developed and tested extensively before being released to the industry and commercialized. The British Hop Association adds two years to this process, whereby the tenth year serves as the first commercial planting and the eleventh year as the first commercial crop.¹² In other words, under ideal conditions, it takes nearly a decade to prepare a new crossbred variety for commercial growth. Under favorable soil conditions, hops do not need to be replanted or replaced: During harvest, a farmer can simply cut the entire above-ground section off, as it would die regardless. The perennial rhizome (underground stem) of the plant produces new sprouts, bines, and leaves each year. If one wishes to grow more hop plants without pollination, a section of the healthy rhizome simply needs to be removed and replanted, and within the second or third growing season, the new hop plant should produce a full yield.

¹⁰ Efforts in Europe through the Common Agricultural Policy and in the US through the creation of the Hop Administrative Committee (1966–85) to stabilize price fluctuations and improve farmers’ revenues were only moderately successful. ¹¹ https://www.usahops.org/resources/hop-breeding.html?fbclid=IwAR0gGpfcS2rp8Luc854t_ z7r7g_95jizLaGmxhvBCr1bp8GiwxqzsycW5LY ¹² https://www.britishhops.org.uk/hop-breeding/

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  ,     .

Typically, hops are cultivated using this method, in order to avoid cross-breeding, hybridization, and seed production. In fact, only the female plants are cultivated, while the male plants are carefully kept separate for breeding and development purposes. Because hops have evolved and bred naturally alongside beer production in recent centuries, certain regional varieties have come to prominence. Especially in the nineteenth and twentieth centuries, hop farmers of certain regions became famous for drawing specific characteristics in their harvest, such as the Fuggles and Goldings of England, the Saaz of Bohemia, the Tettnanger of Germany, or the Spalt and Millelfruh of Bavaria. Saaz, Tettnang, Spalt, and Mittelfruh are widely considered among brewers as Noble varieties.¹³ As we saw in section 3, hops are important for brewing as they help to preserve a beer. At the same time, their introduction into the brewing industry has allowed producers to play around with the taste of their beers, as hops in general tend to increase the bitterness of the beer. The harvested part of the hop plant is the flowering female cone, which contains resins and hop oils that contribute both αacids and β-acids. It is these acids that impart bitterness and aroma in a beer’s final character. Today, based on a hop’s acid level, it is very common to be classified as either an aroma or a bittering hop (Hieronymus, 2012). As the hops are bred for their desired characteristics and utilized for fine aromatics, hops have become the aromatic and flavor focus of many modern beer styles. In many New England IPAs, for example, 1 percent or less of all the used hops is added during the brewing itself. In order to maximize flavor and aroma impact, and minimize extracted bitterness, the hops are added before, during, and after fermentation. The IHGC Market Report evaluates a hop harvest in terms of both yield and alpha acid value (International Hop Growers’ Convention, 2011–18). Alpha acids are the quantifiable measure of hop bittering potential and value for preserving beer; thus brewers will alter their hop additions to beers and overall hop consumption based on alpha acids. In other words, a hop harvest with a lesser overall yield (amount of viable hops harvested in metric tons, for example) may be offset by higher alpha values. Some brewers take reported alpha-acid content into account when brewing: to achieve consistent bitterness in their beers, they may adjust hop quantities based on alpha acids and quality of harvest. Whereas now there is a plethora of classical and new hop varieties to choose from, due to more advanced technology and research with regard to better preservation and transportation, in the past brewers did not always have a choice in terms of hop variety or characteristics. Historically, the hops would have been heirloom varieties. Now, the available hop varieties seem to be increasing each

¹³ East Kent Goldings and Czech Saaz hops currently hold PDO (protected designation of origin) status within the EU.

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year as public and private breeders release new varieties to be more competitive and fulfill the brewers’ demand for specific aromas and capacities. For brewers, the need for hops can vary by brewing style, price, market access, and desired characteristics beyond just bittering. Certain styles, such as Czech lagers, German pilsners, or English bitters, may require the subtlety of a traditional variety’s aromatics or flavor balance. Other hops, especially American-grown varieties, may be used in order to add characteristics such as citrus aromas to the beer.¹⁴

5. Demand for Hoppy Beers Since hops are a key ingredient in the beer industry, the overall demand for hops is obviously determined by the demand for beer. Figure 3.1 shows the evolution of global beer production volume between 1910 and 2018. The most striking feature of Figure 3.1 is the spectacular and virtually uninterrupted growth in the world’s beer production from World War II until around 2010. This period corresponds to the strong movement towards increases in scale and concentration in the beer industry (see many excellent contributions on this evolution in Garavaglia and Swinnen (2018)). Consolidation resulted in a decreasing number of 2000 1500 1000 500

1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0

Figure 3.1 World beer production 1910–2018 in billion hectoliters Source: Calculated from Joh. Barth & Sohn GmbH & Co KG, 1908–2019

¹⁴ According to search results on www.hopslist.com, currently grown hops commonly associated with the descriptor citrus include Citra®, Mandarina Bavaria, Ahtanum™, Amarillo™, Cascade, Amethyst, Eureka, Tahoma, Tillicum®, Calypso, Dr Rudi, Waimea, Admiral, Palisade®, Pioneer, Saphir, Ivanhoe, Strisselspalt, Wai-iti, Equinox, Melba, Buzz Bullets, Caliente, Azacca®, Dana, Opal, Multihead, Neo1, Pacific Jade, Sorachi Ace, Magnum, Galaxy, Columbia, Delta, CTZ (also known as Columus, Tomahawk®, or Zeus), Celeia, Merkur, Mount Rainier, Motueka, Olympic, Amallia, Riwaka, Aramis, Bouclier, Red Earth, Centennial, Canadian Redvine, Challenger, Glacier, Southern Cross, Sterling, Sticklebract, Mosaic®, Simcoe®, Pilgrim, Satus®, Summer, Summit™, Warrior®, Pacifica, Triskel, Super Pride, Topaz, and Galena.

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  ,     . 160000 140000 120000 100000 80000 60000 40000 1904 1909 1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

20000

Figure 3.2 World Hops production in 1,000 metric tons Source: Calculated from Joh. Barth & Sohn GmbH & Co KG (1908–2019). Barth, Annual Report, 1908–2019

very large producers which specialized in the production of mainstream lager (Howard, 2013). Only in recent years has this growth has come to a halt, and mature beer markets actually show a tendency toward decreasing beer consumption. As can be seen in Figure 3.2, the steep rise in beer production in the second half of the twentieth century corresponds to an initial rise in hop production after World War II.¹⁵ However, in 1982 hop production reached a peak of 146 million tons; thereafter it plummeted. Rising demand for beer did not translate into a further rise in demand for hops. The explanation for this phenomenon must be sought in the triumph of mainstream lager beers and changes in the amount of hops they used in their production, as well as in the rise of the use of pellets and hop extracts. For the most recent period, however, a reversal of this trend seems to be apparent. Where beer production reached a ceiling, hop production displays a rise. The explanation for this recent phenomenon must be sought in the changing beer market resulting from the craft beer revolution. Starting in the United States after the change in legislation that allowed home brewing, a new generation of craft brewers ventured into exploration of a range of beers, going beyond the mainstream taste of lager beers and developing niche markets (Van Kerckhoven et al, 2020). The number of craft beer producers and their production levels have sharply risen in the past two decades, resulting in a market share of 13.2 percent of the volume of US beer production in 2018.¹⁶ Though there are some signs of a slowdown in the expansion of craft brewing in the United States, its market share is still increasing. While overall beer production in the United States fell by 1 percent

¹⁵ The 1920s and 1930s depict the turbulence of the shocks of the mildew crisis, prohibition in the US, and the 1930s economic crisis (Kopp 2014). ¹⁶ Data from Brewers Association: https://www.brewersassociation.org/statistics-and-data/nationalbeer-stats/. Since the craft beer revolution started in the US, our analysis focuses mainly on the US in this section. But trends in other countries are similar to those in the US.

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in 2018, craft brewers saw production expand by 4 percent. Beer analysts forecast a further rise in the production of craft brewers in the next few years.¹⁷ So even with a slowdown of growth, it is not impossible that the craft beer segment in the United States could reach a market share of around 20 percent in the next decade. There is no question that craft brewers’ creativity resulted in an increased offering of beer types. As craft beer enthusiasts and brewers enjoy a higher volume of hops in many of these beers, the hops market expanded in tandem with the craft beer market. US craft brewers renewed interest in older traditional hop varieties and in the development of new varieties, both domestically and internationally. For example, the British Hop Association claims that more than 50 percent of British-grown hops are now exported.¹⁸ Most of these craft beers use significantly more hops than the traditional lager. Figure 3.3 indicates the amount of hops (in lb) in a keg consisting of the specific beer (an American keg typically holds 1984 oz or 58.7 liters of beer). As can be seen in Figure 3.3, with the exception of amber and hefeweizen styles, the beer styles use significantly more hops than the mainstream lager beers. The most extreme case is the hopping rate of an Imperial IPA, a style which the Beer Judge Certification Program (BJCP) describes as “an intensely hoppy, fairly strong pale ale without the big, rich, complex maltiness and residual sweetness and body

A Ba mbe rle r yw Ca in lif e or ni Bro aC w om n m on ES H ef B e Im wei pe zen Im ria pe l I ria PA Im l P pe ort r i a er lS to ut IP A La ge Pa r le Al Pi e lsn er Po rte r St ou t

4 3.5 3 2.5 2 1.5 1 0.5 0

Figure 3.3 Amount of hops for different beer styles Source: Author calculations from https://www.usahops.org/enthusiasts/brewing.html

¹⁷ See e.g. the Craft Beer Market research report 2019 from Market research Future (https://www. marketwatch.com/press-release/craft-beer-market-comprehensive-research-study-2019-size-sharetrend-global-demand-industry-statistics-and-current-scenario-by-forecast-to-2023-2019-04-16) and Craft Beer Market—Growth, Trends and Forecast (2019–2024) by Mordor Intelligence (https://www. mordorintelligence.com/industry-reports/craft-beer-market) ¹⁸ https://www.britishhops.org.uk/app/uploads/2017/07/Positive-News-from-British-HopGrowers.pdf

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  ,     .

of an American Barleywine.”¹⁹ In its 2015 Style Guidelines, the BJCP specified that among the characteristic ingredients for this style are “a complex variety of hops, typically American or New World, often with cutting-edge profiles providing distinctive differences.”²⁰ In other words, this style is, at least in part, valued for the range and complexity of its hop character. Now, if we compare with the American IPA, which is the style upon which the Imperial, or Double, IPA is based, we see a very different hopping rate. The BJCP states that the American IPA, while using less than 30 percent of the hops of the Imperial IPA, should still be “a decidedly hoppy and bitter, moderately strong American pale ale, showcasing modern American or New World varieties.” The (American) Barleywine and Imperial Stout styles, though technically hopped at higher rates than an American IPA, are described as “full-flavored American ale that challenges and rewards the palate with full malty and hoppy flavors and substantial bitterness and an intensely-flavored, big, dark ale with a wide range of flavor balances and regional interpretations.”²¹ In order to get a more detailed idea of the trends in demand for craft brewing we can have a look at the statistics of the Great American Beer Festival (GABF). Since 1999, this Festival has been publishing statistics on the number of commercial entries in its annual beer competition, per style. As the submissions are closely observed by brewers and beer enthusiasts, they tend to set novel trends in brewing, addressing unmet demand in the market. According to GABF records,²² 1,922 beer samples were submitted in 1999; 118 were India Pale Ales (IPAs), representing just over 6 percent of all samples. For the same competition in 2018, 311 of 8,496 samples (3.7 percent) were submitted in the “American-Style India Pale Ale” category. At first glance this may seem to be a decrease, but it is important to notice the adjacent categories: • Juicy or Hazy Pale Ale (132 entries) • Juicy or Hazy India Pale Ale (391 entries) • Juicy or Hazy Imperial or Double India Pale Ale (150 entries) “Juicy or Hazy”, in this case, refers to a new sub-style of beer not previously included in the competition, also commonly known as the New England IPA (or Pale Ale/Double IPA). As described by the American Homebrewers Association’s John Moorhead circa 2017, New England IPAs have crazy hop aromas with restrained bitterness to follow. When you smell a New England IPA you expect a burst of bitterness

¹⁹ https://bjcp.org/stylecenter.php ²⁰ BJCP Beer Style Guidelines 2015. ²¹ BJCP 2017 report. ²² https://www.greatamericanbeerfestival.com/the-competition/past-winners/

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in the taste, and what you often find are fruity, citrusy flavors and a creamy, soft mouthfeel. It kind of messes with your expectations of what an American IPA stands for.²³

These fruity and citrusy flavors are generally derived from the hops. In February 2018, the Beer Judge Certification Program²⁴ first published guidelines for this style as a substyle of its Specialty IPA category.²⁵ Neil Fisher, head brewer at WeldWerks Brewing Co., which is listed by the BJCP as a producer of one of the commercially available examples of this style, states that typical hopping rates per bbl. range²⁶ from 1.1 to 1.8 lbs per keg, which is higher than the listed hopping rate for an IPA.²⁷ Taking these new substyles of Hazy/ Juicy/New England Pale Ales into account, an additional 673 entries were submitted in new hoppy categories for the 2018 GABF, representing 7.9 percent of the total entries and bringing hop-heavy beers to represent a total of 17 percent of all beer entries, demonstrating the rising popularity of hoppy beers (see Figure 3.4). The above findings are corroborated by the hop producing industry itself: in its annual reports, the Nuremberg-based hop trading company Joh. Barth & Sohn GmBH & Co underlines the impact of specialty beers on hop requirements.²⁸ The 2017/2018 Hops Report estimates that Craft Beers represent about 2.5 percent of the total world beer production volume, while accounting for a staggering 20 to 25 percent of the world hops crop demand. The report notes that even in the noncraft sector, hops demand has grown by 18 percent over the past ten years, while beer production has only grown by 8 percent (Joh. Barth & Sohn GmbH & Co KG, 1908–2019, 2018). These figures may not prove that hop demand will increase continuously across the entire beer sector, but they do indicate the prominence of certain specialty beer styles, which utilize and require up to 1,000 percent of the hop volumes of mainstream international lagers (of which recipes are rarely public).²⁹ It is unlikely that Double IPA, for example, will become the world’s most consumed beer style; however, even marginal growth in consumption would likely be felt in the hop industry. For example, BrewDog produced a beer called Hardcore IPA until 2017, for which the recipe had been made public. Production of 40hl of Hardcore IPA per week would have utilized in total 5,720 ²³ https://www.homebrewersassociation.org/how-to-brew/tips-brewing-new-england-ipa/ ²⁴ The beer judgement certification program was founded in 1985 in the US with the aim to spread knowledge about beer and develop a standardized evaluation process for beers. ²⁵ http://dev.bjcp.org/beer-styles/21b-specialty-ipa-new-england-ipa/ ²⁶ US (beer) barrel = 1.1734 hl. ²⁷ https://beerandbrewing.com/unlock-the-secrets-of-new-england-style-ipas/ ²⁸ The hop trading company Barth & Sohn dates back to 1794. It is currently the world’s largest hop trading company with a market share around 30 per cent. ²⁹ See Figure 3.3 for an example of current hopping rates.

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  ,     . 800

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American Pale Ale Entries

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American IPA Entries

American Barleywine Entries

American Double/Imperial IPA Entries

Imperial Stout Entries

Juicy Pale Ale Entries

Total Entries

Juicy IPA Entries

Figure 3.4 Great American Beer Festival (GABF) entries, by style Source: Author calculations based on https://www.greatamericanbeerfestival.com/thecompetition/past-winners/

metric tons of hops per year,³⁰ or, according to figures for the 2017 harvest, an equivalent of approximately 2.5 hectares of hops (Joh. Barth & Sohn GmbH & Co KG 1908–2019, 2018).³¹

6. Shifting Supply After considering the demand for hops, we will now look at changes in supply. Tables 3.1 and 3.2 show the area harvested (in hectares) and the production (in metric tons) worldwide, respectively. Overall world acreage and production reached a peak in the 1980s, and since then both acreage and production have ³⁰ Recipe calculations retrieved from https://brewdogrecipes.com/recipes/hardcore-ipa, based on additions of 36.9kg of CTZ hops, 30.8kg of Centennial hops, 26.9kg of Simcoe hops, and 15.4kg of Amarillo hops per 40hl, brewing 40hl per week. ³¹ CTZ yielded 3.25mt/ha, Centennial yielded 1.91mt/ha, Simcoe yielded 2.01mt/ha, Amarillo yielded 1.96mt/ha in 2017.

27048 15378 NA NA 14449 13497 70372 9000 21790 NA NA NA NA NA 845 NA 101078

Germany Czech Republic Slovenia Poland England Rest of EU EU27 Total Rest of Europe USA Canada Argentina China Japan South Africa Australia New Zealand World

15224 17264 3000 3600 9706 6409 55203 7450 10076 471 NA NA NA NA 1000 NA 78750

1929 8632 11385 1850 3240 7322 2460 34888 3300 13776 435 NA NA NA NA 700 NA 53742

1937 8428 9884 1730 742 11100 2348 34230 2694 19600 830 223 235 575 158 795 303 59640

1950 9828 8200 2397 2271 8134 4630 35461 13459 11817 343 255 100 908 107 768 239 63957

1960 14876 8735 2411 2150 6965 6183 41319 13923 11210 404 226 NA 1587 125 954 249 70663

1970

Source: Calculated from Joh. Barth & Sohn GmbH & Co KG (1908–2019)

Note: No border adjustments for the period 1913–37; East and West Germany for 1950–80

1913

Country

Table 3.1 Hop acreage in hectares, selected years 1913–2018

20110 11100 2212 2474 5692 7203 48791 14955 15014 327 200 4000 1161 220 1071 158 86926

1980 22399 11807 2508 2257 3594 6292 48857 15700 14357 329 270 6500 842 530 1085 210 91271

1990 18594 6108 1623 2250 1975 2901 33451 3931 14627 NA 100 4930 329 500 813 381 59022

2000 18386 5210 1070 1867 1391 2186 30110 2082 12662 9 235 5502 192 492 448 379 52156

2010

17855 4622 1406 1444 895 1812 28034 1016 18478 105 146 2320 141 395 488 389 51512

2015

20144 5020 1667 1662 965 1947 31405 909 23745 330 160 2608 106 427 652 531 60383

2018

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13100 6600 NA NA 14000 NA 29800 NA 28000 NA NA NA NA NA 750 NA 75600

Germany Czech Republic Slovenia Poland England Rest of EU EU27 Total Rest of Europe USA Canada Argentina China Japan South Africa Australia New Zealand World

14900 12350 2400 3750 20000 9050 62450 3700 15000 750 NA NA NA NA 1000 NA 83275

1929 10640 12168 2396 1545 11918 3879 42545 1233 18106 684 NA NA NA NA 1422 NA 64458

1937 10618 5512 607 397 20625 3202 40960 1764 29238 1016 28 155 174 88 1246 464 75130

1950 18572 7547 4476 1747 13898 5563 49442 8737 22988 593 212 49,5 1710 110 1752 450 89653

1960 32429 11540 3964 2678 13254 7124 67066 11444 22932 912 194 NA 2770 68 2148 528 112943

1970

Source: Calculated from Joh. Barth & Sohn GmbH & Co KG (1908–2019)

Note: No border adjustments for the period 1913–37; East and West Germany for 1950–80

1913

Country

Table 3.2 Hop production in 1,000 metric tons, selected years 1913–2018

28279 10038 3268 1721 9749 8276 61331 14035 34274 538 150 4000 1809 141 2026 281 120011

1980 30284 10617 4583 3641 2320 7040 58485 9168 25843 348,9 270 13000 1656 730 2098 420 114416

1990 29286 4886 2799 1761 3060 4358 46151 2240 30781 NA 128 13000 692 766 2116 828 96612

2000 34467 5670 1071 1511 2289 4276 49284 2406 24002 NA 257 9773 497 937 1238 845 94115

2010

28337 4843 1678 2242 1357 2430 40887 861 36389 120 220 5954 276 769 1201 740 87415

2015

41794 5126 3078 3208 1378 2888 57473 1011 46673 230 270 6992 202 754 1582 722 118410

2018

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displayed a falling trend. This trend, however, has been reversed in the most recent period. This seems to warrant the finding that the rise of craft brewing in the past decade has resulted in an expansion of the area harvested. At the same time, some of the new bitter hop varieties give higher yields per hectare in the US and Germany (Pavlovic et al, 2012). Tables 3.1 and 3.2, on hop acreage and hop production, also show the strong position of the two leading hop-producing countries, Germany and the US. Together they accounted for respectively 73 percent of cultivated area and 75 percent of world production in 2018. The tables also show the decline of the British position and the recent rise of China as a hopproducing country. Figure 3.5 gives an overview of the evolution of the area of harvested hop between 1907 and 2018. Though some of the trends are similar to the ones we saw in production in Figure 3.2, the increase in cultivated hop area after World War II is less marked than the increase in production, while the figure shows a much more dramatic decline in cultivated area starting in the 1980s: cultivated area decreased by more than 50 percent between the post-war peak in 1982 and the lowest cultivated acreage in 2013. Since 2013 the cultivated area of hops has again been expanding. The less marked increase between the 1950s and 1980s and the sharper decrease after the 1980s are in part related to higher yields of hops per acre. But further analysis shows that the explanation is most of all found in a declining amount of hops per produced hectoliter. Figure 3.6 depicts this evolution, relating the beer production in the current year to the hop production of the previous year. It clearly shows a steep decline in the use of hops in beer production since the interwar period. Only for the very recent period can a slight increase in the input of hops be observed. This should be the effect of the higher amounts of hops used in the craft beer segment. 110000 100000 90000 80000 70000 60000 50000 40000 1907 1912 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017

30000

Figure 3.5 Cultivated hop acreage in hectares (world) Source: Calculated from Joh. Barth & Sohn GmbH & Co KG (1908–2019). Barth, Annual Report, 1908–2019

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  ,     . 500 450 400 350 300 250 200 150 100 50 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0

Figure 3.6 World ratio of hops (kilograms) per hectoliter of beer Source: Calculated from Joh. Barth & Sohn GmbH & Co KG (1908–2019). Barth, Annual Report, 1908–2019 (current year of beer production related to hop production of the previous year)

1200

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Hop Farms Per Country

1000

United States Germany

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Number of Hop Farms

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Figure 3.7 Number of hop farms Source: (Joh. Barth & Sohn GmbH & Co KG, 2018), and reported overall acreage in six selected countries (source: International Hop Growers’ Convention, 2018) Note: Data does not include US hops outside the Pacific Northwest, where indications show that a majority of farms are much smaller.

For further evidence, we need to look at the sector in more detail. First, as Figure 3.7 shows, the industrial outlook is quite different at country level. Some countries, in particular the United States and, to a lesser extent, the Czech Republic, seem to grow their hops at a small number of rather large firms. This presumably means that they are able to reap some scale benefits, whereby the marginal costs lowers as the size expands. Other countries, most notably Poland and, to a lesser

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Table 3.3 Hop varieties over 400 hectares in 2017 Country

Hop variety

Hectares reported

United States

Cascade Centennial Citra® CTZ Simcoe Amarillo Mosaic Chinook Summit Nugget Hercules Perle Hallertau Tradition Hallertauer Magnum Hersbrucker Tettnanger Hallertauer Spalter Select Saaz Magnum Lubelski Styrian Golding Celeia Aurora

2813 2132 2072 1976 1865 1201 1098 921 654 604 5797 2966 2704 2011 915 747 723 532 4317 520 419 594 482

Germany

Czech Republic Poland Slovenia

Source: Data compiled from International Hop Growers’ Association, 2018

extent, Germany and Slovenia, have a large number of rather small hop firms.³² The comparative advantage of the US hop farmers in particular is a driving force behind the increase of the average hop acreage per farm across Europe in the twenty-first century. The trend of concentration in the European hops market, resulting in lower numbers of producers and larger acreage per farm, was already notable in the period 2000–8, when an estimated 1,350 farms left the market (Pavlovic, 2012). Second, we need to look at the type of hops in which countries specialize. Table 3.3 provides a breakdown of the cultivated acreage for the main different varieties of hops. As can be seen, countries do specialize in different types of hops. Not surprisingly, it is in the United States that we find a higher acreage for hop varieties that are used by the craft beer sector, like the ones with higher alpha acid values. In particular, the demand for the top US hop varieties, such as Citra®, Cascade, Centennial, Mosaic®, CTZ (Columbus/Zeus), and Summit™, has greatly changed in recent years. For example, Citra®, released just ten years ago, is close to ³² The average size of hop firms is also influenced by historical developments: in the Czech Republic large firms are the heritage of large scale socialist collective farms, whereas in Germany and also Slovenia, family farms were the dominating business unit (Pavlovic et al, 2012).

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  ,     . 24000

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–1000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 US Citra® Hectares

US CTZ Hectares

US Cascade Hectares US Centennial Hectares US Mosaic® Hectares

US Summit™ Hectares US Hop Hectares

Figure 3.8 Hectares of specific hops versus the overall US hop hectares Source: Compiled from International Hop Growers’ Convention, 2010–2018

6000 5500 5000 4500 4000 3500 3000 2500 2000

2004

2006

2008

2010

2012

2014

2016

2018

Figure 3.9 US production of high alpha acid hops (tons) Source: Hectares compiled from International Hop Growers’ Convention, 2004–2019

becoming the most popular US hop variety, surpassing Cascade, which has been the most popular US hop (by acreage) since 2013 (International Hop Growers’ Convention, 2001–18, 2018). These changes in the supply are driven by the demands of craft brewers. The increased variety in the supply of hops is also demonstrated in Figure 3.8, which shows the surge in new types of hops in recent years. The rising trend of high alpha acid hops production in the US is clearly apparent in Figure 3.9. As we saw in the previous section, these types of hops are very present in production in the craft beer segment.

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12000 11000 10000 9000 8000 7000 6000

1992

1995

1998

2001

2004

2007

2010

2013

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Figure 3.10 World demand for high acid hop variants (tons) Source: Joh. Barth & Sohn GmbH & Co KG (1995–2019). Barth, Annual Report, 1995–2019

On a global scale, the surge in demand for high acid hop variants is even more marked, as can be seen in Figure 3.10.

7. Pricing and the Hops Markets The changes in demand and cultivated hop varieties obviously have an impact on the hops market. The trend to use of higher alpha acid hops variants comes at a price. In more exotic recipes, hops are a significant part of the production cost.³³ Craft brewers very carefully analyze the prices of hops when deciding which beers to produce. As they have fewer standardized products, they are relatively flexible in adapting to changing market conditions. This reinforces high price fluctuations; for example, Citra® was sold at around $14 a pound in 2015, $23 in 2016, $15 in 2017, and around $12 in 2018.³⁴ The high fluctuations are regulated in a particular way, ensuring that the market is mostly made up of contracts that are signed before the harvest. The result is that there is a future market, whereby brewers contract with hop growers before the hops have been harvested, and a spot market, where leftover production is sold. This is to the benefit of brewers who have consistent and predictable hop needs, because the contracted price is lower.³⁵

³³ For an example, see the beer blogger The Mad Fermentationist, at https://www. themadfermentationist.com/2019/03/the-economics-of-opening-brewery.html?m=1. He does state in the text that he purposefully pays more for specific hops that are difficult to buy on the spot market. Nonetheless, hops account for forty-three percent of the beer production cost (Citra® 20 percent, Azacca® 14 percent, Centennial 5 percent, and Columbus/CTZ 4 percent). ³⁴ https://www.ft.com/content/0f678bd6-0cc7-11e8-839d-41ca06376bf2 ³⁵ Many hop prices can be found on https://lupulinexchange.com/.

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  ,     .

Table 3.4 Reported percentage of hops already sold, by year Country

2018

2019

2020

2021

2022

2023

USA Germany Czech Republic Slovenia

98 101 100 85

95 93 100 80

65 90 97 75

40 66 80 70

30 60 75 60

25 45 60 N.A.

Source: Joh. Barth & Sohn GmbH & Co KG (1908–2019, 2018)

Hop contracts between brewers and their suppliers may be signed for short time periods such as one year, or for multi-year periods. This gives growers confidence in the future sales of their hop varieties, and gives brewers confidence (if there is doubt) in having certain hops in stock at a certain price. If a brewer does not know the quantities needed for their production in advance, they may have to resort to the spot market for their beers. The amount of hops purchased via contracts varies by country, brewer confidence, hop variety, and beer demand is worked out in Table 3.4. For example, as of November 2018, 95 percent of all the 2019 US hop harvest had been sold by contract (International Hop Growers’ Convention, 2018). In Slovenia the number was 80 percent, in Germany 93 percent, and in the Czech Republic 100 percent. The key difference between these countries is the contract sales for years beyond 2019. In compiling these statistics, it becomes clear that future hop needs for breweries differ according to the country of production. For example, as of November 2018, almost the entire 2019 US production had been sold, and 35 percent of the 2020 harvest remained available. In the Czech Republic, just 3 percent of the 2020 harvest remained. One possible reason for this is the type of hops available on the US market. The Barth-Haas group reported in July 2018 that eighty-seven commercially available hop varieties were grown in the United States (the corresponding number was forty in Germany, by contrast) (Joh. Barth & Sohn GmbH & Co KG, 1908–2019, 2018). In the Czech Republic, 88 percent of all hop acreage is dedicated to Saaz hops, whereas just 13 percent of the US hop acreage was dedicated to the most popular American hop, Cascade.³⁶ It could be that diversity and range of US hops is a reflection of the diverse needs and fast pace of the current craft beer segment, or it could be that breeding and variety of US hops gives brewers confidence in the spot hops market. Either way, this is a major change from the contracting statistics of previous years. Figure 3.11 clearly shows that from 2006 onwards, the future market tends to shift in the United States. An increasing number of hops are contracted before the harvest. Moreover, brewers, afraid of lacking access to their desired hops, start to ³⁶ Note: as of 2018, Citra® hops are anticipated to occupy the most US hop acreage, surpassing Cascade.

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      100 90 80 70 60 50 40 30 20 10 0 1995

1998

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2016

% US Contract sales for same year % US Contract sales 1 year forward % US Contract sales 2 years forward

Figure 3.11 Estimated % contracted US hop sales Source: Joh. Barth & Sohn GmbH & Co KG, 1996–2018

contract further ahead. The result may be a stronger cyclical movement, where increased production and increased demand cyclically outstrip each other. Since hop production has strongly increased in the past few years, the current pressure on the market is slightly lower than before. The cyclical aspect of the hops market in the United States led in the past to the creation of a specific body, the Hop Administrative Committee. This public institution, set up in 1966, sought together with the Handler Advisory Board to increase the welfare of hop producers through the reduction of price cycles, estimating supply and demand on the US market, and setting the volume of hops to be marketed. Though the volume control set by the Committee was not seen as unsuccessful, criticism of favoring monopolistic price formation led to its dissolution in 1985.³⁷ Similar EU efforts to regulate the hops market as part of the Common Agricultural Policy have also been abandoned in more recent years. The rising popularity of hops and hopped beers would indicate that the market is in a better state than ever before. Out of a fear of missing out on their favorite varieties, several brewers have jumped to sign three- to five-year contracts with hop growers. Occasionally this fear is fueled by the evolution of the market. In 2006, for instance, the shortage of hops created severe supply issues and steep prices for brewers who had not forward-contracted their hop supply (Bamforth and Cabras, 2016). This provided the growers with incentives to increase their production and acreage.

³⁷ Similar experiments of production quota and price controls were taken in other countries: In the UK the Hops Marketing Board tried to stabilize hop production and prices between 1932 and 1982 (see https://www.britishhops.org.uk/hops/history/), in New Zealand the government set up a system in 1939 that regulated prices and production quota for hops till the early 1960s (https://www.nzhops.co. nz/printpdf/105).

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  ,     .

However, as is shown above, the US pre-contracted hops numbers are significantly lower than for some other countries. This might show that the current hops market might not be in long-term equilibrium. The US craft beer industry developed very rapidly over the past years (Stack et al, 2016). Though, as we have seen, the share of craft brewing in the US market is still increasing, growth is less strong than anticipated. Expectations of a market share of 20 percent for craft brewers in the US market by 2020 were overstating developments. This has consequences for brewers and hop growers: brewers contracted hops bearing in mind strong continuing growth, and hop growers in turn expanded their capacity and infrastructure based on the projected demand. Now that the craft beer movement is slowing down, the market may move towards an excess supply of hops and the industry might yet again find itself facing stark price fluctuations.³⁸ The expansion of hop production could actually contribute to this. Hop growers keep contracted brewers (who overestimated their need for hops) to their contracts, and draft new contracts with new brewers (who might not have contracted before).³⁹ This will result in a higher number of sales on paper, reassuring investors and banks, but potentially creating a bubble. At the same time, brewers might prefer to sit on their inventory as they might be afraid of not being able to find their specific hops in the future, and fear future engagement in future contracts. In particular, since the market has been growing, they might lack access to overcapacity on the spot market. Interaction with the rest of the world may alleviate pressure on the US market. The craft brewing revolution has spread to other countries and this segment is in full expansion.⁴⁰ The popularity of the US hop varieties in the segment of craft brewing therefore may warrant an increase in exports of US-grown hops. As a result, the current situation of high prices may continue due to a more segmented hops market with more varieties of hops, a more segmented brewing industry, and a rise in the number of new varieties of hops that are company controlled.⁴¹ The high prices for hops may reinforce tendencies to find substitutes for hops, particularly if varieties of hops become company-specific: genetic engineering has already proved able to develop a yeast that produces some of the oils and qualities of hops (Denby et al., 2018). A further element that may influence the hops market is the effects of climate change. Though droughts and heat waves will have the worst effects on the production of barley (Warren, 2018), more frequent droughts can have important effects on the harvest of hops (Yool and Comrie, 2014;

³⁸ As a large variety of hops exists, data is difficult to obtain, and space is limited, we do not provide an overview of the pricing of all different varieties over time. ³⁹ https://47hops.com/industry ⁴⁰ The number of brewers in France, for instance, has risen from 1100 in 2017 to 1600 in 2018, according to CEO of Brasseurs de France, Maxime Costilhes in Le Monde March 20, 2019. In Poland the market share of craft brewers increased by 41.8 percent from 2017 to 2018 (Maszkowski, 2019). ⁴¹ https://www.brewersassociation.org/insights/a-fistful-of-hops/

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Alcitelli, 2017),⁴² as some research shows that hops are particularly vulnerable to the effects of climate change (Mozny et al, 2009). More frequent periods of drought in the European hop producing countries have already resulted in investment in irrigating and moisturizing sprinkler systems—investment that is likely to contribute to further price rises. Thus, though the analysis above mostly deals with the US market, the trends described here could soon—as did the craft beer movement—transfer to other countries and continents.

8. Conclusions This chapter has studied the dynamics of the hops market. After a slow introduction, and historical obstructions due to regulatory and legal issues, hops have become one of the integral components of almost any beer style. The twentieth century witnessed a falling trend in amount of hops per hectoliter of beer. Despite growth in beer production, a combination of this falling trend and the development of hop varieties with higher yields per acre led to a decrease in hop production, and particularly in the cultivated area of hops in the past two decades of the twentieth century. A reversal of this trend seems to have been apparent in more recent years. As this chapter has tried to demonstrate, this new trend is due to the rising popularity of hop variants used in the expanding craft beer industry. Though the craft beer segment is still relatively small, it continues to grow in the United States and it is gaining momentum in the rest of the world. Since many craft and specialty beers utilize significantly more hops than lagers, the demand for hops, and particularly several high alpha acid hops variants, is likely to stay high. On the supply side, hop farmers have increased production in recent years in response to the higher interest in their products. However, hop farmers’ specialization in hops that are in demand by the craft beer sector can lead to higher price fluctuations in more segmented markets, where hop consumers and hop producers are tied to each other by longer future contracts and sunk costs of investment in cultivated areas. If craft beers are considered a more luxury product, an economic downturn may also impact this segment more than the general market for lager beer, and this in turn will affect the hop farms. Research also indicates that hops may become a more vulnerable crop if climate change results in more frequent droughts and rising production costs. This may stimulate a search for alternatives and technological change that could profoundly impact the existing hops market.

⁴² https://www.inside.beer/news/detail/usaeurope-climate-change-is-threatening-hop-growers.html

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  ,     .

References Aerts, E. 1996. Het bier van Lier. De economische ontwikkeling van de bierindustrie in een middelgrote Brabantse stad (einde 14de–begin 19de eeuw), Royal Academy, Brussels. Alcitelli, T. 2017. The hops shortage of 2007–2008 and its silver lining, All about Beer Magazine, February 7. Almaguer, C., Schönberger, C., Gastl, M., Arendt, E. A., and Becker, T. 2014. Humulus Lupulus—a story that begs to be told: a review. Journal of the Institute of Brewing, 120 (4), pp. 289–314. Bamforth, C. and Cabras I. 2016. Interesting Times: Changes for Brewing in Cabras, I., Higgins, D., and Preece, D. (eds), Brewing, Beer and Pubs, Palgrave Macmillan, Basingstoke, pp. 15–33. Behre, K. 1999. The history of beer additives in Europe—a review. Vegetarian History of Archeobotanic, 8, pp. 35–48. Biendl, M. and Pinzl, C. 2013. Hops and Health: Uses, Effects, History, Wolnzach. Cabras, I., Higgins, D., and Preece, D. 2016. Brewing, Beer and Pubs, Palgrave Macmillan, Basingstoke. Cordle, C. 2011. Out of the Hay and into the Hops: Hop Cultivation in Wealden Kent and Hop Marketing in Southwark, 1744–2000, Hatfield, University of Hertfordshire Press. Cornell, M. 2003. Hodgson’s Brewery, Bow and the birth of IPA. Brewing History, 111, pp. 63–8. Darby, P. 2013. The history of hop breeding and development. Brewing History, 121, pp. 94–112. Dasso, M. W. 2015. Analysis of the United States Hop Market. Thesis presented to the California Polytechnic State University San Luis Obispo, California Polytechnic State University San Luis Obispo. Denbi, C., Li, R., Vu, V., Costello, Z., Lin, W., Chan, L., Williams, J., Donaldson, B., Bamforth, C., Petzold, C., Scheller, H., Garcia Martin, H., and Keasling J. 2018. Industrial brewing yeast engineered for the production of primary flavor determinants in hopped beer. Nature Communications, 9, pp. 1–10. Doorman, G. 1955. De Middeleeuwse brouwerij en gruit, Nijhoff, The Hague. Folwell, R. J., Mittelhammer, R. C., Hoff, F. L., and Hennessy, P. K. 1985. The Federal Hop Marketing Order and volume-control behavior. Agricultural Economics Research, 37 (4), pp. 17–32. Gabrielyan, G. and Marsh, T. 2012. Domestic and Export Price Formation of U.S. Hops. Washington State University: School of Economic Sciences. Garavaglia, C. and Swinnen, J. (eds). 2018. Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, New York. Harvey, D. 1963. Locational change in the Kentish hop industry and the analysis of land use patterns. Transactions of the Institute of British Geographers, 33, pp. 123–40.

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Hieronymus, S. 2012. For the Love of Hops: The Practical Guide to Aroma, Bitterness, and the Culture of Hops, Brewers Publications, Boulder. Howard, P. H. 2013. Too Big to Ale? Globalization and Consolidation in the Beer Industry, Department of Community Sustainability Working paper. Ilberry, B. H. 1982. The decline of hop growing in Heresford and Worcestershire, Area, 14 (3), pp. 203–11. International Hop Growers’ Convention, 2001–18. Summary Reports, Economic Commission, Nuremberg, Germany. Joh. Barth & Sohn GmbH & Co KG, 1908–2019. The Barth Report, Nuremberg, Germany. Kopp, P. A. 2011. Hop fever in the Willamette Valley: the local and global roots of a regional Specialty Crop. Oregon Historical Quarterly, 112 (4), pp. 406–33. Kopp, P. A. 2014. The Global Hop: An Overview of the Brewer’s Gold in Patterson, M. and Hoast-Pullen, N. (eds), The Geography of Beer, Regions, Environment and Societies, Springer, New York, pp. 77–88. Maszkowski, W. 2019. Changes in the hop import structure to Poland as a result of the Craft Beer Revolution, Paper presented on June 12, 2019 at Beeronomics 2019 in Pilsen. Mead, V. and Simons, R. 2015. England’s first brewers, 1418–1480, Brewing History, 163, pp. 30–5. Meussdoerffer, F. G. 2009. A Comprehensive History of Beer Brewing, in Esslinger, H. E. (ed.), Handbook of Brewing: Processes, Technology, Markets, Wiley, Hoboken, pp. 2–42. Meussdoerffer, F. G. 2014. Das Bier. Eine Geschichte von Hopfen und Malz, Beck Verlag, Munich. Miller, C. L. 1980. Structural Adjustment and Regional Location in the Tasmanian Hop Industry, University of Tasmania, Hobart. Mozny, M., Tolasz, R., Nekovar, J., and Sparks, T., 2009. The impact of climate change on the yield and quality of Saaz hops in the Czech Republic. Agriculture and Forest Meteorology, 149 (6), pp. 913–19. Mulder, R. 2017. Further notes on the essence of Gruit: an alternative view, Brewing History, 169, pp. 73–6. Papin, K. 2004. De hophandel tijdens de middeleeuwen in Noord- en Midden-Europa (13de—16de eeuw), Handelingen der Maatschappij voor Geschiedenis en Oudheidkunde te Gent, 58, pp. 105–46. Papin, K. 2012. De regulering van de hophandel tijdens de Middeleeuwen en vroegmoderne tijd. Een vergelijkende analyse van de reglementering van Aalst en Poperinge, Handelingen der Maatschappij voor Geschiedenis en Oudheidkunde te Gent, 66, pp. 61–91. Patterson, M. and Hoast-Pullen, N. 2014. The Geography of Beer, Regions, Environment and Societies, Springer, New York.

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  ,     .

Pavlovic, M., Turk, J. and Paslovic, V. 2012. A review of the EU hop involvement within a beer brewing sector, Agricultura, 9 (1), pp. 17–22. Pavlovic, M. 2012. Production character of the EU hop industry, Bulgarian Journal of Agricultural Science, 18 (2), pp. 233–9. Reid, N. 2018. Craft Beer and Hops: The Beer Professor, 11 Aug. 2018 http://www. thebeerprofessor.com/?p=4829. Roy, A. 1991. L’industrie de la bière à Quebec au XIXeme siècle: la famille McCallum, 1813–1875. Mémoire, Université de Laval. Ruis, F. 2016. A note on the Essence of Gruit, Brewery History, 166, pp. 50–3. Simpson, W. J. 1993. Studies on the sensitivity of lactic acid bacteria to hop bitter acids. Journal of the Institute of Brewing, 99, pp. 405–11. Stack, M. and Gale, C. 2007. Quality, Schmality: Talking Naturally about the Esthetics of Beer; or, Why Is American Beer so Lousy? in Steven D. Hales (ed), Beer and Philosophy: The Unexamined Beer Isn’t Worth Drinking, Malden, Blackwell Publishing. Stack, M., Gartland, M., and Keane, T. 2016. Path Dependency, Behavioral Lock-in and the International Market for Beer in Cabras, I., Higgins, D., and Preece, D. (eds) Brewing, Beer and Pubs: A Global Perspective, Palgrave Macmillan, New York, pp. 54–73. Sulerud, G. L. 1931. An economic study of the hop industry in Oregon, Agricultural Station Experiment Bulletin, 288, Oregon State. Swinnen, J. 2011. The Economics of Beer, Oxford University Press, Oxford. Swinnen, J. and Brish, D. 2017. Beeronomics: How Beer Explains the World, Oxford University Press, Oxford. Unger, R. W. 1992. Technical Change in the Brewing Industry in Germany, the Low Countries, and England in the Late Middle Ages. Journal of European Economic History, 21, pp. 281–313. Unger, R. W. 2004. Beer in the Middle Ages and the Renaissance. Philadelphia, University of Pennsylvania Press. Van der Wee, H. 1965. De handelsbetrekkingen tussen Antwerpen en de Noordelijke Nederlanden tijdens de 14e, 15e en 16e eeuw. Bijdragen voor de Geschiedenis der Nederlanden, 20, pp. 267–85. Van Kerckhoven, S., Van Meerten, M., and Wellman, C. R. 2020. Contract Brewing and Its Implications for the Beer Industry, in Madsen, E. S., Gammelgaard, J., and Hobdari, B. (eds). New Developments in the Brewing Industry: The Role of Institutions and Ownership, Oxford University Press, Oxford. Van Tongeren, F. 2011. Standards and International Trade Integration: A Historical Review of the German Reinheitsgebot, in Swinnen, J. (ed.), The Economics of Beer, Oxford University Press, pp. 51–61. Verberg, S. 2018. The rise and fall of Gruut, Brewing History, 174, pp. 46–79. Warren, M. 2018. Climate change is about to make your beer more expensive: extreme weather events are expected to reduce global barley production, Nature, 562, pp. 319–20.

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Wubs-Mrocewicz, J. 2005. Hopped Beer as an Innovation. The Bergen Beer Market around 1200–1600 in the European Context in Brand, H. (ed.), Trade, Diplomacy and Cultural Exchange, Uitgeverij Verloren. Hilversum, pp. 152–68. Yool, S. and Comrie, A. 2014. A Taste of Place: Environmental Geographies of the Classic Beer Styles in Patterson, M. and Hoast-Pullen, N. (eds), The Geography of Beer, Regions, Environment and Societies, Springer, New York, pp. 99–108. Zeyl, R. 1930. La culture du houblon en Alsace, Annales de Géographie, 222, pp. 569–78.

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4 Science Knowledge Exchange in Brewing The Case of the European Brewery Convention Congress Jan Marian Lichota and John Brauer

1. Introduction The European Brewery Convention (EBC) was created as a direct result of World War II’s consequences for the brewing sector. Shortages in raw materials, the need to rebuild commercial activities, and the will to pursue research activities for the common good of the industry and brewers led to the creation of an organization that could deal with all the challenges arising from those circumstances. Before World War II there was no international association looking after brewers, brewing, and beer. In those days, there was a clear dichotomy of brewing practices—the Anglo-Saxon and Irish top-fermented beers on one hand; the Bohemian-Czech, German-Austrian, Dutch, and Danish bottom-fermentation systems on the other. Brewing practices were often a mix of time-honored recipes and continuous improvements tying together tradition and observation. But even in those days, there was one organization which could be called an early form of an international brewing association and that was the London-based Institute of Brewing (IoB). The Institute was beginning to extend its contacts with the brewing world into the wider realm of the British Empire by the 1930s. On the European continent obviously no such unity could be expected, given the hostile political climate prevalent at that time. Still, it needs to be stressed that Germany was leading the field in brewing science with names still familiar to us today, such as the VLB in Berlin, or the famous Weihenstephan school of brewing in Freising, Bavaria. An important name from those days was Prof. Max Delbrück, chair of brewing science in Berlin, who lent his name to Lactobacillus delbrueckii—now known to play a key role in the production of Berliner Weisse, a traditional mixed-fermentation

Jan Marian Lichota and John Brauer, Science Knowledge Exchange in Brewing: The Case of the European Brewery Convention Congress In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0005

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beer (Kunze, 1994). Valuable research was also performed in Copenhagen at the Carlsberg Laboratories and it was here that, even before World War I, Søren Sørensen described the concept of pH value, pertaining to the relative strengths of acids and bases as measured by the concentration of hydrogen ions in solution. As in the case of the European Community of Steel and Coal (ECSC), where steel scarcity was driving a closer cooperation process among countries (Alter, 2007), brewers found it easy to lay to rest any residual animosities resulting from the conflict opposing various European nations, which had also had a detrimental impact on the brewing industry linked to the demographic, agricultural, and technical difficulties arising from the economic and political situation. Similar to the initiative of Jean Monnet, who stood behind the creation of the ECSC, the inspiration for engaging peace through cooperation among brewers came from eastern France. Philippe Kreiss, entrepreneur and Director General of the Brasseries de la Meuse, was born in German-occupied Alsace in 1887, the son of the former brewery director who had been at the helm at the same brewery. Convinced of the need for European brewers to forge alliances for better raw material procurement, and to exchange ideas and protocols leading to improved product quality (there was virtually no connectivity among the various brewing researchers in Europe at that time), he engaged in contacting breweries and research institutions immediately after the war’s end.

2. Establishing the Mission and the Structure A first exploratory meeting took place in Paris in 1946 under the name Centre Continental de Brasserie. At this meeting, representatives from Scandinavia, Benelux, France, and Switzerland attended but no binding resolutions were passed. Nonetheless, the first Congress could be announced thanks to the initiative of the Centraal Brouwerij Kantoor (as the Dutch brewers’ association was known at the time). At the Paris meeting, however, the absence of representatives of two countries was notable. The German brewing industry was trying to pick up the pieces after a disastrous war. The victorious Allies had resorted to dismantling steel and brass vessels in lieu of reparations, and brewing raw materials of quality were almost impossible to source. British brewers had also not been invited, since Monsieur Kreiss was afraid that it was presumptuous to invite Great Britain to join this body, as that country already had a unique and marvelous organization of scientists and technicians in the field of malting and brewing, the Institute of Brewing, which might serve as a model to Continental brewers (Mendlik, 1965).

Even so, in early 1947, the Institute signaled that it would like to join the Continental Brewery Centre. A former senior chemist at Whitbread’s Breweries,

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Dr. Meredith Brown, was the United Kingdom’s first council member, and it was he who suggested the name “European Brewery Convention” (Mendlik, 1968). The inaugural EBC Congress was in the small seaside resort of Scheveningen, outside Den Haag, and ran from June 2 to June 6, 1947; there were 188 delegates, whose registration fees were paid by the Dutch host. It was a diverse assemblage of academics, agronomists, and brewers that got together in Scheveningen and over the subsequent congresses, a pattern would establish itself: Eminent professors and deans from universities offering brewing degrees attending the Congress alongside other scientists who had chosen to be in the employment of brewing companies. In some cases, these brewing companies had become large and powerful, leading to the establishment of research institutes as early forerunners of research and development departments. Among those present were the departments of Guinness, in Ireland; the Whitbread and Bass laboratories, in the UK; Carlsberg Laboratories; and the central research station of breweries in Munich. At this first Congress two standing committees were formed: the EBC Analysis Committee and the EBC Barley & Malt Committee. The Analysis Committee had as its first chairman Dr. L. R. Bishop of the Watney brewery in Isleworth, London, who kept the position for twenty-three years, until 1971. His efforts pertaining to the description of analytical methods for both ale and lager malts and fermented substrates, as well as work on methods for the determination of wort parameters, notably that involving the famous congress wort, led to the establishment of a standard malt and compilation of the approved analyses into a handbook, the Analytica-EBC. His counterpart, the chairman of the Barley & Malt committee, was Dr. Herman van Veldhuizen, a Dutch cereal chemist. Together with a team, he built up an infrastructure for trialing new barley varieties’ suitability for malting and hence brewing, supported by efficient administrative capacities, as national malting barley testing bodies needed to be established in most European countries— tracking for promising varieties using analytical methods and parameters for brew house processing, followed by statistics, informing seed-growers, and then making sure the seeds were planted in the right trialing plots, analyzed, and interpreted accordingly (EBC, 1951, congress proceedings). Under the baton of the first EBC President, Philippe Kreiss, EBC Congresses had assumed a dual role. On the one hand, these were technical meetings dedicated to scientific exchange. On the other, the early steering group of the EBC, the Council, resolved to meet exclusively during congresses. The impetus of the first Congress and the setup of coordinating structure allowed EBC to pursue its mission. The objectives agreed by the founders were: • To provide a platform for scientific and technical exchange for technical brewers and brewmasters. To enable brewers and brewery owners to meet and discuss quality requirements for brewing raw materials and to interact with supplier companies.

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• To disseminate high-level technical expertise and knowledge through publications advertised and sold at the congresses. It needs to be stressed that, at all times, the EBC stood for unfettered exchange of knowledge on the principle of encouraging “pre-competitive” discourse, a term which allowed a quite some latitude in interpretation. Over time, the organization came to work along the following structure: Governing bodies: The Council and the Board Management: The Secretariat Committees and Groups: Analysis Committee, Barley & Malt Committee, Brewing Science Group, Technology & Engineering Forum (with possible subgroups) Activities: Congresses (every two years in odd years), Symposia and Workshops, Publications Membership: National brewers and maltsters organizations or national brew master and research organization

3. EBC Management Role for the Congresses After agreement upon the mission and the list of activities of the organization, an operational structure was put in place. Established in The Netherlands, a permanent Secretariat (which moved to Brussels in 2008) was responsible for coordinating the work of the committees and the organization of Congresses, and later also for the thematic symposia. The permanent office was initially in Rotterdam and then in Zoeterwoude, near Leiden, with Dutch office bearers, as all Secretaries General from 1947 until the office’s dissolution in 2008 were Dutch, as shown in Table 4.1. Good cooperation with the brewing companies, their respective associations, and other industry partners could be guaranteed through the setup and maintenance of long-term relationships, guaranteed by this stability of the general management of the organization. Table 4.1 EBC general management Executive director 1. 2. 3. 4. 5.

Ferencz Mendlik R. Illig Gerhard H. Ulenberg Marjolein van Wijngaarden John M. Brauer

Secretary General Secretary General Secretary General Secretary General EBC Executive Officer

1947–74 1974–8 1978–82 1982–2007 2007—

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     

Likewise, the choice of renowned and stable partners also applied to EBC publications. Before cooperation between the Germany-based Fachverlag Hans Carl and the EBC started taking root in the 1980s it was the Elsevier Company, based in Amsterdam, that was the publishing house for all of the EBC’s outputs: Congress proceedings, monographs, thesaurus, and barley breeding reports were all obtainable from this scientific publishing house. The establishment of networks and the creation of attractive EBC activities was also driven by those holding the position of president. The cooperation stimulus created after the first Congress was largely driven by Philippe Kreiss, which was followed in later years by brewing researchers well known in their field such as Prof. Jean De Clerck or Prof. Ludwig Narziss. Over the years, the profile changed from one focused mainly on brewing science to a more managerial one, and diversified geographically. This has allowed space to deal with the challenges with which the EBC activities were confronted as a result of the changes in its main activity—the Congress—as well as circumstances related to changes in the brewing sector and in the organizations supporting EBC. The diversity of the presidents’ origin explained above is presented chronologically in Table 4.2. Over the years, the EBC management was able to establish well-functioning networks for brewing science exchange among brewers, brewers’ associations, and brewing institutes. The publications delivered solid material that was useful in terms of research and education, and as standards that regulated daily operations in the industry. With the passing decades, technology has advanced in the brewing sector as well as the area of food and beverages more generally, and also with regard to legislation. Social and economic changes have also affected the brewing sector, with impacts on organization among companies and within the respective national associations.

Table 4.2 EBC presidents EBC presidents

Country

Term of office

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

France Belgium United Kingdom Germany Finland The Netherlands Finland Czech Republic United Kingdom Ireland Germany Portugal

1947–63 1963–71 1971–9 1979–83 1983–91 1991–9 1999–2003 2003–5 2005–9 2009–12 2012–15 2015—

Philippe Kreiss Jean De Clerck E. H. M. Clutterbuck Ludwig Narziss Tore-Magnus Enari Paul van Eerde Esko Pajunen Jan Veselý Hilary Jones Christian von der Heide Stefan Lustig Tiago M. Brandão

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In 1995, at the 25th EBC Congress in Brussels, a slow process was initiated of joining interests and activities with The Brewers of Europe, which until 2003 functioned as the CBMC (Confédération des Brasseurs du Marché Commun). While EBC had a scientific and networking vocation, the CBMC was constituted in 1958 as an organization focused on brewers’ representation and advocacy toward the European Economic Community (created in 1957). Regulatory pressure from European authorities demanded that solid scientific evidence was to be presented, in many cases stemming in part from the wave of mergers and acquisitions in the 1990s and 2000s and the diverse beverages-related legislation (Holmes-Walker, 2008). Finally, governance changes within The Brewers of Europe galvanized a groundswell of support for the EBC to move to Brussels in 2008. This cemented the relationship between the two associations and set up the EBC as an autonomous division acting as a scientific and technical arm within The Brewers of Europe. The Congress remained unaffected by these developments and continued in its long-established form.

4. The EBC Congress from a Research Perspective While the Congresses that followed the first one allowed science in the area to progress, thanks to technical advances in equipment and research interests in various areas, over the years the role of the gathering has changed. The initial thirty years determined the profile of the Congress, putting the emphasis on presentations related to laboratory research and brewing technology use. The minor role of other fields grew over time with the appearance of other events, which also started progressively to integrate items pertaining to the main field of the EBC Congress (Figure 4.1). The willingness to share research, the focus on technological improvement, and the general application of the findings has led to some pioneering work and the setup of standards for the brewing industry. From this period emerged work related to barley and malt quality, beer clarity, and flavor stability (see Table 4.3). Since the mid-1950s the list of areas of research presented at the Congress has remained stable and the number of presentations per area has fluctuated according to interest over a determined period. The dynamics of research started to reflect Philippe Kreiss’s conclusions in his last public appearance that “the researchers in any field, but especially in brewing, should have 3 things going for them: Adaptability, Flexibility, and Team Spirit” (Bergal and Kreiss, 1965). With Jean De Clerck at the helm, the EBC entered the mainstream of the 1960s and early 1970s against a backdrop of impressively rising production and consumption figures for beer in Europe. The EBC Barley & Malt Committee, as well as the Analysis Committee, had risen to the challenges posed by a diversifying industry, and various sub-committees had started to spring up. For example, the

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70 60 50 40 30 20 10 0

1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 Brewing Raw Materials Beer & Health Packaging, Sales, Marketing

Analysis, Technology & Engineering Yeast & Fermentation

Figure 4.1 Representation of topics at the first 30 years of EBC Congresses (1947–1977) Source: European Brewery Convention

increased need for microbiological methods resulted in the analytical specialty sub-committee being formed later than other working groups. For the scientists of the Barley & Malt Committee, there was a choice to be made: to work on barley breeding, or to concentrate on the processability of that important raw material. In all cases, brewers were keen for the EBC to pick up the tools of scientific endeavor on their part—this was especially the case for the smaller brewers, as for those that could not afford to pursue fundamental studies in brewing themselves, the EBC represented an important stakeholder motivating and initiating research at university departments and institutes. Although often not communicating directly with smaller brewers, the EBC network served a useful purpose of bringing brewers together with service providers, and also of fostering ties between producers and suppliers. Notwithstanding the stability of areas of research, the focus of investigations evolved over time. Brewhouse mechanics and technical improvements diversified the presentations related to brewing process aspects. The technological advances in the laboratory equipment allowed better performances of analysis and the integration of enhanced research areas, such as study of enzymes, processing aids, yeast, mycotoxins, bacteria, or sensory analysis. As a consequence, the scope of presentations also became more interdisciplinary and developed a consumer-related end focus on aspects such as hop varieties use, drinkability aspects, foam stability, labeling, or beer quality (EBC Congress proceedings 1947–2017).

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Table 4.3 Major pioneering works of brewing science presented at the first 20 years of EBC congresses 1949 (EBC Lucerne). B. D. Hartong: Properties and composition of chill haze. In this paper, Dr. Hartong describes the mechanisms responsible for the formation of cold-induced turbidity in beer. This had an enormous impact on the science of filtration (pre-complexing of haze removed at cold temperatures), as well as being able to understand how hazes would form under certain conditions in bottle and, by inference, on subsequent consumer reaction. 1951 (EBC Brighton). A. Lund and R. B. Gilliland: Investigation into the flocculation phenomenon of yeast. This was an early attempt by this Danish–Scottish research group at explaining the electrostatic interactions between yeast cells at the end of fermentation. This led to a better understanding of beer maturation, especially the kinetics of vicinal diketone control in beer. 1953 (EBC Nice). J. De Clerck: Investigation into the relationship between malt-derived proteins and colloidal stability in beer. Prof. De Clerck’s formative work resulted in a better understanding of stability in beer and laid the foundations for avoidance or reduction strategies for haze in beer. 1955 (EBC Baden-Baden). M. Meilgaard: Hop utilization in the brewing process and how to improve it; (together with P. Kolbach’s work on the effect of pH on hop utilization). Here we witness the beginning of optimizing raw materials from a cost basis whilst taking care not to compromise product quality. 1957 (EBC Copenhagen). E. Urion, L. Chapon, and M. S. Chapon: Systematic studies on the oxidation of beer. This study, carried out at the IFBM laboratories, made an enormous contribution to the previously unknown science of flavor stability, which, with increasing volumes of beer being filled as bottles and cans, was becoming more and more important to brewers exporting their products further afield. 1959 (EBC Rome). J. S. Hough and A. D. Rudin: Continuous fermentations. The post-war boom taking root in Europe in the late 1950s and early 1960s had meant taking a long, hard look at capacity constraints. There was a sizeable fraternity in those days believing in the concept of continuous fermentations. Putting this into practice, with consistent results in product quality, has proved—for the most part—an elusive and difficult goal for brewers. 1961 (EBC Vienna). A. Hartl and W. Kleber: Separation and identification of substances making up hop bitter components. It had been known before that other, non-alpha-acid bitter components contribute to the sensation of bitterness in beer. These researchers used an early generation chromatographic technique (adsorption to polyamide 9—perlon) to elucidate these compounds. 1963 (EBC Brussels). A. M. MacLeod: Gibberellic acid in the germination of barley. Based on the work by Prof. Anna MacLeod, most malting plants nowadays use trace amounts of a plant growth substance (GA3) to achieve a high level of germination during the process. 1965 (EBC Stockholm). T.-M. Enari et al: Identification of different ß-amylases in barley and malt. By identifying different ß-amylases and elucidating their behavior, a better understanding of the biosynthesis of saccharifying enzymes was gained; additionally, maltsters and brewers now had better tools to control enzyme formation, thereby optimizing the production of fermentable extract. 1967 (EBC Madrid). M. Verzele: Progress in the analysis of hop-derived substances. This research group based in Ghent successfully optimized a paper-based chromatography procedure for the analysis of bitterness-inducing hop fractions, before the advent of chromatography columns.

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     

Being based in The Netherlands, EBC has pushed toward being an entity and event organizer with a strong international profile. Cooperation agreements with the American Society of Brewing Chemists (ASBC), the Masterbrewers Association of the Americas (MBAA), the Institute of Brewing and Distilling (IBD London), and the Brewery Convention of Japan (BCOJ) resulted in professional and personal ties among brewers for the purposes of knowledge exchange and visibility targeted at an audience outside Europe.

5. The EBC Congress within Global Meeting Trends Since inception, the EBC Congresses have been aimed at gathering together brewing industry professionals with the aim of disseminating knowledge and enhanced ties among European brewers. The dedication to research presentation, networking, and discovery of the brewing and malting industry has led to a specific format of the Congress in terms of its schedule and location. Over time, specific practices have been established for the event organization, such as a Congress manual, guidelines for the choice of destination, and the modus operandi with the national organization of the country where the meeting was held. In its early years, the Congress developed a structure that remained very similar until 2017 (Figure 4.2). The Congresses have been scheduled in the second half of May or early June, with a registration and reception event on Sunday. The following three weekdays are reserved for lectures in parallel sessions and posters, and discussions in the exhibition area, which has expanded over time in order to provide a mix of research presentation and commercial activities. On the last day of the Congress, there are technical tours to malting plants, breweries, and related engineering places (Table 4.4).

36th EBC Congress, Ljubljana, 2017

“Brewing future: Science for better beers”

Analysis and methodology (raw materials, product, research) Barley breeding and agronomy Beer quality – colloidal Beer quality – foam Beer quality – sensory Beer, society, health and nutrition Brewing and malting co-products Consumer studies End of beer processing, including auxiliary and process aids

Environmental issues and sustainability Filtration Hop breeding, agronomy and processing Malting: malt production and quality Management issues New packaging development New process development New product development Novel raw materials for beer production Wort production Yeast and fermentation

Figure 4.2 Panorama of topics at the 36th EBC Congress in 2017

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Table 4.4 EBC Congress schedule Sunday

Monday

Tuesday

Wednesday

Thursday

Daytime

EBC committee meetings Welcome reception

Congress technical/ scientific sessions Evening sponsored by breweries or suppliers

Congress technical/ scientific sessions Closing reception

Technical visits

Evening

Congress technical/ scientific sessions Traditionally free evening

33 Luxembourg

36 Hamburg

40 Venice

48 Prague

52 Brussels

47 Madrid

42 London

34 Amsterdam

28 Madrid

25 Copenhagen

12 Scheveningen

60 50 40 30 20 10 0

End

1947

1957

1967

1977

1983

1987

1995

2005

2007

2009

2013

Figure 4.3 EBC Congress participation by countries represented (selection 1947–2013) Source: European Brewery Convention

Such a format made it possible to combine the interests of attendees coming from various fields. There have been national quotas for representatives from the brewing sector and it is considered prestigious for brewing companies to attend and present at the congress (Anderson, 2007). This has also largely driven the number of delegates, and with increasing cooperation and internationalization among brewers and brewers’ organizations and the opening of borders for traveling (especially for researchers), the geographical variety of representatives has also changed (Figure 4.3). While the variety of countries from which attendees come increased in the 1990s, the event reached its highest participation numbers in the 1980s, with the Congress in London in 1983 having the highest attendance in history (1,607 participants). For more than forty-five years (between 1959 in Rome and 2005 in Prague) the Congress averaged more than 1,000 participants, but since the mid2000s numbers have been steadily decreasing (Figure 4.4). The reasons include factors such as the change in the subjects present at international congresses, with a slight decrease in topics related to industry and science and a big rise in topics related to technology and management, which had been spread across other events (Figure 4.5). On the brewing side, the first decade of the millennium illustrated multiple phenomena taking place, such as enhanced merger trends among large

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896 771

685

669

764794

888

930

974 842872

1058 948947

1028 990975 857

795

984 822

899 773760

858 727

545

637629

378378

462

533

236

1947 Scheveningen 1949 Lucerne 1951 Brighton 1953 Nice 1955 Baden-Baden 1957 Copenhagen 1959 Rome 1961 Vienna 1963 Brussels 1965 Stockholm 1967 Madrid 1969 Interlaken 1971 Estoril 1973 Salzburg 1975 Nice 1977 Amsterdam 1979 Berlin 1981 Copenhagen 1983 London 1985 Helsinki 1987 Madrid 1989 Zurich 1991 Lisbon 1993 Oslo 1995 Brussels 1997 Maastricht 1999 Cannes 2001 Budapest 2003 Dublin 2005 Prague 2007 Venice 2009 Hamburg 2011 Glasgow 2013 Luxembourg 2015 Porto 2017 Ljubljana

188

555

Figure 4.4 Number of delegates at EBC Congresses Source: European Brewery Convention

25,0%

20,0%

15,0%

10,0%

5,0%

0,0% 63–67 68–72 73–77 78–82 83–87 88–92 93–97 98–02 03–07 08–12 13–17 Medical Sciences Technology

Science Education

Industry Social Sciences

Economics Management

Figure 4.5 Number of meetings and subjects matters share worldwide Source: Jago—ICCA (2018)

companies, the appearance of small brewers, the development of new channels for education, the expansion of the presentation offer at trade shows, and the creation of new local events addressing the needs of the brewing community (producers, suppliers, consumers). Therefore, resources and participation have been spread over a multitude of events, reflecting the shift in priorities and attention of the respective companies, and also of associations.

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On the brewing conferences side, the internationalization of researchers has also led to important changes. In the early 2000s the formerly Flemish-only brewing technology workshop “Trends in Brewing,” held biennially in Ghent, Belgium, went bilingual and then eventually English-only, thereby attracting a larger international following. Brewing researchers from Germany, Belgium, and the UK also founded the “Young Scientists Symposium in Malting, Brewing and Distilling” as a platform for young researchers, mainly postgraduate students, to present their work. Initially the EBC ignored these developments, hoping delegates would eventually consider that excellence was espoused only by the EBC and return to the fold. Alas, it was not to be, and the numbers of delegates continued to hemorrhage. Around 2009, the EBC decided to engage in meaningful debate with the organizers of the events mentioned above. Ensuring an EBC presence at the “Trends” and the “YSS” became important, and reciprocal arrangements were concluded, allowing each of the parties to advertise their event in the printed programme books handed out at these conferences. From a new world perspective, brewing technical congresses held in the United States have always welcomed speakers from the EBC sphere of influence that could enhance their programme, and new events such as Craft Brewers Conference have also appeared, attracting attendees from all over the world. Key to this development has also been the World Brewing Congress (WBC) that meets every four years. Invitations to EBC, the BCOJ, and the IBD are a constant feature of the WBC, which helps to put on a diversified and interesting programme for attendees. The situation just described, with its direct impact on the EBC Congress, also illustrates general trends in the meeting industry. The multiplication of events, companies’ policies regarding traveling and participation (and dissemination of information), and socio-economic trends (e.g. partners’ participation, shorter Table 4.5 Association meetings worldwide Period

Number of association meetings

Average participants number

Average length (days)

1963–7 1968–72 1973–7 1978–82 1983–7 1988–92 1993–7 1998–2002 2003–7 2008–12 2013–17

1718 2562 3817 5556 7895 11,179 15,268 22,621 35,511 53,934 65,182

1263 1036 839 729 599 577 618 547 481 432 409

5.78

Source: Jago—ICCA (2018)

3.65

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trips for family or professional reasons) are reflected in a lower number of participants at different events (Table 4.5).

6. Evolving with Brewing Sector Changes The benefits of investments, knowledge exchange and breweries development resulted in a big leap in the beer production as of the end of the 1960s. The continuous growth of beer production, linked to changes in distribution and logistics, required closer attention to the quality of the product and better cooperation with various suppliers ranging from raw materials providers to final distributors (Table 4.6). The EBC Congress has reflected those changes in the content of its scientific programme, but also in fostering the exchange of practices and contacts among brewers. The beer market’s growth over decades has been driven by economic changes, which have resulted in the creation of ever larger brewing companies at national level in the United States, Canada, European countries, and Africa and the creation of major brewing groups that became global. For some time, increased production has run alongside a decreasing number of brewers, thus limiting their diversity and their interest in innovation, local character, and information exchange. In 1976, Fritz Maytag set his sights on saving the San Francisco Anchor Steam Beer Brewery, a traditional small brewery. He liked the beer and the concept of small, so he scraped some funds together and pleaded with banks and private investors. He was proved right: The beer was popular, the brewery was saved, and in 1979 it moved to new premises. In hindsight, this development was formative in getting a grassroots movement off the ground—the home and microbrewing fraternity (Papazian, 1998). It was in the early 1990s that the craft beer revolution really took off and, by 2017, there were more breweries in operation in the United States than at any prior stage in the history of America (Pease, 2017). Table 4.6 Beer production evolution worldwide Period

Beer production (1000 hl)

1970 1975 1980 1990 1995 2000 2005 2010 2017

629,899 802,407 937,802 1141,733 1248,487 1391,707 1602,000 1863,008 1942,402

Source: Barth-Haas

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This impressive rise in small breweries has gone hand-in-hand with an everincreasing acceleration toward individualism and also with the dominance of the internet, as well as beer bloggers and magazines catering to those wishing to explore the boundaries of established brewing practices and conventional beer styles. The changing channels of knowledge transfer had an initial detrimental impact on interest in participation at already existing events, more oriented toward academic results and professional purposes. Nonetheless, an interest in knowledge, and later in science, has led to the creation of new events, with a strong consumer perspective and community feeling (e.g. events initially emerging from the homebrewer community or festivals). Conventional brewers, obviously part intrigued and part alarmed by the meteoric rise of craft beer, decided to sit out the trend for most of its 30+ year history. As the movement showed no signs of weakening, associations and institutions dealing with the conventional beer sector realized that—unless action was taken—their inactivity could jeopardize their influence and appeal to brewers seeking meaningful dialogue, new avenues for novel beer styles, and access to hitherto unexplored markets. Brewers of Europe and the EBC decided to respond to these new challenges. It became acceptable to talk about craft, even though no satisfactory delineation between craft and conventional could be agreed upon. Member associations also pushed for more engagement and led by example, by actively reaching out to craft brewers in their respective countries even though the majority of them were not members. Their concern to involve small and novel operators was motivated as much by the prospect of recruiting new members as by the desire to stay relevant and informed. The EBC reacted in a similar way. Ahead of the Congress in 2015 in Porto, the Portuguese association motioned for a few selected craft brewers to be present. With the financial support of the Portuguese association, four small operators manned their booths and served some of their beers. Based on this positive outcome, a recommendation was made to the Association of Slovene Brewers to think of a similar approach for the 2017 Congress. This meeting, in Ljubljana, was remarkable from two angles: Not only were the craft brewers actively engaged with, resulting in an unprecedented show of eighteen craft brewers (high for such a relatively small country), but also the public was invited for public lectures on beer and brewing, which were well attended. Changing the approach by including the new wave of innovative brewers had an impact on the Congress: Delegates, as researchers, have been able to network with the small operators and understand their technical problems better. Suppliers, always a numerous group present at the Congress, were eager to draw the attention of the small brewers to the services and products of the allied industry traders. Lastly, delegates, of whatever affiliation, have expressed favorability toward a more inclusive approach in terms of consumer issues, and its inherently positive spin-offs for the entire brewing industry.

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7. Conclusions The appearance of the EBC Congress after World War II meant a great opportunity to stimulate exchange and create a brewers’ network for scientific and industrial cooperation in Europe. This opportunity was seized by the various segments within the sector—brewers, breweries, research institutes, publishers, technical equipment and service providers. Besides the opportunity for scientific and technical exchange, an extra benefit was the provision of a platform for checking on expectations beer and raw material quality in terms of supply and demand. The Congress followed the trends of other international association congresses establishing themselves at that time. After a period of growth and reaching a peak in favorable times of low competition, it steadily declined until it reached a stagnant but stable equilibrium. In the seventy years from the first Congress in Scheveningen to the Congress in Ljubljana in 2017, it has seen its length reduced as well as its number of participants, but has kept attendee numbers above the global average. From a convention and meetings perspective, the EBC Congress is a trendsetter that slowly became a part of a large ecosystem of meetings, as these have been steadily growing and leading to increased competition despite diversification in areas of expertise. The Congress content, the exhibitors, and the areas of participation also reflected the situation in the brewing market, as well as on the wide choice and variety of meeting formulas that appeared among scientific associations and open public events. The EBC as an organization has witnessed the mergers happening first at national level and later globally. The changes occurring within brewing companies and within various industry suppliers have constantly reshaped the market over seventy years. Nonetheless, its resilience over time has proved that the EBC Congress has developed a strong brand among the brewing research community, allowing the building of a new future going beyond the gains of the past. It has also shown flexibility in accommodating new consumer and beer production trends, as expected by the public at large.

References Alter, K. J. 2007. The Theory and Reality of the European Coal and Steel Community in S. Meunier and K. McNamara (eds), European Integration and Institutional Change in Historical Perspective. Oxford University Press, Northwestern Public Law Research Paper No. 920716. Anderson, R. G., 2007. History of Industrial Brewing in Stewart, G. G., Russell, I., Anstruther, A. (eds), Handbook of Brewing, CRC Press, Boca Raton.

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Barth-Haas Group, 1995. The Barth Report 1957–2019. Joh. Barth & Sohn, Nuremberg. Bergal, P. and Kreiss, Philippe. 1965. En mémoire du Fondateur et du premier Président de l’E.B.C. Svensk Bryggeritidskrift, 80 (5–6), pp. 113–18. Brauer, J. 2017. 70 Years of EBC (Part 1) in Brauwelt international VI, Fachverlag Hans-Carl, Nuremberg, pp. 416–19. Brauer, J. 2018. 70 Years of EBC (Part 2) in Brauwelt international II, Fachverlag Hans-Carl, Nuremberg, pp. 158–9. Brauer, J., 2018. 70 Years of EBC (Part 3) in Brauwelt international IV, Fachverlag Hans-Carl, Nuremberg, pp. 295–7. EBC Congress Proceedings 1947–2017. Elsevier Publishers, The Netherlands and Fachverlag Hans Carl, Nuremberg. Holmes-Walker, A. 2008. The Brewers of Europe: 50 Years of Service, 5000 Years of Tradition, Ghosh & Naylor, Brussels. Jago, L. 2018. A Modern History of International Association Meetings—Update 1963 2017, ICCA—International Congress and Convention Association, Amsterdam. Kunze, W., 1994. Technologie Brauer und Mälzer, 7th ed., Berlin, VLB Berlin Verlagsabteilung. Mendlik, F. 1965. What is the EBC? The Foundation and the Development of the European Brewery Convention. Svensk Bryggeritidskrift, 80 (5–6), pp. 119–30. Mendlik, F. 1968. Horace Brown Memorial Lecture. The European Brewery Convention: Its Origin, Development and Tasks. Journal of Institutional Brewing, 74, pp. 9–20. Narziß, L. 1976. Die EBC, ihre alten und neuen Aktivitäten. Brauwelt Jg., 116 (39), pp. 1260–2. Papazian, C. 1998. For The Homebrewer And Beer Lover: Best Articles and Advice From America’s Number 1 Homebrewing Magazine (Zymurgy edited by Charlie Papazian), New York, William Morrow Cookbooks. Pease, B. 2017. Brewers Association Stewardship Report, available at: https://www. brewersassociation.org/wp-content/uploads/2018/03/BA17_StewardshipReport.pdf (accessed 1 July 2018) Unpublished documents, EBC archives, The Brewers of Europe, Rue Caroly 23–5, B1050 Brussels.

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5 Price Promotions in Space and Time Some Evidence for the German Beer Market Jens-Peter Loy, Thomas Glauben, and Amelie Mongrowius

1. Introduction Food retail pricing is a highly complex issue. Recent research has explored several dimensions of the problem by analyzing detailed scanner data sets, which are increasingly available for many markets, having gained prominence first in the US food retail market. This has allowed researchers to focus on issues of cost passthrough, pricing behavior across retail chains, and different outlets (e.g. hypermarkets and supermarkets), and between branded and private label products, where research has highlighted considerable heterogeneity in the dynamics of pricing at the retail stage of the food chain. Studies in this area to date have generally ignored the spatial and temporal aspects of retail pricing behavior and while these issues have drawn attention in the theoretical literature, there have been only a few empirical studies investigating these phenomena particularly in the context of the EU food sector. The analysis of spatial and temporal dimensions of food retail pricing behavior may very well reveal significant welfare implications; in addition, it will improve our understanding of the food retail pricing complexity. To this end we focus on the German beer market, which is an ideal market to address the spatial and temporal aspects of retail pricing, partly due to the availability of detailed price data but also due to the regional and brand coverage of retail prices covering the geography of the German beer market. Specifically, German consumers show a strong affection for locally produced beer brands. The use of regional specifics of landscape, culture, or people’s attitudes is widespread in marketing German beer (Zühlsdorf and Spiller, 2012). Beer is a top ranked product with respect to consumers’ association with regionally produced food categories (DLG, 2011). Marketing managers therefore make use of the regional specifics to advertise brands. Webpages, television commercials, or newspaper ads show well-known and appreciated characteristics of the region of origin to create a unique and favorable brand image. For example, the brand Jever always shows quiet spots from beaches by the German North Jens-Peter Loy, Thomas Glauben, and Amelie Mongrowius, Price Promotions in Space and Time: Some Evidence for the German Beer Market In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0006

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Sea; the brand Flensburger uses typical Northern German landscapes and specific human attitudes of people in the region of origin; and many Bavarian brewers present the beer garden culture that is typical of this region. In addition to the spatial aspect, beer consumption fluctuates seasonally due to holidays or warm weather. Beer consumption is up to 75 percent higher in the summer than in the winter period (Private Brauereien, 2011). Therefore, the main research question in this chapter is to what extent German beer brands employ spatially and temporally differentiated promotional strategies. Only a few studies have addressed issues of beer retail pricing. Recent examples are Rojas (2008), Rojas and Petersen (2008), and Slade (2004), who investigate the role of market power and the impact of advertisement on consumption on the US and UK beer markets; they find no evidence of collusive behavior. Rojas and Petersen (2008) find predatory and cooperative effects for advertising. Culbertson and Bradford (1991) show that beer prices vary substantially across US states due to demand, excise taxes, exclusive territories, and transportation costs. Loy and Glauben (2015) analyze retail scanner data for the German beer market and find, for the first time, spatial and temporal effects for price discounts and number of price promotions. We add to the existing literature by also analyzing spatial and temporal retail pricing and promotional strategies in the German beer market, employing a unique data set for a more recent and longer period. We employ data of promotional prices all over Germany during the period from 2000 to 2012. The data are gathered by Markant, a company which assists retailers in gathering data from competing retailers. This company is contracted with several retail chains to collect promotional prices from newspapers and price leaflets. In this paper, we focus on Pilsner beer, which is the main type of beer consumed in Germany. We select the data for the twelve most preferred brands during this time, which are (1) Becks, (2) Bitburger, (3) Hasseröder, (4) Holsten, (5) Jever, (6) Krombacher, (7) KönigPilsener, (8) Oettinger, (9) Radeberger, (10) Sternburg, (11) Veltins, and (12) Warsteiner. We estimate the impact of the (regional) origin of brands and temporal shifters of demand on promotional prices, and control for brand-specific and retail chain-specific variations of pricing strategies. The data under study are weekly observations from 2000 to 2012. The number of observations is more than half a million. We proceed as follows. First, we will describe the German beer market and present some initial perspectives on the data. Second, we develop the theoretical basis for spatially and temporally differentiated retail promotional pricing strategies. Third, we describe the model variables in detail and explain the empirical model specification. Fourth, we present the estimation results for all characteristics of the spatial and temporal retail promotional pricing strategies. Finally, we summarize our findings and draw conclusions.

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- ,  ,   

2. The German Beer Market Before we address these issues more comprehensively in theory and data, we present some stylized facts about the German beer market. Colen and Swinnen (2011) conclude that Germany, along with the United States, the United Kingdom, the Czech Republic, and Belgium, is one of the major “beer drinking nations” in the world: 53 percent of total alcohol consumption in Germany comes from drinking beer. With an annual per capita consumption of about a hundred liters, beer accounts for almost one seventh of the total per capita beverage consumption in the nation. Though average beer consumption is declining, Germany is still among the major beer-drinking nations in the world. In a survey carried out in 2004 and 2005, El Cartel Media (2005) investigated consumer preferences for beer in Germany. Results show that brands have a strong position in their local (home) market. Every participant in the survey said they knew at least one local brand. Every second respondent’s favorite beer brand came from their own region. For 70 percent of the respondents, brand is more important for product choice than price. Thus, German consumers are highly loyal toward their favorite regional brand. The market shares of brands distributed nationwide show that almost all of the top ten brands are market leaders in their regional (home) market. We define home markets as the regions in which the main brands’ brewing facilities are located; we further define regions by the main two-digit ZIP code. To approximate the distance between the brewery and the retailer, we measure the difference in the two-digit ZIP codes (see Figure 5.1). Consumers can purchase beer in a variety of outlets, for example in specialized beverage shops (SBS), gas stations, or a traditional food retail market. Hard discounters (e.g. Aldi, Lidl, Norma), co-operate discounters (e.g. Plus, Netto), small and large supermarkets (e.g. Edeka), and small, regional, and national hypermarkets (e.g. Famila, Plaza, Real) belong to the traditional food retail market in Germany. The traditional food retail outlets account for about 50 percent of the distribution of beer (Nahrung-Genuss-Gaststätten, 2009). The SBS make up 35 percent of the market. The top ten breweries supply 63 percent of the total beer consumption in Germany, of 83.5 mio. hl per year, and 55 percent of total beer production of about 93.5 mio. hl. The top ten Pilsner brands have a cumulative market share of more than 50 percent of the Pilsner market. Figure 5.2 shows the sales volumes of the top twelve brands in Germany in 2017 in mio. hl (http://aktiongutesbier. de/statistik-bier-und-brauereien/ 02.2019). Though these brands have a significant market share, the German market is fragmented compared to the US or other international markets (Slade, 2004; The Economist, 2010). In 2000, the top four breweries in the United States covered 95 percent of the market; in Germany the top four make up 30 percent of the market (Adams, 2006). Germany is second in Europe in terms of number of

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Kiel Heide

18

24

25

Rostock

23 Lübeck

Teterow

20/22 26

2

27/28

Oldenburg

Bremen

17

Schwerin

Hamburg

21

Prenzlau

19

Lüneburg

Kyritz

29

1

13/16

Celle

49

4

Hannover

Osnabrück

48

Münster

30/31 Biefefeld

Braunschweig

39 Magdeburg

Brandenburg

14

38

10 Berlin Frankfurt/O

12/15

Goslar 32/33 03 Cottbus 46/47 45 Dortmund Soest 37 44 Halle Gottingen Duisburg Essen 59 02 Leipzig Kassel 58 06 Görlitz 01 Mühlhausen 41 40 42 Lüdenscheid 04 34 M.Gladbach Dresden Zeitz 99 57 Jena 09 50Köln Gummersbach Erfurt 51 Aachen Chemnitz Siegen 36 07 35 Meiningen Zwickau 52 Bonn Fulda 98 Gießen 53 08 Koblenz 96 63 65 60/61 Frankfurt 56 95 Wiesbaden Aschaffenburg 97 Bayreuth 54 Mainz Bamberg 55 Trier Würzburg 64 Weiden Kaiserslautern Nürnberg 68 92 66 67 Saarbrücken Heilbronn 74 90/91 93 76 Kartsruhe Regensburg 75 94 Ingolstadt Pforzheim 70/71 73 Passau tgart Göppingen 84 86 77 89 Dachau Pfarrkirchen 85 Ulm Offenburg Reutlingen Augsberg 72 80/81 München 78 83 88 Freiburg VillingenRosenheim Traunstein 87 Schwenningen 82 Ravensburg 79

3

0

5

9

6

7

8

Kempten

GarrnischPartenkirchen

Figure 5.1 ZIP codes for Germany Source: https://www.venue.de/plzkarte/ (2019)

breweries: In 2015, Great Britain had 1,880 breweries, Germany 1,400, France 800, and Italy about 700 (https://de.statista.com/infografik/7049/anzahl-brauereien-ineuropa/). About 800 of Germany’s 1,400 breweries are microbreweries. Their number increased by 32 percent from 2009 to 2017, while the number of other breweries decreased by 6 percent over this period (https://www.statista.com/ statistics/575625/micro-breweries-germany/). Import volumes are less significant

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- ,  ,   

122 7

5.76

6

4.94

5

4

4

2.87

3

2.51 2.15

2

2.08

2.04 1.1

1

1

1 0.7

n

St er

nb ur g

g

H ol ste

Kö ni

Je ve r

ck ’s W ar ste in er Ra de be rg er H as se rö de r

Be

et tin ge r Bi tb ur ge r Ve lti ns

O

Kr om ba

ch er

0

Figure 5.2 Beer production of top brands in Germany 2017 (in mio. hl) Source: http://aktiongutesbier.de/statistik-bier-und-brauereien/ (2019)

for the German market than for other European countries. The share of export volume is 17 percent of total beer production. About 16 mio. hl of beer is exported. Imports amount to about 7 mio. hl (Table 5.1). The beer industry in Germany employs about 27,000 people and has an annual turnover of 8 billion Euros. The industry contributes about 12 percent of turnover (about 700 mio. euro) to state taxes (Table 5.1).

3. Theory of Price Promotion Traditional spatial and temporal pricing models consider the role of transportation and storage costs as well as the role of supply and demand fluctuations over space and time. Products transported over longer distances or stored over longer periods should be more expensive; also, when demand shifts upwards or downwards, prices should rise or fall. When supply expands or costs fall, goods’ prices should decrease. Varian (1980) challenged these comparative static results when he introduced the concept of a mixed strategy equilibrium. Following this concept, firms do not set deterministic prices based on supply and demand, but according to a probability function to compete for informed consumers. Varian shows that the probability function has a u-shaped form, which favors high and low prices at the same time. This main result reflects the real-world phenomenon of price

# mio. hl mio. hl mio. hl mio. hl mio. hl liter # mio. Euro mio. Euro

Breweries Sales Production Export Import Consumption Per cap cons Employees Turnover Taxes

1331 100 98.1 14 6.5 89.9 109.6 28412 7855 728

2009

Source: https://www.brauer-bund.de/ (2019)

Unit

Year 1333 98.3 95.7 14.8 7.5 87.9 107.4 27572 7690 713

2010

Table 5.1 Some statistics on the German beer market

1347 98.2 95.5 15.4 7.7 87.7 109.3 27048 7850 702

2011 1341 96.5 94.6 15.7 7.3 86.3 107.6 26915 7954 697

2012 1352 94.6 94.4 15.1 6.5 85.9 106.6 26825 7652 669

2013 1352 95.6 95.3 15.6 6.8 86.5 106.9 26752 7914 684

2014

1388 95.7 95.6 15.9 6.7 86 105.9 26861 7796 676

2015

1410 95.9 95.0 16.6 7.3 85.5 104.1 27195 7845 678

2016

1492 93.5 93.0 15.7 6.7 83.6 101.2 27233 7843 664

2017

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- ,  ,   

promotions or HiLo pricing in retailing. For many food and beverage products we observe price promotions implying that, at the same time, some retailers offer high regular prices and others offer significantly discounted price promotions. Many researchers followed up on this concept and developed models for various more complex market settings. An important direction of research in this field of microeconomic modelling is investigating the role of consumer loyalty. In the following, we briefly review this branch of the literature and discuss the main findings in this field. If consumers are mainly loyal toward brands produced in the region, nationwide distributed brands likely face a difference in customers’ brand loyalty, which they may consider in their spatial pricing and promotional strategy. Brand loyalty implies that consumers accept a price differential of their preferred brand compared with alternative brands before they switch from their preferred to another competing brand. Not all consumers in the market may be loyal to regional brands. Some may be non-loyal (switchers) and react more sensitively to price changes. Thus, it may be rational even for strong (regional) brands to compete for switchers or non-loyal consumers by offering price promotions. For example, the regional brand may increase its market share by underbidding its competitors to gain all switchers’ demand. This is not a profit-maximizing strategy for all periods; however, a mixed strategy can be rational. Several papers have analyzed the relationship between brand loyalty and promotional sales; to our knowledge, the spatial dimension in this context has not yet been addressed in the literature. If we assume constant marginal costs of production for the brewers and restrictive transaction costs for consumers (no spatial arbitrage), we can solve the spatial pricing problem for each individual market separately and use the following models to obtain the impact of brand loyalty on (spatial) retail pricing. Agrawal (1996), Anderson and Kumar (2007), Jing and Wen (2008), and Kocas and Bohlmann (2008) present models under various settings to determine the impact of brand loyalty on the retail pricing strategies of competitors. Agrawal (1996) models a retailer that sells a strong and a weak brand.¹ Both brands have loyal customers, but the stronger brand’s loyal customers are willing to accept higher mark-ups before switching to an alternative. The retailer faces two options. The first is to sell both brands at the consumers’ reference price to the respective loyal segment; the second is to price-promote either one of the brands to target the entire market. Because the level of loyalty is higher for the stronger brand, effective discounts for the weaker brand need to be higher. As this option is costly for the retailer (loss by price reduction in the loyal segment), it is used less often. Thus, the local (strong) brand promotes more often at shallower discounts compared to other non-regional (weak) brands. Jing and Wen (2008) use a different ¹ The terms weak and strong indicate whether a brand has few or many loyal customers, or whether loyalty is high or low (see Empen et al, 2015).

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125

composition of consumer segments and introduce a non-loyal price-sensitive switching segment. They assume loyal consumers only for the stronger (local) brand and price-sensitive consumers (switchers) for the non-local brands. Depending on the level of brand loyalty and the relative size of respective consumer segments, different outcomes are possible. With a relative increasing price-sensitive consumer segment, brands offer deeper and more frequent promotions. Stronger brands will promote less aggressively if the degree of brand loyalty is high because it is more profitable to exploit the loyal segment than to attract price-sensitive consumers. Kocas and Bohlmann (2008) introduce three brands and define the power of brands in relative terms. For brands with a larger segment of switchers and a smaller segment of loyal customers, it becomes profitable to offer higher discounts. Thus, stronger brands (more loyal customers) promote less often and offer smaller discounts. Anderson and Kumar (2007) present a dynamic (two-period) model where brand loyalty is endogenous influenced by price promotions. Switchers choose the lowest price brand. For this brand, a fraction of switching consumers become loyal customers in the second period. Weak and strong brands indicate a different rate of switchers that turn into loyal customers. Both brands face the trade-off between harvesting loyal customers by charging high regular prices or investing in a higher rate of loyal customers in the future. The stronger brand is more effective in turning switchers and thereby has a higher incentive to invest in future loyal customers. The strong brand therefore offers more and higher price discounts in the starting period. In a standard model of perfect competition, positive (temporal) demand shifts lead to higher prices. Chevalier et al (2003) discuss three different theories that deviate from the standard model. First, consumers are more engaged in shopping during times of high demand. Consumers are willing to search more intensively for low prices and demand becomes more price-elastic. Consequently, retailers have more incentives to lower prices and to accept lower retail margins. Second, in periods of high demand, retailers rely less on tacit collusion. Costs of leaving a tacit cartel are equivalent to the sum of lower margins in future periods, of which currently higher market shares have to be subtracted. If there is a peak demand, revenues of deviating from tacit collusion increase. Consequently, more retailers lower their prices. Third, based on Lal and Matutes (1994), Chevalier et al (2003) argue that retailers use price promotions to attract customers to the store. As advertising is costly, retailers cannot advertise all their goods. They choose products that are of particular importance for the store choice of consumers. The model by Lal and Matutes (1994) “predicts it would be more efficient for retailers to advertise items that are relatively more popular” (Chevalier et al, 2003: 18). Therefore, retailers choose strong brands with a high share of loyal customers for price promotions. If we follow a static concept of brand loyalty, then most models predict that stronger brands promote less often at lower discounts. For a dynamic concept

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- ,  ,   

Anderson and Kumar (2007) show the reverse result that stronger brands promote more intensively. This result can also occur following the loss leader theory when assuming that retailers choose primarily strong brands (key products) for promotion to maximize the impact on store traffic. Further, in periods of high demand, competition between retailers increases due to more intensively searching consumers. This also leads to higher discounts and more frequent promotions. Following these theoretical discussions, we state the following hypotheses:   : Brands offer higher discounts at home markets compared with distant markets.   : Brands offer more frequent promotions at home compared with distant markets.    : Brands offer higher discounts at periods of peak demand.    : Brands offer promotions more frequently at periods of peak demand.

4. Model Specification and Data We analyze promotional prices and the number of promotions of Pilsner beer brands in Germany from 2000 to 2012. The promotional price and a promotion dummy are the dependent variables in our models. The service company Markant collects promotional prices for a range of products used by retailers to monitor their competitors’ pricing strategies. They search in newspaper and promotional leaflets for promotional offers. In the case of beer, we find various different versions of packaging, such as cases with 11–24 bottles of beer of 0.33 or 0.5 liters in size. To compare prices, we use unit values in euro per liter of beer and use the packaging as control variable. According to theoretical discussion, we are interested in the distance to the home market of the brewery, and the impact of fusions. As a first approximation, we use the distance in two-digit postal ZIP codes. If the distance is zero, the brewery and the retailer operate on the same regional market. We take the logarithm of prices and deflate prices by the consumer price index. To model promotions, we construct a zero/one dummy from the data: A one indicates a promotion, a zero indicates no promotion. As we do observe only promotional prices, the data are inflated for all combinations that could possibly indicate no promotion. We presume here that brands are strong in their region of origin, indicating a high share of loyal consumers on the home market. Even though we do not directly operationalize the concept of brand loyalty, for example by consumer experiments or household scanner data, the market share of brands generally coincides with the level of brand loyalty (Fader and Schmittlein, 1993). We define

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127

the home market as the federal state in which the brewery operates its main production facilities. In the empirical model, we apply the distance of the retailer to the home market as an instrument to reflect changes in brand loyalty and/or transportation costs. To test if the location of markets and seasonal demand shifts affect the brands’ pricing strategies on the German beer market, we separately estimate the following model specifications with promotional prices and a dummy variable to indicate promotions as dependent variables (equations 1 and 2). Pit ¼ α þ

X

1 β1k Xi;t þ

E½Promoit  ¼ λ þ

X

β2k Xi2 þ

X

β3k Xi3 :::: þ νi þ uit

X X X 1 δ1k Xi;t þ δ2k Xi2 þ δ3k Xi3 :::: þ ϖi þ εit

ð1Þ ð2Þ

On the right hand side of equation (1), we find different blocks of explanatory and control variables. We start with the type of promotion. The first variable indicates the number of the page of the leaflet where the promotion is printed. The second variable is a dummy, which is one if the ad shows a picture of the promoted brand. The third variable is also a dummy, which is one if a bonus product such as a free extra gift comes with the product. Attractive promotions (good deals) are more likely on front pages; also, a picture may indicate a good deal. Bonus products are costly; thus, such promotions offer a less attractive price. The second block of variables consists of distance, time, and temperature effects. In the third block, we construct dummy variables for the various holidays. Hypothesis (3) states that such periods show more attractive price promotions. For Pilsner beer, we distinguish four different types: regular Pilsner, Export, Extra Mild, and Gold. The regular Pilsner is the most common type and is the reference group in the estimation. Export beer is a bit stronger than Pilsner; it has a bit more hops in it and slightly more alcohol. Extra Mild and Gold beers have less hops than Pilsner. We account for the different brands by introducing respective dummies; the brand Beck’s is the reference group here. Table 5.2 shows the average promotional prices for all brands in the sample. For the different packaging, we also construct dummies with cases of eleven half-liter bottles as a reference group. We expect larger volume packaging to be cheaper due to lower costs of production and handling. However, that does not necessarily have to hold for promotional prices. We also consider the type of the retailer as well as the key account company. Edeka is the leading retail key account company in Germany and is the reference group in this study. Hard discounters such as Aldi or Lidl do not sell the major national beer brands in Germany. Thus, in our sample we observe only soft discounters, which set promotional prices for national beer brands. Finally, we use ZIP code-based dummies to control regional effects. We estimate the first

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- ,  ,   

Table 5.2 Average promotional prices in euro per liter for the national brands

Beck’s Bitburger Hasseröder Holsten Jever Krombacher König-Pilsener Oettinger Radeberger Sternburg Veltins Warsteiner

# of obs.

% of obs.

Mean

Std. Dev.

104,928 120,880 41,049 36,642 63,343 110,522 69,692 19,837 36,826 4547 73,719 116,361

13.1% 15.1% 5.1% 4.6% 7.9% 13.8% 8.7% 2.5% 4.6% 0.6% 9.2% 14.6%

1.297 1.159 0.950 0.970 1.120 1.119 1.101 0.439 1.042 0.511 1.144 1.134

0.270 0.284 0.190 0.222 0.169 0.212 0.241 0.081 0.153 0.069 0.227 0.239

Source: Own, data from Markant 2013

specification by a random effects panel model to obtain estimates for all timeindependent variables. To estimate the second specification in equation 2, we use a random effects panel logit model. The specification is very similar to the first model. However, the variables describing the type of promotion are not considered. As the number of promotions may vary because the number of newspaper and leaflets analyzed varies in time, we control for this by introducing the number of leaflets searched. Besides, we use all other variables of the first model specification. The data under study indicate panel structures. Panel-estimation techniques are therefore appropriate. Pre-tests show that a fixed effects panel model is preferred over a random effects model specification. However, as our main variables of interest are constant across panel members, we cannot use a fixed effects panel model to deliver the respective estimates. Consequently, we decide to employ a random effects panel model specification. Further testing shows that we need to correct for heteroscedastic errors; consequently, we apply the Huber/ White sandwich estimator (Stata, 2015).

5. Estimation Results The beers under study are mostly of the Pilsner type (96 percent). Less than 1 percent are export type and extra mild, and 3.5 percent are Gold beers. Gold beers, like extra mild, contain less hops and are milder in taste, which has increased in popularity in Germany in recent years. Export-type beers are stronger, with more hops, and contain a bit more alcohol. Table 5.3 shows the random effects model estimation results. The overall R² is at 73 percent. The focus is on the distance between the home market (location of

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129

Table 5.3 Estimation results for the random effects panel estimation of promotional prices Dependent variable: Log (deflated promotional price) Distance Deviation ZIP code Peak demand Karneval Easter Father’s Day Labor Day Penecost Reunification Oktoberfest Christmas Control variables Page Picture Bonus Year School holidays Temperature Export beer Extra mild beer Gold beers Bitburger Hasseroeder Holsten Jever Krombacher Koenig Oettinger Radeberger Sternburg Veltins Warsteiner 20  0.33 20  0.5 24  0.33 27  0.33 6  0.5 6  0.33 Off-license Discounter Supermarket Convenience store Markant Metro Rewe Other

Coef.

Std. Err.

Sign.

0.00088

0.00028

**

0.00829 0.00506 0.00809 0.00264 0.00848 0.00228 0.01186 0.02050

0.00113 0.00093 0.00118 0.00111 0.00085 0.00128 0.00077 0.00082

*** *** *** ** *** * *** ***

0.00060 0.00164 0.06676 0.01628 0.00181 0.00081 0.12708 0.03891 0.00397 0.10565 0.22455 0.26892 0.10379 0.11257 0.10032 0.92186 0.09928 0.72513 0.11190 0.10949 0.17368 0.12942 0.08313 0.02945 0.07099 0.17797 0.05454 0.03177 0.03717 0.04419 0.01745 0.02243 0.01865 0.04671

0.00003 0.00101 0.00098 0.00011 0.00042 0.00003 0.01469 0.00753 0.00232 0.00202 0.00252 0.00297 0.00224 0.00201 0.00227 0.00331 0.00250 0.00670 0.00220 0.00197 0.00310 0.00184 0.00194 0.00723 0.00359 0.00205 0.00334 0.00347 0.00294 0.00299 0.00139 0.00195 0.00142 0.00261

*** * *** *** *** *** *** *** * *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Continued

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- ,  ,   

Table 5.3 Continued Dependent variable: Log (deflated promotional price) Distance

Coef.

Std. Err.

Sign.

ZIP 1 ZIP 2 ZIP 3 ZIP 4 ZIP 5 ZIP 6 ZIP 7 ZIP 8 ZIP 9 Constant

0.00611 0.00871 0.01064 0.00947 0.00961 0.01062 0.00961 0.00618 0.01117 0.32292

0.00262 0.00232 0.00249 0.00259 0.00235 0.00242 0.00251 0.00282 0.00287 0.00451

** *** *** *** *** *** *** ** *** ***

Note: * 5%, ** 1%, *** 0.1% level of significance. Reference group is Pilsner beer of the brand Beck’s in casings with eleven bottles of size 0.5 liter sold in cash and carry markets of the Edeka group in ZIP 0 (see map) Source: Own calculations based on Markant, 2013 with Stata Version 15, 2018

the brewery) and the location of the retailer, and the periods of peak demand indicated by the various holidays throughout the year. We also considered several control variables, such as different layout in the promotional leaflets, dummy variables for the type of beer, casing, brand, and region. The first variable of interest is the distance between the brewery and the retailer. We find that promotional prices are higher in markets that are more distant from the location (region) of the brewery, supporting the theories that predict higher discounts for promotions in the market with more loyal customers (home market). This effect is small but highly significant. At maximum, it is about 1 percent. Thus, we find some support for Hypothesis 1. Periods of peak demand for beer are the various holidays in Germany. With only one exception (reunification day), all holidays show lower promotional prices compared with non-holiday periods. For the most prominent holidays, retailers reduce prices by 1 or 2 percent, on average. This result supports Hypothesis 3. The control variables also show some interesting results. First, in summer (higher temperatures) and during school holidays, promotional prices are a bit higher than they are in winter (lower temperatures). We did not consider school holidays as a period of peak demand, because this is the main period for family vacations and in many home markets, the exception being tourist areas, it is not a period of peak demand. Further promotional prices show a negative time trend of 1.6 percent per year over the sample period. Thus, beer promotions have become more aggressive over time.

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131

The variable Page indicates the number of the page on which the promotion is printed. Picture is a dummy with zero and one; one indicates if there is a picture of the product in the ad. Bonus is one if the buyer gets a free bonus item with the purchase of the beer product (a free glass, some tools, etc.). The results show that the lowest (best) price promotions are published on the first pages of a leaflet; a picture also signals a better price deal. However, if an extra item (bonus) supplements the deal, the promotional price of beer increases. Except for the bonus product, the effects are rather small. A picture signals a price on average 0.164 percent below promotional prices without a picture. Price promotions with bonus products are on average about 7 percent higher. Export beers show the lowest price promotions. However, export beers have become very unpopular and make up less than 1 percent of observations; thus, the impact could also be random. The same holds for extra mild beers. Gold beers are still on the market and account for about 4 percent of observations. Their price promotions are slightly higher than for Pilsnertype beers. The different brands show significant differences in promotional price level. The base brand is Beck’s, which is the price leader; all other brands are cheaper. Considering this brand’s marketing effort (TV commercials etc.), this result comes as no surprise. The cheapest brands are Sternburg and Oettinger (see also Table 5.2). For the interpretation of relative differences, we have to keep in mind that the logarithmic transformation reflects percentage changes well only for small values up to 2 percent. For higher positive values, estimators here understate the percentage price differential; for negative values, estimators overstate the percentage price differential. For example, the estimator for Oettinger is 0.92, implying that Oettinger is 92 percent cheaper than Beck’s; however, average Oettinger prices are in fact only 67 percent lower than the prices of Beck’s beer (see Table 5.2 and Table 5.3). Packaging plays a role in the price promotion. The base category is a small case containing eleven bottles of 0.5-liter size. Compared with this packaging, the cases with twenty bottles of the same size are 13 percent lower in promotional price, and even the six-pack of 0.5-liter bottles is 7 percent cheaper. Packaging with 0.33-liter bottles is more expensive, at least if we compare the same number of bottles in the casing. Discounters and cash-and-carry markets offer the best price promotions. Hard discounters such as Aldi or Lidl do not carry the most prominent national beer brands; in this sample, we only observe soft discounters which carry a range of national brands and which offer promotional prices. Off-license stores, which exclusively sell alcoholic and non-alcoholic beverages, charge the highest promotional prices. The various retailer chains show only a small dispersion of promotional prices. On average Edeka offers the lowest promotional prices; its competitors’ prices are at maximum about 5 percent higher. Price promotions

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- ,  ,   

show some regional variations. Promotional prices are lowest in the new Bundesländer (East Germany, low income and high demand) and in Bavaria (South East), which is the region most famous for both drinking and producing beer (high income and high demand). The second estimation model is a panel logit model that uses appearances (0/1) of promotions. To analyze promotions, we inflate our dataset with zeros for all brands and products that are not on promotion in a certain leaflet. Through this procedure, the number of observations is significantly increased and it is no longer possible to analyze the entire period of observation. Thus, we break down the data for individual years. The results for the individual years are very similar. In this paper, we present the results for 2011 only. More results for other periods are available from the authors upon request, and are also similar. The model specification is very similar to the first panel model specification. However, we do not use the promotional variables and the time dummy. Instead, we introduce the number of collected and analyzed promotional leaflets per week as a control variable to prevent the obvious bias that, in weeks with more leaflets analyzed, the number of promotions increases as well. The results show that this control is necessary as the likelihood of a promotion increases with the number of leaflets analyzed (see Table 5.4). While the promotional prices increase with distance, the frequency of promotions decreases with distance between the brewery and the retailer. This supports the suggestion that retailers focus their promotions on local beer brands which indicate high consumer loyalty (Hypothesis 2). Except for Father’s Day and Pentecost, all holidays indicate a positive effect on promotion frequencies, supporting the hypothesis that promotional activities increase in peak demand periods. This supports Hypothesis 4. Retailers primarily use Pilsner beer types for promotion. High-price beers are more often promoted than low-price ones. Beck’s, Bitburger, and Warsteiner charge the highest prices. These brands also show the highest promotion frequencies. The dummy estimates for the brands show a correlation coefficient of 0.83 with the average price levels of the brands. This positive correlation also shows up for the regional ZIP codes; thus, regions with higher prices more often have beers on promotion. Distance and holidays show a negative relationship between promotional prices and promotional frequencies, supporting the peak demand hypothesis. Increased consumer search leads to more competition and thereby to more promotions with higher discounts. Regions and brands show a positive relationship between promotional prices and promotional frequencies, indicating a substitution between frequency of promotion and the level of the price discount. Thus, in the high-demand regions an everyday low-price strategy appears to be more common compared with the higher-price regions, which more often see a HiLo pricing strategy.

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133

Table 5.4 Estimation results for the random effects logit panel estimation of promotions Dependent variable: Promotion (yes/no) Estimates

Distance Deviation ZIP code Peak demand Karneval Easter Father’s Day Labor Day Penecost Reunification Oktoberfest Christmas Control variables No. of leaflets School Holidays Temperature Export beer Gold Beers Bitburger Hasseroeder Holsten Jever Krombacher Koenig Oettinger Radeberger Sternburg Veltins Warsteiner 20  0.33 20  0.5 24  0.33 27  0.33 6  0.5 6  0.33 Off-licence Discounter Supermarket Convenience store Markant Metro Rewe Other ZIP 1 ZIP 2

Marginal effects

coef.

Std. Err.

Sign.

0.0151

0.0030

***

0.0010

0.0002

***

0.1349 0.1566 0.1473 0.0238 0.0096 0.0573 0.0854 0.6848

0.0237 0.0272 0.0309 0.0271 0.0200 0.0254 0.0135 0.0156

*** *** ***

0.0089 0.0104 0.0097 0.0016 0.0006 0.0038 0.0057 0.0453

0.0016 0.0018 0.0020 0.0018 0.0013 0.0017 0.0009 0.0010

*** *** ***

0.0026 0.0132 0.0017 0.2313 0.6530 0.0181 0.1627 0.3808 0.1890 0.0824 0.0691 0.4283 0.2198 0.3454 0.0335 0.0412 0.6016 0.9874 0.9184 1.9034 0.2275 0.2025 0.3218 0.3528 0.4576 0.5090 0.1550 0.5666 0.0524 0.2479 0.0190 0.0432

0.0001 0.0089 0.0006 0.1184 0.0239 0.0208 0.0266 0.0314 0.0216 0.0218 0.0244 0.0346 0.0262 0.0606 0.0236 0.0202 0.0385 0.0225 0.0234 0.0625 0.0378 0.0245 0.0350 0.0320 0.0274 0.0284 0.0149 0.0217 0.0156 0.0290 0.0286 0.0254

***

0.0002 0.0009 0.0001 0.0153 0.0432 0.0012 0.0108 0.0252 0.0125 0.0055 0.0046 0.0283 0.0145 0.0229 0.0022 0.0027 0.0398 0.0653 0.0608 0.1259 0.0151 0.0134 0.0213 0.0233 0.0303 0.0337 0.0103 0.0375 0.0035 0.0164 0.0013 0.0029

0.0000 0.0006 0.0000 0.0078 0.0016 0.0014 0.0018 0.0021 0.0014 0.0014 0.0016 0.0023 0.0017 0.0040 0.0016 0.0013 0.0026 0.0015 0.0016 0.0042 0.0025 0.0016 0.0023 0.0021 0.0018 0.0019 0.0010 0.0015 0.0010 0.0019 0.0019 0.0017

***

** *** ***

** * *** *** *** *** *** ** *** *** *** ** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *

** *** ***

** * *** *** *** *** *** ** *** *** *** ** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *

Continued

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- ,  ,   

Table 5.4 Continued Dependent variable: Promotion (yes/no) Estimates

ZIP 3 ZIP 4 ZIP 5 ZIP 6 ZIP 7 ZIP 8 ZIP 9 Constant

Marginal effects

coef.

Std. Err.

Sign.

0.1166 0.1529 0.1453 0.1201 0.0033 0.1518 0.0965 5.1056

0.0274 0.0279 0.0257 0.0258 0.0259 0.0278 0.0304 0.0662

*** *** *** *** *** ** ***

0.0077 0.0101 0.0096 0.0079 0.0002 0.0100 0.0064 *

0.0018 0.0018 0.0017 0.0017 0.0017 0.0018 0.0020

*** *** *** *** *** **

Note: * 5%, ** 1%, *** 0.1% level of significance. Reference group is Pilsner beer of the brand Beck’s in casings with eleven bottles of size 0.5 liter sold in cash and carry markets of the Edeka group in ZIP 0 (see map) Source: Own calculations based on Markant, 2013 with Stata Version 15, 2018

6. Summary and Conclusions The analysis of spatial and temporal retail price patterns can produce additional information on the conduct and the performance of markets. However, much of this information presently provides no clear indication with respect to impact on the society’s welfare. For example, the finding that promotional beer prices increase during off-holiday times may traditionally imply welfare losses for consumers. However, it is informed consumers that mostly take promotional price deals, and these consumers may face some extra costs in becoming informed. Thus, promotional prices directly affect informed consumers; promotional prices indirectly (randomly) also affect uniformed consumers. Regular prices are naturally higher than promotional prices and may even negatively correlate with promotional prices (see Loy and Glauben, 2015). Thus, we have informed and uninformed consumers who are differently affected by promotional and regular pricing policies. If informed consumers mainly show low incomes, distributional aspects can further complicate the welfare analysis. All this information is hidden when looking at average (national) prices. In addition, the choice of a procedure to calculate average prices may induce an estimation bias, which further complicates any correct estimation of potential welfare implications. The present study clearly shows an indication of spatial and temporal variations of pricing strategies over retailers and brands on the German beer market. According to several studies, local beer brands have more and stronger loyal consumers. The spatial pricing strategy is to promote more aggressively in the home market and to promote less in distant markets. The data under study show

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135

evidence for Hypotheses 1 and 2. “More aggressively” means that retailers place more promotions and offer higher discounts in the home market of the brewery compared to distant markets. Thus, strong brands are promoted more, and more intensively, than weak brands. We find two explanations for these features. Anderson and Kumar (2007) present a dynamic model of consumer loyalty to explain a more aggressive promotional strategy in the home market. Alternatively, Lal and Matutes (1994) have shown that loss leader pricing by retailers can produce a similar result. Whether one or another explanation is more likely depends on whether the retailer or the processor is in charge of setting retail prices. The spatial pattern of regular prices may be the result of transportation costs or part of a pricing strategy focusing on the home market and acting more defensively in distant markets. We also find evidence for temporal retail price patterns according to the theories and the data presented in Chevalier et al (2003), who show that retail prices do not rise (fall) during periods of peak demand, such as before Christmas, Easter, Labor Day, and so on. We find that retailers focus on certain holidays by setting lower promotional prices and increasing the number of promotions (Hypotheses 3 and 4). A managerial implication of these results may be that expanding breweries on the German market are better off taking over competing (local) brands to conquer distant markets, instead of heavily discounting their products (own brands) nationwide (on the distant markets). For takeovers in the German beer market in the past, the new owners always retained the marketing concepts of the newly merged brands and made almost no changes. Consequently, while brewers exit the market following a takeover, they leave their locally established brands and marketing concepts that have fostered consumer loyalty toward these brands. The presented study shows certain limitations that may call for follow-up studies in future research in this field. First, the literature states that beer consumers are strongly loyal to local brands. This result has been based on rather weak survey data so far; it needs to be investigated by more rigorous data and methods. One line of research in this direction could be the matching of household scanner data with retail scanner data to provide a direct measure (estimate) of consumer loyalty. Empen et al (2015) and Allender and Richards (2012) discuss and apply methods to match such data sources and present adequately derived measures of consumer loyalty. Thereby, we could further consider differences in consumer loyalty between brands. In this chapter, we argue that either loss leader pricing by the retailer or a dynamic pricing strategy by the processor could explain the spatial features in retail prices. To answer this debate would require further information and an investigation of the role of processors and retailers in the setting of retail prices for the various brands. Finally, many processors own several brands or sub-brands. To our knowledge, to date the literature has not covered the pricing of multiple sub-brands.

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- ,  ,   

References Adams, J. W. 2006. Markets: Beer in Germany and the United States. Journal of Economic Perspectives, 20 (1), pp. 189–205. Agrawal, D. 1996. Effects of brand loyalty on advertising and trade promotions: A game theoretic analysis with empirical evidence. Marketing Science, 15 (1), pp. 86–108. Allender, W. J. and Richards, T. J. 2012. Brand loyalty and price promotion strategies: An empirical analysis. Journal of Retailing, 88 (3), pp. 323–42. Anderson, E. T. and Kumar, N. 2007. Price competition with repeat, loyal buyers. Quantitative Marketing and Economics, 5, pp. 333–59. Chevalier, J. A., Anil, K. K., and Rossi, P. E. 2003. Why don’t prices rise during periods of peak demand? Evidence from scanner data. The American Economic Review, 93 (1), pp. 15–37. Colen, L. and Swinnen, J. 2011. Beer Drinking Nations in J. Swinnen (ed.), The Economics of Beer and Brewing, Oxford University Press, Oxford. Culbertson, W. P. and Bradford, D. 1991. The price of beer. International Journal of Industrial Organization, 9, pp. 275–89. DLG (Deutsche Landwirtschafts-Gesellschaft) eV. 2011. Regionalität aus Verbrauchersicht, available at: http://www.dlg.org/aktuelles_ernaehrung.html? detail/dlg.org/4/1/4479 (accessed on October 20, 2012). The Economist, 2010. German Beer Drinking: Oktobergloom, Producing Too Much, Consuming Too Little: Beer Is a Microcosm of Germany, available at: http://www. economist.com/node/¬17204871 (accessed on November 18, 2011). El Cartel Media GmbH und Co. KG, 2005. Branchenbericht Bier 2005, Grünwald, available at: http://www.elcartelmedia.de/xbcr/SID-FD7507F7-FFB0DAA5/ecm/ Branchenbericht_Bier.pdf (accessed on October 12, 2011). Empen, J., Loy, J.-P., and Weiss, C. R. 2015. Price promotion and brand loyalty: Empirical evidence for the German ready-to-eat cereal market. European Journal of Marketing, 49 (5/6), pp. 736–59. Fader, P. and Schmittlein, D. 1993. Excess behavioural loyalty for high-share brands: Deviations from the Dirichlet model for repeat purchasing. Journal of Marketing Research, 30 (4), pp. 478–93. Gewerkschaft Nahrung-Genuss-Gaststätten, 2009. Branchenbericht der Brauwirtschaft 2009, Hamburg, Ohne Verlag. Jing, B. and Wen, Z. 2008. Finitely loyal customers, switchers, and equilibrium price promotions. Journal of Economics & Management Strategy, 17 (2), pp. 683–707. Kocas, C. and Bohlmann, J. D. 2008. Segmented switchers and retailer pricing strategies. Journal of Marketing, 72, pp. 124–42. Lal, R. and Matutes, C. 1994. Retail pricing and advertising strategies. The Journal of Business, 67 (3), pp. 345–70.

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Loy, J.-P. and Glauben, T. 2015. Spatial and Temporal Retail Pricing on the German Beer Market in McCorriston, S. (ed.), Food Price Dynamics & Price Adjustment in the EU, Oxford University Press, Oxford, pp. 102–21. Private Brauereien, 2011. Absatzstatistik, available at: http://www.private-brauereien. de/pbb/presse-branche/absatzstatistik.php?navanchor=1010028 (accessed on November 14, 2011). Rojas, C. 2008. Price competition in U.S. brewing. The Journal of Industrial Economics, 56 (1), pp. 1–31. Rojas, C. and Petersen, E. B. 2008. Demand for differentiated products: Price and advertising evidence from the U.S. beer market. International Journal of Industrial Organization, 26, pp. 288–306. Slade, M. E. 2004. Market power and joint dominance in U.K. brewing. The Journal of Industrial Economics, 52 (1), pp. 1–31. Varian, H. R. 1980. A model of sales. The American Economic Review, 70 (4), pp. 651–9. Zühlsdorf, A. and A. Spiller, 2012. Trends in der Lebensmittelvermarktung, available at: http://www.agrifood-consulting.de/index.php?id=cetest_firstpage3 (accessed June 20, 2012).

WWW links https://www.brauer-bund.de/ https://www.venue.de/plzkarte/ http://aktiongutesbier.de/statistik-bier-und-brauereien/ https://de.statista.com/infografik/7049/anzahl-brauereien-in-europa/

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6 Brewing Industry Concentration and the Introduction of the Beer Excise in Australia and New Zealand in the Late Nineteenth Century Brett J. Stubbs

1. Introduction British colonization in the late eighteenth and early nineteenth centuries was followed closely in each of the six Australian colonies, and in neighboring New Zealand, by the development of a flourishing brewing industry. Brewing followed the spread of settlement within the colonies, and breweries reached their numerical maximum in each in the late nineteenth century. The industry contracted subsequently to a comparatively small number of dominant cities, achieving high levels of concentration by the early twentieth century. One significant factor promoting concentration was the introduction of a beer duty, or beer excise, in each of the colonies in the late nineteenth century. When six colonies combined in 1901 to create the Commonwealth of Australia, the new federal government took sole responsibility for the taxation of beer production, adopting a uniform rate of beer excise that was a compromise between the various rates formerly applying in the colonies. As the federal excise essentially continued pre-existing colonial arrangements, statements as to its devastating effect on the brewing industry by causing the closure of many Australian breweries are greatly exaggerated. Nevertheless, the federal tax was accompanied by more onerous administrative requirements that fell more heavily on smaller breweries, and made them less competitive. In this chapter the introduction and operation of the beer excise in each of the Australian colonies (New South Wales, Tasmania, Victoria, South Australia, Western Australia, and Queensland) and in New Zealand, and the later adoption of a uniform federal tax in Australia, are considered in relation to their effects on the brewing industry, and especially as factors promoting concentration.

Brett J. Stubbs, Brewing Industry Concentration and the Introduction of the Beer Excise in Australia and New Zealand in the Late Nineteenth Century In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0007

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2. Brewing Industry Concentration in Australasia The colonization of Australia began with the claiming, in 1788, of the eastern part of the continent together with the island of Van Diemen’s Land in the name of the British Crown. Beer arrived in that year with the first fleet of British ships, and commercial brewing began in Sydney, the first town, in the 1790s (Stubbs, 1993; Hughes, 1996). Van Diemen’s Land (later known as Tasmania) became a separate colony in 1825, but already several breweries had been established there, the first in the early 1820s (Stubbs, 2013). Similarly, several breweries came into operation in the Port Phillip district in the late 1830s, many years before the formation of the south-eastern part of the mainland territory of New South Wales into the separate colony of Victoria in 1851 (Stubbs, 2013). The north-eastern part of New South Wales became the separate colony of Queensland in 1859, several years after the first commercial brewery had begun operation there (Stubbs, 2010). Immediately westward of New South Wales, the remaining part of the Australian continent was formed into the colony of Western Australia in 1831. Commercial brewing began there in the same year (Spiller, 2003). Soon after, in 1836, the Province of South Australia was created by the excision from New South Wales of the middle-southern part of the continent. Several breweries were in operation there by the early 1840s, the first having started at Adelaide probably in 1838 (Painter, 2012). Eastward of the Australian continent, New Zealand also became a focus of British settlement in the early nineteenth century. For a brief time in 1840 New Zealand was a dependency of New South Wales, administered from Sydney, but it became the separate Colony of New Zealand in 1841. Two breweries were operating at Auckland in the early 1840s, although the first in New Zealand had been started in the 1830s, before the beginning of organized settlement (Jones and Paul, 1991). For much of the remainder of the nineteenth century it was commonly believed, in Australia at least, that New Zealand was destined to become part of an eventual political union with the Australian colonies. It was often referred to as an “Australian” colony, and otherwise as one of the “seven Australasian colonies” (e.g. Coghlan, 1896). The earliest colonial breweries were generally small, and were owned by individuals, families, or small partnerships. Incorporated joint stock brewing companies first appeared in the 1860s and 1870s, soon after the introduction in the colonies of legislation based on the English Companies Act 1862 (Lipton, 2007; Ville, 1998). Such entities became commonplace from the early 1880s; they were created to acquire and operate existing breweries, and to establish new brewing enterprises. Brewing followed the spread of settlement within the seven colonies, and breweries reached their numerical maximum and greatest geographical spread

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 . 

in each in the late nineteenth or very early twentieth century, then contracted to a comparatively small number of breweries (Figure 6.1) situated in a small number of dominant cities. In New South Wales, the oldest and most populous of the colonies, the number of breweries peaked at about eighty towards the end of the 1880s, and declined to five in the early 1930s. In Victoria, the next most populous colony, the peak had already occurred by 1872, when 126 breweries existed. The government of Victoria was staunchly protectionist toward native industries (Patterson, 1968; Siriwardana, 1991), which at least partly accounts for the establishment throughout that colony of a particularly large number of breweries by an early date compared to free-trade New South Wales. Nevertheless, only nine remained in operation in the early 1930s. The number of breweries in Queensland reached a maximum of twenty-nine in 1889, and declined to eight in the 1930s. Brewing in the other colonies followed a similar pattern, although the timing of the peak varied from colony to colony, with the last occurring in Western Australia in 1900 and 1901. Long before its numerical minimum was reached, the brewing industry in each colony had attained a high level of concentration. In New South Wales, the three largest breweries accounted for about 67 percent of that state’s beer production by 1901, and 90 percent by the 1910s. In Victoria, in 1901 forty-seven breweries remained in operation, but eight of them, all in Melbourne, produced 69 percent 140

number of breweries

120 100 80 60 40 20 0 1870

1880

1890 Victoria

1900 year NSW

1910

1920

1930

1940

Queensland

Figure 6.1 Numbers of Breweries in New South Wales, Victoria, and Queensland, 1870–1935 Sources: Various official colonial statistical publications

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of that state’s beer. In Queensland in 1901, four breweries in Brisbane produced 66 percent of the state’s beer. Many different factors promoted concentration in the brewing industry in the Australasian colonies. They included: improvements to the transportation systems (notably the development of railway networks focused on the capital cities); scientific and technological advances within the industry; the growth of the tied house system in the retail trade; the growth of temperance sentiment and concomitant retail trade restriction; economic depression in the early 1890s; and a severe drought and consequent economic decline in the early Federation years. Another significant factor was the introduction of a revenue-raising beer duty, or beer excise, in each of the colonies in the late nineteenth century. Many of these factors have been discussed elsewhere insofar as they affected brewing in New South Wales and in New Zealand in the late nineteenth and early twentieth centuries (Jones and Paul, 1991; Stubbs, 1999; Stubbs, 2000), but here the concern is principally the beer excise, and how it functioned across all seven of the Australasian colonies. It has been proposed that the beer duty would, and did, promote concentration in the brewing industry by disproportionately affecting the smaller producers. The historical record is replete with complaints about the introduction of the beer excise in each of the colonies, and with dire predictions of its expected effects. In fact, however, it is difficult to find conclusive evidence of particular brewery closures that were caused directly by the tax. Nevertheless, the following survey of the beer excise in the Australasian colonies reveals that the tax, together with its associated administrative arrangements, was a significant contributor to the profound changes that took place in the structure of the brewing industries of Australia and New Zealand in the late nineteenth and early twentieth centuries.

3. Beer Excise Legislation in the Australasian Colonies The second half of the nineteenth century saw the granting by the United Kingdom Parliament of responsible self-government, based on elected houses of assembly, to all seven of the Australasian colonies (Wentworth, 1956; Ward, 1987). The new parliaments thus created first sat in New South Wales, Victoria, Tasmania, and New Zealand in 1856; in South Australia in 1857; in newly created Queensland in 1860; and in Western Australia in 1890. In the 1880s and 1890s, the seven independently governed colonies under consideration all subjected their respective brewing industries to taxes on production (Table 6.1). Brewing appeared to the colonial governments of that time to have become a sufficiently profitable activity to be able to contribute to the revenue. Moreover, as the colonial brewing industries had advanced, the proportion of beer consumption derived from domestic production grew,

The Beer Duty Act, 1880 The Beer Duty Act, 1891 The Beer Duty Act, 1892 The Beer Duty Act, 1880 The Beer Duty Act 1880 Amendment Act, 1886 The Beer Duty Act Amendment Act, 1907 The Beer Duty Act, 1908 The Beer Duty Act, 1880 An Act to continue and amend “The Beer Duty Act 1880” An Act to further continue and amend “The Beer Duty Act 1880” The Beer Duty Act, 1892 The Beer Duty Act, 1885 The Beer Duty Act, 1897 The Beer Duty Act, 1887 The Beer Duty Act, 1894 The Beer Duty Act, 1898

Tasmania

New South Wales South Australia Western Australia

Queensland

Victoria

New Zealand

Act

Colony March 1, 1880 not stated in the act December 1, 1892 June 9, 1880 not stated in the act January 1, 1908 not stated in the act November 1, 1880 not stated in the act not stated in the act September 1, 1892 October 1, 1885 August 4, 1897 June 3, 1887 September 25, 1894 August 18, 1898

November 19, 1907 not stated in the act October 29, 1880 August 9, 1881 November 29, 1881 September 1, 1892 September 30, 1885 October 7, 1897 June 3, 1887 September 25, 1894 September 9, 1898

Commenced

February 13, 1880 November 17, 1891 November 17, 1892 September 1, 1880 August 17, 1886

Assented to

Table 6.1 Beer excise legislation in the Australasian colonies, 1880s and 1890s

2 and 3 3 3 3 2 2

2

3 2 2

3

3 3 4 3 3

Rate/s (pence per gallon)

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overtook, and eventually dwarfed the proportion derived from importation, making it impossible to maintain the revenues traditionally derived from customs duties on imported beer. In Queensland, for example, domestic production of beer overtook importation in the early 1880s (Stubbs, 2010, p. 10); it did so perhaps decades earlier in the older colony of New South Wales, but annual production figures are not available prior to the 1880s. The colonial governments were constantly casting about for new sources of revenue, and it became a common refrain that the brewing industry, whose development had long benefited from protective import duties, should contribute to the revenue once it had become prosperous.

3.1 Tasmania The first of the seven colonies to properly impose an excise on beer production was Tasmania, by which name Van Diemen’s Land had become known in 1856. There the Beer Duty Act of 1880 (43 Vic. no. 10) instituted a duty of three-pence per gallon on all beer brewed within the colony and removed for consumption or sale (Table 6.1). The stated purpose of the new tax was to offset “deficiencies in the public revenue.” Although set at three-pence per gallon in 1880, the duty in Tasmania was raised to four-pence in 1892 (56 Vic. no.5) as a measure to relieve the colony’s difficult financial position (Australian Brewers’ Journal, October 1892, November 1892). The rate remained at four-pence per gallon until the federal beer excise replaced the colonial tax in 1901.

3.2 New Zealand In New Zealand, the Beer Duty Act of 1880 (no. 44) came into effect on June 9 that year, although the act itself was not assented to until September 1, a few months later (Table 6.1). As in Tasmania, the purpose of the new tax was “making good deficiencies in the public revenue.” There had been an earlier attempt to introduce a beer excise in New Zealand, in 1878. In August that year, the Legislative Council resolved that on and after the 7th of that month, there would be levied and charged on all ale, beer and porter, or other malt liquors, made in New Zealand, an excise duty of 1½ pence per gallon. The bill to enact the measure was subsequently defeated in the parliament; as collection of the tax had already begun, it was necessary to refund the amounts collected.

3.3 Victoria In the larger colony of Victoria, the Beer Duty Act of 1880 (44 Vic. no. 669) commenced operation on November 1 of that year (Table 6.1). It was a tentative

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measure, designed to expire on December 31, 1880 “unless renewed or continued.” If not renewed or continued, the duty paid under the act would be refunded to those brewers who had paid it. Duty at the rate of two-pence per gallon was applied to all beer “brewed or manufactured” within Victoria, as a contribution toward raising a supply. It transpired that the Beer Duty Act of 1880 was retrospectively continued “in full force and effect” by a new act assented to in August 1881 (45 Vic. no. 699). This new act was set to expire on November 30, 1881, but it was considered desirable to pass another (45 Vic. no. 705) to further continue the beer duty until August 31, 1882. At that point in time, less than two years after it had first been imposed, the tax lapsed. An attempt was made in the Victorian parliament in August 1882 to further continue the tax. Its proponents believed it to be an “unobjectionable” tax, that had brought in a substantial amount of revenue for a small cost of collection, and the burden of which seemed not to be felt by the consumer. Nevertheless, the proposal to continue it was defeated by a large majority (Victoria, Legislative Assembly, September 5, 1882; The Argus, Melbourne, September 6, 1882).

3.4 Queensland Beer production was first taxed in Queensland through the Beer Duty Act of 1885 (49 Vic. no. 10), which instituted a beer excise of three-pence per gallon and a system of brewery registration accompanied by payment of a registration fee (Table 6.1). The stated purpose of the tax was to contribute to “raising the necessary supplies to defray the expenses of the Public Service.” The task of overseeing the operation of the breweries fell to the Chief Inspector of Distilleries, a pre-existing office. The Beer Duty Act of 1885 was repealed in 1888 (by the Customs Duties Act, 52 Vic. no. 5), after only three years of operation, and Queensland-made beer ceased to be an excisable article from September 12 that year. The excise, a tax on the finished product, was converted into a tax received through the Customs House on raw materials used in brewing, namely hops and malt.

3.5 New South Wales The most populous of the Australian colonies, New South Wales, introduced a beer excise in 1887 (Table 6.1). The tax was applied to beer brewed throughout the colony from June 3, 1887, at a rate of three-pence per gallon, immediately following the passage through the colonial parliament of the Beer Duty Act (50 Vic. no. 38). The tax was offset somewhat by the remission of the existing import duties on malt and hops (from May 1, 1887; the Customs Duties Act of 1887).

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When first proposed earlier in the year, it was intended that collection of the excise would begin on May 2, prior to its endorsement by Parliament, and that it would be at four-pence per gallon, the highest rate of any Australasian colony. The brewers made great objection to the measure, and as a first step in bringing pressure to bear against it, they determined that it should be passed on fully to the publicans. The publicans, in turn, resolved that the charge should be carried on to the consumer (Daily Telegraph, Sydney, April 6, 1887). Further objection was made by the brewers on the basis that collection of the tax would be illegal until it had been sanctioned by Parliament, a position that was supported by learned legal opinion. The brewers threatened to expel any excise officers by force from their premises should any attempt be made to collect the duty before its approval by Parliament (Sydney Morning Herald, May 3, 1887). A compromise was reached whereby the duty imposed would be only threepence per gallon, to be collected on and after the passage of the Beer Duty Act, with no attempt being made to place excise officers in the breweries before that time. It is unknown whether—as in New Zealand a decade earlier—the government had threatened, as an inducement to compliance, to exercise its undoubted right to reduce the protection provided to the colonial brewers by the existing customs duties on imported beer (which then stood at six-pence and nine-pence per gallon for bulk and bottled beer respectively).

3.6 Victoria (2) After the disappearance of the beer duty from the Victorian statute books in 1882, it was ten years before the tax was reimposed in that colony (Table 6.1). The new Beer Duty Act of 1892 (56 Vic. no. 1257) had a two-fold aspect. In addition to the usual purpose of providing additional revenue to the government, it was calculated to encourage the use of malt instead of sugar, and thus to promote the growth of barley by Victorian farmers. Under this act, beer brewed from sugar, or of which sugar formed an ingredient, attracted duty at the rate of three-pence per gallon, whereas the lesser rate of two-pence per gallon applied to beer brewed from malt and hops exclusively.

3.7 South Australia In South Australia, a beer excise was instituted by way of the Beer Duty Act of 1894 (no. 592), which commenced operating immediately upon the passage of the act in September 1894 (Table 6.1). The rate applied, two-pence per gallon, was modest by comparison with the rates that pertained at the time in all other colonies where a beer excise operated (Tasmania, New Zealand, New South

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Wales, and Victoria). The measure passed easily through the South Australian parliament, although only with the help of the country party, who voted for it simply to prevent the alternative—an increase of the land tax (Australian Brewers’ Journal, September 1894). The South Australian beer duty also applied from the time of its institution in the Northern Territory, for which the province then had responsibility.

3.8 Queensland (2) After a lapse of nearly nine years, a beer excise of three-pence per gallon and brewery licensing were reinstituted in Queensland under the Beer Duty Act of 1897 (61 Vic. no. 5), which had as its stated purpose “raising the necessary supplies to defray the expenses of the Public Service” (Table 6.1). The act came into effect on August 4, and on that evening customs and excise officers were again placed in charge of all breweries in Queensland, which were again required to be registered, and to pay an annual license fee. The colonial excise continued to be collected at the same rate in Queensland until its replacement by the federal tax in 1901.

3.9 Western Australia The last of the seven colonies to introduce a tax on the production of beer was Western Australia, through its Beer Duty Act of 1898 (62 Vic. no. 4), which was assented to early in September, but which commenced operating a few weeks before (Table 6.1). The rate of duty was set at two-pence per gallon, applicable to all beer, ale, and stout manufactured in Western Australia and entered for home consumption. Collection of the levy from coastal breweries was entrusted to the Customs officers, while the police would generally do the work in inland towns.

4. Sources of Beer Excise Law in the Australasian Colonies The attempt to institute a beer duty in New Zealand in 1878 and the passage of the Beer Duty Act of 1880 in Tasmania both preceded the reimplementation of a similar tax in the United Kingdom. There, through the Inland Revenue Act of 1880, the existing duties on brewing raw materials were repealed and in their place an excise was charged on the product, effective from October 1, 1880.¹

¹ An Act to repeal the duties on Malt, to grant and alter certain duties of Inland Revenue, and to amend the Laws in relation to certain other duties (The Inland Revenue Act, 1880). Assented to August 12, 1880.

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An excise on beer had operated in the United Kingdom until 1830, when the relevant act was repealed and an increase was made to the duty on malt. The system of taxing the brewing raw materials (malt and hops, and sugar after its legalization as a brewing ingredient in the United Kingdom in 1847) continued until 1880, when the malt and sugar duties were abolished (the duty on hops having previously been removed) and replaced by a beer duty based on the volume and specific gravity (“original gravity”) of unfermented wort produced. The rate charged, six shillings and three-pence per standard barrel of thirty-six gallons, was roughly equivalent to two-pence per gallon, the rate that applied to finished beer in the Australian colony of Victoria from November 1880, and a little more than the rate proposed in New Zealand in 1878. The rate in the United Kingdom had been augmented to seven shillings and nine-pence per barrel (about 2½ pence per gallon) by the beginning of the twentieth century. The use of a saccharometer was required to determine the specific gravity of the wort produced in the UK breweries, and therefore to calculate the tax payable. It might be expected that the Australasian colonies would follow the United Kingdom, their “mother” country, when seeking a model for beer taxation, but instead the United States of America became the source. An excise on beer and ale was first adopted in the United States in the early 1860s as part of a broader measure of taxing alcoholic beverages to assist with financing the Civil War (Ripy, 1999). A simple system was used, based on the finished volume of beer produced rather than on the ingredients or the wort, as in the United Kingdom. As initially introduced in 1862, the mode of payment was for each brewer to render a monthly account of his brewing activity to the collector, and to pay a tax of one dollar ($1) on each barrel of 31 gallons of beer, lager beer, ale, porter, or “similar fermented liquors.”² Apart from a brief period in the 1860s when the rate was reduced to 60 cents per barrel, and a couple of years at the end of the 1890s when it was raised to two dollars, the rate payable was maintained at one dollar per barrel throughout the nineteenth century. A system of payment by the purchase of stamps was introduced in the United States in 1866. This stamp-based system is important here because it became the model, directly or indirectly, for the collection of beer duty in all seven of the Australasian colonies. It entailed the affixing by the brewer of a stamp purchased from the collector, and denoting the amount of tax required, on the spigot-hole or tap of each vessel containing beer and sold or removed from his brewery. To prevent its re-use, the stamp had to be canceled at the time of affixing to the vessel by writing or imprinting on it the date and the name of the person or firm by

² An Act to provide Internal Revenue to support the Government and to pay Interest on the Public Debt. Chap. CXIX, July 1, 1862.

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whom the beer was made, and affixed in such a way that it would be destroyed when the vessel was tapped or beer otherwise withdrawn from it.³ In debate in the New Zealand parliament concerning the proposed beer duty in 1878, it was stated that the mode of collection would be arranged “to give the least trouble to the payer of the tax, the system of stamps prevailing in the United States recommending itself by its simplicity and directness” (New Zealand, House of Representatives, August 6, 1878; New Zealand Times, August 22, 1878; Auckland Star, August 22, 1878). In Tasmania, in 1880, the government was desirous of levying its beer duty “in such a way as to be of the least annoyance to the manufacturer, while securing full protection” of the revenue. It adopted the plan “so advantageously worked in America, and since found very effectual in New Zealand” (Tasmania, House of Assembly, January 21, 1880). The mode of collection of the beer excise adopted subsequently in all the other Australasian colonies—Victoria, Queensland, New South Wales, South Australia, and Western Australia—followed the stamp-based systems already in use in Tasmania and New Zealand, and in the United States of America. A large range of designs and denominations of beer duty stamps (Figure 6.2) was issued and used in the Australasian colonies, and subsequently in the Commonwealth of Australia (from 1901) and the Dominion of New Zealand (from 1907), and these have formed the basis of a relatively minor but rising specialty among philatelists (e.g. Walker and Smith, 2009). By the end of the nineteenth century it could be said that in charging the duty on beer there were two recognized methods of assessment in use worldwide: the Anglo-German, according to gauge and gravity, and the American, by stamps affixed to the cask. The latter, employed exclusively in the Australasian colonies, was said to be “commendable for its simplicity,” but socially and economically it was open to grave objections. The economist, it was argued, would tax all commodities according to the ad valorem standard, that is, according to their value, whereas the social reformer would tax alcoholic beverages according to their strength. The stamp system, however, made no such distinctions. On the other hand, when gravity was the basis of charge, it provided a fair indication of value, and also allowed for differences in alcoholic strength (Australian Brewers’ Journal, September 1898). The originally simple stamp-based system also became increasingly complex and cumbersome, and increasingly irksome to the brewers and others obliged to comply with its requirements.

³ An Act to reduce Internal Taxation and to amend an Act entitled “An Act to provide Internal Revenue to support the Government, to pay Interest on the Public Debt, and for other Purposes,” approved June thirtieth, eighteen hundred and sixty-four, and Acts amendatory thereof. Chap. CLXXXIV, July 13, 1866.

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Figure 6.2 Example of a Tasmanian colonial beer duty stamp Note: Canceled by the Cascade Brewery Company Limited, November 18, 1891. The value, four shillings and six-pence, represents the duty payable on a kilderkin of eighteen gallons at the ruling rate of three-pence per gallon.

5. Secondary Costs Associated with the Beer Excise In addition to the actual beer excise, of two-pence, three-pence, or four-pence per gallon, there were other costs associated with the collection of the tax and the supervision of production that also weighed heavily on some brewers. These arguably placed as great a burden on some brewers as the tax itself. They included entering into a bond, paying a license fee (in most colonies), keeping books and records, complying with other procedural requirements of the various acts, and paying sometimes severe penalties for intentional or accidental contraventions of those requirements.

5.1 Bond A common feature of the first excise acts was the requirement for a brewer to enter into a bond to pay the duty and to comply with the requirements of the act. In all Australasian colonial jurisdictions, the bond was a sum equal to twice the amount of the tax that the brewer would be liable to pay in one month, although in the

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proposed measure in New Zealand in 1878, the bond was set at three times the anticipated monthly tax liability.

5.2 Books and Records The colonial beer duty acts forced the brewers to keep various books and records, which typically included a day-to-day record of the quantities of beer made and sold or removed and a monthly statement, prepared from the daily record, of the quantities brewed and sold or removed in the preceding month. In some jurisdictions, it was also necessary to keep a daily record of the exact quantities of sugar, malt, and hops received into the brewery. One New Zealander complained in 1880 that the act would, “in addition to the tax and the absurdities therein contained, necessitate the employment of one or more extra clerks, according to the amount of the business, to enable the brewer to steer clear of the pains and penalties annexed to” it (Waikato Times, September 14, 1880). An estimate of the additional cost to brewers of the new Victorian beer duty in 1892 included a sum of at least thirty pounds per month for the extra clerical labour necessitated by the book-keeping requirements of the act (Australian Brewers’ Journal, August 1892).

5.3 Penalties for Non-Compliance Penalties, often severe, were provided for in the various acts for such things as evading the duty, for not keeping the required books and records, for neglecting to affix stamps, and for failing to cancel stamps. In the New South Wales town of Young, for example, in 1890 a local firm of brewers were put out of business for a contravention of the Beer Duty Act. Specifically, they allowed a barrel of beer to be removed from their brewery with a defaced stamp, for which they were fined, and their horse, cart, chattels, and the beer were confiscated (Burrangong Argus, April 2, 1890). In addition to breaches by brewers, the publicans—the brewers’ main customers—were liable in all jurisdictions to fines for not destroying the stamps at the time of opening the vessels to which they had been affixed.

5.4 License Fees License fees, where and when the licensing of breweries was required, undoubtedly represented a cost associated with the production of beer, but in the Australasian colonies they usually were not directly associated with the beer duty. Most of the colonies had introduced a system of registration or of licensing

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for breweries before, and often long before, any taxation was imposed on production. The purpose of such licenses was to allow some supervision of the industry and to regulate the sale of the brewers’ products, sometimes to limit their sale to “wholesale” quantities, which could mean quantities not less than one, two, or five gallons, depending upon the jurisdiction. In only two of the seven colonies, New Zealand and Queensland, did licensing of brewers operate directly through the legislation governing the beer duty. In New Zealand, the Beer Duty Act of 1880 required each brewer to obtain a license, and to pay a modest annual fee of one pound, although this replaced a pre-existing system of licensing of brewers that had operated through the Distillation Act of 1868. In Queensland, a system of registration of breweries, accompanied by the payment of an annual fee of five pounds, was implemented through the Beer Duty Act of 1885. The fee for a brewer’s licence in Queensland was increased to twentyfive pounds per annum in 1897.

6. Who Paid the Tax? It was widely perceived by the 1880s that brewing was a very profitable business in the Australasian colonies. An opponent of the proposed excise in New Zealand in 1878 observed that there was “a popular belief” in that country that the brewing industry was “a wonderfully profitable one” (New Zealand Times, September 2, 1878). In Victoria, soon after the excise had been imposed in 1880 and the question had arisen of who was going to pay it, there was said to be a feeling “among publicans and sinners, and the rest of the world, that brewers make excessive profits already” (Geelong Advertiser, November 9, 1880). In Queensland, where the brewing industry was producing around two million gallons annually by the mid-1880s, the Beer Duty Act of 1885 had as its premise that such a large and profitable industry should no longer remain exempt from contributing to the revenue, as distillers, publicans, and wine and spirit merchants already did. One influential Brisbane newspaper declared that the brewers “make vast fortunes, and go scot free from paying their legitimate share of taxation” (Telegraph, Brisbane, August 29, 1885). In New South Wales, too, the brewing business was generally understood to be exceedingly profitable; during debate on the Beer Duty Bill in 1887, reference was made to the “enormous profits” made by the brewers. The exact amount of their profits, however, was a matter of disagreement. One member had been informed that the net profit on a hogshead of beer (54 gallons) sent out of a colonial brewery was at least twenty-five shillings, equivalent to six-pence per gallon. Another thought this estimate to be excessive, but supposing for the sake of argument that it was correct, the three-pence per gallon duty would remove half the brewers’

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earnings “at one fell swoop” (NSW, Legislative Assembly, May 5, 1887). Small brewers, quite simply, might not be able to pay. The Treasurer was sure that the brewers would pass the tax on to the consumers if they could, but the proportion which it bore to the price of a glass of beer— generally three-pence—was so small that it could not be charged to the consumer, there being no current coin of the realm small enough. The Premier was confident that “the brewers dare not raise the price” (NSW, Legislative Assembly, May 5, 1887). Despite their initial posturing, threats, and scaremongering, the bigger breweries of New South Wales submitted meekly to the beer duty when collection of it began in June 1887, and absorbed it entirely; one report stated that “the brewers are all paying the duties without a murmur,” and that “the price of the article to the retailers has not been altered, nor has the cost to the consumer been in any way increased” (Daily Telegraph, Sydney, June 9, 1887). When Tasmania became the first of the Australasian colonies to formally implement a beer excise, imposing a duty of three-pence per gallon on colonialbrewed beer on March 1, 1880, most of the major northern Tasmanian brewers reacted to the duty by combining to raise their prices to compensate for it. One brewery in that part of the island (the Cornwall Brewery in Launceston, the largest northern town) kept to the old rates. This earned it the pledged support of half of the forty-eight publicans in Launceston, which in turn persuaded other brewers to reconsider. On March 9, the Tamar and Cataract Breweries at Launceston and the Esk Brewery at Perth all advertised that they had reverted to their original prices (Launceston Examiner, March 9, 1880). Thus, the northern Tasmanian breweries, at least, absorbed the three-pence per gallon impost. More usually, however, the prices were raised and the publicans and ultimately the consumers paid the tax, as is shown by reference to its introduction in other places and at other times. When collection of the excise in New Zealand began on August 7, 1878, meetings of brewers were immediately called to consider the matter, and moves were made to raise the price of beer (by two-pence per gallon, slightly more than the amount of the proposed tax) in compensation. The publicans, in turn, wanted to raise their price by two-pence a pint, making an increase to the consumer of one shilling and four-pence per gallon, more than ten times the amount of the tax (Temuka Leader, August 10, 1878; New Zealand Times, August 13, 1878). Later in the month, a deputation of brewers presented a written statement to the Colonial Treasurer (John Ballance) detailing their objections to the tax (Auckland Star, August 22, 1878; New Zealand Times, August 22, 1878). The treasurer countered most of the brewers’ complaints by explaining that it was never the government’s intention that the tax should fall upon the brewer; it was a “universal principle of legislation that all taxes were paid by the consumer.”

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Indeed, he had heard that the brewers had already determined to make the publicans pay the tax. If that were not sufficient, he remarked that the amount of the proposed tax, three halfpence (1½d) per gallon, was much less than in the United States (where it was the equivalent of almost 3d) and in the United Kingdom (where the different taxes on materials and licenses constituted a duty of 18–23 percent on the trade price of beer) (New Zealand Times, August 22, 1878; Auckland Star, August 22, 1878). Balance added that the New Zealand brewers had a protection of one shilling per gallon against imported English bulk beer, compared to the highest rate in Australia of 9d, so after paying the 1½ pence per gallon would still have greater protection than the brewers in any Australian colony. In what was undoubtedly a veiled threat, he asked whether the New Zealand brewers would accept as an alternative the reduction of the duty on English beer, which would largely increase the consumption of it and in fact generate additional revenue (New Zealand Times, August 22, 1878; Auckland Star, August 22, 1878). The 1892 proposal by the Tasmanian government to increase the beer duty to four-pence per gallon was met by the usual protests from brewers, but the increase was enacted, and came into effect at the beginning of December. In announcing the change in Parliament in October, the Treasurer described it as “so slight” that it “will not press injuriously either on brewers or consumers.” He later added that it was “obvious that the consumers would pay this tax.” “The brewers would be able to take care of themselves. It was inevitable that duties would come from the consumers . . . and it was idle to say that any interest, such as that of brewing, would be injured.” As an increase of three-pence per gallon was to be made in the customs duties on imported “malt liquors,” the extra penny on the excise was thought to be “not unfair” (Tasmania, House of Assembly, October 4 and 11, 1892). The commencement of the beer duty in Victoria in November 1880 was immediately followed by a public announcement by the Victorian Brewers’ Club, a pre-existing organization representing many of the biggest of the colony’s breweries, that its members would “in all cases whatever” charge their customers “with the full amount” of the tax (The Age, November 11, 1880). When the re-imposition of the duty in Victoria was proposed in 1892, the brewers argued that it could not be paid out of their profits; reference to the balance sheets of eleven leading Victorian breweries showed that the dividends paid per annum amounted to considerably less than the sum expected by the government to be realized from the duty. As far as the brewers were concerned, the burden of it would therefore be passed on to the publicans, as had been done when the tax was levied in 1880–1 (Geelong Advertiser, June 27, 1892). When the collection of the first beer excise in Queensland was imminent in August 1885, the mood was captured as follows: “Naturally enough the brewers and publicans are waxing wrathful at [the] proposal to tax Queensland brewed

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beer. The brewers are moving the publicans, and the publicans are moving the poor man” (Telegraph, Brisbane, August 29, 1885). When the tax was restored in 1897, the brewers reportedly had “accepted their fate” and were “paying the excise without a murmur.” They were, however, “wise in their generation, and [again] pass the burthen on to the consumer with a liberality which does them infinite credit. And the public, on its side, displays an equal solicitude in regard to revenue, and pays the impost with a readiness which is flattering to their patriotism” (Australian Brewers’ Journal, September 1897). The introduction of the beer duty in Queensland on both occasions—in 1885 and 1897—was followed by downturns in the combined output of Queensland’s breweries, which may reflect an initial consumer resistance to paying increased prices for their beer. Both adjustments, however, were small in magnitude and brief in duration (Stubbs, 2010, p. 8). In South Australia, brewers met the day after the beer duty was announced by the Treasurer to discuss the matter. They unanimously determined to “charge the duty on to their customers.” “Bearing in mind that the trade in this colony is suffering from bad times and excessive competition, which between them have brought prices down till nothing more than a bare living can be obtained, the brewers could not well have come to any other conclusion.” Now they seem to be waking up to the folly of cutting one another’s throats, and a scheme is on foot to kill two birds with one stone—charge the publicans the duty for the Government, and at the same time add something more for themselves, and so bring prices to a figure more nearly approaching equality.

The government’s proposal may therefore turn out to be a “blessing in disguise.” “If the brewers merely put on the duty, the publicans with 2d extra to pay can hardly raise the price per glass; but if the increase is double the duty, they can make such an increase as will put the retail trade on a sound footing” (Australian Brewers’ Journal, August 1894). In the same month, a meeting of city and suburban licensed victualers was held to “consider the retail prices to be charged for beer . . . in the event of the excise tax on beer . . . as proposed by the Government being adopted by the Legislature.” New prices were agreed to for glasses, butchers, and pints, to take effect “as soon as the new duties become law” (South Australian Chronicle, August 18, 1894). Indeed, it was later reported that the Adelaide publicans had raised their prices within hours of the duty coming into force (Mount Barker Courier, September 28, 1894). In parliament, the Labour party was the only one which as a body voted against the beer duty; that party “fully recognised that the brewers would pass the tax on to the consumers” (Australian Brewers’ Journal, September 1894). Soon after the imposition of the beer excise in Western Australia, a meeting of the colony’s brewers was held to consider what course should be adopted in

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consequence. It was resolved to form an association of brewers, and to sell beer to the trade and to bottlers at uniform agreed prices. The prices adopted represented an increase of 1d per gallon, amounting to a division in the payment of the duty between the brewers and the publicans. Provision was made in the agreement for a substantial penalty for any breach of the agreement on the part of a brewery (Daily News, Perth, September 2, 1898). The usual response in Australasia accorded, therefore, with what seems to have been the position in the United Kingdom in the late nineteenth century. That position was made perfectly clear by the Chairman of the Inland Revenue Board when addressing a gathering of brewers in 1897. The taxes, he told them, were paid by consumers: “Through your agency I am enabled to extract from the pockets of the people a sum of money . . . and to do this without their knowing anything about it at all” (Gourvish and Wilson, 1994, p. 196). Raising prices was not the only way for brewers to offset the beer excise and its associated costs. Brewers could also reduce the cost of production by the use of cheaper ingredients, or by brewing a lower-gravity (weaker) product through the use of less fermentable material in the making of it. There is evidence of the latter, at least, having occurred. Publicans could accommodate the impost by making glasses smaller, if not by raising prices. A professional brewer in Sydney explained in 1890 that “he did not know of any case in which the brewer paid the duty without making it up in some way.” If not by passing it on to the hotel-keepers, this could be done by reducing the cost of manufacture. This was possible “only to a small extent” by brewing beer of an inferior quality; brewers could save a little under pressure of the tax by using less material and making their beer a little weaker. They could not save as much as the duty, however, as before it was imposed, beer had already become “almost as light as the public would stand” by competition among brewers. Nevertheless, he thought that the general quality of beer had deteriorated somewhat since the tax had come into operation (Daily Telegraph, Sydney, July 14, 1890). This view is supported by the official statistician of New South Wales, who several years later reported a general understanding that “since the imposition of excise duties on colonial beer in New South Wales . . . the strength of the article has been somewhat reduced . . . and does not now average more than 13 percent of proof spirit” (Coghlan, 1896, p. 108). It was a common charge against brewers that various illegitimate compounds were used in place of honest material in order to “make the weaker article taste as strong as the better production,” but this had been disproved as often as it had been made (Daily Telegraph, Sydney, July 14, 1890). Opponents of the proposed beer excise in New Zealand in 1878 had claimed that the tax would cause brewers to “use articles in the manufacture of beer deleterious to the consumer, for the purpose of cheapening the cost of production,” but that course would render the brewer liable to heavy penalties, and when it was discovered, the public would

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“revenge themselves upon the brewer” (New Zealand, House of Representatives, August 30, 1878). Charges of adulteration against the colonial brewers were generally untrue, and reflected a tendency of the time for temperance crusaders to attempt to frighten drinkers into sobriety (Stubbs, 2019, p. 210).

7. Brewing and the Australian Federation On January 1, 1901 six of the seven self-governing, politically independent “Australian” colonies became a Federation, under the name of the Commonwealth of Australia. New Zealand, although it had participated in 1890 in a Convention aimed at establishing an Australian Federation, declined to join, so remained a separate self-governing colony. A statistical summary of the brewing industries of the seven colonies in 1899, shortly before the establishment of the Australian Federation, is provided in Table 6.2. In New Zealand, brewing continued to be regulated by the Beer Duty Act of 1880, as thrice amended, which continued in force until 1908. It was replaced by the consolidating Beer Duty Act of 1908, which maintained the rate of excise at three-pence per gallon. In 1915, through the Finance Act of that year, the single rate of three-pence per gallon was replaced by a variable rate based on the specific gravity of the wort used in the production of the beer, similar to the system introduced in the United Kingdom in 1880. Under the Australian Federation the new states, as the colonies became known, retained their own parliaments, and reserved their powers, except for those transferred specifically to the new federal government. Included in the federal powers were the exclusive right to levy customs and excise duties, and on October 8, 1901 the federal parliament adopted the first uniform tariff. From that date, Table 6.2 Beer produced, population, and breweries in the Australasian colonies, 1899 Colony

Beer production (gallons)

Population

Number of breweries

New South Wales New Zealand Queensland South Australia Tasmania Victoria Western Australia

12,218,560 6,261,200 5,422,194 3,004,437 1,352,928 15,555,445 3,373,642

1,356,650 756,500 482,400 370,700 182,300 1,163,400 171,030

59 85 (1896) 74 (1901) 24 29 6 59 36

Sources: Australian Brewers’ Journal, April 1900, May 1900, June 1900; Coghlan, 1900, A Statistical Account of the Seven Colonies of Australasia, 1899–1900; The New Zealand Official Year-Book, 1902; Western Australian Year-Book for 1900–01; Stubbs, 2013, Very Good Beer and Ale; Painter, 2012, Beer Barons or Bankrupts?

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uniform rates of excise applied throughout the Federation, and trade between the Australian states became free.⁴ On the previous day, the federal Beer Excise Act, the act providing the machinery for collecting the beer excise, came into operation (Commonwealth of Australia Gazette, October 5, 1901). Although the beer excise in Australia had become the exclusive right of the Commonwealth at the beginning of 1901, it continued to be collected by the states at the existing colonial rates until the Beer Excise Act and the uniform tariff came into effect in October 1901. The rate of beer excise for the Commonwealth was set at three-pence per gallon, and two-pence per gallon for beer made from malt and hops only. This differential excise followed the Victorian colonial system, and was designed to encourage brewers to make beer without the inclusion of sugar, thus assisting the Victorian barley growers, as well as supplying the public with what was considered to be a superior, healthier beverage (Australia, House of Representatives, February 6, 1902). The adoption of the reduced rate for non-sugar beers was wholly idealistic, however, as the system in Victoria, after nearly twenty years of operation, had failed to alter the established practice of brewing with sugar, and it was considered unlikely ever to do so. In 1900 less than 4 percent of beer manufactured in Victoria fell into this category, despite the one penny per gallon concession. Indeed, most Australian brewers considered the use of a certain amount of sugar essential in the manufacture of colonial beer.⁵ In Queensland the concession was seen as an attack on the labor engaged in that state’s important tropical sugar industry (Queenslander, February 22, 1902). More generally it was thought to be an unfair advantage to “the Germanised lager,” which was then gaining in popularity at the expense of British-style ales (Australian Brewers’ Journal, December 1901). Anyway, the exceptional rate for non-sugar beers was eliminated in 1918, and all Australian beer was taxed at three-pence per gallon. As the federal excise essentially continued pre-existing colonial arrangements— with the vast majority of the beer produced continuing to be subject to the same rate of tax, three-pence per gallon—its effect on the brewing industry might be thought to have been minor.⁶ It was accompanied, however, by more onerous administrative requirements, more stringent supervision, and severe penalties for non-compliance. In this regard, it might reasonably be assumed that it would have presented a further burden to smaller breweries especially. Details of many of the prosecutions for contraventions of the Beer Excise Act that occurred in the years after Federation can be found in the Commonwealth of ⁴ With the exception of Western Australia, which retained the right to charge duties on goods from other states for a period of five years; see Reitsma (1960, p. 11). ⁵ See for example the evidence of Sydney brewer Arthur W. Tooth, May 25, 1905, to the Tariff Royal Commission, Commonwealth Parliamentary Papers, 1906, vol. 4, p. 260. ⁶ Of the 41 million gallons of beer produced in the six Australian colonies in 1899, 80 per cent was subject to duty at the rate of 3d per gallon.

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Australia Gazette. Where a dispute had arisen between an officer and a person alleged to have contravened the excise law, it was open to the person to have the dispute settled by the relevant minister, and it was the outcomes of these disputes that were published regularly in the Gazette. On the assumption that the disputed cases are representative of the total number, it is possible to make some generalizations about the nature of the contraventions. First of all, it is evident that the vast majority of these disputed contraventions were accidental, not the result of any intention to defraud. It is also clear that the overwhelming proportion of contraventions arose from publicans and other licensed retailers neglecting to destroy the duty stamps associated with the beer supplied to them by the brewers. It was necessary for a brewer to affix to every vessel, before its removal from the brewery, a duty stamp of a denomination appropriate to the volume of the vessel, and to cancel it by writing or imprinting on it the word “canceled” together with the name of the brewer and the date of cancelation. The person opening a vessel to which a stamp was attached was required to cut the stamp into two or more pieces without removing it, rendering it unfit for further use. Of approximately 2,800 beer-related excise contraventions recorded in the Commonwealth of Australia Gazette just in the years 1904 to 1909 inclusive, nearly 94 percent were concerned with the failure of resellers to cut the attached stamps. Only about 6 percent (177) of the recorded contraventions relate directly or indirectly to actions or inactions on the part of brewers. They include the failure of a brewer to affix a duty stamp to a vessel before removing it (which was prima facie evidence of failure to pay the duty), the failure to cancel an affixed stamp (as described above), and the use of a stamp of the incorrect value for the size of the vessel. In addition, retailers could be penalized for opening a vessel to which the proper stamp had not been affixed by the brewer. It was also an offense to remove beer from a brewery in a vessel or case not marked with the name of the brewery or brewer, the place where the beer was made, and a distinctive number, or to remove beer from a brewery outside certain hours (5 am to 7 pm from October to April, and 6am to 6 pm in other months). Making beer without holding a license under the Beer Excise Act was a serious offence, but in the sample of contraventions referred to it most often related to producers of temperance drinks (such as ginger beer and hop beer) who had produced, usually unknowingly, beverages that exceeded 2 percent proof spirit (1.15 percent alcohol by volume) in alcoholic strength (the maximum concentration allowed without the possession of a license and payment of duty), and probably also to some individuals who had brewed beer for private use, also not permitted except with a brewer’s license. Other common contraventions by brewers appearing among those recorded in the Gazette are the failure to keep records in the required manner or form. The making of beer was, for the protection of the revenue, subject to strict supervision

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by customs officers, who had complete access to every part of any brewery at all times. The act provided that every licensed brewer should provide “reasonable” office accommodation, and provide “all reasonable facilities” to enable the officers to exercise their supervisory powers. For the information of the officers, every brewer was required to keep books (including daily diaries and delivery books), to prepare and render monthly accounts of their activities, and to keep a detailed record of materials received and used, beer made and bottled, and, among other things, the quantities of beer removed by size of vessel. Far more often than brewers, as has already been shown, the much more numerous licensed retailers were correspondingly more often represented, to their great annoyance, among the prosecutions for contraventions of the Beer Excise Act. For example, in evidence to the Tariff Royal Commission in 1905, the secretary to the Queensland United Victuallers’ Association submitted that the provision in the act concerning the cutting of stamps “merely provides employment for men in different States to travel about the country and . . . to persecute and victimise unfortunate publicans in order to defray their expenses” (Tariff Royal Commission, Brisbane, June 14, 1905, p. 22; Brisbane Courier, June 15, 1905). In addition to purchasing duty stamps to affix to their vessels and cases of beer, thus paying the excise on production before the beer was delivered, and in addition to paying an annual license fee, brewers were required to provide security in a sum of twice the estimated amount of the duty expected to be paid in any one month, as they had been under the various colonial beer duty acts. A disgruntled brewer, writing in 1905, summed up the ill-feeling that existed against the Beer Excise Act. He considered the brewers of the Commonwealth to be “a long-suffering body of men,” to “sit quietly and patiently, under the burden of the” act. He called for Parliament to “sweep away the whole thing” and replace it with the English system where “the excise officer walks into the brewery, dips his measure into the tun, calculates the contents, allows for waste, gets a cheque from the brewer, and the whole thing is over in five minutes.” Rather than attempt to describe “the absurd regulations” of the Australian Beer Excise Act, and the “endless worry and expense to the brewers,” he summarized its operation as follows: “the brewers are treated like ticket-of-leave men, and the excise officers are expected to act like spies or detectives, sneaking around the country trying to catch the brewers and publicans tripping” (Australian Brewers’ Journal, April 1905). In 1935, more than three decades after Federation, the author of A History of Brewing in New South Wales, 1788–1935 claimed that the Beer Excise Act of 1901 had been solely responsible for the immediate and simultaneous extinction of at least seven breweries in Sydney alone. The writer’s argument is flawed, however, as he recorded 1900 as the final year of operation of several breweries that had actually closed in the late 1880s and early 1890s, prior to Federation (Howard, 1935, pp. 174–6, 201–3). Howard’s work, undertaken for the giant Sydney brewer Tooth and Co., was never published in its entirety, but his exaggerated claim was

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repeated and amplified in two books published by the company, which stated that the Excise Act had brought “annihilation” to “no less than sixteen breweries in Sydney alone” (Anon., 1935; Anon., c.1953, p. 25). Although the Beer Excise Act undoubtedly further burdened the Australian brewers, it was not nearly the singular catastrophe that these accounts suggest. As explained elsewhere (Stubbs, 2000), the use by big capital city breweries of the railway networks to send their products ever farther into new territory, and their tying of retail outlets, were direct causes of the closure of many smaller breweries in New South Wales in the late nineteenth and early twentieth centuries, and it would have served the interests of Tooth and Co. to attribute such closures to the operation of the beer excise, rather than to the company’s own predatory conduct.

7.1 A Licensing Anomaly A particular complication concerning brewers’ licenses arose in at least two jurisdictions with the transfer of responsibility for beer taxation to the Commonwealth in 1901. The Federal act imposed on brewers a license fee of £25, and while this was not in itself a cause for complaint, considerable confusion arose over whether this license was intended to supersede any state license that already operated, or whether it was to operate in addition. This became especially problematic in New South Wales, where, during the first few years of operation of the federal act, several brewers were charged under the Liquor Act of 1898 (the relevant NSW statute) with carrying on their trade without holding a state license. It is yet another example of the new hardships imposed upon brewers by the federal beer excise arrangements. It emerged after several court cases, including one in 1904 in the High Court of Australia, that the state license fee was not a duty of excise within the meaning of the Australian constitution, and that the state license therefore was not affected by the federal Beer Excise Act. There had been a move in 1902 to reduce the fee for a brewer’s license in New South Wales to a small amount, but when an amending Liquor Act eventually was passed in 1905 it gave no relief to the aggrieved brewers; the license fees remained at thirty pounds for brewers in the metropolitan district, and twenty pounds for those in the country. Fortified by the decision of the High Court as to the legality of the state license, the government abandoned its course to provide relief, and the requirement to pay for two licenses remained as a hardship upon brewers in New South Wales (Stubbs, 2019, pp. 131–6). In Victoria, a similar anomaly existed, and at least one prosecution resulted from the failure of a brewer to obtain a state license after Federation. There, however, the High Court decision brought about the opposite response. The Victorian government believed that it was “undoubtedly implied” that the brewers’ licenses granted under the federal law would replace those issued by the states,

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and through the Licensing Act of 1906 (6 Edw. VII no. 2068), it helpfully reduced the fee for a brewer’s license in that state from twenty-five pounds to one pound (Victoria, Legislative Assembly, July 17, 1906). No such complication was even possible in Queensland, where the licensing of breweries operated directly through the legislation governing the beer duty. As in the other five Australian colonies, in Queensland the Beer Duty Act ceased to have effect upon the imposition in 1901 of the uniform Commonwealth duties. This was a specific provision of the act of the parliament of the United Kingdom that established the Commonwealth of Australia (Commonwealth of Australia Constitution Act, 63 & 64 Vic. c. 12, assented to July 9, 1900) and granted exclusive customs and excise power to the new Commonwealth (section 90).

8. Conclusion: Out with the Small and Vulnerable It was often stated in opposition to the beer excise that it would fall hardest on the smaller brewers. This was one of the many objections to the tax outlined by the New Zealand brewers in a written statement to the Colonial Treasurer when the tax was implemented there in 1878. Its effect, they predicted, would be to “stop competition by forcing small brewers to close their doors, thus throwing trade into the hands of few capitalists” (New Zealand Times, August 22, 1878; Auckland Star, August 22, 1878). In New South Wales, Edward Combes, a member of parliament and a former brewer himself, was a vigorous opponent of an unsuccessful proposal to implement a beer excise in that colony late in 1879. He did not doubt that some brewers were wealthy, but most made less profit than the government believed, and would be unable to bear the tax. Not only would the smaller breweries be unable to pay, but there were so many of them that collection of the tax would be rendered excessively costly (NSW, Legislative Assembly, January 15, 1880). Several years later, when the excise was eventually implemented in New South Wales, James Toohey, a prominent Sydney brewer and a member of parliament, declared with great candor that if he were true to his own interests he would hail the proposal with delight. The larger brewers in the colony, of which his own firm was one, could pay the tax, whereas the smaller brewers could not. The tax would “throw on the small brewer the responsibility of finding a larger amount of capital than he can fairly be expected to find, and thus the tax will have a tendency to wipe out the small industries.” The result would be, Toohey predicted, the existence in a few years of a large monopoly (NSW, Legislative Assembly, May 5, 1887). Yet another member had been “informed at different times by country brewers that their profits [were] not by any means more than 10 or 15 percent.” The tax, therefore, would “unquestionably crush a number of small brewers throughout the colony.” A tax of the character proposed would “have the effect of creating a

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ring of a small number of brewers who . . . will take advantage of their position, and do pretty well as they please with the consumer” (NSW, Legislative Assembly, May 5, 1887). A few years later, when the major brewers of Sydney were seeking to have the import duty on sugar remitted, it was pointed out that “under the unfairly heavy burdens imposed on brewers by the Government [of New South Wales], not only were existing breweries unable to earn a fair return on their capital, but that several of the smaller country breweries had already gone to the wall” (Sydney Morning Herald, May 26, 1890). The “professional brewer” already cited explained around the same time that the imposition of the excise had had “a severe effect upon the small brewing firms throughout the country districts” of New South Wales; several had closed in consequence of it, and almost all had been “so heavily handicapped as to render their operations barely profitable” (Daily Telegraph, Sydney, July 14, 1890). Several weeks before the beer excise was restored in Victoria in 1892, Nicholas Fitzgerald, chairman of one of Melbourne’s largest brewing concerns, told a meeting of shareholders that he regretted that the brewing industry “should be strangled by further taxation.” Should it come to a question of the survival of the fittest, however, “the smaller breweries would be killed and the larger ones live on their trade” (Argus, Melbourne, July 19, 1892). During consideration in 1894 in the South Australian parliament of the proposal to levy the excise duty on beer, one opponent believed that the tax would “seriously affect the small breweries, who had no bound houses, but did most of their trade in bottled ale.” “In killing the small breweries [the legislature] would be playing into the hands of the large ones, and would thus be increasing the evils of the brewers’ monopoly” (South Australia, House of Assembly, August 30, 1894). In Western Australia, it was reported in September 1898, the month after the excise came into effect there, that since its imposition two breweries had closed their doors, and that there were rumours of another following suit shortly. Some other concerns were making heavy losses (West Australian, September 10, 1898; Australian Brewers’ Journal, September 1898). A traveler in New Zealand around that time reported that “a good many of the very small breweries in that colony have been obliged to close for some reason or other” (Australian Brewers’ Journal, September 1898). As is the case for the colonial beer duties, it is difficult to find clear evidence of particular Australian brewery closures after 1901 that can be attributed directly to the federal excise, although complaints against it are plentiful, and general accounts of its alleged effects are persuasive. One South Australian brewer, in evidence to the Commonwealth Tariff Royal Commission in 1905, complained that having to pay for two licenses—twenty-five pounds to the federal government and about ten pounds to the State—and especially having to pay the same

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amounts regardless of size, pressed unduly hard on small breweries. This method of “taxing” breweries was “no encouragement for people to start in a small way,” and was likely, he believed, to “drive trade into the hands of a few large concerns” (Tariff Royal Commission, Adelaide, December 8, 1905, pp. 64 and 65). It is difficult, and perhaps impossible, to disentangle the effects of the various factors operating simultaneously to promote concentration in the brewing industries of the several Australasian colonies, and to consider solely the contribution of the beer excise. Indeed, shrinking brewery numbers was a widespread phenomenon in the late nineteenth and early twentieth centuries. The Australian Brewers’ Journal noted in 1898 that it was happening “all over the world,” and cited the case of Germany, where, during 1897, “the number of breweries decreased from 21,503 to 21,236—a falling-off of 267” (Australian Brewers’ Journal, September 1898). Nevertheless, there is no doubt that the beer excise, with its associated costs and obligations, was another burden for the brewers to carry, and was undoubtedly the “straw that broke the camel’s back” for a number of the smaller, insufficiently established or inadequately financed businesses. Ironically, an industry composed of a small number of large and relatively powerful brewing businesses would provide a greater defense against the prohibition movement, arguably the greatest threat to the industry in the early twentieth century. Also, a small number of large breweries would be easier and cheaper to supervise insofar as collection of the tax and the policing of regulations were concerned, so the disappearance of the smaller producers would have been advantageous to the government from a revenue point of view. By the early 1930s, through multiple causes, the number of breweries in operation throughout Australia had declined to about forty, from a nineteenthcentury peak of more than two hundred. In 1934–5, for instance, and taking New South Wales as a typical example, only five breweries remained in operation in that state, in contrast to the peak number of nearly eighty in the late nineteenth century. Three of the five were large capital city breweries owned by two powerful companies which controlled large tied house estates and, through the use of railways and coastal shipping, commanded extensive market areas. These three Sydney breweries accounted for about 99 percent of the 22.5 million gallons (100 million liters) of beer brewed in New South Wales in 1934–5. In New Zealand in the same year, about fifty breweries remained in operation, down from more than 120 in the early 1870s (Wellington Independent, April 29, 1874; Golledge, 1963), but still more than in the whole of Australia. Together they produced about 10.6 million gallons (48 million liters) of beer, less than half the output of the big three Sydney breweries. The persistence of many small local and provincial breweries in New Zealand probably reflects the limitations imposed upon transportation by the country’s rugged terrain and the consequent creation of numerous isolated markets. Where competition did exist, however, it is certain

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that the operation of the beer excise would have favored larger producers, and, as in the Australian colonies/states, contributed to concentration in the brewing industry.

References Anon. 1935. The First Hundred Years: A Brief History of Kent Brewery 1835–1935, Tooth and Co. Limited, Sydney. Anon. c.1953. Over a Century of Brewing Tradition, Tooth and Co. Limited, Sydney. Coghlan, T. A. 1896. A Statistical Account of the Seven Colonies of Australasia, 1895–6, William Applegate Gullick, Government Printer, Sydney. Coghlan, T. A. 1900. A Statistical Account of the Seven Colonies of Australasia, 1899–1900, William Applegate Gullick, Government Printer, Sydney. Golledge, R. G. 1963. The New Zealand brewing industry. New Zealand Geographer, 19 (1), pp. 7–24. Gourvish, T. R. and Wilson, R. G. 1994. The British Brewing Industry 1830–1980, Cambridge University Press, Cambridge. Howard, W. S. 1935. A History of Brewing in New South Wales, 1788–1935, unpublished typescript, Tooth and Co. Archives, Noel Butlin Archives Centre, Australian National University, Canberra, Z223 Box 125. Hughes, D., 1996. Australia’s first brewer. Journal of the Royal Australian Historical Society, 82 (2), pp. 153–67. Jones, S. R. H. and Paul, D. R. 1991. Concentration and regulation in the New Zealand brewing industry, 1850–1970. Australian Economic History Review, 31 (2), pp. 66–94. Lipton, P. 2007. A history of company law in colonial Australia: Economic development and legal evolution. Melbourne University Law Review, 31, pp. 805–36. Painter, A. 2012. Beer Barons or Bankrupts? Early Brewers in South Australia, The Author, Clapham, SA. Patterson, G. D. 1968. The Tariff in the Australian Colonies, 1856–1900, F. W. Cheshire, Melbourne. Reitsma, A. J. 1960. Trade Protection in Australia, H. E. Stenfert Kroese, Leiden. Ripy, T. B. 1999. Federal Excise Taxes on Alcoholic Beverages: A Summary of Present Law and a Brief History. The Library of Congress, Congressional Research Service, Report RL30238. Siriwardana, A. M. 1991. The impact of tariff protection in the colony of Victoria in the late nineteenth century: A general equilibrium analysis. Australian Economic History Review 31 (2), pp. 45–65. Spiller, G. 2003. Micro-Breweries to Monopoly and Back: Swan River Colony Breweries 1829–2002, Western Australian Museum, Perth.

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Stubbs, B. J. 1993. The Brewing Industry in New South Wales, 1887–1932: A Study in Industrial Concentration, MA Hons thesis, University of New England. Stubbs, B. J. 1999. Tied houses, taxes and technology: Concentration in the brewing industry of New South Wales, 1882 to 1932. Australian Economic History Review, 39 (2), pp. 87–113. Stubbs, B. J. 2000. City vs country: The demise of the brewing industry in country New South Wales, c.1898 to 1932. Australian Geographer, 31 (1), pp. 55–73. Stubbs, B. J. 2010. Beer, Mines and Rails: A History of the Brewing Industry in Queensland to the 1920s, Tankard Books, Lismore, NSW. Stubbs, B. J. 2013. Very Good Beer and Ale: Breweries and Brewers of Tasmania 1820s to 1930s, Tankard Books, Lismore, NSW. Stubbs, B. J. 2019. Bygone Breweries of New South Wales: The Southern Districts, Tankard Books, Lismore, NSW. Ville, S., 1998. Business development in colonial Australia. Australian Economic History Review, 38 (1), pp. 16–41. Walker, M. and Smith, D. I. 2009. Beer duty stamps of Australia, part 1, Tasmania, The Courier: Research Journal of the Tasmanian Philatelic Society, 47, pp. 4–24. Ward, A. J. 1987. Exporting the British Constitution: Responsible government in New Zealand, Canada, Australia and Ireland. Journal of Commonwealth and Comparative Politics, 25 (1), pp. 3–25. Wentworth, W. C. 1956. Responsible government in Australia: State constitutions and federal power, The Australian Quarterly, 28 (2), pp. 7–19.

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7 The “largest beer bottler in the world” Developing Whitbread & Co’s Bottling Operation, 1869–1914 David Turner

1. Introduction In 1914 an advertisement in a British newspaper proclaimed that the London brewer, Whitbread & Co., was the “largest beer bottler in the world” (Whitbread, 1914, February 27). This claim was reasonable: the brewer had a network of more than forty bottling depots and stores in Britain and Belgium; a dozen bottles were available anywhere in Britain for 2 shillings 6 pence; and in 1914¹ it put 427,455 barrels into bottle, 50.54 percent of its output (Redman, 1991). This chapter analyses how Whitbread’s bottling operation achieved this market-leading position between 1869 and 1914, concentrating on its operations in Britain. The historiography of the British brewing industry before 1914 has focused only minimally on bottled beer; relationships between the brewery, the public house, and the public have taken precedence, given this constituted the larger part of the industry’s overall trade (Webster, 2015; Janes, 1963; Owen, 1992; Gourvish and Wilson, 1994). Even Knox’s history of the London brewing industry, written with special reference to Whitbread, explicitly omitted reference to this activity (Knox, 1956). The development, stimuluses, and strategic and operational characteristics of the bottled beer trade before 1914 therefore need further exploration, as we do not understand its dynamics in this period. This is not to say that Whitbread’s bottling operation has not come under scrutiny previously: others have chronicled its development (Redman, 1991; 1990). Yet, its success in a crowded marketplace has never been explained. Using a wider range of sources than other accounts—for instance, archival, periodical, and newspaper records— this chapter argues that success stemmed from a Chandlerian three-pronged investment in production, management, and distribution that effected economies of scale and scope and delivered to Whitbread market-leader status. ¹ All year dates in reference to financial details refer to the year ending 6 July. David Turner, The “largest beer bottler in the world”: Developing Whitbread & Co’s Bottling Operation, 1869–1914 In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0008

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This chapter first adds some weight to those questioning Chandler’s critiques of British business development (Hannah, 2009). Chandler argued that British firms fell behind rivals because they failed to invest to the same extent as those in rival countries in production, management, and distribution, with a commitment to non-professional or family management inhibiting them from doing so and diminishing their ability to affect scale and scope economies (Chandler, 1990). Possibly reflecting these arguments, Acheson, Coyle, and Turner have suggested that family control in British brewing after 1900 was potentially a negative influence on business performance. In the late nineteenth century, competing breweries raced to buy up tied houses to secure routes to market, leading many to convert to limited liability status to access considerable capital for investment. Many, however, over-extended themselves, leading to poor rates of return on capital (ROCE). Acheson and colleagues’ assessment showed that after 1900, “good corporate governance and capital market discipline have a positive relationship with performance, and family ownership has a negative relationship with the performance of preference shares.” But, as they stress, causality cannot be determined by these findings, which possibly indicate different governance structures and strategies between firms (Acheson et al, 2016, p. 746). Whitbread’s case before 1914 shows that, indeed, corporate governance in the British brewing industry was diverse. The company might, on the surface, be considered a typical family-controlled firm. Founded by Samuel Whitbread and Thomas Shewell in Old Street, London, in 1742, it relocated to Chiswell Street in 1750, and subsequently became a leading London brewer (Whitbread, Undated). From brewing 63,408 barrels of beer in 1806, output climbed to 261,018 barrels in 1889 and 693,706 in 1900 (Anon, 1905, September 23). In 1889, to access capital for expansion, Whitbread converted to limited liability status, and the acquisition of public houses and five breweries doubled its initial nominal share capital of £2,000,000 by 1901 (Gourvish and Wilson, 1994). This did not however change control: until World War I the board was controlled by Samuel Whitbread, the great-grandson of the founder (Anon, 1905, September 23), and a few other families long associated with Whitbread (Gourvish and Wilson, 1994; Knox, 1956). In 1908, of £814,000 preferred ordinary shares issued by the company, £474,000 (58 percent) were in the board’s hands, or 23.8 percent of the total paid up share capital (Anon, 1908, August 8). Potentially aligning with Acheson et al’s findings, the negative impacts of family control were possibly reflected in the company’s difficult performance after 1900, it having low ROCE (Gourvish and Wilson, 1994). The organizational reality was, however, more complex than Whitbread being a simple family firm. While wholly owned by Whitbread, the success of the bottling department—separated in organizational and accounting terms from the brewing and tied house business (Kristandl and Quinn, 2017)—allowed the company to

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“ride out the storm after 1900 far more easily than all their competitors” (Gourvish and Wilson, 1994). This chapter argues that this success, particularly from the 1890s, stemmed from the department’s three-pronged investment in production, management, and, as will be revealed most importantly, distribution. In Chandler’s analysis of British business, he particularly criticized companies’ lack of investment in distribution, suggesting this was a significant factor in their weak performance. In his thesis, as a firm’s product line developed and grew in sophistication, those downstream such as merchants, wholesalers, and retailers would have to invest in specialized facilities and staff. Yet, this would put those trying to sell a considerable range of products, such as general merchants, at a cost disadvantage compared to manufacturers who integrated downstream, given that the former could not affect the same economies of scale and scope as the latter. In addition, manufacturers’ investment in distribution established a beneficial connection, through its staff, with its customer base, who fed information to and from corporate headquarters to inform strategy (Chandler, 1990). For Chandler, British companies did not affect these investments, hindering their development. Contrary to these arguments, Whitbread is an example where investment in distribution secured competitive advantage. This chapter uses the concept of supply chain governance (SCG) to understand Whitbread’s success, and although a concept not recognized or articulated in the period in question, it acts as a useful prism through which we can better understand Whitbread’s actions. Where supply chain management refers to the management of supply chains’ processes— which are also examined here—SCG refers to the oversight, rules, and institutions that govern all or part of them. Recently, stakeholder pressure has demanded that modern companies account for the social and environmental impacts along disaggregated international supply chains, even if this is beyond their traditional corporate boundaries. They have consequently extended their governance of, and accountability along, their supply chain, lest upstream suppliers potentially damage their reputation (Vurro et al, 2009, Gereffi et al, 2005). This chapter provides a historical account of the importance of SCG in delivering business success, something rare in the business history literature (see also Spain, 2016). Rather than product-line sophistication stimulating downstream investment, as per the Chandler model, from the late 1860s, when Whitbread entered the bottled beer trade, it countered concerns over the negative impacts of intermediaries such as bottlers on product quality and corporate reputation by extending its governance over the supply chain through bottling and distributing the beer itself. After 1890, however, further downstream integration into distribution, through the establishment of a network of bottling plants and distribution centers, secured operational economies of scale that delivered competitive advantage that kept down operational costs and prices for consumers. The scale of the operation dwarfed competitors’, and delivered a competitive advantage.

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2. The Early Bottling Operation, 1869–c.1890 The developments of 1869–c.1890 in the company’s bottled beer business set the company on the path to this point. Tiny amounts of Whitbread’s beer had been bottled for export before 1869, probably through bottling firms (Tharratt, 1864, July 23). Then, in that year, the company entered the domestic bottled beer market, which presented it with opportunities (Whitbread, c.1930). Demand for bottled beer grew across the late nineteenth century, and as Mrs Lovibond, managing director of the brewers Henry Lovibond, reported in 1898, in the previous twelve months that brewer’s bottled trade had doubled (Papers, 1899). Changes in consumer habits were the cause. First, the public house’s centrality in the social habits of many sections of society was diminishing, especially for middle and upper-class consumers, who thought them less desirable and less socially acceptable to frequent. Preferring to drink in homes or private clubs, bottled beer was more appropriate for them (Gutzke, 1989; Duncan, 2013; Hands, 2018). Alternative entertainments such as music halls, excursion trains, and sports spectatorship also took a greater share of the leisure market. This diminished public house attendance, but bottled beer suited these more mobile pastimes. In 1895 it was reported of excursionists visiting the seaside that “Very often, sandwiches, bottled beer, and concertinas will appear, if the train is one of the cheap excursion tribe” (Anon, 1895, September 18). Finally, working-class home drinking diminished. Families had long taken delivery of nine- or eighteengallon small casks, but by the 1880s such large amounts were not required by them. Bottled beer suited lower rates of consumption, lest beer turn sour (Cornell, 2010). The need to capture a portion of this growing market, particularly in London, was apparently championed by Frederick Manning-Needham, a partner in Whitbread since 1863 (Redman, 1990). Whitbread stood out among its competitors, who up to that point had used semi-independent bottling firms to bottle and distribute, especially in the export market (Gourvish and Wilson, 1994). In November 1869 the Morning Advertiser carried an advertisement stating that Robert Baker “begged to inform the trade” that he was “sole agent” for selling Whitbread’s bottled beers, working out of 26 Worship Street, London (Baker, 1869, November 2); the operation would move to a site on Gray’s Inn Road in 1870. The “sole agent” label was a fiction, Baker heading up a company-owned new bottling department. This unique integration into production and distribution, thus extending its SCG, was conditioned by public concern over the quality and purity of alcoholic beverages. Duguid (2003) argued that in the mid-1800s “adulteration was endemic” in the alcoholic beverages sector—the result, Rioux suggested, of the separation of the place of production from the point of retail, the anonymity of the intermediary agents in the supply chain opening up opportunities for adulteration (Rioux,

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2019). Through various methods, retailers tried to legitimately rectify drinks that had gone off, unscrupulously diluting or mixing wines to maximize profits, or trying to pass off inferior wines as superior brands (Duguid, 2003). Beer’s reputation was particularly poor. To increase longevity and raise profits, financially challenged publicans were known to first dilute beer, then add ingredients such as oranges to restore taste or increase bitterness, while chemicals such as sulphate of iron might be used to restore the head (Rioux, 2019). John Mitchell thus reported to a Select Committee in 1855 that of 200 samples of beer taken over the preceding nine years, not one was pure (Gourvish and Wilson, 1994). Bottled beer was also considered subject to considerable falsification by intermediaries (Higgins and Verma, 2009), the British Medical Journal recording in 1872 that In no respect probably do the public suffer from more mischievous imposition than in the tricks of bottlers who put up inferior ales and beer under well-known brands, employing for this purpose second-hand labels, and adopting all sorts of devices to “clear” the ale chemically, and to give it a fictitious character. (Anon, 1872, March 9)

In response, beverage companies sought to protect their brands and reputations legally, bringing trademark cases before the courts. Between 1838 and 1880, three brewers—Guinness, Allsopp, and Bass—brought twenty-two cases, seventeen involving prosecutions against elements in the supply chain (merchants, distributors, or retailers) (Duguid, 2003), thus revealing how the nature of supply chains can condition business behavior. As Higgins and Verma demonstrated, engaging third parties entailed commercial risk: Bass’s “limited adoption of forward vertical integration and its reliance on a large number of non-exclusive independent bottling firms meant that defence of its trademarks and brand reputation were especially difficult” (Higgins and Verma, 2009, p. 6). Coming to bottling later than competitors, Whitbread’s integration into bottling and distribution therefore eliminated such challenges, as well as providing other advantages. It eliminated a source of value extraction found in other companies’ supply chains—bottlers and merchants. Most significantly, controlling the journey of the beer from production to retail outlet eliminated middle agents, who commonly perpetrated forgery and adulteration, while allowing closer monitoring of retailers. As Foresters’ Monthly Journal confirmed, Whitbread did “not . . . trust the article out of their possession until handed to the consumer” (Anon, 1873, April 4). The company had therefore shrunk the conceptual space between producer and consumer, building consumer confidence and delivering competitive advantage. As the York Herald argued, because of the company’s system, “absolute purity may be implicitly relied upon” (Anon, 1872, September 21), while the Food Journal opined that if other companies followed Whitbread’s

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lead, falsification of beer under other companies’ labels would be less common (Anon, 1873, August 16). Building a strong reputation did not, however, stop with bottling, and every element of the company’s operation and product was designed to embed in consumers’ minds the messages of quality, reliability, value, and purity. While possibly open to forgery, corks carried the company’s hind’s head logo, the label instructing drinkers to ensure the legitimacy by observing “that the cork in this bottle is branded Whitbread & Co” (Redman, 1990, p. 19). Recipes also expressed a commitment to purity. Pattinson noted that despite the Mash Tun Act of 1880 allowing in the mash a wider range of fermentables, which brewers used to reduce costs, unlike its competitors Whitbread stuck to traditional ingredients—malt, sugar, hops, water, and yeast—eschewing the use of cheaper adjuncts, such as flaked maize or rice (Pattinson, 2011, May 28). Whitbread’s choice of bottle size also met consumer expectations better than its competitors. Consumers frequently complained about receiving only “reputed pints.” By contrast, “the individual who pays for a pint . . . issued by [Whitbread] . . . may always rely on getting, not only quality, but a full pint for their money” (Anon, 1871, November 26). Whitbread therefore sought to carve out a space in the market by addressing all the common complaints about other bottled beer offerings. This strategy was reinforced by marketing communications that emphasized the bottled beer’s key attributes. That the conceptual space between producer and consumer had been shrunk, thus ensuring the beer’s purity, was keenly invoked in the advertisements of sellers—“Whitbread & Co are the only large Brewers who bottle their own beer”—underlining that by buying Whitbread’s beer consumers would not be risking receiving the impure or adulterated products allegedly found elsewhere, perhaps fraudulently available using the labels of other brewers (Clarbut, 1871, July 1). Notably, and despite corporate public relations (PR) efforts having been considered an inter-war development (Heller, 2016a), Whitbread undertook what could be considered PR-type initiatives through various channels to reinforce the central messages about its products. In 1872 four medical journals were sent samples of six bottled beers (Whitbread, 1874), and their positive analyses were reported in the general press. The Lancet, a staunch advocate of food purity and thus important to satisfy in the public eye, stated that the samples were “perfectly genuine, well brewed, and of excellent quality; they are free from acidity, well up, and in first rate condition” (Anon, 1872, April 13). Similarly, the British Medical Journal’s tests concluded that “samples were of excellent quality . . . the original gravities of the worts from which they were brewed showed that the full proportions of malt had been used in each” (Anon, 1872, March 9). To further validate its claims of purity and honesty, the company allowed reporters from The Kentish Mercury (Anon, 1872, August 3), The Era (Anon, 1871, November 26), and Medical Times and Gazette to visit Gray’s Inn Road, the latter stating that in the bottling plant, “cleanliness rules and reigns” (Anon, 1873, May

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17). Indeed, this journal’s report was reproduced by Whitbread as paid copy in newspapers in 1872 and 1873 (Anon, 1872, June 28; Anon, 1872, June 29). The sum result was that the company created a positive public narrative around its product and built a strong reputation among consumers, translating to progressively increasing sales. In 1870 the 1,293 barrels bottled constituted 0.57 percent of the company’s total beer output; by 1890 31,782 barrels, 8.8 percent, were being bottled (Redman, 1991). It is important to recognize that this success was also the result of some investment in production and distribution. After the move to Gray’s Inn Road in 1870, Foresters’ Monthly Journal stated that the production equipment purchased was on a scale beyond that of any private bottler, the result of “large capital and extensive resources” (Anon, 1873, April 4). These included a washing and automatic syphon filling system (Anon, 1872, August 3), while the site had the capacity to store 32,400 dozen maturing bottles. Over time, other labor-saving investments were introduced. Initially, hand-corking reigned, one worker being able to cork 280 dozen daily (Anon, 1872, August 3), but by the late 1880s an automatic machine had been purchased. Bottle washing by a foot treadle machine was also replaced, with a vertical steam boiler and bottle-washing machine taking over. Also, a new storage depot was opened at Britannia Street in 1889. Another development that potentially reduced labor costs was the introduction of screw tops in 1885, although corking continued until around 1910 (Redman, 1990; 1991). It can also be suggested, although there is no explicit evidence of this, that economies of scale may have been affected in the purchasing of different elements of production such as labels and bottles. The company thereby displayed some commitment to ongoing investment in production, although precise cost figures are unavailable. Nonetheless, and reflecting prevailing trends in British business (Wilson, 1995), greater production capacity in response to business growth was primarily facilitated by increasing the number of low-skilled and low-cost manual employees, with 200 working for the Bottling Department by 1890. This commitment to using cheap manual labour was exemplified by events in this year. When the men struck for reduced hours, Baker replaced them all almost immediately (Anon, 1890, February 7; Anon, 1890, February 8). Few economies of scale seem to have been effected by new production equipment, and the labour cost per barrel bottled (hereinafter just “barrel”) increased from 28.29 pence in 1880 to 40.91 pence in 1895, or by 44.61 percent (calculated from: LMA, 1879–85; LMA, 1895). Much larger diseconomies of scale were found in the distribution of beer up to 1891. With the trade London-focused, most deliveries were made by the company’s own horses and drays, and so existing cost outlays could be considered predictable. Whitbread nonetheless sought to grow its non-London trade, and from the late 1870s offered “economy in dispatch” (Anon, 1872, August 3) and delivery free to any “railway station or carrier in London,” the minimum order

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being three dozen (Whitbread, 1877, February 17). This approach probably contributed to building brand recognition, especially given the esteem in which the product was held. Nonetheless, it was progressively a more costly enterprise. Faced with the new challenge of sending bottled beer over long distances across multiple transport providers, the company did not always (and perhaps never) dealt directly with the railways or shipping companies, instead using carriers such as Pickford’s who potentially arranged transit from brewery to railhead/wharf, to station/wharf, and then to retailer. This lack of integration into distribution was a source of value extraction in the supply chain, the carrier taking the profit. The nature of country deliveries also affected costs. Promises of speedy despatch required responsiveness to the demands of individual retailers, resulting in a fragmented pattern of deliveries to places as far away as Leeds and Sunderland (Boys, 1891, June 29; Redman, 1991). For example, in one week in January 1891 (Table 7.1), 4,814 dozens of beer—29.22 percent of the total distributed—and 522 jars were delivered in forty-three consignments to three wharfs and ten railway companies, with some visited multiple times in a day. Consolidating consignments, which would have secured scale economies, were thus infrequent, and as Table 7.1 Visits to different railway companies and wharfs from Gray’s Inn Road, 1891 (LMA, 1891, Jan 24–Jan 31) 24 Jan Dundee Wharf Free Trade Wharf Great Eastern Railway Great Northern Railway Great Western Railway Harrison’s Wharf London & North Western London & South Western London, Brighton & South Coast London, Chatham & Dover London, Tilbury & Southend Midland Railway South Eastern Railway Total Dozens Jars Barrels

1 1 1

26 Jan

1 2 1 2

1

27 Jan 1 1 2

28 Jan

1 1

29 Jan

1 3

1 2

30 Jan

1 1 1

1 1 3

1

1

1

2 4 536

2 9 831 186

10 1010 78

1 1 6 755 78 3.5

1 1 7 1083 180

1 7 599

Total 1 1 5 6 4 1 7 5 3 1 0 4 5 43 4814 522 3.5

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the bottled trade outside London grew, overall delivery costs increased from an estimated 65.11 pence per barrel in 1880 to 97.19 pence in 1895 (calculated from: LMA, 1895; LMA, 1879–85; Redman, 1991). It was arguably this growing inefficiency in distribution and the supply chain that led to fundamental structural changes in distribution after 1891. Finally, investment in the bottling department’s management—the third prong of successful Chandlerian corporate development—also remained limited. Given that the company had one site and no geographically dispersed outposts, and most of the trade before 1891 was in London, this is unsurprising. Baker was initially joined by only two senior managers (Anon, 1924, January), and there were only nine senior and salaried (clerical) staff by 1892. On the other hand, and sowing the seeds of the bottling department’s later more fulsome independence from board oversight, apart from occasional inspections by Whitbread’s central offices to observe cleanliness (Anon, 1873, August 16), Baker had some autonomy in strategy development. Ultimately, before 1891, Whitbread’s bottling department never engaged fully in Chandler’s three prongs of production, management, and distribution. Nonetheless, it was in the latter sphere—Whitbread’s greater SCG than its competitors—that its success came. Integration into production (in this case bottling) and distribution, combined with a concerted unified communications strategy, where consistent messages of assurance of beer quality and purity were espoused, meant it faced down every critique of bottled beer in the marketplace, provided products of unique integrity, and built consumer confidence. These developments would stand it in good stead when the business developed more fully after 1891. From the 1890s the bottling operation grew enormously. In 1891 the whole country (bottled and cask) trade comprised 54,111 barrels; by 1914 the total was 414,661, or 50.57 percent of output (Figure 7.1). As noted above, this was important for Whitbread’s financial surety. In a period when brewers’ profits were under pressure from falling consumption, the threat of government intervention, and particularly capital over-extension (Acheson et al, 2016), Whitbread’s bottling operation bolstered the company’s financial position. This section argues that the bottling department’s success rested on further investment in production, management, and distribution, particularly its SCG and the creation of more than forty bottling depots and stores. It is, however, important to say that beer quality remained important. While Gourvish and Wilson suggested that bottled beer’s popularity from around 1900 rested on filtering and carbonation, Whitbread built its product’s reputation by doing neither (Anon, 1905, September 23). The Era concluded that business growth was because “of the beers being uniformly kept to the pitch of perfection and to the system that Messrs Whitbread practice of bringing all their bottled beers into condition by maturing in bottle, the natural method” (Anon, 1908,

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600000 500000 400000 300000 200000 100000

6J ul y 6 J 189 ul 8 y1 06 899 -Ju l 06 -00 -Ju l 06 -01 -Ju l 06 -02 -Ju l 06 -03 -Ju l 06 -04 -Ju l 06 -05 -Ju l 06 -06 -Ju l 06 -07 -Ju l 06 -08 -Ju l 06 -09 -Ju l 06 -10 -Ju l 06 -11 -Ju l 06 -12 -Ju l 06 -13 -Ju l-1 4

0

Town

Country

Bottling

Figure 7.1 Destinations of beer brewed at Whitbread’s Chiswell Street Brewery, 1898–1914 (barrels) Source: LMA/4453/C/8/07, Trade Book

13 February). This quality was underpinned by a testing regime, ensuring beer went out in perfect condition (LMA, July 1908–September 1909). Factors beyond the product itself may also have had a large impact on brand performance. Whitbread’s bottled beer traded largely on its reputation for purity and quality, something that stood it in good stead when fears over beer quality returned in 1900. The adulteration of food had been legislated on over the previous twenty-five years. The Sale of Food and Drugs Act of 1875 made it illegal to add to food or drink anything that affected its “nature, substance and quality” to “the prejudice of the purchaser,” or which harmed health (Phillips and French, 1998a), while another act in 1899 strengthened the inspection frameworks and definitions of what constituted adulteration. Adulteration did not however decline significantly in the wake of these acts (Phillips and French, 1998b), and indeed, in November 1900, arsenic traces were discovered in beer around Manchester and Salford; 3,000 cases of poisoning were reported and seventy people died. A Royal Commission on Arsenic Poisoning was established soon after, while succor was given to Pure Beer Campaigners, who introduced on February 19 a Pure Beer Bill (a proposal for a new law presented to Parliament for debate) (Phillips and French, 1998a). Speedy action by the brewers to restore public confidence prevented this from becoming law, and the Royal Commission confirmed the risk had been eliminated (Gourvish and Wilson, 1994). This challenging environment

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put Whitbread in a strong position. It exploited this crisis to reinforce its wellestablished market position as a bastion of purity, with one advertisement from December that year proclaiming the “absolute purity of [their] ales and stouts” (Advert, 1900, December 20). Its reputation remained unsullied; after describing adulteration problems and then referring to Whitbread’s lack of use of hop substitutes, the London Evening Standard implied that its products were trustworthy (Anon, 1908, February 13). More broadly, though, the entire character of the bottled beer business was changing. Before 1900 retailers and merchants were mostly responsible for advertising bottled beer, the offerings of different breweries being placed side-by-side in the same advertisements. Whitbread’s expenditure on press advertising was consequently little, and between 1879 and 1884 it amounted to only £1,453 in total, £2,000 less than the company would spend in 1893 alone (LMA, 1879–85). Such small outlays became a thing of the past after 1900, as competition for a growing market intensified. Advertising spending by one of the company’s major competitors, Bass, rose from £20,945 in 1901 to £73,916 in 1907—the year of a massive campaign including front-page spreads in the national daily newspaper, the Daily Mail (NBCA, 1905–c.1914)—falling back to £45,615 in 1912 (NBCA, 1905–12). Whitbread never invested as much, possibly suggesting that it relied on the beer’s reputation for sales.² Nonetheless, as the bottling network grew and trade expansion became an objective, press spending increased, reaching £37,910 by 1913 (Figure 7.2). This more aggressive press advertising strategy was demonstrated by the engagement of an advertising agent, H. Powell Rees, to manage publicity in 1913 (Rees, 1913, January 17) and the emergence that year of the first pictorial advertising (Whitbread, 1913, September 19). This expenditure was deployed to reinforce familiar and consistent messages in the minds of consumers. An advertisement in 1913 guaranteed “absolutely pure and wholesome beverages” without artificial process, while beer was conditioned in bottle (Whitbread, 1913, September 19). Similarly, others stressed how the company’s stouts were “recommended for invalids” (Whitbread, 1904, December 14). Advertorials made similar claims: Whitbread’s beer was good for singers, actors, and actresses’ vocal cords, and it was “matured in bottle” (Anon, 1914, September 23). Posters and showcards all carried similar messages. In some sense, this uniformity of messaging across marketing communications could be considered similar to one element of what is described in modern marketing parlance as integrated marketing communications (IMC) practice—where in planned campaigns there is consistent messaging across tools and channels—thus partially reinforcing recent scholarship finding that such practices are not a new ² According to Truman’s, Whitbread in 1903 was spending £12,000 on “station advertising”, although there is no sign of this level of investment in the accounts (Gourvish and Wilson, 1994).

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Figure 7.2 Comparative spending on advertising by Bass and Whitbread, 1893 to 1913 Source: Bass and Whitbread accounts

phenomenon (Heller, 2016b; Turner, 2018). Nonetheless, and possibly because individual depots oversaw their own advertising output, there is seemingly no evidence of strategically planned national campaigns, and thus the strategic and coherent deployment of marketing communications also found in IMC was missing. Nonetheless, the broadly consistent messages maintained and strengthened Whitbread’s position within the marketplace. Consistent messaging was complemented from around 1900 by a very competitive and consistently found price point for Whitbread’s beer, something competitors could rarely offer. Bass did not compete on price. The evidence suggests that the presence of bottlers and merchants in Bass’s supply chain meant pricing was beyond its control. Seemingly, retailers set the price, meaning this varied. In 1903, a dozen pints of Bass Pale Ale was sold by M. T. Cocks in Aylesbury for 4 shillings (Anon, 1903, June 20); by the Red Lion Hotel in Kilburn, London, for 3 shillings 9 pence (Anon, 1903, June 23); and by J. W. Green of Luton for 3 shillings 2 pence (Green, 1903, May 22). This delivered inconsistency for consumers, and meant that Bass could not use price as a selling point, so tended to focus advertising on product quality (NBCA, 1910–c.1914). Whitbread, however, was not limited in that regard. As another competitor, Truman’s, commented, “Whitbread’s make a point of the public being able to obtain their beer anywhere in England at 2/6 a dozen” (LMA, May 1902–October 1908). This was one of the ingredients in its success and was facilitated by various factors. The vertical integration established in 1869 allowed Whitbread to

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eliminate intermediaries found in other companies’ supply chains, shifting the balance of power in it toward the brewer, and, as competition intensified, allowed it to implement resale price maintenance. In 1904 Whitbread told its trade customers that its Family Ale and Cooper should after April 1, 1904 not be sold at less than 2/4 per dozen pints or 1/6 for half-pints, while the price for the India Pale Ale should not be less than 2/6 per dozen pints or 1/6 for half-pints. This, the brewery argued, guaranteed retailers six pence per dozen profit, but, critically for its reputation, delivered a consistent and universally found low price that formed another marker of reliability in consumers’ minds in addition to beer purity (NBCA, 1903, December 31). This lower price point was possible because of various economies of scale. Others are described presently, but one has already been noted: while in other companies’ supply chains intermediaries would extract value, integration into bottling meant this was not so with Whitbread. Moreover, and most notably, the amount paid to Whitbread’s central brewing business—given that the two parts of the business were separated in accounting terms—fell from 405.91 pence per barrel in 1895 to 356.61 pence in 1910 (LMA, 1895; 1910). The reason for this is unclear, but it may represent economies of scale at the central brewery, or simply reduced charges. The final element of Whitbread’s market positioning was its boast that its beer could be found anywhere—a further marker of consistency. Underpinning this claim, as well as the beer’s competitive price point, were changes in production, management, and particularly distribution, again emphasizing the importance of supply chains and SCG in Whitbread’s success. Between 1891 and 1914 it developed a distribution network of more than forty bottling plants and stores nationwide. Indeed, the company’s structured, planned, and well-organized logistics operation was lauded for being pioneering. Commercial Motor Magazine commented in 1913 that it compared well “with the well-considered plan of supply of Lever Bros., Ltd., of Port Sunlight, that big soap-making company one of the first concerns so to organize” (Anon, 1913, May 29). It can be suggested that Whitbread’s strategic shift from centralized distribution to a network can be attributed to the company’s incorporation in 1889. Faced with the need to service considerable debts and loans, fierce competition, and the diminution of its traditional London pub trade, business growth was needed. Some of this growth was sought in new territories. The Cardiff depot (opened 1894), for instance, allowed it to “open up some of the ground in South Wales and to introduce our bottled beers into places where the name was previously almost unknown” (Anon, 1927, October). Elsewhere, the company opened depots where it wished to grow the business—or at least meet expected growth—cost-effectively in existing areas, especially given that distribution constituted the largest segment of operating costs. As noted previously, the distribution of small consignments became increasingly costly before the 1890s. The depot system, however,

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eliminated or reduced costs at most stages. When depots were established, beer was sent in bulk (in barrels) to them from Chiswell Street, bottled, stored until mature, and then distributed to retailers by local means. This consolidated the beer’s transit along the longest part of the delivery flow and shortened the distance between bottling, storage, and retailers, thus reducing expenditure. Moreover, while third party operators remained in use for local distribution at the majority of depots by 1913 (Anon, 1913, May 29), the company extended their SCG over much of the beer’s journey, reducing their work and eliminating a source of value extraction. To maximize the economies of this new system, careful decisions about depot locations were also taken. The districts served by the early bottling plants were seemingly chosen based on the pre-existing trade. The first three, in Birmingham, Leeds, and Liverpool, generated 20.5 percent of the bottling department’s gross sales revenue in the year ending July 1894, suggesting considerable prior trade in those places (LMA, 1894). To maximize economies, they had also been allocated considerable catchment areas; on opening in 1892 the Birmingham depot served a territory from the “Potteries in the north to within a few miles of Gloucester in the south, and from Coventry and Leamington in the east to the borders of Wales in the west” (Anon, 1926, October). Such strategic choices therefore eliminated a great number of fragmented, long-distance, and costly deliveries. Within the chosen conurbations where bottling plants were located, the sites of the buildings used also contributed to streamlining the operation. Each was centrally placed within a major market and had good transport links; for instance, those at Newcastle and Liverpool were located directly under the passenger stations (Anon, 1928, January; Anon, 1927, April). The Leeds Depot was situated at “The Calls,” with railway and canal links (Anon, 1927, January). Such siting seamlessly integrated bulk beer delivery and bottled beer distribution (either by horse and dray, lorry, or rail), eliminated potentially inefficient last mile shipment from station to company depot, and reduced transhipment and handling costs. The establishment of depots and stores also raised the quality of service provided to retailers, better meeting the claims of nationwide availability. To better service growing demand and relieve overstretched depots, Whitbread routinely established sub-warehouses where beer was matured in bottle, and which later turned into bottling plants themselves. For instance, when the Leeds depot was reaching capacity, sub-warehouses for beer maturation were established in Sheffield, Hull, and Bradford, all supplied from it by rail (Anon, 1927, January). Such actions located the distribution node closer to retailers, meaning the company could more quickly match supply with demand, while localized storage meant the delay commonly occurring when using the railway for delivery was minimized (Anon, 1909, October 21). Advertising could therefore confidently proclaim “All orders promptly delivered” (Whitbread, 1914, February 27).

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The depot system also eliminated other problems found with rail transit, such as damage to and pilferage of bottles. These were significant problems. For instance, the Tottenham Depot, which from 1897 served places such as Cambridge by rail (Anon, 1924, October), claimed for loss and damage against the Great Eastern Railway 178 times between November 1903 and August 1913 (LMA, 1903–53). Sending beer in barrels (harder to damage or steal) and local bottling and storage was therefore preferable, and by 1908 the depot system had reduced breakage (from all sources) to 0.5 percent (Anon, 1908, February 13). Pilferage in transit, however, was never completely eliminated, and between the wars Whitbread consequently ceased sending any bottled beer by rail (TNA, May 1949– November 1950). Lastly, given the importance of transport to the operation, Whitbread’s SCG enabled it to exhibit tactical flexibility in transport and warehousing choices, particularly between brewery and depot, and logistics was an area of constant reassessment in the search for efficiencies, thus improving the margins on sales. The evidence suggests that no transport provider was necessarily considered automatically superior in terms of cost. For instance, in 1896 a dozen cases for Southampton were sent via the Great Western and Didcot, Newbury, and Southampton Railways, rather than via the rival and more direct London & South Western (LSWR), because the latter’s rate was too high (Anon, 1896, February 13). The company was also not wedded to using the railway network, frequently using coastal shippers (TNA, 1901, November 1; Anon, 1930, April). It was also an early adopter of motor vehicles for deliveries beyond the range of horses and drays, using motors for bulk beer deliveries from Chiswell Street to the Kingston Depot. This was considered more timely and secure than the railway alternative, but also affected considerable cost reductions: supplying the depot via rail was 1s 8.5d per barrel, whereas by lorry it was 11.25d, 45 percent less (Anon, 1913, May 29). Indeed, the adoption of motor distribution at almost all depots by 1913 effectively meant that costly onward distribution of bottled beer by rail to customers out of the range of horse and drays had been largely eliminated. Ultimately, while a nationwide bottling network could therefore not have been established without the railways, Whitbread never considered itself beholden to them—although the company was never afraid to make preferable agreements with the railways to its advantage. In 1913, when a site was secured next to the LSWR’s Plymouth station, Whitbread agreed not to use the depot for storing goods not conveyed by the LSWR unless the rate for sending them there by the company was higher than that of sending them by another line, thus guaranteeing the lowest rates (TNA, 1907, March 20; LMA, 1907–13). The impact on costs of this aggressive expansion of the distribution system was not inconsiderable, expenditure on distribution per barrel falling from 97.19 pence in 1895 to 75.38 pence in 1910 (calculated from: LMA, 1895, 1910). This reduction was nonetheless less important than the ability to keep costs down while

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the operation expanded. Where in 1880 delivery costs stood at 65.11 pence per barrel on a largely London-focused trade, the evidence suggests that the rise to 97.19 pence in 1895 was largely a consequence of a growing non-London trade supplied by rail and boat in a fragmented manner. Had Whitbread, up to 1914, sought to grow this trade nationwide—constituting 89.41 percent of its total bottled beer sales in 1913—to the same extent as it did without moving to a system of bottling depots and stores, it can be strongly suggested that the nonLondon segment of overall delivery costs would have only increased further. While estimates are unclear, the excess may have been tens or hundreds of thousands of pounds more, and even at the lower end of this spectrum would have rendered the 2/6 price point impossible. The aggressive change to distribution via depot and store therefore potentially made the whole bottling operation viable and competitive. The extent of the operation, and adhering to the messages in marketing communications, also required investment in production facilities. Maintenance of Whitbread’s reputation for availability and purity, and corporate goals of cost efficiency, demanded the highest standard of bottling equipment, with it investing in the “latest and most improved bottling machinery” (Redman, 1991, p. 109). Depots were also frequently augmented to meet demand more effectively, while in many cases expansion plans included the building of completely new buildings, such as that in Brussels, Belgium, in 1904 (Anon, 1926, April) (no evidence was found describing why Whitbread decided to expand into Belgium). Consequently, the value of depots and stores reached £236,385 in 1905, rising to £390,000 in 1913 (LMA, 1905–13). Economies of scale were not, however, seemingly forthcoming in this sphere. Bottling remained labor-intensive, borne out in wages and salaries per barrel rising from 40.91 pence to 51.57 pence (calculated from: LMA, 1895; 1910). Investment in organizational and information systems was also important in the effective and efficient coordination of depots, allowing the firm to effectively meet growing demand. First, the Bottling Department’s organizational separation from the rest of the business remained, the divide facilitating the devolution of much strategic control from the board. This was most prominently seen in depot establishment. Initially, board members and bottling management decided this together, with Baker and Harry Whitbread for instance choosing the Leeds site in 1892 (Anon, 1927, January). Later establishment, by contrast, was seemingly decided, or at least principally determined, by senior managers, without direct directorial intervention. Baker, Walter Sharpe (Baker’s successor from 1899), and Austin (a long-established senior manager) were the architects of the network, Austin for instance having responsibility for “inspecting and assisting to control the new depots as they were opened” (Anon, 1924, January). This Chandlerianstyle devolution to managers allowed the bottling department to control its own resources, meet market demand more closely, ensure the quality of the product,

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and determine success or failure itself, without constant reference to the board’s decision-making mechanism. Below the senior management, a management cadre and internal labor market were also established to oversee and coordinate this growing and geographically dispersed operation. While Baker, Sharp and Austin were seen as the organization’s “fathers” into the 1920s, a promotion and advancement system had developed by 1914. Depot managers would usually be picked from among the lower ranked officials, such as commercial travelers and clerks, and would oversee a small depot. They would then move up the ranks, eventually taking control of more important sites. A good example was Frederick Smith, Depot Manager at Kingston-upon-Thames in 1927. Starting as a clerk at Gray’s Inn Road, he moved to Britannia Street in 1900 and then was appointed to Poole, then Newport on the Isle of Wight, and then Kingston in 1905 (Anon, 1925, January). Such managers had some degree of autonomy, and formed part of the public face of the company. In 1924 their responsibilities were described as supervising bottling, ensuring efficiency, the cultivation of friendly relations with customers and expanding trade, and upholding staff welfare. As noted, they also had responsibility for local advertising spending and organizing local distribution (Anon, 1913, May 29). As the staff magazine commented, “undertaking the management of a depot, with its valuable trade connections and local properties, a great responsibility rests upon the manager, a trust that is an incentive to create great interest and render loyal service to the firm” (C.P.K., 1924, January). Consequently, depots were to an extent responsible for generating and responding effectively to local needs and retailer demands. Nonetheless, the center had ultimate oversight over the operation: Kristandl and Quinn arguing that the bottling department’s “expansion and geographical spread increased the need for accounting information for decision making” (p. 9) and monitoring by the center, with cost and management accounting measures being created. Each depot had its own bank account controlled by Gray’s Inn Road, so sales could be monitored. Detailed records of traveling salesmen’s activities were also kept, with their sales totals carefully recorded. Whitbread’s salespeople sold beer on a sell-and-return basis, with all unsold and returned beer being monitored—the goal was under 2 percent (Kristandl and Quinn, 2017). Moreover, nationwide availability and ensuring that supply met demand rested on bottling depots constantly communicating with headquarters about local conditions and any need to better fulfil orders. Should there be difficulty finding beer in any part of the nation, application to any depot manager would lead to this information being this communicated to the center and relevant action being taken (Anon, 1905, September 23). Depot inspectors were despatched to inspect and report on the business’s depot operations (Redman, 1991). Finally, the need to monitor the growing operation and ensure effective working led to information systems being created to track the movement of beer as it traveled along the supply

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chain from brewery to depot, and then onward to the consumer. Ledgers show very close attention to the losses incurred in transit (LMA, 1903–53), while product integrity was assured by deploying batch control. Offices could track every bottle to the team which bottled it, the officials in charge of the process, and the gyle (wort in the process of fermentation added to a beer) from which the beer was supplied (Anon, 1908, 13 February). This ensured that the public reputation for integrity—the company’s long-standing and most valued asset in the marketplace—was maintained, as sources of contaminated beer could be located and issues rectified, while it also acted as a protection against imitation and falsification, defending the brand. The creation of information systems therefore played an important part of the operational and strategic cohesion of the business, and conforming to Chandler’s thesis about the benefits of investment in distribution, they allowed the company to meet and be better informed about market conditions.

3. Conclusion The sum result was that by 1914 Whitbread was a market leader in the bottled beer segment, in contrast to its pub and tied house trade, where the picture was not so rosy (Gourvish and Wilson, 1985). This chapter has for the first time articulated why this success came about. Of significant importance, the company’s messages about its bottled beer, formulated in 1869, remained steadfast up to 1914. In an environment where food and beer purity was of significant concern, its commitment to cleanliness, purity, availability, and after the early 1890s value and universal availability, meant it won favor in the minds and mouths of consumers, capturing the lion’s share of the market. Underpinning these things were organizational change. As noted, it is has been previously assumed that British breweries were significantly wedded to family or what Quail called proprietorial forms of corporate governance (Quail, 2000). Whitbread’s case adds complexity to this picture. Whitbread adopted in these decades a mixed corporate form; on the one hand, as demonstrated by other scholars, the brewery and public house trade remained a family firm, but on the other the bottling department developed distinctly Chandlerian characteristics. After 1890 particularly, three-pronged investment in management, production, and distribution delivered some economies of scale that underpinned the lower price point of the company’s beers. What this chapter has particularly stressed is the role of supply chains, distribution, and transport in delivering Whitbread’s success, although the nature of their importance changed after 1890. In the first decades after the establishment of the bottling department, the extension of the company’s SCG over the bottling and distribution of beer eliminated intermediaries in the supply

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chain, guaranteeing in the minds of consumers the purity and reliability of the product, thus delivering competitive advantage. After 1890, the company’s further extension into local distribution through a network of bottling depots and stores— and the attendant investment in information systems, production, and management—also ensured the availability of the company’s product nationwide, its responsiveness to growing market demand, and its flexibility in distribution, and effected economies of scale that were passed onto consumers. All these facets meant that Whitbread & Co. had a constantly growing share of the bottled beer market, and by 1914 could claim to be the “largest beer bottler in the world.” Indeed, while other breweries followed Whitbread into bottling their own beer from the 1890s and particularly the 1900s, none did so on the scale of Whitbread and it can be tentatively suggested that they were unable to effect the economies of scale it could, thus significantly restricting the available profits. For instance, this was true of Truman’s limited venture by 1911; it only possessed five bottling plants in outer London and the operation was considered not very profitable (Gourvish and Wilson, 1994). The sum result is that this chapter has made various important contributions to our understanding of British brewing history, on the one hand revealing more complexity in brewers’ pre-1914 organizations and illuminating the development of the bottled beer trade. Moreover, it challenges business historians to consider how the management, development and function of supply chains have influenced the performance of firms historically.*

References Acheson, G. G., Coyle, C., and Turner, J. D. 2016. Happy hour followed by hangover: financing the UK brewery industry, 1880–1913. Business History, 58, pp. 725–51. Advert. 1900, Dec 20. Advert. Leicester Daily Post, p. 1. Anon. 1871, November 26. Beer in Bottle. The Era, p. 3. Anon. 1872, April 13. The Bottled Ales and Stout of Messrs Whitbread & Company. South London Chronicle. Anon. 1872, August 3. Bottled Beer. Kentish Mercury, p. 3. Anon. 1872, June 28. Untitled. Islington Gazette. Anon. 1872, June 29. Whitbread’s Bottled Beer. Kilburn Times, p. 3. Anon. 1872, March 9. Reports and analyses and descriptions of new inventions in medicine, surgery, dietetics and the allied sciences: Whitbread & Co’s bottled ales and stouts. British Medical Journal, 1, p. 267.

* Research for this chapter was funded by the Business Archives Council (BAC) Bursary for Business History Research, awarded in 2016.

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Anon. 1872, September 21. Whitbread and Co’s Bottled Ales and Stout. York Herald, p. 11. Anon. 1873, April 4. Pure Malt Liquors. John Bull, p. 248. Anon. 1873, August 16. Untitled. John Bull, p. 538. Anon. 1873, May 17. Untitled. John Bull, p. 338. Anon. 1890, February 7. Editorial. London Evening Standard, p. 4. Anon. 1890, February 8. Editorial. p. 2. Anon 1895, September 18. The Sketch. Anon. 1896, February 13. Editorial: The Didcot and South Western Companies. Southern Echo, p. 3. Anon. 1903, June 20. Advert. Bucks Herald, p. 1. Anon. 1903, June 23. Advert. Kilburn Times, p. 1. Anon. 1905, September 23. Editorial. The Era, p. 15. Anon. 1908, 13 February. Purity of British Foods and Beverages. London Evening Standard, p. 9. Anon. 1908, August 8. Economic and financial notes. The Investors’ Review, XXII, p. 170. Anon. 1909, October 21. One Day’s Work (New Series)—No. 12. The Commercial Motor. Anon. 1913, May 29. “What Users Tell Us”—After At Least 81 Years of Experience. Commercial Motor Magazine. Anon. 1914, September 23. Untitled. The Era, p. 11. Anon. 1924, January. The Bottling Stores. The House of Whitbread. Anon. 1924, October. The Bottling Stores, No. 4—Tottenham. The House of Whitbread. Anon. 1925, January. Bottling Stores No. 5—Kingston and Willesden. The House of Whitbread. Anon. 1926, April. The Bottling Stores—No. 10—Belgium. Anon. 1926, October. Bottling Stores—Provincial—No. 12—Birmingham. The House of Whitbread. Anon. 1927, April. Bottling Stores—Provincial—No. 14 Liverpool. The House of Whitbread. Anon. 1927, January. Bottling Stores—Provincial—No. 13—Leeds. The House of Whitbread. Anon. 1927, October. The Bottling Stores—Provincial—No. 16—Cardiff. The House of Whitbread. Anon. 1928, January. Bottling Stores—Provincial—No. 17—Newcastle. The House of Whitbread.

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LMA 1879–85. LMA/4453/B/01/017 Bottling Stores Accounts Ledger No. 3— Deliveries. LMA 1891, Jan 24–31. LMA/4453/A/15/031—Letters, bonds, receipts and notes. Individual unrelated items regarding production, property and financial matters. LMA 1894. LMA/4453/B/02/005, Balance Sheets and Accounts Director’s Copy. LMA 1895. LMA/4453/B/02/006, Balance Sheets and Accounts Director’s Copy. LMA 1903–53a. 4453/S/03/001—Tottenham Depot Claims Book. LMA 1903–53b. LMA/4453/S/03/001—Tottenham Depot Claims Book. LMA 1905–13. LMA/4453/C/08/073—Various Statistics Book C H Adam Private. LMA 1907–13. LMA/4453/D/02/16—Notebook containing various brewing information and statistics. LMA 1908 Jul–1909 Sep. LMA/4453/D/07/001—FGS Baker’s notebook No.1. LMA 1910. LMA/4453/B/02/021, Balance Sheets and Accounts Director’s Copy. LMA May 1902–Oct 1908. B/THB/A/121, Turman’s Monthly Reports. NBCA 1903, December 31. 90/0229, Scrap Book, Letter from W. T. Sharpe, Whitbread Manager, to country customers. NBCA 1905–12. A139, 143, 145, Bass, Ratcliffe & Gretton, accounts. NBCA 1905–c.1914. 89.1430, Bass Scrap book number 3. National Brewery Centre. NBCA 1910–c.1914. 89.1430, Bass Scrap book number 3. National Brewery Centre. Owen, C. C. 1992. “The Greatest Brewery in the World”: A History of Bass, Ratcliff & Gretton, Derbyshire Record Society. Papers, B. P. 1899. C.9171 C.9172—Departmental Committee on Beer Materials— Report, Minutes of Evidence, Appendices. Command Papers. Pattinson, R. 2011, May 28. Whitbread Pale Ales 1880–1889 [Online], available at: http://barclayperkins.blogspot.com/2011/05/whitbread-pale-ales-1880–1889.html (accessed on March 19, 2019). Phillips, J. and French, M. 1998a. The Pure Beer Campaign and arsenic poisoning, 1896–1903. Rural History, 9, pp. 195–209. Phillips, J. I. M. and French, M. 1998b. Adulteration and Food Law, 1899–1939*. Twentieth Century British History, 9, pp. 350–69. Quail, J. 2000. The proprietorial theory of the firm and its consequences. Journal on Industrial History, 5, p. 5. Redman, N. B. 1990. The Story of Whitbread Plc, 1742–1990. Redman, N. B. 1991. Whitbread and Bottled Beer, 1969–1930. The Brewer. Rees, P. 1913, January 17. Advert: Modern Methods in Financial Publicity. The Times, p. 49. Rioux, S. 2019. Capitalist food production and the rise of legal adulteration: Regulating food standards in 19th-century Britain. Journal of Agrarian Change, 19, pp. 64–81.

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&

’  , –

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Spain, T. J. A. 2016. “Food Miles”: Britain’s Transition from Rail to Road-Based Food Distribution, 1919–1975. Thesis (PhD), University of York. Tharratt, J. 1864, July 23. Advert. North London News, p. 4. TNA 1901, November 1. RAIL 236/161, Great Northern Railway Traffic Committee— Whitbread + Cos application to rent arches at City Rd Bradford. TNA 1907, March 20. RAIL 411/26, Traffic Committee, minute 597. TNA 1949 May–1950 Nov. Brewery traffic: Whitbread & Co Ltd. Turner, D. A. 2018. “Delectable North Wales” and stakeholders: the London & North Western Railway’s marketing of North Wales, c.1904–1914. Enterprise & Society, 19, pp. 1–39. Vurro, C., Russo, A., and Perrini, F. 2009. Shaping sustainable value chains: network determinants of supply chain governance models. Journal of Business Ethics, 90, pp. 607–21. Webster, I. 2015. Ind Coope & Samuel Allsopp Breweries: The History of the Hand, Stroud, Amberley. Whitbread. 1874. Advert: Bottled Cooper, Stout and Ales. Year-Book of Pharmacy. Whitbread. 1877, February 17. Advert: Beer in Bottle. Hastings and St Leondards Observer, p. 4. Whitbread. 1904, December 14. Whitbread’s London Stout. Kentish Mercury. Whitbread. 1913, September 19. Advert. Biggleswade Chronicle. Whitbread. 1914, February 27. Whitbread’s London Stout and India Pale Ale. Nantwich Guardian, p. 5. Whitbread. c.1930. Whitbread’s Brewery: An Illustrated History of the House of Whitbread, London, Unknown publisher. Whitbread. Undated. Whitbread’s Bottling Stores. Wilson, J. F. 1995. British Business History, 1720–1994, Manchester University Press, Manchester.

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8 Branding and Consolidation in the Global Beer Market Erik Strøjer Madsen

1. Introduction Liberalization of trade has been high on the political agenda since World War II, first through international cooperation in GATT and WTO, and later through the creation of the single market in Western Europe and the opening up of Eastern Europe and China. The breweries responded to these changes in institutions with a global growth strategy with which they went into the newly open markets, mainly by acquiring local breweries. Figure 8.1 shows how the number of acquisitions in the global beer industry took off at the turn of the century, reached a peak before the financial crisis in 2007, and subsequently settled at a high level. The liberalization of trade opened the gate for cross-border M&A, but why did the breweries choose this route, and was there some pay-off for them through this strategy? Following the M&A strategy, the concentration of ownership among breweries increased the CR4 of the global market share dramatically, from less than 30 percent to about 60 percent in fifteen years (Figure 8.2). This restructuring of the global beer market was driven by the large breweries, and the largest brewery increased its market share from 9 to 27 percent of the world market in the period. The dynamic of this restructuring also switched the position of the large breweries. SABMiller was the largest brewer up to 2008, when InBev’s acquisition of AnhBush made it the largest—a position it consolidated eight years later with the acquisition of SABMiller. Section 2 of this chapter looks at how the M&A strategy has affected the concentration of the industry and thereby the ability to exercise market power. Besides the policy of market liberalization, economic growth and rising consumer income also contribute to changes in the global markets for alcoholic beverages. There has been a trend away from wine and spirits toward beer. This trend has caused growth in the beer market compared with the markets for other alcoholic beverages in the past fifty years (see Piron and Poelmans, 2016). The growth has been driven by an increase in consumption per capita, which has

Erik Strøjer Madsen, Branding and Consolidation in the Global Beer Market In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0009

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193

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

500 450 400 350 300 250 200 150 100 50 0

1997

M&A deal

       

Number

Value

Figure 8.1 Number and value of M&A in the brewing industry in the period 1997 to 2017 Note: Value of M&A measured in billion euros. Only deals with known value of the transaction amounting to 56% of the deals over the period Source: Zephyr database of M&A deals, 2019

70

Market share %

60 50 40 30 20

CR1

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

0

2002

10

CR4

Figure 8.2 Increasing concentration of ownership in the brewing industry in the period 2002 to 2017 Source: Market Lines’ Database—Market Data Analytic, 2002 to 2013. Passport Database, 2013 to 2017, Euromonitor International, 2018

doubled in that period mainly due to increasing beer consumption in the new emerging countries, whereas consumption in developed countries has been stagnant or declining. The possibility of value extraction from premium brands by acquiring breweries in emerging growth markets is another motive for crossborder M&A. By moving into the emerging markets, in which premium brands

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have a low market share but a very high growth rate, the breweries can reap a higher return through an acquisition than is possible through investment in mature markets. Section 3 of this chapter deals with these relationships in the global beer market, and points to push and pull effects behind the large breweries’ investment in emerging economies. The price premium earned by the branding of beer may be the motivation behind the large spending on marketing and sales promotion, but may also be one of the motives behind the M&A activities in the industry in recent years. As a product, beer is very heterogeneous, with large variations in quality or consumer perception of quality. At the low end of the scale, the consumer can choose cheap discount beer; at the top end, they can choose expensive, branded premium beer. Because the large breweries own the large premium brands, they can benefit from acquisitions by introducing their beer brand into the acquired breweries’ distribution networks, and thereby extend the market for their premium brand. Accessing the local market with their own brand is therefore a motive behind the M&A strategy for the larger breweries; in addition, they have the opportunity to upgrade the local brand and make it more profitable. Section 4 of this chapter deals with the segmentation of the market for lager beer in a discount and premium segment and calculates the price premium for branded lager beer. The literature on horizontal mergers often states three main reasons behind mergers and acquisitions. First, the market-power hypothesis claims that having fewer firms in the market facilitates collusion on a high price strategy, thereby benefiting the owner of the breweries. Less competition also facilitates collusion on a low-cost marketing strategy with less advertising. Second, breweries can gain synergies through size and operation efficiency, and there is some evidence that the M&A strategy has increased efficiencies in distribution and marketing (see Madsen and Wu, 2016). Finally, there could be some non-profit-maximizing or managerial motives behind expanding the companies, where managers of both the acquired brewery and the acquiring one can benefit from the merger through their compensation packages. Sections 5 and 6 examine the effects of the increasing market power and acquisitions in emerging markets on breweries’ performance.

2. Global Concentration of Ownership and Beer Brand The liberalization of trade and the opening up of foreign markets have triggered a wave of M&A in the brewing industry and increased the concentration of ownership in the global market. However, it is unclear how this affects the local competition, as the acquisition of a local brewery changes the ownership but not necessarily the number of local competitors, if the acquiring brewery is not present in the local market before the acquisitions. Figure 8.3 shows the development of concentration in four regional markets in the period up to 2013, in which

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1 0.9 0.8

CR4 share

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 World

Asia-Pacific

Europe

Americas

Africa & Middle East

Figure 8.3 Regional development in concentration in the brewing industry in the period 2002 to 2013 Source: Market Lines’ Database—Market Data Analytic, 2016

the concentration has increased in all regions except Africa and the Middle East. The concentration is low in Asia and the Pacific, with a modest increase over the period, and the increase in global concentration is therefore driven by a higher concentration in the Americas and Europe. The world regions in Figure 8.3 are quite extensive and may be geographically too extensive for an analysis of the relevant competitors. Beer is a heavyweight product with high transportation costs, which often results in breweries finding it more efficient to set up their own distribution network. This creates an important entry barrier to the local market in those cases where the local market is only big enough to accommodate a few large suppliers with their own distribution. The national beer market may therefore be more relevant when analyzing the level of competition, and Figure 8.4 compares the development in owner concentration index at a global and national level in the period from 2008 to 2017. While the global concentration measured with CR1 and CR4 has increased in the period, the national concentration has not changed much, and the market share for the largest brewery, CR1, in the national market has even decreased. One reason why the national concentration of ownership has not changed in the period may be that it is already quite high, with an average 80 percent of the market share belonging to the four largest breweries. The countries’ national competition authorities would probably not approve any merger between the large local breweries, as it impairs local competition. However, a foreign purchaser not already present in the market can have an acquisition approved. Therefore,

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 ø  90 80 Market share %

70 60 50 40 30 20 10 0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 CR4 world

CR1 world

CR4 National

CR1 National

Figure 8.4 National development in concentration in the brewing industry in the period 2008 to 2017 Note: The calculation of the national concentration index is a simple average of the concentration index in the individual countries Source: Passport Database, Euromonitor International, 2018

many of the acquisitions have taken place across the national borders, leaving the national concentration unchanged, but increasing the global concentration. As the large breweries moved into the national markets, they may even have threatened the largest local breweries, explaining the decrease in CR1. For the globalization of ownership to pay off, it is important for the large breweries to roll out their main beer brand on a global scale, as this will increase the effect of their advertising. The sponsoring of sports activities at the highest level of football, ice hockey, and others allows them to reach out to a global audience of TV payers, which makes it necessary for the sponsored brand to be present on many regional markets in order to provide the beer demand and create a pay-off for the advertising. Levitt (1983) was probably the first to write about the trend of globalization of consumer brands, and Porter (1990) talks about a global village where consumer preferences have converged due to increasing communication across borders. Porter further puts emphasis on the concentration of production in local clusters, in which companies with critical local customers can develop world-class products with competitive advantages on the world market. This global village model was a good fit with a number of consumer products at the time, ranging from cars to electronic devices, fast food, personal care, and soft drinks. If Coca-Cola and Pepsi could go global with their brands, why should breweries not do the same? However, the beer market has not become a global village with global brands, according to Market Lines’ database of consumer data (which includes forty-seven large countries worldwide), as Table 8.1 verifies. Their database covers about 96 percent of total world beer consumption as reported by FAOstat (2014). Saudi

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Table 8.1 Market share of a selection of large beer brands in the period 2002–13 Brands AB InBev Bud Light Budweiser Stella Artois Skol SABMiller Carling Black Label Aguila Heineken Heineken Superior Carlsberg Carlsberg Baltika Tuborg Kronenbourg China Harbin Snow beer Tsingtao Yanjing All brand less China All including China

2002

2005

2008

2010

2012

2013

2.60% 1.98% 0.60% 1.77%

2.60% 1.91% 0.76% 1.93%

2.54% 1.73% 0.66% 1.87%

2.82% 1.80% 0.64% 2.10%

2.85% 1.80% 0.64% 2.25%

2.88% 1.81% 0.64% 2.28%

0.57% 0.68%

0.53% 0.64%

0.50% 0.61%

0.51% 0.63%

0.50% 0.66%

0.50% 0.67%

1.57% 0.51%

1.44% 0.53%

1.36% 0.55%

1.24% 0.56%

1.23% 0.56%

1.20% 0.56%

0.98% 0.73% 0.50% 0.52%

1.05% 0.82% 0.57% 0.49%

1.19% 0.88% 0.55% 0.39%

1.34% 0.76% 0.52% 0.36%

1.49% 0.73% 0.53% 0.35%

1.56% 0.74% 0.55% 0.35%

0.69% 1.83% 3.28% 1.62%

0.91% 2.80% 3.34% 1.95%

1.29% 4.01% 3.34% 2.66%

1.48% 5.07% 3.82% 3.11%

1.66% 6.05% 3.94% 3.41%

1.75% 6.25% 3.87% 3.52%

13.1% 20.43%

13.27% 22.27%

12.83% 24.13%

13.28% 26.76%

13.59% 28.65%

13.74% 29.13%

Note: Selection of brands with a global market share of at least half a percentage point in 2002 Source: Market Lines’ Database—Market Data Analytic, 2016

Arabia and the United Arab Emirates have insignificant consumption of beer products, and will therefore not be included in the time series analysis that follows. The market share of the main beer brands from the large breweries seems quite stable, with a share around 13 percent of the world market in the period. In the same period, the four largest breweries doubled their share of the global beer market to around 50 percent (Figure 8.2). Following the acquisitions, they were not successful in promoting their own main brand in the acquired market, and in this period the global brands’ share of the largest breweries’ income dropped from above 50 percent to around 25 percent (see also Stack, Gartland, and Keane, 2016, who find a very low internationalization degree of the top world beer brands). The missing globalization of large breweries’ main beer brand is especially related to the Asian markets, where they miss the fast-growing Chinese market. The four main beer brands in China now sell more beer than the twelve global

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brands from the four large breweries listed in the table. M&A in China has not been an easy road to travel due to state regulation and state ownership in strategic industries, which, surprisingly, included the breweries. However, after AB InBev had to sell 49 percent of Snow Beer to gain approval for its takeover of SABMiller in 2016, Heineken managed to buy 40 percent ownership of Snow Beer in 2018. Globalization of the beer brands in the period is also prevented by a strong local beer culture in which the regional brands have a high reputation among local consumers. When the wave of M&A took off around the turn of the century and the large breweries rolled out their main brands, it was not clear that beer consumers would stick to their local beer brands, for reasons previously cited. Most notably, in the soft-drink market, Coca-Cola and Pepsi gained a high market share after their global introduction.¹ McDonald’s and Kentucky Fried Chicken are similar examples from the fast-food industry. The lack of globalization of the beer brands makes the concentration of ownership less profitable due to reduced global marketing pay-off. Interbrew was probably the first brewery to recognize the difficulties of creating a global brand in the beer market. Stella Artois never really took off globally, as Table 8.1 verifies. Interbrew therefore changed its M&A strategy and kept the local brand. They let the local management stay in place, introduced an upgrade of the production technology, and enhanced the efficiency of their organization. Such decentralized management with independent national subsidiaries seems to have served Interbrew well in its efforts for global dominance of the market. Heineken and Carlsberg, with their global brands, were more exposed to global advertising and have looked for the advantages of using their acquisitions to grow their premium brands. Where the large breweries keep the acquired local brands in their brand portfolios, the result is a brand proliferation based on a regional segmentation of the market. Table 8.2 lists the number of brands for the four largest breweries in 2013, and the number correlates positively with firm size. However, looking at the Table 8.2 Number of brands and market share for the largest breweries in 2013 Brewery

Number of brand

World market share

# brand per market share

AB InBev SABMiller Heineken Carlsberg Total

57 52 69 36 214

20.05 11.98 9.88 5.53 47.44

2.84 4.84 6.98 6.51 4.51

Source: Market Lines’ Database—Market Data Analytic, 2016

¹ Their main brands “Coca Cola” and “Pepsi” have an average market share of 26.6 percent and 10.2 percent across 98 countries. Passport Database, 2019.

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number of brands per market share, Heineken and Carlsberg stand out with the highest degree of brand proliferation. Preferences for local beer are strongest in Germany, where the beer market has stayed highly fragmented even after most national beer markets became concentrated due to economies of scale in production and marketing after national broadcasting came into existence in the 1960s and 1970s (see Adam, 2006). However, the strong consumer preference for local beer brands in Germany seems to apply to the national level as well, where the national beer brands have resisted the globalization of beer branding, making Germany outstanding in beer consumption terms, with a strong regional beer preference. The preference for national brands seems to be very strong in many countries and this informal institution forms the basis of the large breweries’ proliferation of national brands. Governmental or regional policies to protect or support local production have reinforced the strong consumer preferences for local beer. Restrictions on advertising in magazines or television affect the consumer’s perception of national or global brands and protect local producers by reducing returns from economies of scale in marketing. Regulation of packing and production also aims to protect the local producer. The best known regulations are the German “purity” requirements, which also reduce the benefit of scale economics by increasing the cost of transportation and exclude competition from most foreign beers (Swinnen and Briski, 2017).

3. Structural Change in Consumption In addition to the dramatic changes in ownership concentration, the global beer market has also undergone a massive structural change in consumption since the turn of the century. Table 8.3 lists the world consumption of different types of beer, both in quantity consumed and in value of consumption, according to Market Data Analytics. Lager beer is the most popular type of beer, covering close to 90 percent of world consumption, with standard lager as the main type. Lager beer or pilsner beer is bottom-fermented at a low temperature, which makes the beer clearer compared with ale and stout, in which the top-fermentation makes the beer less clear but more strongly flavored. Premium lager usually has a higher alcohol content and is advertised by the breweries as a high-quality beer and sold at a price premium. Lager beer gained market share in the period 2000–16, as verified by a higher growth rate compared with the growth rates of ale and stout and specialty beer. Although low-alcohol beer has the highest growth rate, total consumption in 2016 was only 5.3 billion liters, representing 2.8 percent of the world market. Specialty beer is a craft-styled beer brewed in small-scale local breweries that emerged in the 1990s as so-called microbreweries that use a variety of brewing methods.

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Table 8.3 World consumption of different types of beer in 2016 and growth since 2000 Type of beers

Standard lager Premium lager Ales and stouts Specialty beers Low alcohol beers Total beer cons.

Quantity consumed (Bill liter)

Value of consumption (Bill USD)

2016

Freq. 2016

% 2000–16

2016

Freq. 2016

% 2000–16

139.7 30.6 5.7 9.0 5.3 190.3

73.4 16.1 3.0 4.7 2.8 100.0

55.6 31.8 14.6 27.8 108.0 49.2

335.8 143.8 23.7 47.4 18.0 568.7

59.1 25.3 4.2 8.3 3.2 100.0

53.9 45.1 16.2 42.8 110.9 50.0

Source: Market Lines’ Database—Market Data Analytic, 2016

However, specialty beer accounted for less than 5 percent of the world market in 2016 and has seen a declining share of the world market since 2000. For more details on the historic development of beer types, see Poelmans and Swinnen (2011), Persyn and Swinnen (2011), and Swinnen and Briski (2017). Table 8.3 also lists the value of beer consumption, which increased by 50 percent in the period; this percentage was almost the same as the increase in quantity consumed, which was 49.2 percent. This implies that on average, world retail prices of beer have been constant in the period and equal to 3.81 USD per liter. As US consumer prices increased 39 percent in the period, beer became relatively cheaper, which may explain part of the increase in consumption. The decline in the average retail price could be the result of a change in both the cost of production and the consumer tax, which is generally high for beer consumption and also varies greatly between countries (see Bamforth and Cabras, 2016). The main reason for the relative decrease in the average world price of beer is probably the fast growth of beer consumption in Asia, where the production costs of beer are considerably lower compared with those in Western countries. Table 8.4 shows the regional development in consumption for three types of beer after the turn of the century. In the period covered, beer consumption has decreased in Western Europe, remained stable in North America, but increased dramatically in developing and emerging countries, particularly for lager beer. Asia now alone consumes more than half of the amount of standard lager and a quarter of the amount of premium lager. The developing countries also have a higher growth rate of specialty beer, but this comes from a low level. North America and Western Europe still consume about three-quarters of the amount of specialty beer. The main factors behind this dramatic shift in beer consumption are the different rates of economic growth in the countries as well as the fast rise in living standards in the new emerging

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Table 8.4 Regional consumption of three types of beer in 2016 and growth since 2000 World regions

Africa & M. E. Asia South America North America Western Europe Eastern Europe All countries

Number of

Standard lager

Premium lager

Specialty beers

Countries

2016

% 2000–16

2016

2016

% 2000–16

% 2000–16

5

4.6

51.5

0.7

29.6

0.2

32.3

14 5

72.9 24.5

130.9 45.0

7.3 1.5

78.2 233.7

0.4 0.6

69.4 95.6

2

12.9

0.8

7.9

3.2

4.6

15.8

16

13.0

23.3

6.9

0.0

2.5

19.3

5

11.9

37.6

6.3

103.8

0.7

56.8

47

139.7

55.6

30.6

31.8

9.0

27.8

Note: Consumption measured in billion liters Source: Market Lines’ Database: Market Data Analytic, 2016

countries that can now afford higher consumption of beer. This picture confirms the positive income elasticity of beer and probably also the finding of significantly lower elasticity in developed countries (see Colen and Swinnen, 2011). To examine the effects of increased income on the different types of beer, we estimate the following equation (1) allowing for a non-linear relationship and with a log transformation of the variable. Qkjt is quantity consumed of the k type of beer in country j at time t. Gjt is GDP per capita in country j and Xjt is another controlling variable, while βk is the estimated income elasticity of the k type of beer and δk controls for income variance of the elasticity. Finally, λj is a fixed effect for countries picking up differences in drinking habits across countries and μkjt is the normal stochastic term. 2  LogðQkjt Þ¼ α þ βk LogðGjt Þþδk LogðGjt Þ þηk Xjt þλj þμkjt

ð1Þ

Table 8.5 shows the estimated elasticities from three regression models, building on equation (1), in the period from 2000 to 2016, where models 1 and 2 leave out the squared income variable. GDP per capita is PPP-corrected and downloaded from the Penn World Table 2016, and the estimation controls for the openness of the countries. The estimated income elasticities from the pooled regression in model 1 varies markedly in size between the different types of beer and is much lower for standard lager compared with the income elasticity of other types of beer, with the highest income elasticity of specialty beer. Controlling for country heterogeneity in model 2 by a fixed effect estimation reduces the estimated income

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Table 8.5 Income elasticities of different types of beer Type of beers

Model 1

Model 2

Model 3

Standard lager Premium lager Ales and stouts Specialty beers Low alcohol beers Total beer cons.

Pooled OLS βk 0.659*** 1.140*** 1.435*** 1.650*** 1.407*** 0.764***

Fixed effects βk 0.220*** 0.422*** 0.109*** 0.288*** 0.226*** 0.247***

Fixed effects βk 3.297*** 3.086*** 1.423*** 0.020 0.731 2.791***

δk 0.169*** 0.144*** 0.071*** 0.015 0.027 0.138***

Note: Three star for coefficient significantly different from zero at p < 0.01 Source: Market Lines’ Database: Market Data Analytic, 2016

elasticity dramatically, especially for ale and stout. This verifies a large crosscountry difference in beer-drinking habits, which are positively correlated with the income level of the countries. It also verifies a much higher within-country income elasticity of premium lager than of any of the other types of beer. The large cross-country differences in beer consumption between developed and developing countries have to be reflected in different sizes of the income elasticity. To study this, model 3 allows a non-constant elasticity, where the size of the income elasticity varies with the income level of the countries. The nonconstant income elasticity is highly significant for most of the beer types, except for specialty beer and low-alcohol beer, for which a constant income elasticity seems more adequate. The significant negative squared term verifies that the income sensitivity of beer consumption decreases with countries’ development. The income elasticity of standard and premium beer decreases over the relevant income levels (Figure 8.5), and the income elasticity of standard lager even becomes negative for income level above 19,000 USD per capita. The income elasticity of premium beer is still positive in developed countries and levels out with an elasticity of 0.5. The high income elasticities in emerging countries, together with a high growth rate in the period, explain the dramatic change in regional beer demand in Table 8.4 with fast rising demand in developing countries and stagnant or decreasing beer consumption in developed countries. The constant income elasticity of specialty beer reflects a shift from traditional lager beer to specialty beer in the developed countries.

4. Global Beer Branding Beer branding is an important competitive parameter in the marketing of beer. The large breweries spend around 15 percent of their sales income on promoting

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2

Income elasticity

1.5 1 0.5 0 1000

11000

21000

31000

41000

51000

61000

71000

81000

91000

–0.5 –1

Income per capita, USD Standard

Premium

Figure 8.5 Higher income elasticities in emerging countries for beer Table 8.6 Prices for different types of beer on the global market, 2016 World regions

Standard lager

Premium lager

Specialty beers

Ales and stouts

Low alcohol beers

Total beer cons.

Africa & M. E. Asia South America North America Western Europe Eastern Europe All countries

2.22 2.10 2.09 2.51 4.93 2.14 2.40

2.46 4.53 2.58 4.28 6.74 3.95 4.70

5.34 5.14 2.64 5.39 6.52 2.51 5.29

2.14 6.76 2.06 3.70 5.81 1.90 4.14

2.01 3.23 2.29 3.70 4.48 2.07 3.41

2.35 2.38 2.13 3.58 5.61 2.71 2.99

Note: Prices in USD per liter calculated as market value divided by market volume Source: Market Lines’ Database—Market Data Analytic, 2016

their beer on the market, and the industry ranks among the top advertisers in the consumer industries. The breweries focus their promotions on premium brands, which sell at a large price premium compared with standard lager selling at discount prices. Table 8.6 lists the average beer price for different types of beer in different regions: the prices vary greatly, and are significantly lower in emerging countries. The low price in emerging countries reflects lower production costs, and the high trading cost for beer reduces the international trade of beer and violates the law of one price. The price also varies across the different types of beer, with standard lager the cheapest and specialty beers the most expensive type. The higher prices for specialty beer and ale and stout may also be a result of higher production costs. Production normally takes place at small breweries where

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the beer is produced in small quantities and scale advantages are missing. However, lager beer constituted 89.5 percent of the quantity consumed worldwide in 2016, thereby offering excellent conditions for exploiting scale advantages by using mass production technology and distribution systems. This may be true for standard lager that sells at a very low price. Premium lager, on the other hand, is sold on average for almost double the price of standard lager. As the market for premium lager constitutes more than one-third of the total market for lager beer in developed countries, the scale advantages should still work and the price premium may be a result of the heavy branding of premium lager by the breweries. Whether premium beer is of higher quality is an open question. Beer is definitely not homogenous. There are big differences in taste, color, sweetness, bitterness, freshness, and so on. The heterogeneity is most pronounced for ale and stout and specialty beer, whereas the special brands of lager beer are much more homogenous. This probably explains why lager beer outcompeted the original top-fermented types of beer about 100 years ago, because consumers like its cleaner and fresher taste. The production processes of beer brewing are very old and have not developed much over time. The technology is therefore well known and brewing includes only a few raw materials, such as water, barley, hops, and yeast. However, brewing is a chemical process that is both complicated and difficult to control. The taste of the final product depends not only on the quality of the raw materials but also on the cooking time of the malt and hops, the temperature of the fermentation, and the lager time, among other parameters. Most breweries brew different types of beer, such as pilsner and lager, and the production costs do not vary significantly between these types. While the breweries have their own recipes for brewing the different types of beer, they normally do not manage and develop the technology of the brewing process itself. This is outsourced to special companies that deliver turnkey projects for a brewing plant. Therefore, the technology in the industry is available for all players and is not an entry barrier. Because the breweries use the same technology, the taste differences in beer are very moderate, and the recognition of brands is therefore not common in blind product tests within the same categories of beer. In their study, Almenberg, Dreber, and Goldstein (2014) used a triangle test in which three blind samples are presented to the subjects: two are identical and one contains a different beer. After testing all three samples, the subjects are asked to single out the one that is different, which should happen in more than 33 percent of cases, if taste differences exist. They use the method to verify whether beer consumers can differentiate different brands of beer within the same category. The experiment uses three well-known European lager beers: Czechvar from the Czech Republic, Heineken from the Netherlands, and Stella Artois from Belgium. Their main conclusion is that beer consumers are unable to distinguish between different European lager brands.

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While the actual product differences are quite insignificant, the differences in product quality revealed by the beer drinkers are very significant. Their perception of difference in quality is probably copied from other consumer goods, from which the consumer learns that he gets what he pays for. This is particularly true in the car market, where there are huge differences in quality and prices; it is also true for furniture and consumer electronics, to name a few examples in which we see significant differences in quality. This consumer price-quality perception of beer is most forcefully illustrated by McConnell (1968a,b), who undertook a controlled experiment of the branding effects in the American beer market. He made twenty-four home deliveries of sixpacks of beer over two months to a large sample of beer consumers. All the beers were identical, so there were no quality differences at all, but the beer consumers did not know this because the regular labels were removed and new labels added with three different prices corresponding to the average price of a popular, premium, and super-premium beer at that time. When assessing the quality of the beer, the panel ranked the high-priced beer as much higher in quality compared to the low-priced beer. One drinker even said about the brand he thought was cheap: “It would poison me—make me ill. I couldn’t finish the bottle.” This social cohabit of beer preferences among group members is also verified in a study of international students by McCluskey and Sanatan (2011). They conducted a survey of beer habits among international students in the United States, who came from different countries with quite different beer cultures. They found that the number of years in which the participants had been living in the United States had a positive and statistically significant effect on their preferences for US beer. Social groups often consume the same type of beer, and they are open to peer influence through advertising and branding of specific beer in relation to social activities, such as football. When consumers perceive the quality of beer by price signals, the implications for breweries are clear. By segmenting the beer market into premium and standard lagers by means of labeling the beer and setting a price premium for the highquality branded beer, breweries can get more value for money, which means they turn to marketing management in their business strategy. Figure 8.6 tracks the average price premium on the world market of different types of beer in percentages, compared with cheap standard lager. Specialty beer has the highest premium, of 120 percent, followed by premium lager, with a price premium close to 100 percent; these premiums have increased more than 20 percent in recent years. To a large extent, the price premium for specialty beer may reflect higher production costs in small scale craft and microbreweries. Easy access to the technology and knowledge of brewing makes entering the industry simple and keeps profit on the ground. In the case of premium lager, on the other hand, the production costs may be similar to those for standard lager, and the price premium may be a result of the branding effects. However, the price premium

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% Price premium

120 100 80 60 40

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0

2000

20

Year Premium beer

Specialty beer

Ales and stout

Low alcohol

Figure 8.6 Development in price premium for different types of beer Note: Price premium calculated as percentage price increase compared to price of standard lager Source: Market Lines’ Database—Market Data Analytic.

comes at a cost. Breweries have to invest heavily in advertising to compete on promoting their premium brands and to create a price premium and gain market share. Investment in brands is a sunk cost, which makes it risky for entrants to introduce a new brand. This limits the number of brands in the market and keeps the premium high.

5. Globalization and Market Power The market for premium beer had a value of 143.8 billion USD in 2016, and has grown 45 percent since 2000 (see Table 8.3). To keep the market growing and the price premium high, breweries have to invest in branding of the premium beer. Table 8.7 lists marketing and sales expenses for the eight largest breweries covering 61 percent of the world market for beer in 2012. SAB Miller does not mention its marketing and sales promotion expenses in its annual report, but the other seven breweries, accounting for 50 percent of the world market, spend 12.4 billion USD. Marketing and sales expenses as a share of revenue vary a lot between the breweries and the largest breweries, except Molson Coors and Yanjing, reduced their expenses for marketing and sales promotion as a share of their revenue in the period 2002–12. This may be a result of M&A activity, which created economy of scale advantages in marketing and sales costs for the largest, fast-growing companies in the industry in the period. See Madsen and Wu (2016) for a discussion of this effect.

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Table 8.7 World market share and marketing and sales expenses as share of revenue Company

AB Inbev SAB Miller Heineken Carlsberg Molson Coors Kirin Tsing Tao Yanjing Total Average

World market share

Marketing and sales expenses Billion USD

Marketing and sales cost Share of revenue

2012

2012

2002

2012

5.250

0.188

0.132

1.350 1.238 1.126 2.904 0.449 0.157 12.481

0.154 0.201 0.280 0.192 0.162 0.077

0.122 0.183 0.288 0.134 0.153 0.104

0.179

0.159

0.195 0.117 0.101 0.054 0.041 0.032 0.038 0.034 0.612 0.077

Note: Share of marketing and sales costs in net turnover. Data from Kirin begins in 2006 and there is no information for marketing in the annual report from SAB Miller Source: Cost share from companies’ annual reports and world market share from Market Data Analytics Database, 2016

Figure 8.7 tracks the development in world market share of the eight largest breweries and the development in their EBIT and marketing and sales cost. The dramatic restructuring of the industry has increased owner concentration and doubled the breweries’ share of the world market from 30 percent to 65 percent in the period. The reduced competition makes it easier for the breweries to collude on a high-price scenario and a low marketing and sales cost scenario. The increasing price premium of more than 20 percent and the increased EBIT share of more than 30 percent in the period could be a result of reduced competition in the world markets. Further, the breweries have an interest in reducing marketing and sales costs, as a large part of these costs represent a kind of cannibalism between the breweries: when all breweries use marketing and sales efforts, the market shares do not move much. This cannibalism effect enlarges the scale effects on the marketing and sales costs of larger breweries previously mentioned. While the development in profit and promotion fits a strategy of greater collusion between the large breweries in the period, it is not clear how this collusion emerged. As discussed previously in relation to Figure 8.4, the global concentration of ownership in the brewing industry has not generally affected the national concentration of ownership, and therefore the breweries’ market power at an aggregate level. Further, the concentration of brands seems unaffected by the high M&A activity. However, even though the aggregate level of national

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% share

50 40 30 20 10 0

2002

2003

2004

2005

2006

Marketing share

2007

2008

2009

Market share

2010

2011

2012

Ebit share

Figure 8.7 Development in concentration, marketing share and EBIT share Note: Share of marketing and sales costs in net turnover. Data from Kirin begins in 2006 and there is no information for marketing in the annual report from SAB Miller. EBIT calculated as sales revenue minus production, distribution, marketing and sales costs Source: Cost share from companies’ Annual Reports and world market share from Market Data Analytics Database, 2016

concentration does not change over the period, there exist large national variations in concentration between the countries, and the question is where these differences in national market power are reflected in the national prices of the branded beer. Table 8.8 shows the development in CR4 and CR1 from 2008 to 2016 for a number of countries; the concentration of ownership varies greatly between countries, with Germany at the bottom, with the most dispersed ownership. The simple average of the national concentration in ownership has not changed much in the period, and CR1 even dropped. However, there are still significant changes in the national concentration, with a large increase in China, Portugal, and Singapore. Analyzing how these differences in the size of and development in the national concentration affects beer prices, we focus on the prices of the branded lager beer and measure the price premium for branded lager relative to standard unbranded lager beer in percentage points. Equation (2) estimates the effects from concentration on the price premium for branded lager using OLS and fixed effects methods: Pjt is the percentage price premium in country j, CR4jt and CR1jt are a 4 and 1 firm concentration ratio, and Xjt is a vector of covariance. The estimation uses a log transformation of the concentration and covariate variables, making the interpretation of the coefficient easier. Pjt ¼ α þ β1 CR4jt þβ2 CR1jt þβ3 Xjt þìt

ð2Þ

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Table 8.8 Development in market concentration in a number of countries from 2008 to 2016 Isocode

AUS AUT BEL BRA CAN CHN CZE DNK ESP FIN FRA GBR GER HKG HUN IRL ITA JPN KOR MEX NLD NOR NZL POL PRT RUS SGP SWE THA TUR USA VNM ZAF All

CR 4

CR 1

2008

2016

Change

2008

2016

Change

85.6 74 68.4 96.6 83.9 53.5 77.2 77.5 75.1 90.8 70 69.7 34.6 36.2 83.3 67.8 67.1 58.5 96.2 94.9 76.9 81.7 75.8 88.9 48.9 76.8 34.8 70.5 93.9 98.3 71 80.9 89.6 78.66

80.5 77.1 72.3 96.6 83.7 68.9 77.3 78 76.6 80.5 76.5 71.2 34.9 63.2 82.6 69.6 65.9 56.1 89.4 98.4 76.3 75 89.6 84.6 87.7 69.1 74.3 70.6 97.9 98.6 82.7 88.5 91.7 82.55

5.1 3.1 3.9 0 0.2 15.4 0.1 0.5 1.5 10.3 6.5 1.5 0.3 27 0.7 1.8 1.2 2.4 6.8 3.5 0.6 6.7 13.8 4.3 38.8 7.7 39.5 0.1 4 0.3 11.7 7.6 2.1 3.89

46.4 53.7 52.2 64.3 43.1 17.8 46.1 62.3 32.3 40.5 32.8 19.1 12.2 16.8 27.4 23.1 29.8 36.7 56.7 59.5 43.6 49.8 43.3 40.2 36.7 38 19.5 30.4 50 86.1 50.6 47.1 77.1 48.09

43.2 56.5 52.2 63.4 45 25.7 46.1 52.7 30.7 34.1 32.6 20.1 12.8 30.3 32.8 26.3 28.3 35.9 52 57.5 40.1 46.3 41 36.1 43.4 34.9 42.9 29 51.2 58 44.1 41.9 72.9 47.6

3.2 2.8 0 0.9 1.9 7.9 0 9.6 1.6 6.4 0.2 1 0.6 13.5 5.4 3.2 1.5 0.8 4.7 2 3.5 3.5 2.3 4.1 6.7 3.1 23.4 1.4 1.2 28.1 6.5 5.2 4.2 0.49

Note: The calculation of the national concentration index is a simple average of the concentration index in the individual countries Source: Passport Database, Euromonitor International, 2018

Table 8.9 shows the estimation results of three different models. Model 1 is a pooled OLS regression and models 2 and 3 correct for country heterogeneity by using fixed effects for countries. Further, the estimation control for the market size is measured with the quantity of specialty beer, lager beer, and branded lager beer, which may be supposed to be covariates to the price premium.

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Table 8.9 Influence of national owner concentration on the price premium for branded lager Model 1

Model 2

Model 3

Dependent variable: Price premium Constant CR4 CR1 Market size of specialty Market size of lager Market size of branded R square Observations

0.1091 0.1006 0.1600*** 0.0150*** 0.0802***

Fixed effect 0.0293 0.0443 0.1142*** 0.0797***

0.1555 405

0.9824 405

Fixed effect 0.0056 0.0216 0.1013*** 0.2755*** 0.2030*** 0.9840 405

Note: Three stars for a coefficient indicates significant difference from zero at p < 0.01 Source: Passport Database, Euromonitor International, 2018

The market size of specialty beer has a significant negative influence on the price premium for branded lager beer, which verifies that the new craft beer is a substitute for branded lager beer and serves the same segment of beer consumers. The market size of lager beer has a positive effect on the price premium in all three models and the market size of branded lager introduced in the last model has a negative effects. The effects of ownership concentration are mixed. The CR4 is not significant, but CR1 is highly significant with a negative effect on the price premium in model 1. However, looking at within-country estimation effects of concentration in models 2 and 3, both concentration measures are insignificant. Interpreting this estimation is tricky and it may be open to discussion. The negative market-size effect for branded beer can be a result of more competition in a larger market where there is space for more brands. The positive market size effect for lager beer may pick up the potential advantages of a large lager market for branding of a premium beer. The significant negative effect of CR1 in the cross-country regression could be a result of potential competing entrants in a national market dominated by one large brewer, who then loses market share. However, the within-country estimation shows no effects on the price premium of concentration measures in models 2 and 3. The limited period available for the estimation may make it difficult to find a significant effect from concentration of ownership. Further, the question is where the national market is the right geographic marketplace for an analysis of the collusion among the large breweries. Cross-border M&A has increased the global concentration of ownership, with the implication that the large breweries meet each other in several national markets. When the large breweries more often meet face to face in national markets with their national or local brands, they have to consider the reaction of the other large breweries when they decide on their

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marketing strategy. This opens the possibility of spillover effects of competition strategy between the national markets, where the large breweries collude across the national borders: “If you avoid an aggressive marketing and price strategy in my main markets then I will do the same in your main markets.” Bernheim and Whinston (1990) analyzed the effects of multimarket contact on the degree of cooperation between the firms. They examine the collusive behavior in a variety of formal models and find that the contact has real effects on the market outcome, as the firm accommodates the competitor’s reaction in other markets when they choose their marketing strategy. Hughes and Oughton (1993) examine multimarket contacts in the UK manufacturing industry in 1979 and estimate the effects on price–cost margin when diversified firms meet in several markets. They find the effects on profit from an index of the firms’ product diversification to be more important than effects from the traditional measure of market concentration. These collusion results from diversified firms may apply to the brewing industry as well when the large breweries meet in several national markets. Even though the national concentration of ownership has no effect on the price premium of branded lager, there can exist a price effect of the large breweries’ price collusion following the M&A strategy and the resulting multimarket contact. Table 8.10 takes a closer look at the regional market for premium lager in 2016 and the development of the prices premium for branded lager since 2000. Assuming the breweries have the same production costs in producing premium beer as in producing standard lager beer, we have made a rough calculation of the size of the price premiums in the regional markets in the period from 2000 to 2016. The main market for premium lager in 2000 is in Western Europe, followed by North America, Asia, and Eastern Europe. However, conditions have been tough for the breweries in Western Europe with a low and decreasing price premium in the period. Part of the reason for the low premium is the high beer taxes in many of the Western European countries. The high excise tax on beer reduces the size of the relative price premium. Moreover, the excise tax also increases the price elasticity for the breweries, which makes a price increase less profitable. This makes collusion among the breweries at a high price level less likely and can contribute to an explanation for the low and decreasing price premium in Western Europe. However, there is a large increase in the price premium in North America and Eastern Europe, amounting to an average 26 percent increase of the premium in the global markets. As the changes in national concentrations of ownership cannot explain the large global increase in the price premium of branded lager beer, then a possible explanation is the increase in the large breweries’ global market power following cross-border M&A in the period. The large increase in the price premium also takes place despite growing competition from the microbreweries, which we find to have a moderating effect on the price premium. Further,

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Table 8.10 Development of the price premium for branded lager beer, 2000–16 World regions

Africa & M. E. Asia South America North America Western E. Eastern E. All countries

Market size 2000 Branded lager Billion USD

Price premium Percent 2000

2016

1.0 18.7 1.1 29.6 42.0 6.7 99.1

13.8 106.6 36.6 46.3 47.4 57.2 75.6

10.7 116.1 23.6 70.2 36.9 84.4 95.3

Change in premium Percent 22.6 8.9 35.6 51.7 22.2 47.5 26.1

Note: Prices in USD per liter and calculated as market value divided by market volume. Price premium calculated as percentage price increase compared to the price of standard lager and market size measured with quantity sold Source: Market Lines’ Database—Market Data Analytic, 2016

the existence of a global market power effect is supported by the fact that the large breweries have reduced their investment in advertising in the period, amounting to a 15 percent decrease in marketing and sales costs for the eight largest breweries (see Madsen and Wu, 2016). The national competition authorities do not take account of market power arising from transnational collusion, with the exception of members of the European Union, where the European Commission has to approve cross-border M&A within the EU. This opens a door to global market power for the largest breweries. By acquiring breweries in their competitors’ home markets, they can manage to modify their competitors’ price and marketing strategies.

6. Push and Pull Effects behind M&A Besides the global market power effect of the cross-border M&A strategy, countries’ different market conditions affect the breweries’ M&A strategies too. The most aggressive breweries behind the wave of M&A in the period were breweries with headquarters and their main market in Western Europe, a stagnant market with tough competition and a low and decreasing price premium for branded lager. These market conditions may have pushed or pulled the breweries into other and more profitable markets, and/or markets with more growth opportunities for the branded lager beer. Table 8.11 shows the regional development in the demand for branded lager beer from 2000 to 2016, where growth has been large in the emerging economies. The large increase in consumption of branded lager beer in emerging markets represents strong pull forces and the large breweries have rushed to acquire local breweries in Asia and Eastern Europe. The increase in both the price premium and consumption was based on fast economic development, with a growing middle class

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Table 8.11 Development in sales of branded lager beer, 2000–16 World regions

Africa & M. E. Asia South America North America Western E. Eastern E. All countries

Market size 2000 Branded lager Billion USD

Quantity sold Thousand liters 2000

2016

1.0 18.7 1.1 29.6 42.0 6.7 99.1

520 4,111 463 8,118 6,892 3,126 23,230

674 7,324 1,545 7,861 6,852 6,370 30,625

Change in quantity sold Percent

29.7 78.2 233.4 3.2 0.6 103.8 31.8

Source: Market Lines’ Database—Market Data Analytic, 2016

in these countries who want and can afford to pay for the branded products. The emergence of the large Western breweries, and their marketing strategies, in these countries probably also contributed to higher income elasticity for branded beer. The world market for branded lager beer grew from 99.1 billion USD to 143.8 billion USD in the period from 2000 to 2016 and the large breweries captured a large part of this market through their M&A strategy. If the production costs are the same for branded lager and standard lager, then the total price premium earned on branded lager beer in the global market was 70.4 billion USD in 2016. Of course, this premium comes with a cost for marketing and sales efforts to brand the premium beer. The marketing and sales expenses for the seven largest breweries amounted to 12.4 billion USD in 2012, covering 49.5 percent of the world market. If the smaller breweries use the same amount on marketing and sales efforts, total expenses would amount to 24.8 billion USD, which would still leave the breweries with a high pay-off of marketing investment. However, the smaller breweries probably have a lower share of the premium market for lager beer and invest less in branding, making the return on branding for the large breweries even larger. The acquisition of local breweries also comes at a cost, as the acquirers have to pay a premium to the owner of the acquired breweries. The acquisitions therefore load the acquirer with goodwill capital on their balance sheet, and it has to be served by interest payment on the additional debt. For the largest breweries, the higher EBIT on their sales is matched by higher capital cost and leaves the return on equity unchanged (see Madsen et al, 2012). However, the acquisition strategies have placed a larger part of their business in a growing market, and in the long run that may pay off for the shareholder too.

7. Conclusion The liberalization of trade turned on a wave of cross-border M&A after the turn of the century that has increased the concentration of ownership dramatically in the

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global beer market, where the four largest breweries now serve close to 60 percent of the market. This chapter looked at the motivation behind these changes in corporate ownership and the pay-off for the breweries and their owners. Based on a database of prices and consumption of different types of beer, the chapter studied development in the global beer market after the turn of the century. While the ownership concentration increased dramatically in the global beer market, concentration in the national beer market was on average unchanged. The M&A strategy also left the concentration of the global beer brands unchanged, revealing a strong consumer preference for local beer brands, and the large breweries now have a sizeable portfolio of local beer brands. The homogeneity of the main lager beer is very high, and the beer is produced at low cost in large-scale plants. However, the breweries spend a large amount of money promoting some of the lager beer as premium beer, and as consumers perceive it as high-quality beer, they are willing to pay a high price premium for the branded beer. We estimated the price premium for branded beer and related it to the rapid change in the ownership structure of the beer market. We found no effects on the price premium from changes in the national concentration of ownership. However, the price premium has increased by 26 percent in the period under study, leaving the increase in global ownership and the global market power as an explanation. The cross-border acquisitions mean the large breweries meet each other in several markets, leading to multimarket collusion for less aggressive price competition. This is further strengthened by the fact that they have reduced their marketing and branding expenses in the same period. The analysis also points to push and pull effects as a motivation behind the large breweries’ M&A strategies in the period. Due to a low price premium and low growth of the premium lager market in the home countries, the breweries were pushed and pulled to invest in emerging economies with higher return prospects. The increase in concentration of global ownership and the resulting collusion among the large breweries have increased the price premium of branded beer and at the same time reduced the breweries’ expenditure on branding of the premium beer. Part of this gain from the acquisitions may have been handed over to the owner of the acquired breweries.

References Adams, W. J. 2006. Beer in Germany and the United States. Journal of Economic Perspectives, 20, pp. 189–205. Almenberg, J., Dreber, A., and Goldstein, R. 2014. Hide the Label, Hide the Difference? Wine Economics, AAWE Working Paper no. 165. Bamforth, C. and Cabras, I. 2016. Interesting Times: Changes for Brewing, in Cabras, I., Higgens, D., and Preece, D. (eds), Brewing, Beer and Pubs—A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 15–33.

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Bernheim, B. D. and Whinston, M. D. 1990. Multimarket contact and collusive behavior. RAND Journal of Economics, 21 (1), pp. 1–26. Colen, L. and Swinnen, J. 2011. Beer-Drinking Nations: The Determinants of Global Beer Consumption, in Swinnen, J. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 3–28. FAOstat, 2014. Statistics of the Food and Agriculture, Organization of the United Nations. Hughes, K. and Oughton, C. 1993. Diversification, multi-market contact and profitability, Economica, 60, pp. 203–24. Levitt, T. 1983. The globalization of markets. Harvard Business Review, 61 (3), pp. 92–102. Madsen, E. S. and Wu, Y. 2016. Marketing and Globalization of the Brewing Industry, in Cabras, I., Higgens, D., and Preece, D. (eds), Brewing, Beer and Pubs—A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 34–53. Madsen, E. S., Pedersen, K., and Lund-Thomsen, L. 2012. Effects of the M&A wave in the global brewing industry 2000–2010. German Journal of Agricultural Economics, 61 (4), pp. 235–43. McCluskey, J. and Sanatan, S. 2011. Culture and Beer Preferences, in Swinnen, J. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 161–70. McConnell, J. D. 1968a. The development of brand loyalty: An experimental study. Journal of Marketing Research, 5, pp. 13–19. McConnell, J. D. 1968b. The price-quality relationship in an experimental setting. Journal of Marketing Research, 5, pp. 300–3. Persyn, D. and Swinnen, J. 2011. Where History Meets Globalization in Swinnen, J. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 3–28. Piron, E. and E. Poelmans, 2016. Beer, the Preferred Alcoholic Drink of All? Changes in the Global and National Beer Consumption Since 1960 and Convergence and Trends since the 1990s in Cabras, I., Higgens, D., and Preece, D. (eds), Brewing, Beer and Pubs—A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 205–27. Poelmans, E and J. Swinnen, 2011. A Brief Economic History of Beer in Swinnen, J (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 3–28. Porter, M. E., 1990. The Competitive Advantages of Nations. The Free Press, New York. Stack, S., Gartland, M., and Keane, T. 2016. Part Dependency, Behavioral Lock-In for Beer in Cabras, I., Higgens, D., and Preece, D. (eds), Brewing, Beer and Pubs—A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 54–73. Swinnen, J. and Briski, D. 2017. Beeronomics—How Beer Explains the World, Oxford University Press, Oxford.

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9 Industry Concentration and the Entry of Craft Producers into the Global Beer Market Christian Garavaglia and Johan Swinnen

1. Introduction Craft brewers and their customers have transformed the global beer markets over the past two decades. They ended a century of consolidation of breweries, which had resulted in the domination of a few global multinationals, and the homogenization of beer. Their counter-revolution against the domination of the macrobrewers and their uniform beer styles has totally transformed the global beer scene. This chapter documents and explains this transformation, providing key insights that derive from a comparative analysis of the craft beer developments and the beer industry transformation in the various countries. Our discussion starts by defining craft beer. We then document and explain the consolidation in the traditional brewing industry which preceded the craft revolution. Afterward, we document when the craft beer movements started in the various countries and how they have evolved. The last part of the chapter concentrates on the role of governments, who have influenced the craft beer market through regulations, and the macrobrewers’ reaction to the growth of the craft breweries.

2. A Definition of Craft Breweries Given the diversities among countries and their different historical traditions in beer brewing, there is no generally accepted definition for the term “craft beer” or “craft brewery.” Garavaglia and Swinnen (2018) review definitions and present a classification in four categories. Real craft refers to specialty beers brewed by a

Christian Garavaglia and Johan Swinnen, Industry Concentration and the Entry of Craft Producers into the Global Beer Market In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0010

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small and independently owned brewery.¹ Many of those beers have since grown in market size, and with this, the breweries have grown. This growth can occur as the brewery itself grows but still stays independent. One could refer to this as big craft. In quite a number of cases, craft breweries have then been taken over by mass brewers. One could refer to this as ex-craft. A fourth category is craft-style beers, which are beers produced and launched by macrobrewers. Unavoidably, to some extent this will remain a subjective issue and open for interpretation. However, what is clear is that some craft beers/breweries are more craft than other craft beers/breweries. Contract brewing has also played a role in the emergence of craft beers in many countries. Contract brewing occurs when brewers who do not own their own equipment and premises for producing beer contract other breweries to brew for them. Contract brewing has been used by start-up brewers to overcome entry costs and financial constraints. These brewers have been referred to in sometimes exotic ways, including “gypsy brewers,” “phantom breweries,” and “cuckoo breweries” (Weiner, 2014; Dann, 2015).

3. Industry Concentration and Product Homogenization in the Global Beer Market, 1900–1980 A long period of consolidation and homogenization in the global beer industry started in the late nineteenth century and lasted for most of the twentieth century. Breweries merged, were acquired, went bankrupt, or just stopped producing. In the United States, the number of macrobreweries fell from 421 in 1947 to only 10 by 2014. In Belgium, the number of breweries declined from more than 3,000 in 1900 to around 1,500 in 1930, continuing to fall to 143 in 1980. The evolution of the English market displays similar dynamics: the share of the top five firms increased from 18 percent in 1954 to 55 percent in 1979, and a few beer styles (both lager and a few mass-produced English ales) dominated an increasingly homogenized market (Cabras, 2018; Gourvish and Wilson, 1994). The reasons for this consolidation are well known now by now (Clemons et al., 2006; Swinnen, 2011; Tremblay and Tremblay, 2005).² The introduction of

¹ The vast majority of “traditional and innovative” beers started out as being brewed by a “real craft” brewery but not all. For example, in the US, Blue Moon was developed at a small scale by Coors. In Belgium some surviving smaller lager brewers reinvented themselves in the 1990s and 2000s as craft brewers by launching new beers. ² Elzinga et al. (2015) and Tremblay and Tremblay (2005) discuss reasons for the decline in numbers and the increase in plant size of the surviving macrobrewers See also Gokhale and Tremblay (2012).

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bottom-fermented beers in the last part of the nineteenth century, in combination with technological innovation—automation of the beer production process; the acceleration of packaging; a more automated brewing, fermenting, and conditioning process; better distribution through improved road networks, and so on—led to greater economies of scale (Adams, 2006; Gourvish, 1994). This caused larger breweries to grow and smaller breweries to exit the market. In several countries that were involved in World War I or World War II, this process was reinforced by equipment confiscation during the wars and shortage of capital, which induced many breweries to either quit or merge with larger breweries because of the investments that were necessary for re-equipment and modernization of the breweries (Poelmans and Swinnen, 2011). A last contributing factor was the spread of large-scale advertising since World War II, which led to an escalation of sunk advertising costs, which could only be paid by larger breweries (Sutton, 1991; George, 2009). After World War II, the effectiveness of mass advertising was enhanced by network television. In 1950, only 9 percent of U.S. households had a television set, a number that rose to 88 percent in 1960 and 96 percent in 1970. The growing popularity of television gave a marketing advantage to large brewers who had a scale of operation (in terms of output and geographic availability) that enabled their beer to be advertised on commercial television (George, 2011). This process started more recently in Europe—which was dominated by public TV channels until the 1980s—with the spread of advertising on commercial TV channels. Globally, mergers and acquisitions strongly contributed to a dramatic consolidation of the beer industry in the 1990s and 2000s. This was most dramatically demonstrated in Eastern Europe, where, after the collapse of the communist regime in 1989, the privatization of previously state-owned breweries led in the 1990s to the takeover of local breweries by multinational brewers such as AB Inbev,³ Heineken, and Carlsberg (Van Herck et al., 2012; Fertő et al., 2018; Chlebicka et al., 2018; Pokrivčák et al., 2018). This global process resulted in global multinationals which dominated the world beer market: AB Inbev, SABMiller, Heineken, and Carlsberg. As a consequence, globally, beers became more standardized and homogeneous.

4. The Growth of Craft Beer The craft beer revolution started first in the markets where consolidation was more extreme. Elzinga et al. (2018) identify the start of the craft beer movement in the United States, when Fritz Maytag bought the Anchor Brewing Company of ³ Most of the take-overs were done by Belgian company Interbrew which later merged with Ambev and Anheuscher-Busch to form AB Inbev.

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San Francisco in 1965. In the United Kingdom, the origin of the craft beer movement is typically associated with the emergence of the CAMRA association during the 1970s. Van Dijck et al (2018) identify the start of the craft beer revolution in the Netherlands in 1981, when the first new brewery since World War II was founded (De Arcense Stoombierbrouwerij). Also in Australia, craft brewing started around 1980: Sammartino (2018) documents how the start was slow in the first half of the 1980s but clearly picked up with several new craft brewers entering the market in the second half of the 1980s. In the United States, the United Kingdom, and the Netherlands, the total number of breweries was at its lowest point around 1980. In those countries the decline in macrobreweries was more than compensated by the growth in craft breweries from the 1980s onwards. In the United States, the number of craft brewers (thirty-seven) exceeded the number of macrobrewers (thirty-four) for the first time in 1985. Since then the total number of brewers has grown to reach more than 7,000 in 2018, the vast majority of which are craft-type breweries. Craft brewing started later in traditional wine countries. For example, Garavaglia (2018) reports that the first brewpub in Italy started in 1988, and Garavaglia and Castro (2018) identify the start of the pioneer craft beer producer in Spain in 1989. However, the spread and success of craft brewing in these countries occurred later, in the late 1990s or the beginning of the 2000s in Italy and after 2010 in Spain. In Portugal, the advent of craft brewing occurred even later. It is more difficult to identify the start of craft brewing in Belgium and Germany. In Belgium, the origin of the current movement can also be traced back to the 1970s, although in a way, Belgium has to some extent always been a “craft beer nation” (Swinnen and Briski, 2017). In Germany it is even more difficult to classify the beginning of craft beer, given the historical presence of small and local producers (Depenbusch et al, 2018). However, in both countries there can be found a clear time period when new, mostly smaller, breweries started producing new specialty beers. A good indication of the take-off of the craft beer sector is the number of breweries. In all countries, the number of breweries declined during much of the twentieth century. It is only when new craft breweries start in the part of the century that the number of breweries increases again. Figure 9.1 illustrates the evolution of the number of breweries for which data were available (United States, United Kingdom, Germany, Belgium, Italy, and the Netherlands) over the period 1930–2017. Figure 9.1 clearly documents the continued decline in the number of breweries for most of the twentieth century, due to consolidation and bankruptcies in the mainstream beer industry, and a growth in the number of breweries in more recent years, due to the growth in craft brewers. In Germany and Belgium, the growth in the number of breweries in recent years is much lower than the decline in the pre-1980 period. Moreover, the low point of the curve (i.e. when the number of breweries was at its lowest) was also

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    

7000 6000 5000 4000 3000 2000 1000

1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

0

Belgium

Germany

Italy

Netherlands

United Kingdom

United States

Figure 9.1 Number of breweries, 1930–2017 (selected countries) Source: Garavaglia and Swinnen (2018)

significantly later in Germany and Belgium and the growth in the number of breweries since has been much less dramatic than in, for example, the United States, the United Kingdom, or the Netherlands. Germany and Belgium are also countries which had a relatively low level of concentration in the beer industry in the late twentieth century. They had (by far) the highest number of breweries per capita in the 1980s—17.4 (Germany) and 14.5 (Belgium) per million people, compared to less than 1 in the United States, the Netherlands, and Italy, and less than 3 in the United Kingdom. These observations are consistent with the argument that the emergence and growth of the craft breweries are strongly linked to the consolidation in the traditional brewing industry. This argument finds evidence and further support also in Figure 9.2, which reports the evolution of the number of breweries per capita in selected countries from 1980 to 2017. In 2017 the number of breweries per capita in the United Kingdom and the Netherlands was higher than in Belgium or Germany, a clear reversal of the situation in the 1980s and 1990s. Depenbusch et al. (2018) provides further evidence of the correlation between industry concentration and the rise of craft breweries by studying different regions in Germany: using regional data, they find there is a positive correlation between the emergence of new craft breweries and the overall beer industry concentration at the regional level. In Belgium, the survival of smaller breweries is probably due to different reasons than is the case in Germany (there was no protection against competition due to standards such as the Reinheitsgebot, as in Germany). Their survival is

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50 45 40 35 30 25 20 15 10 5 0

1960 Belgium

1970 Germany

1980

1990

Italy

Netherlands

2000

2010

United Kingdom

2017 United States

Figure 9.2 Evolution of the number of breweries per capita, 1980–2017 (selected countries) Source: Garavaglia and Swinnen (2018)

probably associated with the large diversity of traditional beers, which provided niche markets for many small breweries (Swinnen, 2017; Poelmans and Swinnen, 2018). These dynamics mean that the number of breweries per capita is vastly different today than in the 1980s.

5. Growing Opportunities for Craft Beers The demand side of the beer market changed significantly from the 1970s onwards. In traditional beer markets (such as Belgium, Germany, the United Kingdom, and the United States), per capita beer consumption has declined over decades (Colen and Swinnen, 2016). So the growth of craft beer has occurred despite the shrinking overall beer market in these countries. There are several reasons for the growth of the craft beer market. In particular, in the following we discuss the role of: (1) increasing demand for a greater variety of beer styles; (2) growth in the income of beer consumers; (3) the organization of consumers in associations focused on experiencing and disseminating information about different beers; (4) pioneering entrepreneurs; and (6) the development of markets for technology and capital. (1) Demand for variety: consumers value not only the price and quality of certain products, but also variety. As consolidation took place in the

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macrobrewery sector, craft brewers began to enter the market by filling product niches left empty because of the homogenization of macro beer. A related factor is the increased interest of consumers (and society as a whole) in local products, environmental and sustainability considerations, and a rising sentiment against globalization (and products from giant and multinational firms). This changing attitude (captured sometimes by the term “neo-localism”) shaped people’s consumption of food.⁴ The change in consumers’ preferences and lifestyle typically leads to a market for new products, which often starts as a niche in the market but may grow later. New products (or more variety) can either come from domestic producers or from imports (or both).⁵ In some countries, imports played an important role in stimulating consumer demand for beer variety. Swaminathan (1998) finds that the entry of new craft breweries into the United States was correlated with the growth in demand for imported beers, which helped to stimulate the appreciation of new beer tastes among US consumers. Elzinga et al. (2018) also emphasize the relationship between beer imports and the growth of the domestic craft beer market. (2) Increasing income: craft beers are typically more expensive than standard lager beer. Not surprisingly, studies show that high-income consumers are more likely to buy craft beer (Elzinga et al., 2015; Gómez-Corona et al., 2016; Murray and O’Neill, 2012). Craft beer generally commands a price premium over the import, super-premium, and premium categories of beer, making it less affordable for low-income or high-consumption beer drinkers. Higher incomes not only stimulate an increase in demand for more expensive products but also stimulate demand for more variety.⁶ (3) Peer effects: consumers’ purchase decisions are often influenced by their environment, social pressures, and their peers (Nicosia and Mayer, 1976; Nelson and Consoli, 2010). Food and beer consumption are not an exception. Deconinck and Swinnen (2016), for example, show how peer pressure played an important role in the dramatic growth of beer consumption in

⁴ Through consumption of food, as well as other consumer goods, individuals aim at satisfying their needs: individuals use products to express who they are and consumer-product relationship reflects crucial life themes and identity concerns (Fournier, 1998). In this sense, consumers needs and values are “deflected” into consumption activities (Nicosia and Mayer, 1976). ⁵ The growth of the California wine industry has also similar characteristics. Delacroix and Solt (1988) claim that the entrants in the wine industry in California were driven by a niche formation process. Swaminathan (1995) shows in the American wine industry between 1941 and 1990 that a gradual shift in consumer demand was initially satisfied by an increasing imports of differentiated wine from continental European countries and in addition by the entry of microwineries which started to produce specialized products. ⁶ For example, Chai and Moneta (2012) and Chai (2011) empirically investigate these effects and show that as household income rises, total household expenditure is distributed across different goods in an increasingly even manner, and over time there has been an acceleration in the rate at which household expenditure patterns become diversified as household income rises.

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Russia in the 1990s. In several countries, consumers’ associations were created in order to mobilize craft beer enthusiasts. The role of consumers’ associations and communities has been relevant in contributing to the development of craft beer for at least two reasons. On the one hand, consumers’ associations stimulated the activity of the first entrants into the craft beer segment, sustaining a demand for specialized products over mass-produced beer. On the other hand, consumers’ associations often promoted the homebrewing activities which played an important role in the experience of the first entrepreneurs. A well-known example of a consumers’ association is probably CAMRA, the Campaign for Real Ale, in the UK (Cabras, 2018). The success of CAMRA in the UK inspired similar organizations in other countries. For example, in the Netherlands a group of Dutch beer enthusiasts organized the association PINT, whose goal was “to make beer culture important again in the Netherlands” by supporting the production and consumption of traditional beers (Van Dijk et al., 2018). (4) Pioneers and entrepreneurs: various studies document how the first craft breweries were started by pioneer entrepreneurs. Often, the first entrepreneurs were in some way associated with existing breweries, where they developed knowledge and skills in brewing. Another factor was that the old breweries provided the new entrepreneurs with an establishment in which to start brewing. In many countries, the pioneers’ inspiration to start craft breweries also came from experiences in foreign countries or contact with other beers when they traveled in a foreign country with a tradition in brewing. Inspiration was important not only for the pioneers but also for the next waves of craft brewers. They often directly visited the pioneer breweries and picked up the fervent enthusiasm of the first entrepreneurs. These thus inspired the establishment of later generations of craft brewers. (5) Developing technology and capital markets: the growth of the craft sector and the entry of increasing amounts of small brewers was enhanced by the growing availability of technical equipment which allows the production of batches on a small scale. The maturation of the market for capital equipment used in the brewing process has facilitated the entry and expansion of craft brewing everywhere. Access to capital is a similar story. In the infancy of craft beer, entrepreneurs faced major difficulties in financing their brewery. In later stages of the craft market development, and as craft brewing revealed itself to be a profitable business, new sources of financing developed and supported the start-up of new craft breweries. Banks became more and more familiar with the concept of craft brewing and therefore started to provide start-up capital. Crowdfunding has reduced the entry barriers for starting up a microbrewery. For example, several Dutch breweries have used crowdfunding to finance construction or

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     expansion. Contract brewing became an institutional mechanism to overcome capital and technology constraints.

6. Regulations Beer in general has been the subject of many government regulations (Swinnen, 2017). Regulations have been introduced to serve several objectives: to enhance government revenues through beer taxes; to protect consumer health; to protect society from alcohol abuse; to reduce the price of bread grains; to constrain market power. Many of these regulations affect craft beers and brewing. There has been a twoway interaction between regulations and the growth of craft brewing. On the one hand, regulations have stimulated or constrained craft brewing compared to macrobrewers. On the other hand, the growth of craft brewing has induced changes in regulations. Concerns about alcohol abuse and tax evasion resulted in regulations that prohibit(ed) homebrewing in several countries. In many countries, differential taxation rates for different types of beer still reflect these concerns, as beers with higher alcohol content (like most craft beers) have sometimes been restricted or have been taxed at higher rates than lager beers. The birth of craft brewing was hampered by restrictive regulations which were tailored to and designed for the mass producers. These regulations sometimes represented major entry barriers for the first pioneers and lowered the initial growth of craft breweries. Legalization of homebrewing represented a key factor to facilitate entry of craft brewers. For example, in the United States, federal legalization of homebrewing occurred in 1979; in Netherlands, it was not until the early 1990s. Homebrewing activity encouraged hobby brewing among people, increased expertise about beer making, and ultimately facilitated knowledge sharing, thus stimulating support for the emergence of craft brewing. In Japan up to 1994 there was a restriction on the minimum required amount of annual beer production per brewery. This restriction was deregulated from 20,000 hl to 600 hl (and to 60 hl in the case of a low-malt beer, happoshu). The deregulation soon led to the entry of many small beer producers (Nimomiya and Omura, 2018). For much of history, beer taxes were a major source of government revenue and governments had to devise innovative ways to try to prevent tax avoidance by brewers (Deconinck et al., 2016; Nye, 2007). The taxation system has always been an important factor for small firms in particular. In many industries, small producers have asked for lower tax rates. Many countries have a reduced excise tax for smaller brewers, such as Denmark, Slovakia, the United Kingdom, and the

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United States, where there is a lower tax rate below a threshold of production, respectively 200,000 hl in Denmark and Slovakia, 5,000 hl in the United Kingdom, and 2 million barrels in the United States.⁷ Beer production has also been regulated to prevent the use of unhealthy ingredients or to prevent the use of grains which were needed to feed war horses, or people when food was scarce. One example is the German Reinheitsgebot (“Purity Law”), which restricted beer ingredients to hops, barley, and water (later, yeast was added to the list) (van Tongeren, 2011; Swinnen, 2017). In Germany the Reinheitsgebot restrictions protected the German beer market from import competition. At the same time, the regulation prevented experimentation with various types of ingredients, which were not allowed. This contributed to the relatively slow development of “new craft” brewing in Germany. Finally, with consolidation in brewing growing, governments have regulated both horizontal and vertical coordination in the beer industry. Mergers have been scrutinized to prevent too much concentration in brewing, while restrictions on vertical linkages between breweries and pubs have tried to prevent excessive control of large brewers over the retail market. For example, in Australia, during the 2000s some states loosened liquor licensing laws, thus weakening the dominant control of the macrobrewers. As a consequence, smaller bars and restaurants started to differentiate by offering craft beers and specialized distributors began to push craft product into retail stores, bars, restaurants, and pubs (Sammartino, 2018). Vertical relationships between brewers, retailers, and pubs have been a strategic (and controversial) issue in the brewing industry. In many countries tied houses have emerged, where pubs are controlled by brewers through ownership or contracts. These systems have allowed brewers to control the retail outlets for their beer (and to exclude competing beers), at the same time as providing capital-constrained pubs with equipment and sometimes financial support (Deconinck and Swinnen, 2016). Depenbusch et al. (2018) argue that thanks to a strong tied-house system, local and regional beer producers were able to reinforce their market position and to build brand loyalty, thus contributing to preserving the fragmented structure of the German beer industry. Deconinck and Swinnen (2016) also find that in Belgium and the Netherlands especially smaller incumbent brewers use this system to protect their market share. This system gives a clear advantage to incumbent producers and represents a barrier to entry for new firms.

⁷ Moreover, craft brewers complain in some countries (e.g. Italy, Slovakia) that wine producers benefits from an excise duty equals to 0, which represents a discrimination against beer production.

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7. The Strategic Responses of Macrobrewers Initially, macrobreweries did not strategically react as long as the craft breweries were considered too small to represent a real threat.⁸ However, the beer produced by craft breweries soon started to gain a larger market share, while overall beer consumption either stabilized or fell in traditional beer markets. In the United States total beer consumption continued to increase until recently, but in many traditional beer markets, such as the United Kingdom, Germany, and Belgium, total beer consumption has been declining for decades. Hence, with their traditional markets shrinking, macrobrewers responded to the growth in craft beers in several ways.⁹ A widespread strategy in response to the growing success of craft beer was for macrobrewers to produce a craft-style beer themselves. Among the very first responses was the reaction of the “Big 6” (Bass, Allied, Watneys/Grand Metropolitan, Scottish and Newcastle, Courage, Whitbread) in the United Kingdom. Worried by the boost in sales of “real ale” beers among middle-class consumers during the 1970s, the big producers reconsidered their strategy of promoting nationwide beers and started to reintroduce local brand names of cask-conditioned beer (Gourvish and Wilson, 1994). In the mid-1990s, the major US producers introduced new brands (sometimes referred to as “phantom” or “faux” craft). The brands explicitly did not display the name of the large company behind them, in order to keep a distance from the macro connection. The most successful of these brands is probably Blue Moon by Coors. In Denmark, the market leader, Carlsberg, made a strong entrance to the specialty segment with the opening of a production plant in 2005—the Jacobsen brewhouse. The declared goal is the development and marketing of uncompromising specialty beers, giving people new taste experiences. Some unexplored styles in Carlsberg’s production activity have been introduced into the market, such as pale ale, wit, barleywine, and some other experimental brews. In Italy the market leader, Heineken Italia, launched new flavored beers, called “the regionals,” in

⁸ One could argue that the craft brewers followed the so-called “Judo economics” strategy (Gelman and Salop, 1983). Capacity limitation and small scale entry signal a friendly behaviour to incumbent firms, that therefore may accommodate entry. Later when the craft sector grew, they had established themselves as a strong force inside the market. ⁹ Probably the most famous case of conflict among craft and macro producers is related to the AB InBev advertising during the Super Bowl in US in 2015 when AB InBev used its marketing dollars to promote Budweiser at the expense of craft beer. The ad asserted that Budweiser is proud to be a macro beer that is brewed “the hard way” and compared Budweiser drinkers, composed by young, attractive male and female actors, to craft beer drinkers, represented negatively as bearded snobs who sniff and sip “pumpkin peach ale,” rather than real beer (Elzinga et al 2018). This ad caused a great deal of Internet buzz. The AB InBev strategy of intensifying the rivalry was unusual both because negative advertising goes against an industry tradition which refrained from negativity toward other companies’ beer, and because it criticized craft beer while the company had acquired several craft brewers and established a substantial portfolio in its “craft and specialty beer network.”

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2015 (Garavaglia, 2018). In Japan, the macroproducers tried to preempt the diffusion of craft brewers by setting up smaller-sized brewing factories, called “beer parks” (Nimomiya and Omuna, 2018). The macrobrewers also reacted strategically by directly entering the craft beer segment through acquisitions. Most of the initial acquisitions of craft breweries were domestic; more recently they have become global. Elzinga et al. (2018) report the main acquisitions in the United States, starting in 1988 when Miller acquired the Leinenkugel Brewing Company (Chippewa Falls, WI). In addition, in 1995 Miller acquired a partial interest in the Celis and Shipyard producers, while Anheuser-Busch acquired an interest in the Redhook Brewing Company in 1994 and Widmer Brothers Brewing in 1997. In recent years, AB InBev has acquired many craft breweries in the United States,¹⁰ adding them to several other craft beers that AB Inbev acquired in other countries, creating a substantial portfolio of specialty beers in its “craft and specialty beer network.” Interbrew/ Inbev (the Belgian roots of AB Inbev) had acquired Hoegaarden and Leffe (both Belgian craft breweries at the time) in the 1980s and Hertog Jan, one of the first craft breweries of the Netherlands, in 1995. In 2015 AB Inbev acquisitions were particularly vivid both in the domestic (see note 10) and in the global market: AB Inbev purchased one of the first craft producers in Brazil, Cervejaria Colorado; the biggest craft brewery in Colombia, the Bogotá Beer Company; Camden Town Brewery in the United Kingdom; and Mill Street Brewery in Canada. In 2016 it acquired one of the best-known craft producers in Italy, Birra del Borgo, as well as the Belgian Bosteels brewery, a seven-generations-old small family brewery and producer of the award-winning Tripel Karmeliet. Similarly, SABMiller and Heineken, from the Netherlands, actively participated in this craft takeover strategy. Not surprisingly, these acquisitions have been criticized heavily by some of the remaining craft brewers and consumers. They often consider such acquisitions as a departure of the beer from its craft origins—turning into ex-craft. As an illustration, Sam Calagione, the founder of US craft brewery Dogfish Head, emphasizes the issue of independence, claiming that “true craft brewers are brewers first, business people second” while big companies are “run by nothing but business people” (Allyn, 2015). Consumer backlash may be a threat to the takeover spree (Hart, 2017). Consumers ask for authenticity (Frake, 2016). For example, Jean Van Roy, owner of the Belgian Brasserie Cantillon, withdrew Birra del Borgo’s invitation to the well-known Brussels beer festival Quintessence after the announcement of the brewery’s acquisition by AB InBev in 2016 (Sottile, ¹⁰ Goose Island (2011), Blue Point Brewing (February 2014), 10 Barrel Brewing (November 2014), Elysian Brewing (January 2015), Golden Road Brewing (September 2015), Breckenridge Brewing (December 2015), Four Peaks Brewing (December 2015), Devil’s Backbone Brewing (April 2016), Karbach Brewing (November 2016), Wicked Weed Brewing (May 2017), Platform Beer Co. (2019). Source: https://www.fool.com/investing/2018/08/28/anheuser-busch-inbev-really-is-the-king-of-beers. aspx

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2016) because it was no longer considered authentic craft. However, there are obvious advantages for macroproducers: through acquisitions, they gain immediate access to the growing craft beer segment, with established brands in the craft market. Another strategic reaction of the macrobrewers is in the area of distribution. Most craft breweries start off small and serve a small group of local customers. However, when they grow, they need to find access to customers through retailers and/or bars. In Belgium this has been difficult for some time, as macrobrewers have often ties with bars and wholesalers and may use these to prevent craft beer sales at the bars they control. They oppose craft beer sales (a) because they create competition for their own beers and (b) because they accuse the crafts of “free riding” on their infrastructure investments in the bars. In response, the macrobrewers have used their control over the bars and retailers to push their own portfolio of beers, including a growing list of their own (ex-)craft beers. In the United States, most beer wholesaling is done by distributors who concentrate on brands in either the AB InBev portfolio or the MillerCoors portfolio. Of those wholesalers authorized to distribute either AB InBev or MillerCoors products, most also distribute craft beer. Recently, AB InBev announced a plan that would incentivize some of its distributors to focus on the sale of AB InBev brands (primarily Budweiser products). The program offers financial reimbursement to those distributors whose sales are at least 98 percent AB InBev products, thus discouraging the distribution of craft beers.¹¹ Last but not least, craft beer enthusiasts are concerned by the recent acquisition (February 2019) of the website RateBeer.com by ZX Ventures, a 100 percent subsidiary of AB InBev (the acquisition started in October 2016 with a minority stake).¹² RateBeer.com is a consumer review website that is renowned as a reliable source of information about beer. Craft beer enthusiasts are worried that the change in ownership could hamper the true independence of the beer ratings, generating favoritism. This certainly would not play in favor of craft beers.

8. Conclusions In this chapter we have documented how consolidation of the traditional breweries preceded the emergence and growth of craft breweries in all countries, but the extent of consolidation, and the size of the recent craft growth, differ quite strongly among countries. The consolidation of the traditional breweries and the advent of the craft breweries are strongly related phenomena. In those countries

¹¹ See Wall Street Journal (2015) at http://www/wsj.com/articles/craft-brewers-take-issue-with-abinbev-distribution-plan-1449227668. ¹² https://www.vrt.be/vrtnws/en/2019/02/06/ab-inbev-buys-ratebeer-com/

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where the degree of industry concentration was relatively lower in the late twentieth century and the number of breweries per capita (meaning also more product variety) higher, as in Belgium and Germany, the manifestation of the recent wave of entrants (craft breweries) in the beer markets occurred relatively later than in other countries, such as the United States, the United Kingdom, or the Netherlands. In addition, the growth in the number of breweries in recent years is much lower than the decline in the pre-1980 period, and has been much less dramatic than in other countries. Behind these differences is consumer demand for more variety. In this chapter we have reported key insights and lessons from a comparative international analysis based on the various country studies. We have documented the factors which have been important globally for the emergence and growth of craft breweries. A common aspect in all countries is the homogenization of the traditional beers which has accompanied the consolidation of the traditional breweries. Economies of scale in production, marketing, and distribution provided a competitive advantage to large breweries and gradually led to a concentrated industry, where only a few big producers survived and produced mass products. In addition to these dynamics, changes in consumer preferences played a key role in the craft beer revolution. A growing demand for beer variety since the 1980s and increased consumer income generated opportunities for small new companies (that is, craft breweries) who sold to niche beer consumer markets which the large traditional brewers were ignoring. Consumers’ demand became more diversified and sophisticated, including various aspects such as taste and preference for local products. While the process of globalization in the advanced economies eroded the importance of distinctiveness of local economies and spaces, thus leading to more and more standardized products, consumers’ rediscovery of a sense of place and connections with local communities marked a move in the opposite direction. This attitude, called “neo-localism,” generated a new demand through which consumers aim at keeping the local alive and cultivate local ties (Garavaglia, 2020). Another global connection relates to the initial craft breweries: in all countries, these were started by pioneering entrepreneurs who were inspired by different beer varieties in other countries, and often first experimented with homebrewing. Associations of craft consumers, craft brewers, and homebrewers helped expand the market by spreading information and experience, and acting as vehicles for new forms of marketing (often via internet, social media, and special events). Again, the role of consumers has been important for sustaining the diffusion of craft brewing. The role of the consumer in the modern economy has changed: consumers are connected, more informed, and active, rather than isolated and passive as they were years ago (Prahalad and Ramaswamy, 2004). Many studies in the economic and marketing literature investigate how firms rely on consumers to develop new products and innovations. Ahonen and Moore (2005) believe that consumers’ connected community activity represents one of the most relevant

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changes in business over the past 100 years. Later on, the development of specialized brewing technology markets and new forms of finance were important to stimulate the growth of the craft beer sector. Government regulations in various forms affected the growth of craft beer. These included health and product safety regulations, differential taxes for different beers, restrictions on homebrewing, regulations on ingredients of beer, rules on advertising, regulations on vertical linkages in the beer industry, and so on. In many countries regulations have been adjusted in the past decades in response to the growing craft sector. In recent years, macrobreweries have responded to the growth of craft beers by acquiring craft breweries and/or beers and integrating them in their global beer and brewing portfolio. Not surprisingly, this has resulted in a negative response from real craft brewers and from real craft beer consumers. However, this has not prevented a rapidly growing international market for ex-craft or craft-style beers sold by large brewing companies. These developments have coincided with rapid growth in international trade in craft beer—some of it from smaller breweries selling their beer internationally, some of it through the multinational distribution systems of large companies. In conclusion, it is incontestable that craft brewers and their customers have transformed the global beer market. In many countries, craft brewers started out as small and isolated but ultimately transformed a global industry. Interesting reflections now need to consider how this transformation will continue, what the future entails for this “revolution” in the global beer industry, and where it will end. For example, by 2018, craft beer sales by volume had reached a market share of 13.2 percent in the US market.¹³ It is unclear how much room there is for further growth. If we consider the US market share of craft beer as the benchmark, then we could consider that there is room for further growth in many other countries, where the craft beer revolution started later and where the diffusion of craft brewing is still less significant. Another key issue is how different segments within the craft beer sector will evolve. The success of craft beer has been grounded in the ability to introduce new products and new varieties, as well as in the capacity to establish strong local connections. We could speculate that these aspects will continue to play a role in the future, with the introduction of new products and new experiments, and the connection of products with territories. The strategies chosen by craft beer producers will have to combat the strategies of the multinationals, who have shown themselves to be increasingly interested in the craft beer segment. The beer market and global industry remains a highly dynamic sector, with much to teach us about economic history, entrepreneurship, industrial evolution, and development.

¹³ Source: https://www.brewersassociation.org/statistics-and-data/national-beer-stats/

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Gourvish, T. R. 1994. Economics of brewing, theory and practice: concentration and technological change in the USA, UK, and West Germany since 1945. Business and Economic History, 23 (1), pp. 253–61. Gourvish, T. R. and Wilson, R. G. 1994. The British Brewing Industry 1830–1980, Cambridge University Press, Cambridge. Hart, J. 2017. Scraping the Bottom of the Beer Barrel: Consumer Preferences for Localness and Responses to Brewery Acquisitions. Journal of Wine Economics, Working Paper, available at: http://www.wine-economics.org/aawe/wp-content/ uploads/2017/05/Jarrett-Donald-Hart-Scraping-the-bottom-of-the-beerbarrel-Consumer-preferences-for-localness-and-responses-to-brewery-acquisi tions.pdf (last accessed July 20, 2019). Murray, D. W. and O’Neill, M. A. 2012. Craft beer: penetrating a niche market. British Food Journal, 114 (7), pp. 899–909. Nelson, R. R. and Consoli, D. 2010. An evolutionary theory of household consumption behavior. Journal of Evolutionary Economics, 20 (5), pp. 665–87. Nicosia, F. M. and Mayer, R. N. 1976. Towards a sociology of consumption. Journal of Consumer Research, 3 (2), pp. 65–75. Ninomiya, M. and Omura, M. 2018. Government Regulations and Microbreweries in Japan in Garavaglia, C. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, pp. 424–55, Palgrave Macmillan, Basingstoke. Nye, J. 2007. War, Wine and Taxes, Princeton University Press, Princeton. Poelmans, E. and Swinnen, J. 2011. A Brief Economic History of Beer in Swinnen, J. (ed.), The Economics of Beer, pp. 3–28, Oxford University Press, Basingstoke. Poelmans, E. and Swinnen, J. 2018. Belgium: Craft Beer Nation? in Garavaglia, C. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, pp. 137–60, Palgrave Macmillan, Basingstoke. Pokrivčák, J., Lančarič, D., Savov, R. and Tóth, M. 2018. Craft Beer In Slovakia. In: Garavaglia, C. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, pp. 321–43, Palgrave Macmillan, Basingstoke. Prahalad, C. K. and Ramaswamy, V. 2004. Co-creating unique value with customers, Strategy and Leadership, 32 (3), pp. 4–9. Sammartino, A. 2018. Craft Brewing in Australia, 1979–2015 in Garavaglia, C. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, pp. 397–423, Palgrave Macmillan, Basingstoke. Sottile, L. 2016. Birra artigianale revolution. Cosa sta succedendo? trebicchieri, Il settimanale economico del Gambero Rosso, Anno 7, n. 20, 12 Maggio, available at: http://www.gamberorosso.it/it/vini/1024660-birra-artigianale-revolution-cosasta-succedendo (last accessed March 15, 2019). Sutton, J. 1991. Sunk Costs and Market Structure, MIT Press, Cambridge MA. Swaminathan, A. 1995. The proliferation of specialist organizations in the American wine industry, 1941–1990. Administrative Science Quarterly, 40 (4), pp. 653–80.

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    

Swaminathan, A. 1998. Entry into new market segments in mature industries: endogenous and exogenous segmentation in the US brewing industry. Strategic Management Journal, 19 (4), pp. 389–404. Swinnen, J. (ed.) 2011. The Economics of Beer, Oxford University Press, Oxford. Swinnen, J. 2017. Some Dynamic Aspects of Food Standards. American Journal of Agricultural Economics, 99 (2), pp. 321–38. Swinnen, J. and Briski, D. 2017. Beeronomics: How Beer Explains the World. Oxford: Oxford University Press. Tremblay, V. J. and Tremblay, C. H. 2005. The US Brewing Industry: Data and Economic Analysis, The MIT Press, Cambridge, MA. Van Dijk, M., Kroezen, J. and Slob, B. 2018. From Pilsner Desert to Craft Beer Oasis: The Rise of Craft Brewing in the Netherlands in Garavaglia, C. and Swinnen, J. (eds) Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, pp. 259–93, Palgrave Macmillan, Basingstoke. Van Herck, K., Swinnen, J., and Deconinck, K. 2012. How the east was won: supply chain restructuring in the Eastern European beer market. German Journal of Agricultural Economics, 61 (4), pp. 213–22. Van Tongeren, F. 2011. Standards and International Trade Integration: A Historical Review of the German “Reinheitsgebot” in Swinnen, J. (ed.), The Economics of Beer, pp. 51–61, Oxford University Press, Oxford. Wall Street Journal. 2015. Craft Brewers Take Issue with AB InBev Distribution Plan, available at: http://www/wsj.com/articles/craft-brewers-take-issue-with-ab-inbevdistribution-plan-1449227668 [last accessed October 20, 2019]. Weiner, J. 2014. A Fight Is Brewing. The New York Times Magazine, March 26, available at: https://www.nytimes.com/2014/03/30/magazine/a-fight-is-brewing. html [last accessed October 20, 2019).

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10 Contract Brewing and Its Implications for the Beer Industry Sven Van Kerckhoven, Michelangelo van Meerten, and Casey Wellman

1. Introduction In recent years, the number of breweries in the world has significantly increased. After decades of industry consolidation, resulting in a small number of macrobrewers (large-scale brewers) dominating the global market, the industry has recently witnessed a large number of small and medium-sized “craft” brewers¹ entering the market, in what has been called the craft beer revolution. These new players have provided the industry with some much needed variety and excitement. These developments have been greatly supported by the ability of small brewers to contract out (part of) their production as they enter the market and grow. Brewing beer is a labor-intense undertaking and comes at a significant cost. A significant initial investment in (basic) brewing equipment, representing an important sunk cost, needs to be made in order to be able to brew a beer. Making such an investment in the face of an uncertain future, as consumer demand might not yet be established, is risky. Moreover, the brewing industry is characterized by strong economies of scale, whereby significant cost advantages can be obtained due to a larger scale of operations. So, as the production number goes up, the cost per unit of output decreases (Tremblay et al, 2005; Nelson, 2005). Small-sized and startup breweries’ output is typically too limited to be able to reap the benefits of scale. Due to their ability to produce different beers with the same equipment, breweries also benefit from economies of scope, whereby the marginal cost per unit produced also goes down as a wider variety of different brews are produced. The presence of such economies of scale and scope partly explains why the industry has witnessed strong consolidation in the past decades, leading to a ¹ There is some discussion with regards to what exactly should be considered a craft brewery. Moreover, several different terminologies are used. Sometimes these breweries are referred to as microbreweries, artisanal breweries, independent breweries, . . . Any definition of craft breweries in general builds upon the concepts of the level of tradition/innovation, the small size, and the independence of ownership. However, the resulting benchmarks tend to differ in between different countries and in between observers (Garavaglia and Swinnen, 2018). Sven Van Kerckhoven, Michelangelo van Meerten, and Casey Wellman, Contract Brewing and Its Implications for the Beer Industry In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0011

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  ,     .

situation whereby only four companies supply about half of the global demand.² These companies dominate not just the global market but also most national markets. Globalization has in this respect allowed companies to further explore these economies of scale and scope by enabling them to produce at a global scale. Moreover, significant economies of scale also exist with regards to marketing and distribution costs (Nelson, 2005; Madsen and Wu, 2014). Consequently, new entrants face higher production costs due to their inability to benefit from large production facilities. Contract brewing provides an alternative that allows breweries to start producing beers without investing in the necessary equipment. Contract brewing is an arrangement whereby a company outsources certain steps in the production process (and sometimes the bottling and distribution) of a beer to another brewery. In doing so, the contracting brewer produces beers on equipment it does not own. Until the 1980s, contract brewing was a feature to expand the production of established brewers before they could build a new plant, or to cover a period of capacity constraints due to, for example, maintenance of production facilities. In recent years, start-up brewers have increasingly relied on contract brewing. The beer is marketed by the contracting brewer, who generally also provides the recipe to the contract brewer (for the purpose of this chapter, we shall call the party who outsources production the “contracting brewer,” and the party who produces the contracted beer the “contract brewer”). The practice of contract brewing has been recurrent among larger brewers, who have often taken advantage of each other’s overcapacity, but since the 1980s it has become increasingly popular among craft brewers as well (Oliver, 2012, p. 262). Due to the craft beer revolution, contract brewing has grown more important in recent decades. It has also benefited from technological advances that have made communication easier, allowing craft brewers to reach out to large-scale brewing partners via email and social media, among others. The collaboration allows startup brewers to benefit from the large-scale and excess production capacity of their partner, hence circumventing their higher production cost that originates from limited production and rendering it unnecessary to make a significant initial investment in equipment. This contribution studies in depth the usage of contract brewing as an important avenue for young and innovative breweries. Contract brewers have greatly supported the rise of craft beers in recent years. The next section argues that this is due to the economic realities faced by most small-scale breweries. Contract brewing has certain advantages and disadvantages compared to brewing on acquired equipment. These are discussed in the following sections. The chapter then briefly discusses the wide variety of contracts drafted with regards to contract

² https://www.jpmorgan.com/global/research/beer-market

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brewing. Well-drafted contracts allow all the potential advantages realized by cooperation between a contracting and a contract brewer to be reaped, but mostly could address some of the potential issues that might pop up. The chapter then continues with a forward-looking view on potential developments in the market and presents a few case studies of different breweries who have significant experience with contract brewing. We end with a short conclusion.

2. The Economic Underpinnings of Craft Beer Production The rise of craft breweries has been well documented. Garavaglia and Swinnen (2018b) document that for most countries (but not for all), one can observe a J curve that clearly indicates the strong rise in the number of breweries in recent years. This came as a welcome surprise after years of consolidation in the industry, mostly resulting from technological advances (Kerkvliet et al, 1998). The revival of craft brewing was a response to market forces. Homogenization of the beer produced by macrobrewers proved to be one of the main determinants of the rise of craft beer, together with rising incomes and a change in local demand conditions (also leading to the establishment of consumer organizations). As macrobrewers continuously attempted to strengthen their market share, the beers they produced aimed to satisfy the taste of as many consumers as possible. In the eyes of some, this has made these beers the common lowest denominator among a wide variety of consumers, ultimately resulting in a lower appeal to certain parts of the market. These latter parts of the market were no longer served due to the disappearance of many local and regional producers, which found themselves unable to compete with the macrobrewers. Furthermore, the active merger and acquisition strategy of macrobrewers led to the further disappearance of many smaller breweries, or at least changed their governance structure whereby previously independent brewers were incorporated by macrobrewers. As a consequence of unmet demand, space was opening up in expanding niche markets as certain consumers’ demands were increasingly unmet. Large firms are, in general, ill-equipped to move into these spaces. Smaller and new entrants are better able to build on existing technical competencies and apply these to emerging market segments. The resource partitioning model of Carroll (1985) helps to shed light on this. Consumer demand can be modeled among different dimensions of taste preferences. Macrobrewers focus on the center, where mainstream demand is located. Economies of scale can be realized in this space, resulting in the survival of a few “generalists.” This leaves open the periphery of the market, where lower demand is located. Craft breweries actively attempt to locate themselves in these niches and specialized corners of the market as they are developing and cultivating new and innovative beer styles targeted at the specialized (but increasingly also the general) public. In doing so, they separate themselves from

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  ,     .

macrobrewers. As argued by Toro-Gonzaléz et al (2014), the macro and micro markets can be seen as separate. They attract different consumers, as craft beer enthusiasts and the general public have different drinking habits. Craft beer enthusiasts are in general more frequent drinkers and value more outspoken tastes. Moreover, they perceive craft beer to be of the higher quality that they are looking for (Aquilani et al, 2015). However, recently, a third market, at the interface of both, seems to be emerging, as both craft and multinational breweries are moving toward each other. Multinational brewers have been acquiring craft breweries and have been working to establish their own beers aimed at the craft beer market. At the same time, some craft brewers have grown into multinational companies by acquiring or establishing breweries internationally. In this third market, “craft beers” and beers produced by multinational brewers might be presented adjacently in the same venues, though availability, price, freshness, and relevance of each product may vary according to scale, distribution, and production costs. In order to address the valuable niches in the market left open by generalists, craft brewers started to produce their own beers. However, starting a craft brewery is not an easy task. First, due to their initial small production, craft breweries fail to reach the minimum efficient scale (MES). Producing below MES does not allow for minimizing the long-run average cost. As such, the MES is the scale of production where the (internal) economies of scale have been fully exploited. An increase in economies of scale relative to the size of the market causes an increase in the MES at the firm level and a fall in the number of firms required to function at the minimized industry production costs (see Figure 10.1). In recent years, it has been observed that the MES at the firm level has strongly increased in the brewing industry, further putting pressure on smaller producers. Tremblay and Tremblay (2005) show this for the US market (see Table 10.1), but their findings presumably hold for other countries as well. This has been caused by new

Costs

Economics of scale

Diseconomics of scale Long run average

Output MES

Figure 10.1 Minimum efficient scale

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Table 10.1 Minimum efficient scale. MES output level measured in million barrels, MES market share measured in the needed market share to reach the MES Year

1950

1960

1970

1980

1990

2000

2009

MES (output level) MES (market share)

0.1 0.1

1.0 1.5

8.0 6.4

16.0 9.0

16.0 8.4

23.0 14.0

23.0 14.0

Source: Data from Gokhale and Tremblay, 2012

technologies, such as increased automation and increased speed in bottling/ canning, as well as by lower transportation costs due to decreasing global barriers to trade. These changes have had implications for the market as well. Due to the increasing MES, several regional mass producers have left the industry, further increasing the value and size of niche markets. However, in these niche markets, reaching a MES is difficult. As a result, production costs are higher and competition is lower, allowing craft brewers to sell their products at a premium price. Most craft brewers also enter the market without having access to significant resources. As they are in general start-up companies, they face high uncertainty with regard to realization of the demand levels. This might deter them from investing more significantly in equipment that could allow for cheaper production. Potential investors, who are in general risk-averse, would also be discouraged to provide start-up brewers with easy access to outside financing. The difficulty of accessing financial resources also explains most craft brewers’ choice to brew ales rather than lagers. Not only does the latter come with more limited innovation potential, but brewing bottom-fermented beers (lagers) also requires higher fixed costs, as artificial cooling is needed during fermentation and maturation time. A more extreme form of contract brewing is that by so-called gypsy brewers. These brewers follow the model set by the “flying winemakers” which started to emerge from Australia in the 1980s, whereby wine producers started producing wine all over the world. So-called gypsy or itinerant brewers copied this approach, usually releasing their beers under a single overall brand name, but producing at a variety of breweries. In general, the brewer then has a variety of projects running in a variety of places. The image of the itinerant brewer, seemingly unaffected by the discontent and critics of the idea of contract brewing, seems to have captured the American imagination in particular. As information technology and social networks speed and facilitate communication and collaboration among brewers, it is to be expected that the “flying brewmaster” will become more common (Oliver, 2012). Some well-known examples of gypsy brewers are: Mikkeler: A Danish brewery which does not operate an official brewery and instead collaborates with other brewers (often Belgian) to produce their recipes or experimental one-off brews.

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  ,     .

Evil Twin: Another brewer from Denmark that has in the past produced at ten different breweries in six different countries around the world. However, in January 2019 Evil Twin Brewing opened their first brick and mortar brewery in Queens, New York City, mostly due to high consumer demand for a permanent visiting place. Stillwater Artisanal: A gypsy brewer that produced fifty new Stillwater creations brewed in twelve different countries in 2015.³ Omnipollo: A Swedish brewery that produces all over the world.⁴ In order to allow craft breweries to enter the market, contract brewing provides small breweries a cheaper, lower-risk alternative to acquiring their own equipment. The next sections provide an in-depth analysis of the advantages and disadvantages of the practice of contract brewing.

3. The Advantages of the Practice of Contract Brewing Contract brewing has been a common practice in the brewer’s world. Throughout history, brewers have, when facing a shortage of their own production capacity, reached out to each other. Moreover, several brewers have entered into contractual relationships with retail chains, who then market the beer under their private label. In recent years, the practice of contract brewing has helped small-scale brewers to outsource part of their brewing process to a host brewery that takes over part of, or supports, the production process. This has certain advantages compared to brewing on site, for both the contracting brewer and the contract brewer.

3.1 Contract Brewer Contract brewers are typically relatively large brewers with significant capacity. There are two types of contract brewer: the first consists of brewers whose facilities’ production capacity exceeds their own production and the second of brewers that have specifically built significant production capacities, but with no view of brewing their own beers; their business model consists of renting out their capacity to aspiring brewers. The first type of brewer was not specifically set up to brew for contracting parties. However, for several reasons (overcapacity, lower demand for their own beer, seasonal fluctuations), they find themselves with overcapacity at certain ³ http://www.stillwater-artisanal.com/about.html

⁴ https://omnipollo.com/pages/about

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moments. The Belgian breweries De Ranke (also producing for Novabirra⁵) and De Brabandere (also producing for Beavertown⁶) are examples of such breweries. For these brewers, contract brewing provides significant cashflow in “down” periods and ensures that their production facilities do not stand idle. These breweries are established producers of certain beer types and have significant expertise in brewing their own beers. These might be attractive resources for certain breweries. The second type of brewer is focused on supporting other brewers. Some examples here are the Belgian Brouwerij Anders⁷ and the Proefbrouwerij.⁸ In general, these brewers have built up significant expertise in the entire production process and can thus support other brewers during all of the different steps in the production process. However, they might not have the in-depth knowledge that the first type of brewer might have accumulated. For these brewers, contract brewing is their main business. In both cases, the contract brewer is able to turn its (excess) capacity into a steady revenue stream by renting out production facilities and equipment to contracting brewers. As a complement to these two types, start-up breweries which have recently built or expanded their own facility can also benefit from contract brewing since they might have some overcapacity, as they typically will have acquired facilities allowing for some future growth. Contract brewing can then also help to increase the cashflow of start-up breweries who have acquired their own facilities.

3.2 Contracting Brewer There are several advantages for contracting brewers in using the services of a contract brewer. Contracting brewers who lack their own brewing equipment or have too small a capacity might want to resort to a contract brewer in order to be able to produce their beer. Using a contract brewer means that the contracting brewer does not need to possess the necessary equipment itself. As a result, the large investment in acquiring this equipment is saved. More risk-averse brewers might hence prefer to use contract brewing. They might further be tempted by the relative ease of contract brewing compared to building their own facilities, which is timeconsuming and demanding in terms of regulation. Even though the potential for survival and profitability for start-up craft brewers is by now well established, several potential craft brewers still find it rather difficult to get access to financial ⁵ https://belgianbeergeek.be/2014/03/29/brouwerij-de-ranke-dottignies/ ⁶ https://www.beavertownbrewery.co.uk/bridging-the-gap/ ⁷ https://www.brouwerijanders.be/nl/ ⁸ http://www.proefbrouwerij.com/

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  ,     .

resources provided by investors and/or banks. This explains why several of them have attempted to reach out to alternative means of finance, such as crowdfunding. Good examples of this attempt to gather financial resources from potential clients through crowdfunding are the Brussels Beer Project’s “Beer for life” campaign, whereby interested individual investors pledge a certain amount in return for a number of beers each year,⁹ and the “Equity for Punks” crowdfunding campaign organized by Scottish brewers BrewDog.¹⁰ Potential investors and banks seek a fast return on their investment. By using contract brewing, not only does the risk of investing in a new brewery decrease, but the prospect of an early return on investment increases. If they do not have to incur the costs of acquiring equipment, potential investors might be more attracted to supporting the craft brewer. The risk related to the uncertainty of demand is to some extent alleviated by the smaller funding needs. In this way, contract brewing has allowed several innovative breweries to start up and has revived several traditional ones. Moreover, by using contract brewing, a large amount of the initial cashflow of the start-up brewer is freed, which, instead of being invested in brick and mortar, can now be used in the branding and marketing of the beer. In line with the high sunk costs of entry into the industry (Sutton, 1999), the ability to directly use initial cashflows to establish the brand and marketing is extremely welcome. IT developments, such as social media and online message boards and reviews, have enabled craft brewers to create a strong brand which can help them to compete with the gigantic advertising budgets of the multinationals (Clemons et al, 2006). Contract brewing further allows a new brewer to test the market for its product without having to make significant start-up investments. Due to their nature, craft brewers need to experiment. Their consumers value creativity and want to continuously try out new brews, otherwise they might lose interest. As ratings play an important role in consumers’ selection of a specific beer (Clemons et al, 2006), creativity and quality are important for craft brewers. This raises a particular issue, as every new beer comes with additional uncertainty with regard to the eventual success and the required production level. In this respect, contract brewers can help craft brewers to realize the necessary variety. As contract brewers tend to have relatively large facilities—given that they often combine brewing their own beer with several contract brews for contracting brewers—contracting brewers can benefit from the economies of scale/scope realized at the contract brewer. The contract brewer might be producing closer to the MES. Even large brewers who are able to get close to the MES might resort to contract brewing when they want to develop a new beer. Rather than using their

⁹ https://www.beerforlife.be/

¹⁰ https://www.brewdog.com/community/equity-for-punks

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large facilities, it is often more beneficial for these brewers to reach out to contract brewers, where they can then produce the new potential beer in smaller batches. Contract brewing allows contracting brewers to take advantage of the expertise of the contract brewer. Turning innovative single-batch recipes into great beers is not the easiest task. Working together with a contract brewer can help the contracting brewer to ensure the quality of the production. Some start-up brewers might further have a lack of knowledge of specific parts of the production process or need some support with packaging and distribution. The more experienced contract brewer can then provide these services and support the start-up brewer in the areas of the production process with which they are less familiar or with which they lack expertise. Furthermore, brewing at someone else’s facilities can help to address one of the biggest costs in the process of producing beer. Beer is rather expensive to transport.¹¹ By reaching out to a contract brewer, the contracting brewer can produce the same product at several locations, which makes it cheaper to supply their products to different geographical areas. Since the beer market is increasingly global and since several brands and beers are widely distributed, shipping costs can be avoided by producing at several locations. The biggest challenge is then to ensure the similarity and the quality of the beer, which is more difficult when production is decentralized in several locations. Established multinationals might be better able to ensure the quality and similarity of beers produced at different facilities than start-up brewers, who might lack the market clout, the staff, and the expertise to oversee their partners. Such a decentralized production process only affects the largest of craft brewers, as proven market demand is needed before expanding internationally. BrewDog, for example, produces in Scotland, the United States, and Australia.¹² By working together with a contract brewer, contracting brewers are provided significant freedom. Since the contracts are generally only for a limited time period, contracting brewers are free to change their contractor or renegotiate their terms at the end of the contract. This built-in flexibility allows contracting brewers to “shop around” and look for the best possible partner, as well as allowing them to reconsider their involvement in the different tasks in the production process if they wish to. Moreover, there are also differences in the longevity of the contracts. Some companies use contract brewing for one brew, or when suffering a shortage of production capacity. Other brewers use contract brewing consistently. The gypsy brewery is particularly popular in Denmark, with up to 150 recorded in 2013 (SBR, 2014).

¹¹ https://www.huffpost.com/entry/craft-beer-expensive-cost_n_5670015 ¹² https://www.brewdog.com/locations/brewery/columbus

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  ,     .

In short, there exist several advantages to outsourcing part of the production of a beer to a contract brewer. The next section discusses the other side of the coin: the disadvantages with regard to contract brewing.

4. Agency Issues and the Disadvantages of Contract Brewing As with any relationship between two parties, there are certain agency issues that might pop up. Parties can engage in opportunistic behavior that might affect the relationship, creating agency problems—a conflict of interest inherent in any relationship where one party is expected to act in another’s best interests. Given the specific nature of the relationship between a contract brewer and a contracting brewer and the requirement for close collaboration between contracting brewers and contract brewers, these agency problems can pose significant issues. Some of these are now considered in more detail.

4.1 Contract Brewer For the contract brewer, the disadvantages are rather limited. Most importantly, the contract brewer may be concerned with how the contracting brewer uses his equipment, when the contracting brewer handles the production himself at the contract brewer’s facilities. Moreover, contracting brewers will gain valuable knowledge of the operations of, and insight into the expertise of, the contract brewer. If the contract brewer produces its own beer as well, supporting the contracting brewer might create future competition for the contract brewers’ products. At the same time, as contracting brewers in general only contract their brews out for a short time, the experience and knowledge of the contract brewer can be transferred to the contracting brewer, which could then move its production elsewhere.

4.2 Contracting Brewer It is not unusual to see reference in the craft industry literature to “phantom”¹³ and “cuckoo” breweries,¹⁴ or “faux,” “stealth,” “virtual,” and “pretend” breweries (see, e.g., Cottone, 1995). These claims are voiced by both competing microbrewers and beer experts. From the names given to contracting brewers and

¹³ http://www.drinkinginamerica.com/mystery-phantom-brewer/ ¹⁴ https://www.theguardian.com/small-business-network/2015/nov/18/budding-beerentrepreneurs-gypsy-brewing

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their products, it immediately becomes clear that the practice of contract brewing is a controversial issue in craft beer circles. Critics state that contracting breweries, by not investing in bricks and mortar, do not contribute to the infrastructural stability of the craft beer market,¹⁵ and dilute the already busy craft beer market.¹⁶ These criticisms have been voiced by, for example, Hugh Sisson, founding partner of Clipper City Brewing, who has stated that gypsy breweries should not be considered legitimate as they have “no skin in the game,” meaning no capital at risk.¹⁷ He later clarified that he referred to these brewers as opportunists rather than serious beer folks, and that with the rise of craft breweries, most might find themselves ill-equipped to survive in an industry witnessing unsustainable growth. However, he added that there are also a few of these contracting brewers that are clearly passionate, professional, and invested in developing successful businesses.¹⁸ The concern from some observers and other brewers is that the lack of down investment of contracting brewers reflects their level of commitment. These comments, while focusing on the lack of physical infrastructure, complement another much heard criticism related to the governance of the beer brewing process. Since contract brewers can take over (part of) the production process, critics have argued that the loss of oversight in the different steps in the production process might hamper the quality of the beer. There thus exists a tension as to whether contract brewing adds or subtracts to the quality of the beer. This relates to whether the contract brewery will be committed to the production quality of a contracted brew. When the contract brewery slacks on its effort, the quality will be low. However, as argued before, the contract brewer’s experience could also improve the quality of the contracted brew. Contract brewing is still sometimes perceived as disconnecting the brewer from the beer, which then leads to the suggestion that the contracting brewery is not as committed or credible as its brick and mortar peers.¹⁹ Producing a beer in an environment that is not completely controlled by the contracting brewer might create issues. Craft beers with strong and distinctive flavors are even more susceptible than standard brands to variability of brew kit, ingredient sources, production management, and fermentation control. Another issue relates to the provenance of the beer. Consumers prefer to buy from small, local producers rather than national or multinational corporations (Carroll and Swaminathan, 2000). As such, the craft brewery movement has given consumers wider access to locally brewed beers. In this regard, craft beers ¹⁵ https://vinepair.com/wine-blog/what-is-gypsy-brewing/ ¹⁶ https://vinepair.com/wine-blog/craft-beer-bubble/ ¹⁷ https://beerpulse.com/2012/08/gypsy-brewers-react-to-clipper-city-founders-skin-in-the-gamecomment/ ¹⁸ https://beerpulse.com/2012/08/clipper-city-brewing-founder-clarifies-comments-regardinggypsy-brewers/ ¹⁹ A few buddies who are good at designing labels, websites and sales plans but do not actually own a brewery are not, in fact, a brewery. P

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  ,     .

complement the well-established traditional local/regional brewers, who generally focus on lager. However, provenance is an issue for contracting brewers, whom might be producing their beers outside the region. As a result, contracting brewers almost always conceal the true origins of their beer, which could be produced for example at a mass production brewery with excess capacity (Ono, 1996). This results in a cloudy marketing situation, whereby the so-called local craft brewery uses local landmarks or names extensively for marketing purposes, but the beer is not produced in close vicinity.²⁰ The Brussels Beer Project, for example, had no brewing capacity in its initial stage in Brussels, but uses the city’s image prominently. This led to some controversy, with other Brussels-based breweries (such as Brasserie de la Senne) voicing concern.²¹ Carroll and Swaminathan (2000) found evidence that contracting brewers have higher exit rates, in particular due to their inability to claim this local embeddedness. Interestingly, gypsy brewers that have put contract brewing at the center of their business plan seem to have been greeted more favorably by beer drinkers and producers. Clearly stating that their beers result from collaboration with other brewers seems to make the provenance issues less important. As production of the beer takes place at a contract brewer, the contracting brewer faces some strategic issues. First of all, the contract brewer needs to be reimbursed for the work it conducts. This could lead to double marginalization, which creates deadweight losses and results in higher prices and lower output, eventually making the whole market worse off. Second, the contracting brewer and the contract brewer need to invest in the relationship, which creates significant transaction costs that might be amplified if trust needs to be established. Another issue is that contracting breweries in theory rely on the over-capacity of the contract brewer (in particular if the relationship is envisioned to be shortterm). Since the contract brewer might brew its own beer, or beer for other contracting breweries, the available capacity might change. This creates planning issues for the contracting brewer, as the latter might not always be able to use the contract brewers’ facilities. At the same time, since demand in the start-up phase is uncertain and can fluctuate, the contracting brewer might be crowded out of the contract brewers’ facilities when either of the two parties’ production expands. The contracting brewer then needs to find another contract brewer, which creates additional transaction costs. Lastly, there is also an issue with regard to intellectual property rights. Since both brewers will collaborate closely, the risk exists that one of the parties will steal valuable knowledge.

²⁰ For the tension that this practice created, see https://www.lesoir.be/art/535112/article/ debats/cartes-blanches/2014-05-03/cri-d-alarme-des-brasseurs-belges-artisanaux ²¹ https://belgibeer.com/fr/blog/beer-in-brussels-midway-between-evolution-and-tension), https:// www.lesoir.be/art/535112/article/debats/cartes-blanches/2014-05-03/cri-d-alarme-des-brasseursbelges-artisanaux

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Contracting brewers consequently face a number of issues in contracting out (part of) their production. In order to alleviate a few of the issues that might arise, a clear contract is needed. The next section explores the types of contracts common in the contract brewing world.

5. The Legal Environment of Contract Brewing Contract brewing requires a well-drafted contractual agreement. As there are a variety of functions that can be performed by contract brewers and a variety of specific tasks that contracting brewers might want to outsource, each of these contracts is specific to the relationship. There are two theoretical “extremes” in the potential agreements between the contracting brewer and the contract brewer. The first type is what can be called a “market and brand” agreement. In this case, the relationship is mostly distant and conducted by phone or email. In this case, the contract brewer takes care of a significant portion of the whole production process, from developing or refining the recipe to packaging and distributing the beer, with very little input from the contracting brewery. In this case, the contracting brewery is essentially a marketing company, mostly focused on developing the brand, putting it on the market, and selling it. With this type of contract, the contract brewer is responsible for the whole process and “owns” the beer until the final delivery. The other type is the tenant brewing agreement. This involves a more hands-on approach, whereby the contracting brewer brings in their own ingredients and yeast strains, supplies the recipe, and specifies every small detail of production, down to packaging. In the latter case, a brewer or manager from the contracting brewery will frequently visit the premises of the host brewery, shepherding beer through the system, resulting in a partnership between the contracting brewer and the contract brewer. With this type of contract, the contracting brewer is responsible for the whole process and acts as a renter of the brewing space and equipment of the contract brewer. In terms of the actual arrangement, the contract brewer is still producing the beer. The main difference is that the contracting brewer is actually present for the production of the beer: investing their time in production, while also hiring the contract brewer for production. There exists a wide variety of arrangements located somewhere between these extremes. In essence, in the best approach, a contracting brewer uses a contract brewer to complement its own shortcomings but takes care of the parts of the process in which the contracting brewer itself has the necessary competences and skills. The contracting brewer’s involvement in the actual production of the beer will vary; however, more in-depth research and interviewing would be required in order to provide insight into specific production contracts.

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  ,     .

Another form of agreement consists of really combining the knowledge and skills of both partners and developing a clear partnership to learn from each other. This probably could not really be defined as contract brewing, but builds on the same complementary approach. As argued by several observers (Garavaglia, 2018; Garavaglia and Castro, 2018; Li et al, 2018; Toro-Gonzaléz, 2018), the overall legal environment initially provided a deterrent to entry for craft brewers. However, in recent decades, changes in the legal environment have enabled the growth of craft breweries. In several countries, this has changed in recent years as a result of the legalization of homebrewing (in 1979 in the United States, for example). The European Council, in its 1992 directive on the harmonization of the structures of excise duties on alcohol and alcoholic beverages (Council Directive 92/83/EEC), distinguished between small and large breweries, and stated that small and independent breweries may enjoy lower taxation rates.²² This applies to companies with a yearly production not exceeding 200,000 hl that are legally, economically, and materially independent, and the company is not allowed to work under license. If one of these requirements is not satisfied, the brewer will be deemed to be a commercial brewer, which attracts a higher taxation level. Hobby brewers in Belgium are not allowed to engage in any commercial activities but are not liable under the tax regime. The legal framework further stipulates the applicable licenses and other regulatory activities that need to be undertaken.

6. The Future of Contract Brewing with Maturing Craft Breweries Craft breweries have thus greatly benefited from cooperating with craft brewers. This has allowed several of them to enter the market and realize rapid growth, as contract brewing helped them to overcome their lack of production capacity. However, there are several challenges that might affect the future of contract brewing. In recent years, several smaller start-up breweries who resorted to contract brewing in the past have moved to on-site production, or are planning to do so. In general, when they launch their own brewing facility, their initial investment exceeds their current production needs. As such, these start-up breweries can provide contract brewing arrangements to other microbreweries. This provides them with an income stream and allows them to use their equipment at full capacity. At the same time, it will ensure that the start-up that has just invested in its own on-site production facilities gathers significant experience. However, the ²² Article 5, para.2 Law of 7 January 1998 with regards to the structure and taxation on alcohol and alcoholic beverages.

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start-up brewery will find itself directly competing with the contracting breweries it should support, creating agency issues, as discussed previously. Due to the recent proven potential for profit generation by start-up breweries, their access to finance through both traditional (investors and banks) and technological (crowdfunding) channels might make it easier for them to gather the necessary financial means to shorten the track to acquiring or establishing their own premises. This might result in a declining need for contract brewers. This would increase the industry’s capacity, which has declined in recent years (Tremblay and Tremblay, 2011). The move to on-site production generally occurs once a solid consumer base has been developed. The certainty with regard to sales volume and branding then allows contracting brewers to make the step toward on-site production.²³ On-site production has an additional benefit as it provides consumers with a place to interact with the brewers. Existing and potential consumers can be more directly targeted once there is a self-owned main site of production. This allows for direct contact with consumers who might be interested in visiting the brewery and taproom. It further helps to advance the building of the brand. This direct interaction is indeed what spurred the rise of craft breweries in the first place: Their open approach to beer brewing and their expertise in developing exciting beers has attracted significant interest by beer lovers. Macrobrewers find it more difficult to develop this interaction directly, but have recently also jumped on the bandwagon. AB Inbev, for example, recently established the Maison Leffe, where visitors can get information regarding production of the Leffe beers, and do a Leffe tasting.²⁴ In this facility, AB Inbev aims to recreate the typical direct interaction with consumers typically witnessed at these smaller start-up breweries. However, it is clear that in this case there is no direct link to the brewers, nor to the brewing facilities. Hence, this attempt could be regarded as a “brand outlet store.” Establishing its own production site gives a brewery more control in guaranteeing quality and fuller freedom in planning the production process than when part of the production process is outsourced. It further minimizes transaction costs, as all operations can be conducted in house. It also solves potential contract issues. Microbreweries acquiring and developing their own equipment do face competition from macrobrewers, who started to develop their own “craft” brands, also called “phantom” or “microclone” brands of specialty beers, in the mid-1990s. These macrobrewers face the disadvantage of being labeled corporate multinationals. As a result, they often hide the macrobrewery origin on the labeling of their “craft” beers. So far, the macrobrewery movement into craft beers has had limited success, but the macrobrewers have a significant advantage in producing at larger scale, greater access to distribution channels, and more financial resources ²³ However, the exact tipping point differs from brewery to brewery. ²⁴ https://leffe.com/nl/maison-leffe

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  ,     .

and experience. This attempt to access the craft beer market has also gone hand in hand with acquiring shares in microbreweries and creating subsidiaries (AB Inbev for example has a “High End Brands” department). Most importantly, in several markets, craft brewers face strong competition from imported beers (Tremblay et al, 2005). These often are seen as an alternative to a craft beer, due to imported beer’s “exotic” appeal. On the opposite side, craft beers are also increasingly traded and imported in other countries. This creates even more competition, as craft brewers are consequently faced with domestic and foreign craft brewers and imported beers. The question whether the craft brewery movement is already at its peak, or even is a bubble, has been raised extensively in the professional and beer aficionado’s literature. A craft beer bubble could create significant issues, in particular as several of the craft brewers are acquiring their own premises. If the craft beer hype is truly just hype, long-term demand might be significantly lower than their current ambitious production plans, which have led to the establishment and expansion of production facilities. As a result, several of these facilities might find themselves facing over-capacity, which would then increase the competitive pressure on contract brewers and along the value chain.²⁵ Several chapters in Garavaglia and Swinnen (2018b) document high entry and exit in the craft beer market. This is also a consequence of the limited shelf and tap space to which craft brewers have access. Indeed, the distribution to shops is strongly in the hands of macrobrewers. The same applies for the available space in bars, as a large proportion of pubs in several countries are owned by macrobrewers (Deconinck and Swinnen, 2016). This competition would intensify strongly if the craft beer market proves to be smaller than anticipated.

7. From Gypsy Brewer to Contract Brewer: Selected Cases In recent years, many smaller breweries have become involved with contract brewing, both as a contract brewer and as a contracting brewer. This section will discuss a few specific cases. Černý Potoka is a Czech gypsy brewery established in 2016, which started off as a homebrewer, eventually growing to brew its beer at carefully chosen contract breweries. As of February 2019, Černý Potoka was rated the second-best Czech brewery on the beer rating app Untappd, a remarkable achievement for a gypsy brewer. Černý Potoka argues that there are several benefits to working together with a contract brewer, the most important of which is that such an arrangement allows them to grow step by step and remain

²⁵ See for example Van Kerckhoven et al. (2020) for an analysis of the hop industry.

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strongly independent. Not having their own equipment means there is no pressure to run at full (or high) capacity, which gives them the freedom to decide when to brew beer. Additionally, the paperwork for a gypsy brewer is much more limited, as there is no need to gather all the permits to establish a brewery, nor is there the requirement to have the brewer qualification under Czech legislation (where malting and brewing are considered regulated trades). However, as discussed during interviews, Vaclav Vomáčko, the owner of Černý Potoka, also recognizes significant issues with working as a contracting brewer. Due to the need to collaborate closely, the operational side is much more complicated. The contract brewer works to its own deadlines and might attempt to renegotiate an additional payment for longer lagering time. The contract brewer might also change dates or cancel brews, which might require a move to another contract brewer. Such a change in partner can alter the taste of the beer. However, for the time being, Černý Potoka values the independence of being a contracting brewery and has no plans to acquire its own brewery.²⁶ Other breweries have in recent years decided to take the step to move from contracting brewery to a brewery with on-site production. The Belgian brewery L’Annexe started as a homebrewing project in 2013. In January 2017 the company was founded, and in May 2017 it released its first beer as a contracting brewer, brewing at Brasserie Millevertus in Tintingy. After a very short time period, in spring 2018, the brewery opened its own brewing facilities in the Brussels quarter of Saint Gilles. In an interview, Max Lagrillère and Grégoire Berthon, the founders of L’Annexe, voiced many of the advantages and disadvantages mentioned before, but stated that they mostly decided to open their own facilities as a result of their ambition to target local pubs in Saint Gilles. These had been hesitant to adopt the beers brewed by L’Annexe, as they did not consider them to be local products.²⁷ Some other microbreweries have had their own facilities for a while, and work (partly) as contract brewers. The Belgian brewery De Ranke originally started off brewing at other breweries (Brewery Deca), but after eleven years, Nino Bacelle and Guido Devos decided to acquire their own facilities. They have now taken up contract brewing services for other breweries. In an interview, they indicated that this leads to a faster amortization of the investment in the equipment, and that collaboration with contracting brewers has given them new insights. At the same time, there are some challenges, as the contracting brewer might require significant education in order to be able to use the equipment. At the same time, since De Ranke produces its own beers, on occasion small issues might arise in the working space if contracting brewers feel that they deserve priority, which is difficult when internal production is also taking place. De Ranke requires

²⁶ Interview with Černý Potoka, 9 February, 2019, 12:17pm. ²⁷ Interview with L’Annexe, 12 October 2018, 2:30 PM

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  ,     .

contracting brewers to work according to its philosophy and standards, which may be more specific than those of the contracting brewer.²⁸

8. Conclusion This chapter argues that the rise of craft brewing and the start-up of new microbreweries has been greatly accommodated by contract brewers. At the same time, the latter have benefited from the rise of craft brewers. The rise of microbreweries and that of contract brewers consequently go hand in hand. This can be explained due to economic realities faced by craft brewers, who produce at a small scale. Producing beers at a third brewery has helped startup breweries to overcome some of the hurdles that come with first entering the market. Contract brewing provides both the contract brewer and the contracting brewer with significant advantages. Financially, it is cheaper to use a contract brewer than it is for the contracting brewer, who faces significant uncertainty about future demand, to acquire its own facilities. The mutual exchange of knowhow and expertise also helps both parties. However, there are several disadvantages to contract brewing, as well. Most importantly, contracting brewers are sometimes considered as “fake” breweries due to the lack of brick and mortar on-site production. Other negative implications of the relationship can often be solved through the development of contracts. As every relationship is different due to the different needs of the contracting brewer and the different services offered by the contract brewer, writing these contracts can be time and effort-intensive. More importantly (for the contracting brewer), their involvement in the brewing process may vary from necessary to redundant. It may be interesting for a future study to investigate the participation of contracting brewers in beer production to investigate if double marginalization is seen by the end consumer, and to see the impact of this on sales. With more and more craft brewers acquiring their own facilities as the demand for their products grows, significant issues could arise in the short run. Demand for craft beer might be saturated, in which case the additional brewing capacity might create over-capacity in the industry. This would have severe implications for many craft beer producers, as well as the contract brewers.

References Aquilani, B., Laureti, T., Poponi, S., and Secondi, L. 2015. Beer choice and consumption determinants when craft beers are tasted: An exploratory study of consumer preferences. Food Quality and Preference, 41 (1), pp. 214–24. ²⁸ Interview with De Ranke, 8 February, 2019, 1:28pm.

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Carroll, G. 1985. Concentration and specialization: Dynamics of niche width in populations or organizations. American Journal of Sociology, 90 (6), pp. 1262–83. Carroll, G. and Swaminathan, A. 2000. Why the micro-brewery movement? Organizational dynamics of resource partitioning in the U.S. brewing industry. American Journal of Sociology, 106 (3), pp. 715–62. Clemons, E. K., Gao, G., and Hitt, L. M. 2006. When online reviews meet hyperdifferentation: A study of the craft beer industry. Journal of Management Information Systems, 23 (2), pp. 149–71. Cottone, V. 1995. Virtually All You Need to Know about Contract Brewing. Pint Post (Summer): 1. Deconinck, K. and Swinnen, J. 2016. Tied Houses: Why They Are so Common and Why Breweries Charge Them Higher Prices for Their Beer, in Cabras, I., Higgins, D., and Preece, D. (eds), Brewing, Beer and Pubs: A Global Perspective, Palgrave Macmillan, Basingstoke, pp. 231–45. Garavaglia, C. 2018. The Birth and Diffusion of Craft Breweries in Italy, in Garavaglia, S. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 229–58. Garavaglia, C. and Castro, D. 2018. The Recent Advent of Micro Breweries in the Spanish Brewing Industry, in Garavaglia, S. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 345–72. Garavaglia, C. and Swinnen, J. 2018. Economics of the Craft Beer Revolution: A Comparative International Perspective, in Garavaglia, S. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 3–54. Garavaglia, S. and Swinnen, J. (eds) 2018b. Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke. Gokhale, J. and Tremblay, V. J. 2012. Competition and price wars in the U.S. brewing industry. Journal of Wine Economics, 7 (2), pp. 226–40. Kerkvliet, J. R., Nebesky, W., Tremblay, C. R., and Trembaly, V. J. 1998. Efficiency and technological change in the U.S. brewing industry. Journal of Productivity Analysis, 10 (1), pp. 271–88. Li, F., Shi, Y., Boswell, M., and Rozelle, S. 2018. Craft Beer in China, in Garavaglia, S. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 457–84. Madsen, E. S. and Wu, Y. 2014. Globalization of Brewing and Economics of Scale, Aarhus University Economics Working Papers, 2014–23. Nelson, J. P. 2005. Beer Advertising and Marketing Update: Structure, Conduct, and Social Cost. Review of Industrial Organization, 26 (3), pp. 269–306. Oliver, G. 2012. The Oxford Companion to Beer, Oxford University Press, Oxford. Ono, Y. 1996. Who Really Makes that Cute Little Beer? You’d Be Surprised. Wall Street Journal, April 15, p. 1, A6.

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Scandinavian Brewers Review. 2014, 3, editorial p. 6. Sutton, J. 1999. Technology and Market Structure, MIT Press, Cambridge, MA. Toro-Gonzaléz, D., McCluskey, J. J., and Mittelhammer, R. C. 2014. Beer snobs do exist: Estimation of beer demand by type. Journal of Agricultural and Resource Economics, 39 (2), pp. 1–14. Toro-Gonzalée, D. 2018. The Craft Brewing Industry in Latin America: The Case of Colombia, in Garavaglia, S. and Swinnen, J. (eds), Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke, pp. 115–36. Tremblay, V., Iwasaki, N., and Tremblay, C. H. 2005. The dynamic of industry concentration for U.S. micro and macro brewers. Review of Industrial Organization, 26 (3), pp. 307–24. Tremblay, V. and Tremblay, C. H. 2005. The U.S. Brewing Industry: Data and Economic Analysis, MIT Press, Cambridge, MA. Tremblay, V. and Tremblay, C. H. 2011. Recent Economic Developments in the Import and Craft Beer Segments of the U.S. Brewing Industry, in Swinnen, J. (ed.), The Economics of Beer, Oxford University Press, Oxford, pp. 141–60. Van Kerckhoven, S., Van Meerten, M., and Wellman, C. 2020. The Dynamics of the Hop Industry, in Madsen, E. J., Gammelgaard, J., and Hobdari, B. (eds), New Developments in the Brewing Industry: The Role of Institutions and Ownership, Oxford University Press, Oxford.

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11 The Internationalization of Craft Beer Martin Stack

The title of this chapter seems to beg debate: can we really think of craft beer as being international? Historically, little beer—even from the biggest breweries— has crossed national borders, and the notion of small, locally oriented breweries beginning to explore distant markets is rather hard to swallow. Yet, beer markets throughout the world have changed tremendously since the 1970s and international linkages have played an important role in these changes. While the most immediate cross-border manifestation of these connections is exports, this chapter argues for a broader conceptualization of this development. The very fact that the terms “craft beer” and “craft brewery” are commonplace throughout the beer world can be taken as examples of an internationalization process which also includes fundamental steps such as the global diffusion of beer styles and brewing techniques. A number of authors have discussed the evolution of country-specific craft beer markets. Garavaglia and Swinnen (2017a) provides a series of country-level discussions of this process, and they Garavaglia and Swinnen (2017a, 2017b) summarize several factors that the emergence of these new craft beer markets shared in common; but, as they note, their focus is on cross-country analysis rather than international linkages across the various craft beer markets: “we summarize key insights that derive from a comparative analysis of craft beer developments and beer industry transformation in the various countries” (p. 4). There is clearly overlap between comparative and international analysis, but the focus here is on the series of ways in which domestic craft beer markets have been and continue to be influenced by ideas, people, and products across countries. This chapter begins with a brief discussion of the distinction between beer and craft beer, and how a craft brewery can be defined. Section 2 develops a two-stage model outlining the wide-ranging ways in which domestic craft beer producers and consumers have interacted with key actors in other countries. In stage 1, the first pioneering craft brewers begin to emerge, having typically found their inspiration abroad or from looking back upon their nation’s own brewing history (or both). At the same time, a small number of consumers draw on their international experiences as they become more curious about the range of their

Martin Stack, The Internationalization of Craft Beer In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0012

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beer choices. Imports from traditionally minded, small breweries in a handful of European countries helped inspire and educate the first wave of craft beer producers and consumers in emerging craft beer markets throughout the world. In stage 2, domestic craft beer markets continue to grow through a combination of supply and demand-side dynamics. Entrepreneurs open new breweries at a rapid pace, motivated by a combination of traditional breweries from other countries and successful craft firms in their home market. At the same time, craft consumers become increasingly informed about beer quality and styles, and they begin to buy domestic beers similar to those that in stage 1 had to be imported. This discovery telegraphs a crucial point developed later in the chapter: exports have played key roles for some craft breweries, but sustained exports are challenging, in part because of the sophisticated domestic competition that has arisen in many beer markets throughout the world. While the relative timings of stages 1 and 2 vary, most craft beer markets go through this two-stage process of awareness (and importing) followed by domestic imitation and innovation (and import substitution). Section 3 presents a case study of this model, examining how international factors have shaped the US craft beer market from its birth in the 1970s to the present. The conclusion explores how the internationalization of craft beer will continue to evolve.

1. From Beer to Craft Beer While all craft beer is beer, not all beer is craft beer. To help understand this distinction, it is important to review briefly how industrialization changed beer and brewing, and how craft beer represents a return to a differently ordered production system. Beer is an ancient beverage and over time it has been characterized by a wide range of styles and production processes. While there is a several millennia-long tradition of home brewing, the construct of a commercial brewing industry is relatively recent. Advances in science and technology revolutionized beer production in the eighteenth and nineteenth centuries, giving rise to the first generation of modern breweries (Swinnen and Briski, 2017). During the nineteenth and twentieth centuries, brewing grew into a leading manufacturing industry in many countries. As these markets matured, it was common to see an array of competing brewery strategies. For example, in the United States in 1900, breweries varied by output level (from the very small (hundreds of barrels) to the very large (more than 1,000,000 barrels)), type and range of beers (ales versus lagers), geographic distribution (local, regional, national), type of packaging (draught versus bottled), and level of investment in science and technology (Stack, 2000).

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Although manufacturing and consumption remained largely national through the nineteenth and twentieth centuries, it also became increasingly common during this period for brewers, raw materials, machinery, and knowledge about brewing to travel across borders. These movements contributed rather unexpectedly to two key cross-country convergences across national beer markets regarding the scale of production and the type of beer being produced. First, dominant breweries sought to capitalize on the gains from economies of scale and scope by greatly expanding their annual production levels. As a result, concentration ratios in most beer markets rose rapidly over these years as mass production became the norm. Second, most of these large breweries came to focus on one style of beer in particular: pilsner. Although breweries throughout the world produced a wide range of beers into the early twentieth century, by the late twentieth century nearly every beer market was dominated by mass-producing breweries brewing pilsnerstyle beer. There were, however, some important exceptions to these broad trends. In a handful of regions, locally oriented breweries kept alive beer styles and brewing traditions that were in danger of going extinct. Some of them realized that limiting their production levels enabled them to remain better connected to their customers and communities. While many of these traditional breweries faded over the course of the twentieth century, those that persevered ended up serving as inspirations to the new generation of craft beer brewers and consumers (Swinnen and Briski, 2017). In fact, the very criteria that the Brewers Association (the trade association for craft breweries in the United States) has put forth to define a craft brewery draw heavily on the key characteristics of some of these long-running traditional breweries. According to the Brewers Association, a craft brewery is small, independently owned, and committed to traditional brewing processes and ingredients. Yet, as this chapter argues, small, traditional, and independent does not mean backward, unsophisticated, or unaware of broader currents in brewing markets at home and abroad.

2. A Two-Stage Model for the Internationalization of Craft Beer Although at first glance craft beer seems to be all about the local, there are in fact many cross-border dimensions which evolve as these markets grow and mature. The emergence of a series of national craft beer revolutions was deeply dependent on a number of international connections linking producers, consumers, and other facilitating figures including importers, distributors, retailers, and writers (Kamp, 2007; Cabras and Bamforth, 2016). The next step is to explore

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how these cross-country interactions and interconnections contributed to the two-stage emergence of national craft beer markets and identities.

2.1 Stage 1: Internationalization and the Birth of a Craft Beer Market In the 1970s, beer drinkers throughout the world were very parochial. Evans (2011) argues that during these years “British people drank British beer . . . American drinkers held fast to their light lagers, Australians quenched their thirst with a similarly bland offering, and the countries of Europe remained behind their still-existent frontiers, knowing and appreciating for the most part only the beers created within their own borders” (p. 6). Yet, it was from this environment that awareness of, and ultimately appreciation for, different beer traditions emerged. The fundamental question is why this was. During Stage 1, some consumers begin to experiment with beer brands and beer styles that are quite different from the prevailing domestic and imported lagers that dominate their home markets. In many countries, these developments reflect broader social forces that lead consumers to try new and novel products in an array of food and drink markets (see, e.g., Levenstein, 1993; Kamp, 2007). A few authors have taken this analysis one step further, trying to generalize about those consumers who help shape new trends and tastes. Sax (2014) defines a tastemaker as “anyone with the economic or cultural power to create and influence food trends” (p. xv), and in his discussion about how new food trends emerge, he asks, “who were the tastemakers behind them who took an idea, cultivated it, and changed the way we ate?” (p. xv). In partial answer to this question, Rao (2009) coined the term “evangeale-ists” to describe beer enthusiasts who rebelled against homogenous, mass-produced beer, instead preferring artisanal, distinctive beers. This raises the question of how these tastemaking evangeale-ists became aware of these artisanal alternatives. Not surprisingly, the specific answer to and timing of this question varies by country, but the spread of products and ideas internationally played a key role. While the sources and spread of this information varied, the fundamental process was similar: consumers learned about the different beers, breweries, and beer styles that existed in other countries, and demanded them. Depending on the time period and the country involved, this knowledge came through an array of sources, including books/articles, physical and online videos, social media, home brewing, sampling imported beers, and direct travel.¹

¹ Part 3 details how this process unfolded in the United States.

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On the supply side, there were two key factors. First, pioneering brewers began producing beers quite different from the best-selling products in their home markets. For inspiration, these mavericks typically drew on examples from their domestic brewing history and/or contemporary beers from traditional European breweries. Second, several entrepreneurs founded importing companies specializing in small-batch, artisanal beers. Some evangale-ists first experienced distinctive new beers through imports rather than from the first generation of domestic craft breweries, whose initial distribution was typically quite limited. In addition, importers helped many traditional European breweries realize that they could offset some of their declining demand at home with new converts abroad.² During Stage 1, overall awareness of craft beer is relatively low, and imports play an important role in helping consumers (and some producers) become more familiar with the wide range of beer styles and flavors still being produced by traditional breweries. From a very low base, craft beer grows quickly during this period, but it remains a tiny share of the national beer markets. Large, macro breweries do not really pay any attention to craft beer, and within the national context, craft beer is not widely available at retailers or on-premise locations.

2.2 Stage 2: Internationalization and the Growth of a Craft Beer Market While Stage 1 spans the birth and early development of a craft beer market, Stage 2 covers the period of growth. After markets are grouped into Stage 1 or Stage 2, they can be further divided into early or late Stage 1 or Stage 2. For example, the United States was one of the pioneering craft beer nations and is now well into Stage 2, while Argentina, Brazil, China, and Vietnam are newer to craft beer and are better viewed as relatively early in Stage 1. As these markets develop, their relative placement in these stages will change.³ The first countries to enter Stage 1 were very influenced by brewers, breweries, and ideas from countries such as Belgium, the United Kingdom, and Germany. Over time, as a craft market matures into Stage 2, its international experiences change: for example, the United States progressed from being a country that

² The international expansion of Starbucks presents a similar lesson. In the early 1990s, Starbucks operated exclusively within the United States, but it faced an important question: as it continued to grow, should it deepen its footprint domestically, or should it expand internationally? Its answer in the mid-1990s was to enter large, sophisticated cities in Canada, Japan, the Philippines, and the UK, reasoning that urban consumers abroad would be more receptive to their product and concept than old-fashioned coffee drinkers in smaller US cities. ³ The idea of categorizing craft beer markets by their level of development is somewhat similar to the model of the Product Life Cycle hypothesis, which explores how innovating and imitating countries alter their production and consumption over time.

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simply imported its craft beers and beer knowledge to a country that inspired and informed craft brewers and drinkers abroad. During Stage 2, craft brewers and consumers grow in number, knowledge, and sophistication. On the demand side, craft beer awareness becomes more widespread. During Stage 1, a very small number of consumers (Rao’s evangeale-ists) begin to explore alternative beers; during Stage 2 a much wider group of consumers are willing to try craft beers, and some become quite knowledgeable about the increasing range of options, both at home and abroad. There are equally transformative developments on the production side. Some pioneering breweries develop regional and even national distribution, inspiring new rivals to enter the market. While most of these first-generation craft breweries focus on domestic expansion, a handful seek to capitalize on their growing international reputation by exporting to emerging craft beer markets which have not yet created their own domestic champions. Physical imports/exports, though important for reasons highlighted earlier, have never accounted for a significant percentage of overall sales. In addition, the window for exports typically depends on the speed with which domestic rivals can emerge: as target markets graduate from Stage 1 to Stage 2, the opportunity for exports begins to wane. This leads some breweries to explore alternative modes of international expansion and connection such as opening up new breweries in another country, acquiring brands and breweries, and setting up joint venture and licensing deals abroad.⁴ These strategies enable brewers to avoid the transportation, time, and tariff costs of exports, though each approach presents its own unique set of challenges. Thus far, we have reviewed Stage 2 developments from the perspectives of consumers and brewers separately. Often, however, phenomena impact both sides of the equation simultaneously, and that is the case with the rapid international diffusion of beer styles and brewing techniques. This trend began in Stage 1 with new craft breweries replicating traditional Belgian-style and English-style beers in particular. In Stage 2, the pace of diffusion continues and in a few instances even increases. As new styles are introduced, they quickly spread to other countries, where they are reproduced (often with a local twist).⁵ In a similar way, craft breweries have also revised and popularized older styles that had fallen out of fashion (e.g. Berliner Weisse) or production (e.g. Gose, Gruit) in their home market. Most foreign consumers have experienced these new and revised styles through craft brewery interpretations, not imports: it is the style, not a particular brand, that has internationalized. Compared to Stage 1, Stage 2 presents a much more sophisticated craft beer market, so it is not surprising that its vector of internationalization is ⁴ Examples of these are discussed below in Section 3. ⁵ The website and app Untapped (https://untappd.com/beer/top_rated) provide an excellent illustration of this. It lists all of the beers (and their styles) which have at least 150 ratings.

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different. As domestic craft breweries deepen their product portfolios, consumers have less need of imports, which in earlier periods were often the only option for trying specific styles. At the same time, many consumers and producers develop greater levels of awareness of foreign craft beer trends and seek to bring them into their home market. Advancements in social media, smartphone apps, and web publishing have played crucial roles in this process. Finally, as more markets enter Stage 2, the interactions between countries become more multi-directional, with inspiration and ideas flowing across a wider range of craft beer markets.

3. A Case Study—Internationalization and the Rise of Craft Beer in the United States Several authors have discussed the rise of the craft beer market in the US (Acitelli, 2013; Carroll and Swamimathan, 2000; Elzinga, Tremblay, and Tremblay, 2015, 2017; Mittelman, 2008; Ogle, 2006), but none of these studies have concentrated on the broad range of international linkages surrounding its development.⁶ Given the sophistication and size of the US craft beer market in the 2010s, it is sometimes difficult to recall how thoroughly this market has changed over the past forty years. In the 1970s, the United States, like nearly every other beer-drinking country, was dominated by a few national pilsner beer brands. Industry production was very concentrated and most consumers had acquired a taste for this rather bland style of lager. In this environment, it was hard to imagine rapid changes on either the supply or the demand side. Yet, new developments came on both fronts and international factors played a key role. During the early years of America’s craft beer revolution, the influence of these variables was very one-sided, as US producers and consumers imported knowledge, ideas, and traditional beers from abroad, primarily Europe. Over time, as the United States matured into one of the world’s leading craft beer nations, the interconnections began to flow in multiple directions as US beer, brewers, and craft knowledge came to be in demand throughout the world’s many emerging craft beer markets. The goal here is to explore the specific role international connections played in the two-stage development of the US craft beer market. While the length and precise timing of these stages differ by country and are by definition imprecise, this case study of the United States defines Stage 1 as 1970s–1990s and Stage 2 as 2000s–present.

⁶ While most country-level studies have not examined international connections at all, there is one notable exception: Elzinga et al (2017) do analyze some of the important linkages between craft beer in Europe and the United States. The case developed here builds on and amplifies this earlier study.

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3.1 Stage 1, 1970s–1990s: International Linkages and the Creation of the US Craft Beer Market While discussions about the origins of craft beer in the United States often start on the producer side, looking at the pivotal role played by Fritz Maytag (Anchor Brewing), Jack McAuliffe (New Albion Brewing), and Ken Grossman (Sierra Nevada Brewing), this analysis begins instead with consumers and the broad context in which beer-drinker preferences were formed. Several writers have discussed the wide-ranging changes that transformed food and drinking tastes and trends in the United States over the twentieth century (Hess and Hess, 1977; Kamp, 2007; Levenstein, 1993). These and other authors highlight how Americans came to prefer mass-produced, homogenized foods and drinks over the post-World War II period. Yet, these food historians also examine how knowledge from abroad regarding foods, beverages, and cooking techniques entered the United States and slowly but steadily influenced American tastes. Foreign chefs and writers (e.g., Jacques Pepin and Lidia Bastianich) brought to the United States a wealth of perspectives from their home countries, and key American voices in the emerging food revolution, from the chef/restauranteur Alice Waters at Chez Panisse to the cookbook writer/TV cooking show celebrity Julia Child, capitalized on their experiences abroad to introduce seemingly new ideas about food and cooking. It is not coincidental that the US craft beer revolution began just as this wider transformation in food preferences was unfolding in the 1970s and 1980s. For brewing, the specific question is what forces contributed to challenging the prevailing pilsner culture. While other writers have discussed some of the developments that combined to create craft beer consumers (Cabras and Bamforth, 2016; Elzinga et al, 2017), here the focus is on the international influences. By the 1970s, most Americans would no longer have had personal experience with any of the fuller-flavored domestic beers which had been produced on a limited scale after the repeal of Prohibition. Instead, Americans looking for alternatives to domestic pilsner searched abroad, mainly in a handful of European countries. Section 1 of this chapter explained that traditional breweries in a few European countries had kept alive regional beers and beer styles even as their domestic audiences were declining. Familiarity with these traditional European beers came from four primary sources: Europeans who moved to the United States, Americans who traveled to Europe, an emerging group of beer writers, and a small but influential set of beer importers. European transplants to the United States had long lamented the unavailability of their traditional beers, but there did not seem to be much they could do about it. Similarly, many Americans traveled to Europe and developed a taste for the unique styles they discovered there, only to realize they could not find them when they returned home.

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Beer drinkers had traveled back and forth between the United States and other beer-producing regions for decades, but in the 1970s and 1980s there were three important differences. First, as discussed previously, broader cultural developments regarding food and drink led to new-found appreciation for the role that foreign perspectives could play. Second, the first wave of writing about beer emerged, and many readers were eager to learn more about these traditional, but not well-known, breweries and beer styles. Third, a few pioneering brewers and importers began to either brew in the United States or bring in more fully flavored beers from abroad. Before turning to the supply-side contributions of these new brewers and importers, we need to briefly discuss the cross-national impact that the first generation of beer writers played in educating the newly emerging craft consumers and producers. Charlie Papazian founded the American Homebrewers Association in 1978, and published his influential work The Complete Joy of Home Brewing in 1984. Of particular interest here is that the British beer writer Michael Jackson wrote the foreword to this book. Jackson’s writings introduced brewers and drinkers throughout the world to a wide array of beer traditions, many of which were scarcely known outside of their local community. In 2011, the Brewery History (BH) dedicated an entire issue to the impact Jackson and his writings had on the development of craft beer. In his essay, Evans (2011), argued that Jackson’s 1977 book The World Guide to Beer was, without exaggeration, the inspiration for the establishment of hundreds of new breweries in North America and elsewhere. In the United States the founders of such leading craft breweries as Sierra Nevada and Samuel Adams have acknowledged that it was The World Guide to Beer that inspired them to take a leap of faith, and start up new businesses in an industry that had only seen independent company contraction and consolidation for generations.

This new generation of brewers drew heavily on the writings of Papazian, Jackson, and several others, including Roger Protz in the United Kingdom and Fred Eckhardt in the United States. In addition, these new brewers were greatly influenced by their direct experiences in Europe and with traditional European beers. The founders of several important breweries established between the mid 1980s and the early 1990s (e.g., New Belgium Brewery, Odell’s Brewery, and Boulevard Brewery) have emphasized that trips to Europe helped inspire them to start new breweries at a time when the US craft market was in its infancy.⁷ Nearly all of the United States’ new breweries announced that they would be concentrating on British-style, ⁷ Elzinga et al (2017) discuss several other examples and it is clear that many more cases could be introduced as well.

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Belgian-style, or German-style beers; but the inspiration went beyond the styles themselves. As John McDonald, founder of Boulevard Brewery, explains, he “fell in love . . . not just with the beer, but with the idea: small breweries making flavorful beers in a variety of styles for a local or regional market” (McDonald, 2019). Most of the traditional European breweries visited by these early American craft beer pioneers were small, family-run, and community-focused. These visits provided inspiration for the beers they brewed and the locally oriented breweries they established. This is not to suggest that all new craft breweries founded during this period were a success. Many failed, and a particularly interesting case involved Pierre Celis, an important brewer in Belgium, who helped revive the traditional witbier before selling his Hoegaarden brewery to Interbrew (the antecedent to AB InBev) in the 1980s. A few years after the sale, Celis moved to Austin, Texas, where he opened a new brewery in 1992. The entire range of beers was critically acclaimed, and Michael Jackson awarded the Celis White a perfect four-star rating (Kitsock, 2011). Unfortunately, critical acclaim does not guarantee market success; despite brewing a series of award-winning beers, financial pressures led Celis to sell half of the brewery to Miller in 1995 and he closed Celis Brewery in 2000. The following year, a reporter argued that consumer tastes in Austin and Texas during the 1990s were not ready for Celis: “the kind of beer Texans overwhelmingly prefer is the antithesis of the kind of beer Pierre Celis spent his life perfecting” (Lisheron, 2001). This article went on to quote David Edgar, director of the Institute for Brewing Studies in Boulder, Colorado: “There is a perception that Texas is not a market receptive to the craft brewing industry. I would agree with that perception.” It is fascinating to look back, eighteen years later, and see how much has changed in the US craft market, and in Austin and Texas in particular. Today, Austin is widely regarded as a craft beer center and is home to one of the United States’ most esteemed microbreweries, Jester King. Jester King was founded in 2010, a decade after Lisheron’s article, and it specializes in beers fermented with wild yeasts, a style that is seemingly much more challenging than Celis’ white ales. The failure of the Celis Brewery is an important reminder that during Stage 1, craft beer culture is still embryonic. That a world-class brewer producing awardwinning beers failed in a city that a decade later was famous for boutique breweries shows how quickly craft beer culture and awareness can evolve. While Celis’ entry into the burgeoning US craft scene was not successful, he did end up having a significant impact through his Hoegaarden brand. During the 1990s and 2000s, Belgian-style witbier became increasingly popular with American craft beer drinkers and producers. In 1995, after earning his PhD in brewing science from the University of Brussels, Keith Villa created Blue Moon, a Belgian-style wheat ale. Since Miller-Coors produces Blue Moon, the BA does not consider it a craft beer, but Blue Moon has become the highest selling non-pilsner beer in the United States and is sold in more than twenty-five other countries.

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Hoegaarden was not the only imported beer during the 1980s and 1990s to greatly impact the United States’ evolving craft beer market. In fact, during the early years of Stage 1, specialty imports played an instrumental role in acquainting consumers (and many producers) with new and hard-to-find beers. Two particularly noteworthy importers were Merchant du Vin and Vanberg & DeWulf. Charlie Finkel began Merchant du Vin in 1978 and he introduced several distinctive and hard-to-find beers into the United States, including Samuel Smiths from England, Orval and Rodenbach from Belgium, and Ayinger and Pinkus from Germany. Bert Grant, founder of one of the United States’ early, influential craft breweries (Grant’s Brewery), wrote that Finkel deserved credit for “importing all those wild beers. He sort of primed the pump so that when the microbrewed beers showed up, people were prepared to taste something different” (Grant, 1998, AleMasters). This pump priming was tremendously important when the distribution range of beers from new microbreweries like Grant’s was quite limited. Another particularly influential firm was Vanberg & DeWulf, founded by Don Feinberg and Wendy Littlefield in 1982. Like many of the first-wave craft brewery entrepreneurs, they too were inspired by personal experiences in Europe—in this case, time spent in Belgium: We lived there for 3 years. The beer landscape was barren in America, but bountiful in Belgium. Our companies were transferring us back to [New York] and we thought “if Americans knew about Belgian beers they’d love them”. We began importing in 1982 and in short order had the best indigenous example of every style brewed in Belgium, albeit the market was small. For 7 years we worked full time and did beer on the side. Our import career very much mirrored Michael Jackson’s—we were all proselytizers. (Gastronomista, 2014)

A bit different from Merchant du Vin, they focused exclusively on beer from Belgium, though they readily acknowledged the challenges of this strategy. Reflecting back on their experiences in the 1980s, they explained: It was the dark ages. People could care less. Distributors actually spit out sour beer we presented to them, saying “Don’t ever bring me anything like that again!” Slowly, we were able to educate and expose people to the great brews of “The Beer Country.” We were the first to import a number of benchmark beers stateside, such as Duvel, Affligem, Rodenbach, the Lambics of Frank Boon. (DrinkingBelgianBeer.com, 2013)

Discussions about changing consumer preferences often gloss over how it happens, how slow it is, and how difficult it is for the pioneering firms. This passage nicely reflects the difficulties firms in Stage 1 had in shifting consumer tastes.

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While their sales were never huge, importers such as Merchant du Vin and Vanberg & DeWulf helped show Americans the fuller range of beer characteristics in much the same way that imported foods revealed the variations and complexities of many comestibles Americans had come to take for granted. By the end of the 1990s, America’s craft beer market was well established. Its consumers were growing in number and becoming steadily more knowledgeable. The total number of microbreweries had grown to more than 1,500 by 1999. As a result, Americans had wider and more consistent access to domestically produced Belgian-style, English-style, and German-style beers. By the end of Stage 1, internationalization was increasingly about replicating the styles from these countries rather than physical imports.

3.2 Stage 2, 2000s–Present: International Developments and the Maturing of the US Craft Beer Market We began with consumers in Stage 1, as broad changes in consumer preferences and tastes spilled over into beer, helping to provide the setting for a revolution in beer consumption. In Stage 2, we begin on the supply side. As the domestic craft market matures, home-grown options increase in quality and availability, diminishing the reliance on traditional imports. Intriguingly, Feinberg and Littlefield, the couple who founded Vanberg & DeWulf, ended up contributing on both sides of this equation: first as importers, then as craft brewers.⁸ In 1997, they opened Ommegang, a Belgian-style brewery in upstate New York. They were not the first to open a Belgian-style brewery, though they were among the best connected to Belgium. This shift in emphasis reflected structural changes in the US craft beer market: they realized that domestic production would be better positioned to meet changing consumer preferences than a model relying entirely on imports. Beginning in the 2000s, the international flow of resources, ideas, beers, and breweries began to move from a one-way flow, to a two-way street, and ultimately to a complex web connecting craft brewers and consumers throughout the world. On a certain level, this seems a bit strange: craft breweries typically begin with strong ties to their local communities. Yet, over time, some craft breweries grow, and as they do, they must address a fundamental question: do we try and expand within the United States (which was quickly becoming the most competitive craft market in the world) or do we explore the possibility of exports? During the 2000s and 2010s, a few breweries on the West Coast experimented with exports to Asia⁸ In fact, they contributed in a third way as well: in 1995, they published Michael Jackson’s The Great Beers of Belgium. This book solidified Jackson’s reputation as one of the top writers in English about Belgian beer.

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Pacific rather than expanding more deeply across the United States; similarly, some East Coast breweries tried exporting to Europe rather than expanding westward. Notable pubs in London such as the White Horse were among the first importers of these beers.⁹ In 2004, the Brewers Association established its Export Development Program (EDP), which helped promote US craft beer overseas through sponsorships and market research analysis. By 2017, the EDP estimated craft beer exports to be 482,000 barrels, valued at $125 million: Canada accounted for 50 percent of the sales and the United Kingdom accounted for another 10 percent. While not insignificant, it was only about 2 percent of US craft beer production, which totaled 24.8 million barrels (Brewers Association, 2019). While media-savvy breweries like to highlight that their beers are available abroad, the reality is that very few US craft breweries rely much on exports. Nonetheless, there are some breweries who have excelled at exporting; one of the most successful has been Brooklyn Brewery, which derives nearly half of its sales from overseas markets (Margolis, 2018). One reflection of Brooklyn’s international focus is that it announced in only January 2019 that it would begin distribution in California (Furnari, 2019). By this point, it had much deeper relationships with countries in Europe and Asia than in the western half of the United States. Brooklyn’s success in exporting reflects a combination of a few natural advantages (its position on the East Coast, its name recognition in Europe) with some innovative investments in shipping and logistics. Its CEO, Eric Ottaway, recently stated that Brooklyn would be among a handful of US breweries that will continue to be successful exporters (Brewbound Podcast, 2018, Episode 16). Despite Brooklyn’s success in this area, most craft breweries view exporting with some skepticism. Exports incur high transportation costs and can take a long time to arrive, leading to concerns about quality. At New Belgium, exports account for just under 5 percent of its sales. Casey Kjolhede, its export manager, explains that concerns about product quality lead them to reject most requests for international distribution (Margolis, 2018). Brooklyn and other exporters fully understand the challenges and limitations of shipping their beer across oceans, and this has led a couple of them to explore alternative modes of international expansion. For example, Brooklyn set up joint ventures with breweries in Denmark, Sweden, South Korea, and Hong Kong, and signed a licensing agreement with Coopers in Australia to brew some of their beers. Yet, while Brooklyn has used licensing and joint ventures to great effect, few

⁹ It is not coincidental that this was one of Michael Jackson’s local pubs. He was an early advocate of breweries such as Anchor Steam and Sierra Nevada. Just as Jackson introduced many Americans to traditional British beers, he also played an instrumental role in educating British beer drinkers about the rapidly changing US craft market (Boak and Bailey, 2014).

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other breweries have pursued such relationships (Brewbound Podcast, 2018, Episode 16). The most significant international commitment a firm can make involves foreign direct investment (FDI): the two primary examples are when a brewery (a) sets up new production facilities overseas or (b) acquires another brewery. While large breweries such as Guinness have operated foreign plants since the 1960s, very few craft breweries have expanded in this manner. As a result, Stone Brewery, from California, generated a great deal of attention in 2016 when it opened a second brewery in Berlin (Nurin, 2018). Mass-produced American beers were not highly regarded in Germany, so Stone’s move into Germany was viewed as both audacious and a sign of how far US craft beer had matured.¹⁰ Interestingly, at roughly the same time that Stone expanded into Europe, two maverick European craft breweries—BrewDog, from Scotland, and Mikkeller, from Denmark—began production in the United States.¹¹ This is particularly significant since there have been very few examples of even large foreign breweries producing in the United States. Guinness tried unsuccessfully to run a brewery in New York in the 1940s and closed it after a few years; interestingly, in 2015, it decided to try again and opened a new brewery in Baltimore, Maryland. This new venture will brew a few beers for the US market (e.g., Guinness Blonde) but not Guinness stout, which will continue to be imported from Ireland. No other foreign breweries have brewed in the United States; so, if they are successful, two upstart craft breweries from northern Europe might become the first breweries apart from Guinness to operate their own plants in the United States.¹² Craft breweries can also internationalize through acquisitions. While several US craft breweries have bought other US craft breweries, there are as yet no examples of US craft breweries purchasing craft breweries abroad. While there are several examples of foreign macrobreweries buying US craft firms (e.g., AB InBev and Goose Island, Heineken and Lagunitas, Mahou San Miguel and Founders), thus far only one foreign craft brewery has expanded by acquisition in the United States: Duvel-Moortgat (D-M), from Belgium. Vanberg & DeWulf were the first to import the Duvel brand into the United States, so it was not too surprising when D-M began a series of international acquisitions by buying a stake in Ommegang in 2003. Since then, D-M has made several additional purchases involving

¹⁰ In April 2019, Stone announced that it was selling its Berlin facility to BrewDog, a craft brewery from Scotland. Stone announced this decision on their website in a posting titled, “TOO BIG, TOO BOLD, TOO SOON.” It will be interesting to see if BrewDog is more successful in its expansion into Germany. ¹¹ Both BrewDog and Mikkeller had developed a wealth of international experiences before they launched their US operations. During the 2010s, both of them had opened a series of branded bars across Europe, South America, Asia, and North America, an accomplishment that no US craft brewery has so far replicated. ¹² There are brands from foreign breweries that have been licensed and contract brewed in the US, but they have not established their own independent production facilities in the US.

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breweries in the Czech Republic and Italy, and has bought two more breweries in the United States (Boulevard Brewery in 2014 and Firestone Walker in 2015). Yet, while all of these examples of brewery expansion are important, the most transformative way in which craft beer is internationalizing is through the broad geographic spread of craft beer styles and techniques. In discussing the rapid growth of the world’s dominant macrobreweries from the 1990s to the 2010s, Stack et al (2016) argued that the internationalization of macrobreweries was occurring at the level of the brewery, not the brand. With craft beer, the most important manifestations of internationalization are through the diffusion of style and of technique. When craft beer becomes popular in a country, the first craft brewers often struggle to produce what the top imports can deliver. But over time, as domestic brewers improve their quality, the need for imports declines. In early Stage 1, this meant that the United States imported traditional craft beers from Belgium, the United Kingdom, and Germany; later in Stage 1, many talented US brewers were quite successfully producing their own Belgian-style, British-style, and Germanstyle beers. In Stage 2, the United States has progressed from imitator to innovator. During the past twenty years, American craft breweries have developed a number of specific styles that are recognized internationally, including American pale ale, American IPA, American wild ale, American barleywine, American brown ale, New England IPA, Brut IPA, American porter, American red ale, and American stout. In an indication of how global craft beer has become, variations of all of these beers are now being produced by craft breweries in Latin America, Europe, Africa, and AsiaPacific. Consider, for example, the New England IPA, which only began to spread across the United States in 2015–16 (Agnew, 2018). By 2018, versions of this style were being produced by craft brewers in a wide and disparate range of countries, including Denmark, Estonia, Brazil, Japan, Australia, China, and Vietnam. The United States has also played an integral role in helping to reintroduce and popularize dead and dormant styles. A particularly interesting example concerns gose, a beer historically associated with the German city of Leipzig. After disappearing from production in the mid-twentieth century, two German brewers— Tilo Janichen and Andreas Schneider—helped to recreate and reintroduce this beer into Leipzig in the 1990s. Somewhat improbably, this once obscure German beer can now be found in craft beer markets throughout the world. While a small fraction of this is due to exports (Janichen now ships 30 percent of his Ritterguts Gose abroad), the primary transmission of this style came from its adoption by scores of US craft breweries (Monaco, 2015). This in turn helped to increase its visibility and popularity throughout the rest of the world: by 2018, craft breweries ranging from Japan, China, and Vietnam in Asia to England, Sweden, and Italy in Europe were producing a type of beer that had previously seemed to have completely died out in its home country (untapped.com/beerstyles).

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Closely related to the international spread of beer styles is the dissemination of craft beer techniques. In the early 1990s, Goose Island Brewery in Chicago began to barrel age some of its beers. Within a few years, many US and foreign craft breweries had adopted this innovation, often making their own contributions by expanding the range of beers and types of barrels being used. The rapid diffusion of this technique provides another example of how craft beer is internationalizing in new and novel ways. By end of the 2010s, the US craft beer market was the largest and most developed in the world. It supported more than 7,000 breweries and accounted for 12 percent of total production and nearly 25 percent of the value of production. During these years, craft beer consumers and producers in the United States became increasingly interconnected with their counterparts abroad, as the United States graduated from being simply an importer of ideas and beer styles to a craft beer culture where techniques and ideas were as likely to be exported as imported.

4. Conclusion Craft beer started in most countries with strong ties to local communities. Yet, the entire history of craft beer has also (somewhat incongruously) had important international dimensions. Early in most craft beer markets’ evolution, consumers and producers look abroad for inspiration. For the first craft beer markets to develop, such as the United States, this mainly meant looking to traditional beer producers in countries such as Belgium, Germany, and the United Kingdom. However, for newer craft beer markets such as Brazil, South Africa, China, and Vietnam, the number of countries which they can draw upon for inspiration and ideas has increased, and now includes markets such as the United States, New Zealand, Italy, and Denmark. While a handful of the world’s most prominent craft breweries effectively utilize traditional modes of expansion such as exports and FDI, at the most fundamental level the most significant way in which the culture of craft beer has been internationalizing is through the diffusion of ideas, styles and techniques. This process started in a very linear way, with ideas flowing outwards from Europe. The second stage saw experienced craft breweries in the United States beginning to inspire and work with new breweries back in Europe, but also in other parts of the world. More recently, a third stage has begun to take form, in which the global craft beer market is better viewed as an interconnecting web than as a series of two-way streets. With a web, insight and innovation can spread from node to node. A particularly interesting example comes from the new wave of craft brewers in South East Asia. Initially, craft beer in this region was quite limited and entirely imported; then the first set of brewers (some expatriates, some local) began to imitate and replicate some of these craft beers. Quite recently, some of

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these breweries have begun to put their own twist on European and US craft beer styles. For example, we now see craft breweries in Vietnam using local ingredients to great effect in their interpretations of the styles they have imported: Mango IPA (LAC Brewing); Passion Fruit Wheat Ale, Jasmine IPA, Pomelo IPA, Dragon Fruit Gose (Pasteur Street Brewing); Far East IPA (East West Brewing); Passion Fruit Gose, Charlie’s Choco-Chili Stout (Heart of Darkness Brewing); Bia Pho (Furbrew) (https://untappd.com/brewery/top_rated). While craft beer will always have a strong domestic dimension, this chapter illustrates the evolutionary and increasingly interdependent way in which craft beer communities draw upon each other for inspiration and encouragement.

References Acitelli, Tom. 2013. The Audacity of Hops, Chicago, Chicago Review Press. Agnew, Michael. 2018. New England IPA Finds Its Niche, available at: http://www. startribune.com/new-england-ipa-finds-its-niche/475425823/ (accessed on February 10, 2018). Boak, Jessica and Bailey, Ray. 2014. Brew Britannnia, Aurum Press, London. Brewbound Podcast, Episode 16, available at: https://www.brewbound.com/ news/brewbound-podcast-episode-16-eric-ottaway-on-the-global-craft-landscapeand-product-innovation (accessed on February 10, 2019). Brewers Association. 2019. https://www.brewersassociation.org/business-tools/ exporting-beer/join-the-edp/ (accessed on February 11, 2019). Cabras, Ignazio & Charles Bamforth. 2016. From reviving tradition to fostering innovation and changing marketing: The evolution of micro-brewing in the UK and US, 1980–2012, Business History, 58 (5), pp. 625–46. Carroll, Glenn R. and Anand Swaminathan. 2000. Why the microbrewery movement? Organizational dynamics of resource partitioning in the U.S. brewing industry. American Journal of Sociology, 106 (3), pp. 715–62. Drinking BelgianBeer.Com. 2013. http://drinkbelgianbeer.com/news/talk-vanbergdewulf-founders-don-feinberg-wendy-littlefield (accessed on February 10, 2019). Elzinga, K. G., Tremblay, C. H., and Tremblay, V. 2015. Craft beer in the United States: History, numbers and geography. Journal of Wine Economics, 10 (3), pp. 242–74. Elzinga, K. G., Tremblay, C. H., and Tremblay, V. J. 2017. Craft Beer in the United States: Strategic Connections to Macro and European Brewers, in Garavaglia, C. and Swinnen, J. (eds) Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry, Palgrave Macmillan, Basingstoke. Evans, Jeff. 2011. World guide to beer. Brewery History, 139, pp. 6–11. Furnari, Chris. 2019. https://www.brewbound.com/news/brewbound-podcast-epi sode-16-eric-ottaway-on-the-global-craft-landscape-and-product-innovation (accessed on February 9, 2019).

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Furnari, Chris. 2019. Brooklyn Brewery Expands Distribution to California, Begins Test Brewing at 21st Amendment, available at: https://www.brewbound.com/news/brooklynbrewery-expands-distribution-to-california-begins-test-brewing-at-21st-amendment Garavaglia, C. 2017a. Birth and Diffusion of Craft Breweries in Italy. In C. Garavaglia and J. Swinnen, eds. Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry. London: Palgrave Macmillan, Basingstoke. Garavaglia, C., and J. Swinnen, eds. 2017b. Economic Perspectives on Craft Beer: A Revolution in the Global Beer Industry. London: Palgrave Macmillan, Basingstoke. Gastronomista interview. 2014. http://www.gastronomista.com/2014/02/wendylittlefield-of-vanberg-dewulf (accessed on February 10, 2019). Grant, Bert. 1998. The Ale Master: How I Pioneered America’s Craft Brewing Industry, Opened the First Brewpub, Bucked Trends, and Enjoyed Every Minute of It, Sasquatch Books, Seattle. Hess, J. and Hess, K. 1977. The Taste of America, Viking Press, New York. Jackson, Michael. 1995. The Great Beers of Belgium. Duncan Baird Publisher, London, UK. Kamp, David. 2007. The United States of Arugula. Broadway Books, New York. Kitsock, Greg. 2011. Wit’s End: Remembering Pierre Celis. Washington Post, April 18. Levenstein, H. 1993. Paradox of Plenty: A Social History of Eating in Modern America, Oxford University Press, New York. Lisherson, Mark. 2001, February 21. Last Call for a Celis. Austin-American Statesman. Margolis, Jason. 2018, February 16. Europeans Are Embracing American Craft Beer. So, Why Are Exports Trailing Off? USA Today. Marketwatchmag.com. 2017. http://marketwatchmag.com/brooklyn-brewery-goesglobal/ (accessed on February 9, 2019). McDonald, John. 2019. https://www.boulevard.com/wp-content/uploads/2017/04/ 2017-John-McDonald.pdf (accessed on February 11, 2019). Mittelman, Amy. 2008. Brewing Battels: A History of American Beer. Algora, New York. Monaco, Emily. 2015, October 30. The Story of Gose, Germany’s Salty Coriander Beer: Understanding Gose, an Old German Beer Back in Vogue. Eater. Nurin, Tara. 2018. Is Stone Brewing Opening a Second Berlin Taproom Because It Wants To or Needs To? Forbes, April 30. Ogle, Maureen. 2006. Ambitious Brew: The Story of American Beer, Harcourt, New York. Rao, Hayagreeva. 2009. Market Rebels: How Activists Make or Break Radical Innovation, Princeton University Press, Princeton. Sax, David. 2014. The Tastemakers, Public Affairs, New York. Stack, Martin. 2000. Local and regional breweries in America’s brewing industry, 1865–1920. Business History Review, 74, pp. 435–63. Stack, M., Gartland, M., and Keane. T. 2016. Path Dependency, Behavioural Lock-in and the International Market for Beer in Cabras, I., Higgins, D., and Preece, D. (eds) Beer, Brewing and Pubs: A Global Perspective, Palgrave Macmillan, London, pp. 54–73. Swinnen, Johan and Briski, Devin. 2017. Beeronomics: How Beer Explains the World, Oxford University Press, Oxford.

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12 Corporate Governance and Internationalization in Japanese Brewing Companies The Cases of Suntory and Kirin Breweries Kanako Kitayama, Christopher Williams, and Seijiro Takeshita

1. Introduction Internationalization of Japanese firms shifted from exports to outward foreign direct investments when the Plaza Accord took place in 1985. The acute appreciation of the yen and an increase in trade restrictions, including voluntary export restraints and import limitations, resulted in Japanese exporters transferring production abroad (Cabinet Office, Government of Japan, 2014). This extended to the foreign expansion of consumer goods firms such as food and beverage manufacturers (Williams et al, 2013). Also, in the beer sector, following the financial crisis and currency appreciation, Japanese consumers demanded lower priced beers. This influenced the local market as Japanese beer makers sold highpriced beers compared with other worldwide beer brands, and their price was fixed due to the heavy regulation (Williams et al, 2013). Overseas breweries started to enter Japan and took market share. Moreover, beers in Japan had passed their growth phase and had reached a stage of market maturity. For these reasons, Japanese beer companies had started to internationalize. While the first beer company that took the lead in overseas expansion was Kirin, the other major brewers soon followed. Asahi, Kirin, Suntory, and Sapporo were the four major national players in the Japanese beer industry, dominating the market in Japan for more than fifty years (Konno, 2001). Suntory, a worldwide alcoholic and non-alcoholic beverages company, was headquartered in Osaka, Japan. The firm had achieved consolidated sales of 2,687 billion yen and consolidated ordinary profit of 156 billion yen by 2015. Of their sales, 62 percent were generated in Japan and 38 percent in overseas markets: 13 percent in Asia and Oceania, 12 percent in Europe, and 13 percent in America. Kirin, a global beverages and pharmaceutical firm headquartered in Tokyo, Japan, was another Kanako Kitayama, Christopher Williams, and Seijiro Takeshita, Corporate Governance and Internationalization in Japanese Brewing Companies: The Cases of Suntory and Kirin Breweries In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0013

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strong player (Kirin Holdings Company, 2007). In 2015, it reached consolidated sales of 2,196 billion yen and ordinary income of 128 billion yen. The sales breakdown was: 54.2 percent in Japan-integrated alcoholic and non-alcoholic beverages, 28.4 percent in overseas integrated beverages, 16.2 percent in pharmaceuticals and bio-chemicals. Subsidiaries and employees were across Japan, other Asian countries and Oceania, and America and European countries. Our case analysis compares the internationalization patterns of Suntory and Kirin in the beer sector, with a particular focus on how their internationalization impacted changes in corporate governance of the companies back in Japan. The chapter begins with a brief review of past literature on Japanese corporate governance, internationalization strategy, and the linkage between the two. We then describe our methodology, before presenting the main findings from the comparative case analysis and a discussion of the main implications from this study.

2. Literature Review 2.1 Corporate Governance in Japan Corporate governance is seen as the “system of laws, rules, and factors that control operations at a company” (Gillan, 2006, p. 382), with this system being divided into two parts: factors internal and factors external to the firm. Internal governance includes the board of directors and managers and how they monitor and control capital structure (assets, debt, equity). In this sense, board member composition is critical; the characteristics of the top management team are reflected in the strategies and control choices they implement (Hambrick and Mason, 1984). However, this also extends to internal organizational culture as a soft and informal control mechanism (Williams and van Triest, 2009), and how this can be used to influence strategic decisions and control how assets are used to yield returns for shareholders. Externally located governance, on the other hand, includes the influence of shareholders and debtholders, and also that of employees and customers (Gillan, 2006). Here, ownership structure has been commonly used to understand aspects of control and key strategic choices (Choi et al, 2011). Japanese firms follow one of the three different corporate governance styles: liberal model, non-liberal model, and hybridized model. The liberal AngloAmerican model is shareholder-centered, and can be seen in US and UK firms (Yoshimori, 1995). An important strength of the liberal corporate governance system, according to Yamamura (2003), is its prompt market-responsiveness. Vitols (2003) noted that the American financial regulatory scheme favors the capital market, stressing transparency and restrictions on market manipulation. There is a necessity for information disclosure and this can be observed in decisionmaking processes, which tend to be speedier (Streeck and Yamamura, 2003).

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Corporations’ economic performance can have considerable impact on employment contracts, resulting in a shorter span of tenure compared to the non-liberal model (Yamamura, 2003). Japanese non-liberal (or traditional) corporate governance, on the other hand, is characterized as bank-centered (Gerlach, 1992) and emphasizes crossshareholding (Cooke and Sawa, 1998; Jackson and Miyajima, 2007). The banking system involves monitoring and controlling of firms’ management (Yafeh, 2000), and its “silent” capital underpins a lifetime employment and seniority system (Aoki, 1990). Cross-shareholding structures lead to insider control and insider members dominating the boards (Aguilera et al, 2008; Jackson and Miyajima, 2007). The interest of employees is considered paramount, and firms are seen as “belonging” to stakeholders (Yoshimori, 1995). While market-orientated capitalism is mainly driven by short-term gains, the traditional Japanese model focuses on long-term competitiveness (Vitols, 2003). There are different categories of corporate groupings in this governance system. Horizontally connected groups spread into diverse industries, with banks or holding companies at the center (Carney, 2008). Vertically integrated forms concentrate on fewer core industries and have vast status differences between the dominating companies and others (Lai, 2000). Unique structures of keiretsus (groups) are observed in this type of governance, along with zaibatsus (conglomerates), which were dismantled by the US occupation forces after World War Ⅱ but were soon reorganized. Banks in Japan went through sequential mega-mergers in the 1990s in response to the banking crisis, leading to a more complex keiretsu system with less clear division of the groupings (Takeshita, 2007). While positive impacts on company performance were seen between the 1950s and 1980s, the traditional Japanese governance style was put under pressure to Americanize after the 1990s as a result of the system’s failure and external solicitation from foreigners owning stock (Fliaster and Marr, 2000; Takeshita, 2007). This failure of internal governance, sometimes described in terms of internal decay, was due to the depression during the 1990s (the so-called lost decade) and the post hoc resistance to change (Takeshita, 2007). Structural change of its business system had occurred as a consequence (Schultz, 2004), yet most did not show complete conversion to the liberal market-based capitalism (Yoshikawa et al, 2007). Some Japanese companies adopted market-based capitalism, but not in a way completely decoupled from the traditional style of their governance practices, leading to the emergence of a hybridized model (Jackson and Moerke, 2005; Nakamura, 2011). Hybridization is the combination of liberal and non-liberal models, where economic determinism and societal determinism views are blended (Jackson, 2003). The transformation, according to Jackson (2003), involves: (1) higher levels of transparency and disclosure through regulation revamp, and allocating corporate equity to be used for implementing speculative management and enabling

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 ,  ,   

corporate restructuring; (2) having new institutional investors who are liquid traders with lower commitment compared to previous banks and intercorporate shareholders, increasing pressure for monetary gains; (3) decay of the main banks’ controlling role and companies being monitored by indirect investors; and (4) changes in careers and remuneration. However, firms’ board members and wellnegotiated labor adjustment remained. It has been argued by Yoshimori (1995) that there are negative dimensions to Japanese governance, especially the ineffectiveness regarding the monitoring system of board members. Managerial culture tends to remain intact as the CEO is selected within the existing group which shares the same values, slowing rejuvenation (Takeshita, 2007). However, Yamamura (2003) revealed that high performance is not always accomplished in the market-oriented approach, and problems of this style are emphasized by researchers including Nakatani (2008). Dore (2007) stresses that it is possible to fulfill accountability in both shareholdercentered and stakeholder-centered governance, although through different processes. Additionally, he points out that it has been the managers’ organizational socialization and promotion paths which have generated work motivations and prevented opportunistic behavior in Japan. The merits of the traditional nonliberal model may have therefore become evident again (Takeshita, 2007).

2.2 Internationalization strategy Internationalization strategy determines the pattern of overseas expansion by companies: which countries firms enter, the timing of entry, and how they do it. Fundamental motives for expanding into foreign markets are based on market seeking, resource seeking, efficiency seeking, or strategic asset seeking (Dunning, 2000). Firms can internationalize into different countries in different ways: traderelated (export, subcontracting, countertrade); transfer-related (leasing, licensing, franchising, BOT); FDI-related (cooperative JV, equity JV, wholly owned subsidiary, umbrella company) (Shenkar et al, 2015). In terms of the last category, Chen (2008) showed how firms’ entry modes can be by either greenfield investment or by acquisitions (establishment aspect) with owning full or partial shares (ownership aspect). The reasons for acquiring existing companies with full ownership tend to align with capability procurement motives. In terms of FDI, Dunning developed the eclectic OLI paradigm, identifying ownership (O), location (L), and internalization (I) advantages as sets of factors that determine the pattern of FDI. “O” advantages in Dunning’s OLI paradigm consider firm-specific advantages (FSAs), linked with resource-based theory, where internal resources and capabilities are seen as sources of sustainable competitive advantages (Barney and Hesterly, 2015). “L” advantages relate to the benefits and opportunities present in a given location. “I” advantages relate

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to transactional costs (Coase, 1988); an internalization advantage is achieved when internal exploitation is more profitable than market transaction. Considering ownership stake, full ownership aligns with internalization while partial ownership involves externalization of transactions (Yamakura, 2012). When a firm expands abroad through FDI, it can gain an advantage by internalizing cross-border knowledge transfer (Henisz, 2003). International expansion means firms have to deal with various forms of distance. From an institution-based view, firms have to understand and overcome various formal (including regulations) and informal (including norms of behavior and cognitive practices) aspects (Williams et al, 2017). One common way to look at the multiple dimensions of distance is the CAGE (cultural, administrative, geographic, and economic) distance framework (Ghemawat, 2001). The CAGE model allows us to look into possible influences which are attributed from distance variables. Risks in international expansion become higher when CAGE distances between home and host countries are larger. In addition, Vermeulen and Barkema (2002) stressed that the internationalization process can influence the profitability of overseas expansion. They highlight time compression diseconomies (the problems firm face in learning when under time pressure) as a reason for under-performing as a result of foreign expansion. Vermeulen and Barkema (2002) suggested the following three dimensions: (1) Pace (of entry)—while slower entry enables the firm to limit adverse influence which speed brings, it can also reduce profit; (2) Rhythm (of expansion)—an irregular pattern of internationalization can decrease profit; (3) Scope (of countries)—although companies’ entrance to dissimilar nations is difficult, there may be positive effects from divergence.

2.3 Links between Corporate Governance and Internationalization Strategy Chen and Yu (2017) studied the extent to which corporate internationalization can be affected by governments’ and financial institutions’ involvement. They concentrated on issues in Japan and Taiwan, and found that monitoring ability correlates with internationalization, and that amakudari (assigning retired bureaucrats as board members of publicly owned firms) and the bank-based system can consequently lead to less foreign expansion. On the external side of corporate governance, Kishi (2003) investigated Japanese companies’ internationalization into other East Asian countries and found that the existence of a compatible hostcountry financial system underpinning corporate governance will promote FDI. Some research has examined the association of corporate governance with internationalization strategy, although not in Japan. Lien et al (2005) studied how ownership can influence FDI by Taiwanese enterprises. Their study suggests

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 ,  ,   

that family ownership is linked to investment in locations where there are familiar networks. By contrast, firms which have state and institutions as their majority equity owners tend to prefer other types of nations. Bhaumik et al (2009) also looked into the effect of family-controlled ownership on FDI by automotive and pharmaceutical firms in India. This study revealed that the former can negatively influence the latter, although this ownership characteristic has been seen as favorable for overcoming weak institutions. Jaw and Lin (2009) studied how corporate elites (chief executive officer and top management team) associate with firms’ overseas involvement, by observing technologically intensive companies in Taiwan. They found: (1) CEOs with longer tenure can enhance foreign expansion level, but become risk-averse once exceeding a certain level; (2) while positive internationalization may be achieved by a large-sized top management team (TMT) having abundant resources, alternative findings suggest that beyond a certain point the size negatively affects foreign market entry; and (3) a high degree of TMT tenure diversity is related to more creative solutions in international markets, although it can hinder task and teamwork when developing international strategy. Nielsen (2010) used a sample of Swiss multinational firms to examine the effect of TMT internationalization on overseas expansion, pointing out that heterogeneous nationalities and international experience increase the number of entries into foreign markets. More recent studies introduce additional perspectives. For Chinese enterprises, Hu and Cui (2014) investigated different governance variables’ impacts on FDI. The results indicate that there is a positive relationship between foreign companies and investment in overseas markets and a positive effect of domestic institutions’ share ownership (Hu and Cui, 2014). In addition, Kling and Weitzel (2011) studied how corporate governance mechanisms relate to international mergers for Chinese firms. They found that government intervention lessens the tendency for cross-border expansion due to the possibility of host nations’ political hostility. Additionally, Khan and Banerji (2016) observed that the adaptation of US and UK governance norms raised the number of subsequent investment overseas. Table 12.1 shows selected research on corporate governance and internationalization.

2.4 Critique of Past Literature Corporate governance and internationalization strategy have traditionally been seen as separate areas of research; the linkage between the two has received little attention. Lien et al’s (2005) study was one of the first to look into the relationship between corporate governance and internationalization. There has also been a small amount of literature focused on Japanese firms, with more attention on companies in the emerging markets such as China, India, and Taiwan. Firms in

Ownership

Proportion of a firm’s assets that are held overseas

Degree of internationalization

Firms’ propensity of conducting outward foreign direct investment

Firm internationalization

Bhaumik et al (2009)

Chen and Yu (2017)

Hu and Cui (2013)

Jaw and Lin (2009)

CEO tenure, TMT size, TMT tenure heterogeneity

State, Domestic institutional investors’ownership, Foreign corporations’ ownership

Internal governance, Financial institutions,Political involvement

Corporate governance variable(s)

International strategy variable(s)

Author (year)

Table 12.1 Selected research on corporate governance and internationalization

Monitoring ability positively correlates with internationalization. Amakudari (assigning retired bureaucrats as board members of publicly owned firms) and a bankbased system can consequently lead to less expansion to overseas nations. Positive relationship between foreign ownership and predisposal to invest in overseas market. Positive association of the domestic institutions’ share ownership and the latter. CEOs with longer tenure can enhance foreign expansion level; however, they become risk-averse once they exceed a certain level. While positive internationalization may beachieved by large-sized TMT due to their resources, alternative findings suggest that the size beyond a certain point leads negatively to foreign market entry. High degree of TMT tenure

Family-controlled ownership can negatively influence FDI.

Key findings

Continued

306 Taiwanese listed firms

224 Chinese listed firms

Indian automotive and pharmaceuticalsector case 200 Taiwanese firms

Methodology

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International strategy variable(s)

Foreign investment (FI) holdings in percentage in a particular year, Marketcapitalism of FI made in million rupeesin a year

Profitability and dividend rates

Volume of M&A, Success of M&A

FDI decision

Foreign market entry, Corporate performance

Author (year)

Khan and Banerji (2016)

Kishi (2003)

Kling and Weitzel (2011)

Lien et al (2005)

Nielsen (2010)

Table 12.1 Continued

TMT internationalization

Corporate control, Ownership structure,Board characteristics

SOEs, Share ownership, Herfindahl indexIndependent, Board, Duality, Disclosure, Legal

Board index, Audit committee, Renumerationof directors, Shareholder/investor grievancecommittee, Remuneration committee, Shareholder rights, Nomination committee Managerial efficiency and financing patterns

Corporate governance variable(s)

Achieving financial structures’ optimization is a prerequisite for Japanese firms to recognize improvement in direct investment. Government intervention lessens the tendency to cross-border expansion due possibility tohost nations’ political hostility. Family governance positively connects with determinants of FDI in China, domestic investorspositively relate to investments in other countries. Heterogeneous nationalities and international experiences increase the number of entrance intocrossborder markets.

diversity is connected to more creative solution to international market, although it can hinder task and teamwork when developing international strategy. Adaptation of such US and UK governance norms raised the number of subsequent investment overseas.

Key findings

165 Swiss listed firms

228 Taiwanese listed firms

4374 M&A dataset

Secondary resources

63 Indian listed firms

Methodology

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the automotive, pharmaceutical, and technologically intensive industries have been used; to our knowledge, there is no research in the brewing sector regarding corporate governance and internationalization patterns. Lien et al (2005) recommended analyzing samples from different types of companies for deeper understanding of the relationship. Moreover, although studies have found evidence which suggests that corporate governance and internationalization can influence each other, most of the studies look at governance variables driving international strategy, and not vice versa. We believe this is an oversight. As firms expand internationally they gain new international assets, new learning, and new executives, but also new coordination costs, with an implication for performance and the way they operate in their home country. Jaw and Lin (2009) did suggest looking into the “opposite” causality of whether firms’ internationalization posture can influence corporate governance characteristics. In addition, although ownership structure and top management team composition seem to be chosen as governance variables for investigation in many studies, other variables, including organizational culture, are somewhat neglected. Also, large sample sizes are mostly used; there are few examples of in-depth case studies showing patterns of internationalization over time. The need for longitudinal data is emphasized by some researchers, including Hu and Cui (2014) and Jaw and Lin (2009).

3. Methodology Our purpose is to investigate the effects of internationalization (equity-related FDI) strategy on corporate governance in Japanese brewing companies. We aim to address the following three gaps found in the previous research: little existing literature (1) in the Japanese context focusing on the alcoholic drinks industry; (2) on how internationalization affects corporate governance characteristics; and (3) which includes broader aspects, including geographical and cultural variables. Following the literature, three corporate governance variables (board member composition, ownership structure, organizational culture) and three internationalization strategy variables (process over time, entry strategy, and approaches to distance) were selected as variables of interest. A comparative case study method was chosen for this study. As suggested by Yin (2009), the use of case studies is most likely to be applicable: (1) when addressing “how” and “why” research questions; (2) when the researcher cannot virtually manipulate events; and (3) when investigating contemporary phenomena which exists in a real-life context. Considering “how” and “why” areas is necessary, as stating causal links of whether internationalization activities have had an effect on Japanese corporate governance alone is insufficient when looking into the deeper analysis of how and why a particular foreign investment changed the way firms govern their businesses back in their home country.

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 ,  ,   

The two companies selected for this study are Suntory and Kirin. This study primarily uses secondary data, which involves corporate websites, journal articles, textbooks, and newspapers (Toyo Keizai, Nikkei). Kirin and Suntory were selected because Kirin can be classified as a non-liberal model and Suntory as a hybridized model. Kirin belongs to the horizontally connected (Carney, 2008) Mitsubishi business group, which is centered on the Bank of Tokyo-Mitsubishi UFJ, Ltd (Gerlach, 1992). A number of banks, such as the Bank of Tokyo-Mitsubishi UFJ, Ltd., and companies within the Mitsubishi group, such as Meiji Yasuda Life Insurance Company, owned Kirin stocks (Kirin Holdings Company, 2016). Moreover, the firm is part of a cross-shareholding system—one of the major characteristics of non-liberal corporate governance (Jackson and Miyajima, 2007). The board was at the time dominated by insider members of the same firm or their group firms (Aguilera et al, 2008). In contrast, Suntory is characterized by a form of family governance which has traditionally not been uncommon in the alcoholic drinks industry (Da Silva Lopes, 2003). Family governance has been associated with the creation of enduring brands in alcoholic beverages; brand development ultimately reflects the governance of the firm (Da Silva Lopes, 2003). Furthermore, while family-run businesses have sometimes been associated with poor performance in the West, they tend to perform well in Japan (Dazai et al, 2015). In addition, unlike Kirin, Suntory is known for going against the traditional Japanese male seniority system, involving more women and non-Japanese members in the board (Matt Shattock, Vincent Ambrosino, Hong Sik Park). As Ohori (1985) noted: “Suntory is one of the few Japanese companies which have an active hiring policy toward women; it is one of the few companies where women are given chances just like men to make the most of their abilities” (Ohori, 1985, p. 174). Another liberal aspect of Suntory can be seen in its corporate vision and philosophy. The infamous corporate philosophy of Suntory was “Yatte minahare” (Why not give it a shot?), where risk-taking capability and challenging passion has constantly created new markets and new values (Suntory Holdings Limited, 2019). However, some traditional Japanese governance practices were also seen in this company, such as a cross-shareholding system (Jackson and Miyajima, 2007), lifetime employment, and a seniority system.

4. Results—Corporate Governance 4.1 Board Member Composition Tables 12.2 and 12.3 show the board member composition for Suntory and Kirin. Four dimensions (age, gender, nationality, and tenure) are presented. In terms of age, Suntory had a slightly younger top management team than Kirin. Average age

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Table 12.2 Suntory board member composition Position

Name

Career Start

Age

Chairman of the Board & Chief Executive Officer, Representative Director Vice Chairman of the Board, Representative Director President & Chief Executive Officer, Member of the Board, Representative Director Executive Vice President & Chief Operating Officer, Member of the Board, Representative Director Executive Vice President & Chief Operating Officer, Member of the Board

Nobutada Saji Shingo Torii Takeshi Niinami Nobuhiro Torii

Sony Trading Company, Limited Itochu Corporation

71

Mitsubishi Corporation The Industrial Bank of Japan, Limited. Suntory Holdings Limited. Suntory Holdings Limited. Suntory Holdings Limited. Suntory Holdings Limited. Suntory Holdings Limited. Mitsubishi Kasei Corporation

57

Senior Managing Director, Member of the Board

Director, Member of the Board

Senior Audit & Supervisory Board Member

Audit & Supervisory Board Member

Shunichi Naito Yasunori Aiba Koji Kojima Hideo Tsujimura Shinichiro Hizuka Izumi Kobayashi Matt Shattock Toru Yamamoto Yasuhiko Kamada Minoru Amano Hideo Yamada

63

50

68 67 64 62 61 57 54

Suntory Holdings Limited. Suntory Holdings Limited. Jurist

60

Waseda University

61

58 68

for Suntory was sixty-one, whereas for Kirin it was sixty-three. In terms of gender, the majority of top board members were men, with one woman each for both companies. However, when executive officers and audit and supervisory members were included, twice as many women were seen in Suntory than Kirin (four women for Suntory and two for Kirin). Nationality of board members shows significantly different results between the two brewers. While there were three non-Japanese involved in the board for Suntory (including executive officers and audit and supervisory members), none were seen in Kirin. From the perspective of tenure, in both firms, approximately half of the members started their career in the same company (or the subsidiaries) for which they currently work. However, the very top board members of Suntory (Nobutada Saji, Shingo Torii, Takeshi

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 ,  ,   

Table 12.3 Kirin board member composition Position

Name

Career Start

Age

President & CEO

Yoshinori Isozaki Keisuke Nishimura Akihiro Ito

Kirin Brewery Company, Limited. Kirin Brewery Company, Limited. Kirin Brewery Company, Limited. Kirin Brewery Company, Limited. Kirin Brewery Company, Limited. Fuji Xerox Company, Limited. Bridgestone Corporation Ministry of Labour The Bank of TokyoMitsubishi Kirin Brewery Company, Limited. Kirin-Seagram, Limited.

63

Representative Director of the Board, Senior Executive Officer Director of the Board, Senior Executive Officer

Director of the Board (outside)

Audit & Supervisory Board Member

Audit Supervisory Board Member (outside)

Junichi Nonaka Toshiya Miyoshi Toshio Arima Shoshi Arakawa Kimie Iwata Katsunori Nagayasu Masahito Suzuki Motoyasu Ishihara Fukutaka Hashimoto Masakatsu Mori Chieko Matsuda

60 56 62 58 74 72 69 69 59 58

Tokyo Hatchobori Law Office. Arthur Andersen & Co.

62

Long-Term Credit Bank of Japan, Limited.

52

69

Niinami, Nobuhiro Torii) had all begun their career at different companies; the opposite was the case for Kirin (Yoshinori Isozaki, Keisuke Nishimura, Akihiro Ito, Junichi Nonaka, Toshiya Miyoshi), where all top board members had started at the company. Of the top four board members in Suntory, three are members of family owners (Nobutada Saji, Shingo Torii, and Nobuhiro Torii). In Japan, it is customary for future top management personnel in a family-run business to first experience business and work at firms that are their important stakeholders, such as banks and trading houses. Overall, by comparing the four aspects, the degree of diversity is greater in Suntory than Kirin overall, the Suntory board being more heterogeneous.

4.2 Ownership Structure For ownership structure, business group affiliation, equity arrangements, and international ownership were considered. Suntory has been a family-owned firm

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since its foundation. Concentration of ownership is observed, and the vast majority (89.32 percent) of its stocks are held by Kotobuki Reality Co., Ltd., which is a holding company of Suntory, having Nobutada Saji (chief executive officer of Suntory) as its representative director (Suntory Holdings Limited, 2016). The organization’s financial report for 2015 revealed no international investors. Kirin belongs to the Mitsubishi business group—a traditional Japanese horizontal keiretsu. Many institutions, firms, and individuals own the firm’s stock. However, the main shareholders are banks and companies within the Mitsubishi group, such as The Master Trust Bank of Japan, Ltd. (share ratio: 5.68 percent), Meiji Yasuda Life Insurance Company (3.62 percent), and The Bank of Tokyo-Mitsubishi UFJ, Ltd. (1.59 percent) (Kirin Holdings Company, 2016). Foreign institutions and individuals account for 33.27 percent of the total stock.

4.3 Organizational Culture In terms of organizational culture, we observed proxies for organizational norms and behaviors. In the annual CSR ranking provided by Toyo Keizai, Inc. (2016), which looks at (1) utilization of human resources, (2) environment, (3) corporate governance and sociality, and (4) finance, Kirin dropped from fifty-sixth to seventy-second (out of listed firms) during the period 2014–15. While there was no change in Suntory’s second-place ranking from 2014 to 2015 (out of unlisted firms), Suntory dramatically increased its ranking for “environment,” moving to twentieth place (out of listed and unlisted firms) from unranked in 2014 (Toyo Keizai, Inc., 2015). Also, Suntory’s corporate philosophy of “Yatte minahare” (“Why not give it a shot?”) emphasized its risk-taking capabilities and challenging passion, which translated into constantly creating new markets and new values (Suntory Holdings Limited, 2019). We do not see this with Kirin.

5. Results—Internationalization Strategy 5.1 Comparing the Timelines Figure 12.1 shows a comparison of the key internationalization events over time between the two companies. While the number of foreign investments was significantly different between the two companies—Suntory investing abroad thirty times and Kirin eighteen times—this reveals differences in the patterns of foreign entry over time. For both companies, overseas entry was sequential and “rhythmic.” Entry to both developed and emerging economies regularly occurred throughout the thirty-five years, with entry into developed countries mainly before 2000. However, Kirin focused on investing in emerging economies after

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286

Suntory

1980 France ACQ (100%) Mexico G/F (100%)

1990 France ACQ (100%) Hungary ACQ (37%) UK ACQ (100%)

Austria G/F (100%) Germany ACQ (100%)

Taiwan G/F (75%)

Hungary ACQ (50%)

France ACQ (35%) China ACQ (74%) China ACQ (100%)

China G/F (60%)

France ACQ (37%) France G/F (37%) France ACQ (37%) France ACQ (37%) France ACQ (100%)

2010 USA ACQ (100%) Austria ACQ (50%)

2000

China ACQ (70%) China G/F (50%)

China ACQ (100%)

China G/F (100%)

France G/F (100%)

China G/F (100%)

France ACQ (50%) France G/F (50%) France ACQ (50%) France ACQ (50%)

Kirin

1980

1990

2000

Australia G/F (100%) Germany G/F (100%) Netherlands G/F (49%) Taiwan G/F (100%)

2010 Singapore G/F (100%)

USA G/F (100%) Philippines ACQ (19.9%)

USA G/F (10%) China G/F (57.8%) USA G/F (100%) China G/F (100%)

China G/F (100%)

Brazil ACQ (100%)

Philippines ACQ (48.39%) Australia ACQ (100%)

China ACQ (25%)

Myanmar ACQ (55%)

New Zealand ACQ (46.1%)

Figure 12.1 Comparison of the internationalization timelines of Suntory and Kirin Note: G/F = Greenfield, ACQ = Acquisition

2000, whereas Suntory invested in both emerging and developed nations. For Suntory, regular entry is seen into France (thirteen times) and China (eight times), out of a total of thirty investments. Suntory increased its equity stake for companies in France and Hungary from pre-2000 to post-2000, owning 37 percent of shares in its first entry and 50 percent in its second entry. In contrast, although Kirin’s entry was sequential, entering China four times and the United States three times, the volume of new investments into the same country was far less than for Suntory. Change in equity stake was not observed among the companies in which Kirin invested.

5.2 Different Entry Strategies Figure 12.2 shows a comparison of the entry strategies (establishment mode and ownership mode) between the two companies. Two different entry strategies can

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Philippines

New Zealand Philippines Myanmar France (2011) France (2011) France (2011)

China

ACQ

France (1989) France (1989) France (1989) Hungary (1991) France

China

Hungary (2011) China

Austria

Establishment China America

G/F

Netherlands

Taiwan

China France (2011)

France (1989)

China

MIN

Ownership Kirin

MAJ

287 Australia Brazil France Germany France France UK China China America

Australia Taiwan Germany America China America China Singapore Mexico Australia China China France

Suntory

Figure 12.2 Comparison of entry strategies (establishment and ownership modes) between Suntory and Kirin Note: G/F = Greenfield, ACQ = Acquisition, MIN = minority stake (=50%)

clearly be observed. Kirin internationalized by mainly using greenfield investments (eleven out of eighteen) with full ownership, while the majority of foreign investments in Suntory were found to be acquisitions (twenty out of thirty) and sharing their stakes with other firms (i.e., joint ventures). Suntory sought collaboration with—and leveraged capabilities from—the companies in host countries when exploring new countries and new business segments, especially when investing in European countries. The firm was open to sharing its knowledge and learning from local partners, as well as creating opportunities to share risks when expanding into countries which they have no prior investment experience and existing networks (Williams and Vrabie, 2018). On the other hand, setting up greenfield wholly owned subsidiaries implies that the company was willing to exploit its Japanese products and their specific internal advantages to the target nations, as well as protecting them and controlling them.

5.3 Differing Approaches to Distance Tables 12.4 and 12.5 show the differences in terms of how the two firms approached various forms of distance, captured through CAGE dimensions (Ghemawat, 2001). Suntory expanded into more geographically distant locations than Kirin: average distance was 8,069 km from Osaka for Suntory and 7,373 km from Tokyo for Kirin. Kirin mainly went into high-context cultural countries

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 ,  ,   

Table 12.4 Comparison of approaches to distance (political stability and economic development) Country (year)

Political stability and absence of violence (percentile rank) (n/a = not available) Suntory

Australia (1981) France (1983) Mexico (1983) Netherlands (1983) Australia (1984) Germany (1988) Taiwan (1988) France (1989) France (1990) Hungary (1991) Germany (1991) US (1993) UK (1994) China (1995) China (1996) US (1996) New Zealand(1998) China (1998) China (1999) US (2002) Philippines (2002) Taiwan (2003) China (2004) France (2005) China (2005) China (2006) France (2007) Austria (2008) China (2009) Philippines (2009) Australia (2009) Singapore (2010) Brazil (2011) China (2012) US (2014) Myanmar (2015) Average

Kirin

GDP per capita (USD) Suntory

n/a n/a n/a

Kirin 4674

943 19701 n/a

n/a n/a

2691 2795 3322

n/a n/a n/a n/a

1703 3176 4258 29150

n/a n/a n/a n/a

4219 1073 8822 37724

45 11 4 60 52

38532 179 11876 37941 37687

36 67

5207 38578

18 48 23 49 58 16 22 52

58

39307 1983 39585 39946 2184 4419 36910

77 7 13 40 49 15 38

39946

38987 10606 3634 31378 38383 6276

72 40

18695

43348 18585

Note: Kirin in italics and underlined

(Hall, 1976), such as countries from Asia and Oceania, which are seen to have strong cultural similarity to Japan. In comparison, Suntory went into low-context European countries. Economic distance was measured by referring to GDP per capita, and administrative and political distance to political stability and absence of violence in the World Bank’s World Governance Indicators. Both results

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Table 12.5 Comparison of approaches to distance (geographic and cultural) Country US China Austria Mexico Brazil Australia Germany France Netherlands Hungary Taiwan Singapore New Zealand UK Philippines Myanmar Average

Distance Suntory 10900 2076 9128 11,304.00 7953 8915 9709

Low vs high context (Hall, 1976) Kirin 10900 2076 17673 7953 8915

Suntory L H L H L L L

9,287.00 9045 2102

2102 5316 9277

9559 8069

Kirin L H H L L L

H H H

H L

L 3000 4603 7373

H H

indicate that there is little difference between the two. However, when differences in GDP per capita are looked at pre- and post-2000, Suntory entered locations that were approximately twice as further from Japan in terms of economic distance than the locations Kirin entered before 2000. Kirin went into economically distant places after 2000, at an average of 27,888 USD; pre-2000 the average was 8,118 USD. The results indicate that Suntory had been taking on risk in terms of distance much earlier than Kirin in their internationalization activities. The distance of the four factors between Japan and the host countries is overall larger for Suntory.

6. Internationalization Affecting Corporate Governance The largest most recent acquisitions in the two firms’ international activities are now considered: the acquisition of Beam, Inc. (the world’s fourth-largest spirits firm, headquartered in the United States at the time) (NetBase Solutions, Inc., 2014) for Suntory, and that of Schincariol (the second-largest brewer in Brazil at the time) (Diamond, Inc, 2011) for Kirin. In terms of board member composition, Suntory had non-Japanese members on the board. The two internationals—Matthew John Shattock (director, member of the board) and Vincent Ambrosino (executive officer)—were then introduced to Suntory’s board when the firm acquired Beam, Inc. Mr. Shattock had served as Beam’s chief executive officer since 2009 (Bloomberg, L.P., 2017a). Vincent

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 ,  ,   

Ambrosino, on the other hand, had been in the position of chief financial officer since 2013 (Financial Times, 2016). The two non-Japanese executives were experienced leaders in the international consumer packaged goods sector (Bloomberg, L.P., 2017a, b). There were no changes in the ownership structure, as the distribution of the firm’s stock remained the same after Beam’s acquisition. However, the management style had significantly changed from family governance. This was due to Suntory inviting Takeshi Niinami to join the board as a chief executive director (Nikkei, 2014). It was the first time that Suntory had introduced an external member to the top management team, as the firm had been family-managed since its establishment. This transformation from traditional family governance resulted from the acquisition of Beam. Mr. Niinami was a top talent with a global network and an understanding of the Anglo-American style of negotiation, being Harvard-educated and actively participating in the World Economic Forum (Nikkei, 2016). As post-merger integration (PMI) of their largest acquisition was a prerequisite for Suntory, the company introduced this global management expert. The next change is associated with organizational culture. According to the annual CSR ranking by Toyo Keizai (2015), Suntory dramatically improved its ranking for “environment” (from unranked in the top thirty to twentieth place) in 2014. This may be due to the acquisition of Beam, as the Jim Beam American Stillhouse achieved LEED (Leadership in Energy and Environmental Design) Gold Certification in 2013, which shows that this facility was assessed as environmentally sustainable (PR Newswire Association LLC, 2013). One of the features indicated on the report was the 50 percent annual water savings made by using special waterpreservation equipment. As Suntory had not received any LEED Gold certification for its facilities, the company may have “become green” with the acquisition of Beam. In contrast to Suntory, although the acquisition of Schincariol was massive for Kirin, none of the corporate governance variables are seen to change. Board member composition did not change; no executives from Schincariol were invited. Additionally, the firm did not break away from the Mitsubishi business group, or change its management style. The CSR ranking stayed much the same: the overall ranking showed a slight drop from twenty-eighth to thirty-third place (of the listed firms) in 2012 (Toyo Keizai Inc., 2013). For individual CSR criteria, there was a fall in the utilization of human resources (from twenty-ninth place to unranked in the top thirty) in 2013; however, no changes were seen for other dimensions (Toyo Keizai, Inc., 2013; Toyo Keizai, Inc., 2014).

7. Discussion In the time period of our analysis, Suntory was family-governed and seen to have been venturing into countries without pre-existing networks, including European

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countries. On the other hand, Kirin had a large proportion of domestic investors and the firm mainly invested in Asia and Oceania, relatively close to Japan. This seems to contradict Bhaumik et al (2009), who argue that family governance negatively influences FDI. It does, however, support Chen and Yu (2017), whose findings showed that the main bank system leads to lower degrees of foreign expansion. Kirin, which belonged to the Mitsubishi group centered on Bank of Tokyo Mitsubishi UFJ, had less overseas expansion than Suntory, which did not hold a main bank. Comparing the two cases suggests that heterogeneous nationalities and international experiences of the top management team and overseas expansion coevolve (Nielsen, 2010). Suntory’s investments in cross-border markets resulted in the board inviting new non-Japanese members. This coevolution is consistent with Khan and Banerji’s (2016) research, which suggests that the introduction of US and UK governance systems increases the number of subsequent foreign investments. Suntory’s Anglo-American governance practices (such as board diversity) were associated with a higher number of cross-border expansions, and their growing FDI resulted in the adoption of more liberal practices (such as inviting non-Japanese on board). As noted, Suntory acquired Beam Inc. in 2014 and introduced Matt Shattock and Vincent Ambrosino. Acquisition is an establishment mode choice within a firm’s overall internationalization strategy. It was possible for Suntory to invite the two top talents as board members due to this establishment mode—a greenfield investment which would take longer time to foster human resources. Since the acquired firm was a US firm, it came with greater distance, both culturally (Japan: high context; United States: low context) and geographically (10,900 km). Political stability and absence of violence and GDP per capita (level of economic development) were close between the two countries. Moreover, through the acquisition, Suntory may have learned the water-saving technique from the Jim Beam American Stillhouse which led it to climb the CSR ranking for “environment” to twentieth place. It also gave access to knowledge and expertise (Mr. Niinami), and inviting that executive on board meant breaking away from the company’s previous family management style. Thus, the combination of the three internationalization variables: (1) acquisition with 100 percent ownership; (2) investing in countries that are geographically and culturally far away but close in terms of distance of political stability and absence of violence and GDP per capita; and (3) the particular point of time (2014), can collectively be seen to result in the following corporate governance variables: (1) introduction of non-Japanese board members; (2) breaking away from the traditional management style; and (3) improvement in the CSR ranking. However, a similar outcome is not found for Kirin, which had undertaken a similar type of internationalization activity in 2011: the acquisition of Brazilian brewer Schincariol. The pattern for this activity is: (1) acquisition with 100 percent

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 ,  ,   

Suntory absorptive capacity

• acquisitions with 100% ownership • geographic and cultural dimensions: far • political stability and absence of violence and GDP per capita: close • particular point of time (2014)

• introduction of non-Japanese board members • breaking away from traditional management style • improvement in CSR ranking

Kirin

absence of absorptive capacity

• acquisitions with 100% ownership • geographic dimension and GDP per capita: far • cultural dimension: close • political stability and absence of violence: moderate • particular point of time (2011)

• no change in board member composition • no change in management style (staying in the mitsubishi group) • slight fall in CSR ranking

Figure 12.3 Summary of findings and differences between Suntory and Kirin

ownership; (2) distant location in terms of geographic dimension and GDP per capita, but closeness in terms of the cultural dimension, political stability, and moderate absence of violence; and (3) a particular point of time (2011). However, this did not have a significant impact on the corporate governance in the home country: (1) no change in the board member composition; (2) no change in the management style (staying in the Mitsubishi group); and (3) a slight fall in the CSR ranking. A summary of this is shown in Figure 12.3. We argue that Suntory was able to do this because of its pre-existing absorptive capacity. Absorptive capacity is the willingness to receive new knowledge, the ability to internalize that knowledge, and acting on that knowledge in order to create or pursue new commercial opportunities (Cohen and Levinthal, 1990). In order to fulfill their objectives, Suntory was willing to learn and recombine firm-specific advantages acquired from other competitors with its existing corporate management style. It even made changes to what it has been doing since its foundation, breaking away from family governance. However, this could not happen without the company’s pre-existing level of absorptive capacity, as

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manifested in the greater diversity of their corporate governance system. Suntory’s pre-existing level of corporate governance diversity (such as a board composition involving more women) encouraged a certain internationalization strategy (e.g., greater volume of transactions and the Beam acquisition), and as a consequence of that strategy, the company’s corporate governance was open to change. Kirin, on the other hand, was more “rigid.” It had a lower absorptive capacity and was potentially closed to new transformative ideas and governance changes. The firm was willing to use its existing ownership advantages and was reluctant to develop new ones. Thus, absorptive capacity can be identified as the moderating variable that has a critical role to play in determining how internationalization impacts corporate governance at home. International strategy seems to drive corporate governance transformation depending on this pre-existing absorptive capacity. In addition to the four classic motives for firm internationalization (market seeking, resource seeking, efficiency seeking, strategic asset-seeking) (Dunning, 2000), the case of Suntory shows that there may be a fifth reason for internationalizing, namely, to help a firm change its corporate management system at home. Although Suntory had internationalized for market and strategic asset-seeking motives, the findings suggest that the transformation of corporate governance was an equally important motive for the company. Can this be seen as a strategic asset? Or should there be an explicit motive for corporate governance transformation recognized in internationalization theory? The results of the case analysis indicate that an important part of the integration required post-acquisition involves board members moving and changes in organizational structure and culture. Suntory had been trying to transfer its practices to the acquired firms, but was at the same time being hit by a number of stimuli, and learning about markets and how to effectively operate in those markets around the world. This came hand in hand with changing its corporate governance in Japan. Suntory had developed its corporate governance by expanding into foreign markets; this may have been one of the company’s reasons for looking overseas. The firm had used internationalization to help rejuvenate the way it does business at home, which led to further internationalization. This study has practical relevance, especially for Japanese brewers. It may indicate that sequential failure in the performance of Japanese brewers in foreign markets may have been prevented if they had effectively used the assets and knowledge of the acquired firms and actively learned from them. Furthermore, it may give insights into how other traditional brewers can shift their governance style to create a more hybridized model. The findings suggest new avenues which can be examined in future studies. Absorptive capacity has been identified as the moderating variable in the relationship between international strategy and corporate governance; future research could explore its role in greater detail. Future research could also test if this model works with large sample data, and with data on brewing companies from other countries. This would reinforce the validity and

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 ,  ,   

reliability of the emerging model that arises by comparing international strategy and corporate governance in the cases of Suntory and Kirin of Japan.

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 ,  ,   

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 ,  ,   

Toyo Keizai, Inc. 2016. 最新！金融・未上場版「CSR企業ランキング」 (Latest version! CSR ranking of non-listed and finance companies), available at: http:// toyokeizai.net/articles/-/129398?page=4 (accessed on March 16, 2017). Vermeulen, F. and Barkema, H. 2002. Pace, rhythm, and scope: Process dependence in building a profitable multinational corporation. Strategic Management Journal, 23 (7), pp. 637–53. Vitols, S. 2003. From Banks to Markets: The Political Economy of Liberalization of the German and Japanese Financial Systems, in Yamamura, K. and Streeck, W. (eds) The End of Diversity? Prospects for German and Japanese Capitalism, Ithaca, Cornell University Press, pp. 240–60. Williams, C. and Vrabie, A. 2018. Host country R&D determinants of MNE entry strategy: A study of ownership in the automobile industry, Research Policy, 47 (2), pp. 474–86. Williams, C., Takeshita, S., Gilles, M., Ruhe. C., Smith, J., and Troll, S. 2013. Leadership and Preparedness to Internationalize in the Brewing Industry: The Case of Asahi Breweries of Japan, in Gammelgaard, J. and Dörrenbächer, C. (eds) The Global Brewery Industry, Cheltenham, Edward Elgar Publishing, pp. 247–68. Williams, C. and van Triest, S. P. 2009. The impact of corporate and national cultures on decentralization in multinational corporations. International Business Review, 18 (2), pp. 156–67. Williams, C., Vashchilko, T., and Martinez, C. 2017. The moderating effect of bilateral investment treaty stringency on the relationship between political instability and subsidiary ownership choice. International Business Review, 26 (1), pp. 1–11. Yafeh, Y. 2000. Corporate governance in Japan: Past performance and future prospects. Oxford Review of Economic Policy, 16 (2), pp. 74–84. Yamakura, K. 2012. 国際戦略経営論の構成 (Update of global strategic management theory). Yokohama keiei kenkyu, 33 (4), pp. 93–103. Yamamura, K. 2003. German and Japan in a New Phase of Capitalism: Confronting the Past and Future, in Yamamura, K. and Streeck, W. (eds) The End of Diversity? Prospects for German and Japanese Capitalism, Ithaca, Cornell University Press, pp. 115–46. Yin, R. K. 2009. Case Study Research: Design and Methods, Sage, London. Yoshikawa, T., Tsui-Auch, L. S., and McGuire, J. 2007. Corporate governance reform as institutional innovation: The case of Japan. Organization Science, 18 (6), pp. 973–88. Yoshimori, M. 1995. Whose company is it? The concept of the corporation in Japan and the West. Long Range Planning, 28 (4), pp. 2–44.

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13 Corporate Governance, the Craft Brew Alliance, and A-B Neil Maltby

1. Introduction The launch of thousands of small craft breweries in America in the past two decades has drawn growing interest among researchers. While the listing of these breweries is relatively rare, there exists a distinct phenomenon of publicly traded craft brewers, which one journalist has dubbed “IPA meets IPO” (Grunbaum, 2014). Over the same time period, corporate governance emerged as one of the key issues of American corporations and academia. While the empirical body of knowledge about governance has grown, there are gaps in this knowledge. This gap is clearly demonstrated by the publicly traded craft brewer. Such firms operate at a crossroads of artisanal tradition and public shareholder market expectations. What can we learn about corporate governance from these firms? The case of the Craft Brew Alliance is particularly intriguing. The Craft Brew Alliance was a company that resulted from the merger of two well-known craft brewers from the 1980s: Redhook Ale Brewery Inc of Seattle, Washington, and Widmer Brothers Brewing Co. of Portland, Oregon. The Craft Brew Alliance was listed on the NASDAQ stock exchange and the largest shareholder was Anheuser-Busch (A-B), the multinational producer of Budweiser. This shareholder relationship violated the Brewers Association equity policy that less than 25 percent of a craft brewer’s ownership be held by an alcohol producing company that is itself not a craft brewer. As a result the Craft Brew Alliance lost its official “craft” status. But the issue involved more than titles. At the heart of the dispute was the vision of the craft beer movement and disagreement about how brewers should be owned and governed. This chapter will examine the corporate governance of one “craft” beer company and analyze how this firm’s governance over time put it at odds with the culture of the industry in which it operated. The ultimate goal of this chapter is to understand the corporate governance challenges of publicly traded firms operating in craft culture. To introduce these challenges, the next section will overview corporate governance theory. Following this, the chapter will provide a summary

Neil Maltby, Corporate Governance, the Craft Brew Alliance, and A-B In: New Developments in the Brewing Industry: The Role of Institutions and Ownership. Edited by: Erik Strøjer Madsen, Jens Gammelgaard, and Bersant Hobdari, Oxford University Press (2020). © Oxford University Press. DOI: 10.1093/oso/9780198854609.003.0014

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of the craft beer industry of the United States. The third section will describe the origins and growth of the Craft Brew Alliance and its corporate governance during the 2008–17 time period. The chapter will conclude with some insights about corporate governance with regard to the craft beer industry.

2. Corporate Governance Corporate governance is the system of laws, regulations, policies, and practices by which a company is directed in order to fulfill its obligations to its stakeholders, including stockholders, employees, customers, suppliers, financiers, government, and the community. The predominant view of corporate governance is rooted in the economic financial paradigm to maximize shareholder returns (Thuraisingham, 2018, Denis and McConnell, 2003; Daily, Dalton, and Cannella 2003; Shleifer and Vishny, 1997; Davis, Schoorman, and Donaldson, 1997). In this view, owners, directors, and managers form the core of commercial governance. In general, the purpose of a Board of Directors is to represent shareholders and ensure the best return on investment through the selection and oversight of management (Denis and McConnell, 2003). Board members are held to a fiduciary responsibility—that is, a legal and ethical relationship of trust. A director is entrusted to optimize the value of the investment of owners (Gillan, 2006; Salacuse, 2003). As an organization moves from start-up to maturity, the board’s role may change (Bonn and Pettigrew, 2009). As a firm’s assets, debts, and equity grow, the need for governance professionalization increases (Bonn and Pettigrew, 2009; Wellalage and Locke, 2011). Ang (1991) notes that management teams for smaller firms lack depth and a “full complement of managerial talents” (p. 3). Very little research has been completed about governance in the beer industry. One thread focuses on financial performance (Ogbonnaya, Ekwe, and Ihendinihu, 2016; Okwo, Okelue, and Uchenna, 2012, Madsen, Pedersen, and Lund-Thomsen, 2012). In a very different approach, Pike (2006) detailed the closure of a British brewery by institutional shareholders in response to brewery underperformance. The 160-year-old Vaux Brewery of Sunderland, owned by Swallow Group plc, was closed for “asset disposal advocated by their advisers and supported by their major institutional shareholders” (Pike, 2006, p. 201). The major investors claimed they were fulfilling their fiduciary responsibility to shareholders (Pike, 2006, p. 215). Pike’s (2006) study is interesting for its examination of a broader view of governance, and one that represents more diverse stakeholders. Governance is shaped by culture both in the external broad context and in the internal corporate context (Salacuse, 2003). Culture may be described as the socially transmitted behavior patterns, attitudes, norms, and values that shape the ideas and actions of groups of people (Salacuse, 2003). In his seminal book about culture, Hofstede (1980) described part of this transmission as collective

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mental programming. According to this view, people belonging to different social groups may be collectively programmed with values and behaviors. Hofstede’s “groundbreaking” work served as a crucial input to subsequent cultural models and research (Taras, Kirkman, and Steel, 2010). Davis, Schoorman, and Donaldson (1997) and Davis, Frankforter, Vollrath, and Hill (2007) refer to culture as a situational context within which management and governance is situated. To understand the culture and values of craft brewers, the next section will review the American craft beer industry. To understand the internal factors, the sections following will review the history, ownership, board of directors, and management of the Craft Brew Alliance.

3. The American Beer Industry: “Craft” and Commerce Industry concentration of market share is a prominent feature of US brewing (Tremblay, Iwasaki, and Tremblay, 2005). In the years following Prohibition the largest four brewers held 11 percent of the market; by the 1980s their market share approached 80 percent. These companies were large-scale standardized producers of a homogenized, light beverage (Elzinga, Tremblay, and Tremblay, 2015). By some accounts, the prevailing beer was bland (Choi and Stack, 2005; Dighe, 2016). As a result, “the door was opened for craft brewers, who produced darker lagers and ales” (Elzinga, Tremblay, and Tremblay 2015, p. 255). These brewers came to be known as “craft” brewers and they launched by the thousands across America over the next decades. The word “craft” connotes a product and idea that distinguishes it from “regular” beer—perhaps even a connection to intellectual culture, tradition, the appreciation of beauty and philosophy (Fillis, 2012). Indeed, in tracing the origin of using “craft” with brewers, Hieronymus (2015) notes the association of craft with artisans. Such brewers embraced diversity, traditional ingredients and methods, innovative recipes, and small-scale or hand-crafted production (Hieronymus, 2015). Flack (1997) argued the craft beer industry was connected to many Americans’ search for rootedness or a sense of belonging, and that America’s rootless “angst has spawned a cultural countercurrent ‘neolocalism’” (p. 38). As a result, brewers were passionate advocates for what Carroll and Swaminathan (2000) call a “selfconscious community” of “self-styled experts.” Rice (2016) links craft beer to artisans in revolution against industry as “Davids” fighting “Goliath.” The heart of this view of beer is authenticity (Watne and Hakala, 2013; Rice, 2016). Authenticity is a complex construct. Frake (2017) associates authenticity with genuine actors who act “in accordance with their true character” (p. 3933). Writing about authenticity, Rice (2016) suggests that “authentic equals revolutionary (opposing the industrial for the betterment of culture) whereas industrial equals complicity (succumbing to big business and the demise of culture)” (pp. 239–40). This is important because

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one clear manifestation of the culture of craft beer was the perception of “crafty” organizations (Rice, 2016). Crafty suggests inauthentic, big business full of deception, lies, and cunning (Rice, 2016). Watne and Hakala (2013) note that some in the industry regard brewers that achieve growth by developing distribution arrangements with big brewers as having “sold their soul to the devil” (p. 64). This idea of “selling out” may indicate inauthentic organizations which seek mass-audience appeal (Frake, 2017). Such brewers may be deemed more “crafty” than craft (Rice, 2016). A particular aspect of crafty behavior—developed later in the section about A-B and acquisitions—involves selling one’s craft brewery to a big brewer. As the industry of small craft brewers grew as a whole in the 1970s and 1980s, so did the awareness that they needed a representative body to unite the disparate breweries and advocate at the state and national levels. This was the mandate of the Brewers Association. As part of their role, the Brewers Association defined what constituted an American craft brewer. While the definition was modified four times between 2007 and 2018 as the concept of “craft” evolved (Kendall, 2018), one key concept remained—craft brewers were independent (Brewers Association, n.d.). Less than 25 percent of the craft brewery equity may be owned or controlled by an alcoholic beverage industry member that was not itself a craft brewer. Brewers Association CEO Bob Pease noted: The independence clause of the craft brewer definition mentions 25% ownership by an alcoholic beverage industry member that is not itself a craft brewer. That’s key, because the definition was never designed to restrict the craft brewer data set due to finances. The primary purpose of the definition is to allow creation of a data set for companies that have much in common . . . The definition does address the obvious market advantages conferred by ownership from another beverage alcohol company, particularly a large brewer. These advantages are again sharply in focus with distribution opportunities or advantages like Anheuser-Busch InBev’s new incentive program, which incentivizes its distributors to carry its acquired brands (note that the incentive program underlines that 25% is an appropriate level, since CBA is included) and also incentivizes distributors to not carry or drop regional craft brewers from their portfolios. These small and independent brewers then have one fewer choice of an already limited number of distribution option in many markets . . . the definition is still more relevant than ever and clearly distinguishes independent breweries from non-independent ones. Just because there are shades of gray doesn’t mean you can’t tell white from black. (Notte, 2016b)

Writing about independence, Julian Shrago, owner and brewmaster of Beachwood BBQ & Brewing, states: “Independence is the only way to ensure innovation. When people have creative autonomy, they are afforded the ability to take chances

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and think outside the confines of the status quo. Unlike large multinational publicly-traded companies, we aren’t beholden to simply maximize profits” (Shrago, 2018, p. 96). Writing about the importance of independence, Founder and Past President of the Brewers Association Charlie Papazian offered: “the term ‘independent’ is defined by ownership. But the term also helps further define the essence of true craft brewers . . . Independence is about establishing a vision for a company in a manner that is independent of mainstream big-business thinking” (Papazian, 2016). In support of the importance of independence, by February 2018 more than 3,000 craft brewers had signed on to use a new independent craft brewer seal. Even so, some craft brewers actively pursued growth opportunities (Cabras and Bamforth, 2016). Another form of growth was the emergence of publicly traded “craft” brewers. In the mid-nineties the Boston Beer Company, Pete’s Brewing Co., Frederick Brewing, Hart Brewing Co., Willamette Brewing Co., Rock Bottom, the Johnson Beer Co., Mendocino, and the predecessor of Craft Brew Alliance— Redhook—listed on stock exchanges (Acitelli, 2015). Craft brewer listings drew their share of ire. Ashworth (2014) recognized that “purists definitely cringe at the thought of craft brewer IPOs” while Hindy (2014) referred to it as a business model that does not work. Listed brewers were definitely in the minority—by 2015 there were only seven listed craft brewers in all of North America. What can we learn about corporate governance from these firms? One of the brewers that no longer met the independence criterion for the definition of “craft” was the Craft Brew Alliance. The next section of this chapter will describe the methodology used to analyze this company.

4. Methodology The craft beer industry and the relationship of A-B and the Craft Brew Alliance permit an interesting case study about corporate governance. Case studies are a research strategy aimed at “understanding the dynamics present within single settings” (Eisenhardt, 1989, p. 534). As noted by Yin (1994), case studies permit answering questions like “how” and “why.” How has the corporate governance of a publicly traded craft organization led to conflict in the industry? Why is the relationship between A-B and Craft Brew Alliance Inc so contentious in the industry? How does this case study inform the theoretical understanding of corporate governance? It is the purpose of this research, then, to use the example of the Craft Brew Alliance to better understand industry-specific aspects of governance. Following Eisenhardt (1989), a governance researcher, this case will then be used to refine corporate governance theory. The data for this case study about corporate governance was derived from two main sources: Schedule 14A and Form 10K for the years 2008–17. These are

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standard disclosures any publicly traded company must prepare. Form 10Ks are a company’s annual report while the Form 14K is the document prepared for shareholders in advance of an annual meeting. Securities regulations make these disclosures public and available from the national filing service EDGAR. Forms 14A and 10K were combed for governance data pertaining to ownership and shareholders, directors, and executives for the years 2008–17. These were the years spanning the formal existence of the Craft Brew Alliance for which submissions were available. The data was assessed for the extent of dependence on A-B. This chapter does not address financial performance, nor does it draw on perspectives of the case study participants. The next section outlines the evolution of the Craft Brew Alliance and its relationship with A-B.

5. Craft Brew Alliance 5.1 Introduction: Redhook Ale Brewery Inc. and Widmer Brothers Brewing Co. The Craft Brew Alliance had its origins in two separate craft brewers of the 1980s: Redhook Ale Brewery Inc. of Seattle, Washington and Widmer Brothers Brewing Co. of Portland, Oregon. Both firms helped pioneer craft beer in the American northwest. Incorporated in 1981 by Gordon Bowker, the co-founder of Starbucks, and Paul Shipman, a wine industry veteran, Redhook gained ground in the market with its 1982 launch of its Ballard Bitter, and in the following years marketed the Redhook Extra Special Bitter, an India Pale Ale. Widmer Brothers Brewing Co., founded by brothers Kurt and Rob Widmer, developed a golden, unfiltered wheat ale called the Widmer Hefeweizen, which grew to become one of the leading American Hefeweizen beers in the United States. From inception, Redhook may have been atypical from other craft brewers. From the outset, Shipman envisioned aggressive growth and large-scale automation (Krebs, 1998). Whereas some in the craft beer industry held growth and listing with suspicion, if not contempt, Shipman saw bigger as better and going public as a validation of their concept (Krebs, 1998). Lastly, unlike many in the nascent microbrewery industry, Shipman not only embraced a relationship with A-B, he initiated it (Hindy, 2014). In response to discussion of the potential for backlash from the craft beer community, Shipman is purported to have responded, “Anheuser-Busch is a great company. I would love to be associated with it” (Krebs, 1998, p. 180). Distribution was a big challenge for small brewers. Writing about Redhook’s challenges accessing distributors, Krebs (1998) describes that “Shipman often complained to Mickelson that he didn’t want to grow old calling on new distributors in an attempt to convince them to carry his beer. Mickelson and Shipman

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often brainstormed about ways to solve the distribution problem. Inevitably, Shipman would suggest an alliance with Anheuser-Busch” (pp. 174–5). In October 1994, Redhook Ale Brewery Inc. signed equity and distribution agreements with Anheuser-Busch.¹ A-B invested $30,000,000 for a 25 percent equity stake in Redhook, which in return gained access to the American giant’s extensive distribution network. Prior to the agreement Redhook was primarily distributed through the American northwest. By the end of 1996, Redhook had gained access to forty-eight states and the distribution advantages of the industry leader. It was one of the first craft brewers, if not the first, to take on a big beer equity infusion. According to Hindy (2014), the partnership earned Redhook scorn from many in the industry, including Jim Koch, the founder of Boston Beer Company, who purportedly referred to the partnership as “Budhook”—a clear poke at the Budweiser connection. On August 17, 1995, Redhook went public with an A-B supported initial public offering, trading on the NASDAQ under the symbol HOOK. The move galvanized a new phenomenon in the American beer industry—the small but publicly traded craft brewer. The net proceeds of the listing totaled approximately $46,000,000 for Redhook, inclusive of A-B’s $30,000,000 investment of common and preferred stock. Following the listing A-B held about 25 percent equity plus the right to nominate two candidates for election to Board.² The IPO funds supported the development of a New Hampshire brewery to enable growth in the eastern United States. Production began in October 1996 with a capacity of about 100,000 barrels. Proximity of location and business strategy brought Redhook and Widmer Brothers together. Founded in 1984, Widmer’s had a pivotal role in the emerging craft beer industry and culture of Oregon (Alworth, 2009). The brewers found success brewing German-style beer for the West Coast (Notte, 2014a). While not publicly traded, Widmer Brothers negotiated comparable equity and distribution agreements with A-B in 1997, resulting in 40 percent ownership. Widmer Brothers subsequently purchased 20 percent of Kona Brewery LLC of Hawaii in 2003 and 42 percent of Fulton Street Brewery LLC, itself the owner of Goose Island beers, in 2006. Goose Island had distributed beer through Widmer Brothers and A-B for several years.³ The $3,600,000 acquisition was “funded primarily with new borrowings from a bank.”⁴ In 2003 Redhook entered into a licensing agreement with Widmer Brothers to sell Widmer Hefeweizen in the Midwest and the eastern United States. The Redhook/Widmer Brothers relationship was further developed in 2004 when they created a joint venture called Craft Brands Alliance LLC. Through this ¹ Unless otherwise noted, all subsequent data is drawn from the yearly Craft Brew Alliance Inc Edgar 10K & 14A submissions 2008–2007. ² Redhook Ale Brewery Inc. (2008) “Form S-4” p. 1. ³ Redhook Ale Brewery Inc. (2008) “Form S-4” p. 117. ⁴ Redhook Ale Brewery Inc. (2008) “Form S-4” p. 128.

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venture both firms sold beer throughout the western United States via a distribution agreement signed by Craft Brands and A-B. Notably, in its 2007 Form 10-K the Company indicated: “there are no Company products distributed in the U.S. by a wholesaler that are not distributed pursuant to the A-B Distribution Agreement or the distribution agreement between Craft Brands and A-B.”⁵ Redhook was one of the first craft brewers to negotiate equity investment from one of the big brewers. It was the first to build national distribution through its distribution relationship with A-B. And finally, Redhook was one of the first craft brewers to list on a stock exchange. By 2007 Redhook estimated that A-B held about 33 percent equity. The announcement of a 2008 merger with Widmer Brothers Brewing Co. was another big move.

5.2 The Merger The Craft Brew Alliance was formed July 1, 2008. Headquartered in Portland, Oregon and traded on the NASDAQ under the symbol HOOK, the merger absorbed the 2004 Craft Brands Alliance LLC joint venture and created a new single entity. The firm had about 400 employees, a capacity of about 800,000 barrels, and production volume of about 424,000 barrels. The merger resulted from a lengthy negotiation and as the natural outcome of several years of cooperation. Speaking about this cooperation, Kurt Widmer observed that the two companies “had a long, long look at each other” and that there weren’t “a lot of unknowns left” (Allison, 2007). Redhook and Widmer Brothers noted that the merger provided many benefits. It was an extension of an existing relationship already formalized in the Craft Brand Alliance LLC joint venture. Merging provided opportunities for production efficiencies, national sales promotion, and greater access to capital markets. Redhook in particular expected that its market capitalization, trading volume, and stock price would appreciate in the market’s eyes and lead to additional coverage by analysts. For Widmer Brothers, sales, brand development, and liquidity for its shareholders were key benefits.⁶ In its 2008 Form S-4 Notice of Merger submission, Redhook indicated that A-B representatives communicated to Redhook management that A-B concurred that a business combination between the two companies could be beneficial to the shareholders of Redhook. In addition . . . designees of A-B on the board of Widmer, acted as facilitators to help advance discussions regarding the

⁵ Redhook Ale Brewery Inc. (2007) “Form 10-K” p. 8. ⁶ Redhook Ale Brewery Inc. (2008) “Form S-4” p. 3.

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parameters of integrating the business operations and management of the two companies, both of whose products were distributed by A-B.⁷

Officially, A-B representatives on the Boards of the two companies abstained from negotiations and voting concerning the merger.⁸ The Craft Brew Alliance also included revised equity and distribution agreements with A-B through to the year 2018. The A-B representatives on the Board of Directors were contractually entitled to sit on each committee of the Board; audit, compensation, nominating and governance, and strategy planning. Restrictive covenants prevented the merged firm from entering into certain transactions without the prior consent of A-B, including the issuance of equity exceeding 20 percent of its outstanding common stock, issuing stock to any person engaged in the malt beverage or alcoholic beverage business, the acquisition of assets related to malt beverage production that exceeded 50 percent of the book value of its assets, the sale of any assets which had a book value that exceeded 30 percent of the value of its assets, amending the articles of incorporation, granting board representation rights to any party, distributing products in the United States other than through A-B channels, or voluntarily delisting from the NASDAQ. The consent of A-B would be needed prior to taking many actions, and the “practical effect of these restrictions is to grant to A-B the ability to veto certain transactions that management may believe to be in the best interest of Redhook and its shareholders.”⁹ Growth over the 1990s and 2000s had focused on building national distribution to access new markets. The Craft Brew Alliance undertook a new approach to growth via acquisition. In 2010 it purchased Kona Brewing Company of Hawaii for $6,200,000 in cash and $11,700,000 in common shares (held by the Healy Trust).¹⁰ Over the next seven years Kona’s beers became the driver of growth at the Craft Brew Alliance, overtaking in sales volume the Redhook and Widmer Brother brands and generating 56 percent of production volume. Another major equity move involved the sale of the company’s 42 percent stake in the Goose Island brewery of Chicago in 2011. The Craft Brew Alliance inherited the stake from Widmer Brothers and sold Goose Island to A-B for $16,300,000.¹¹ A-B had held the other 58 percent share of Goose Island prior to the transaction. In 2011/12 the company increased its capacity from about 900,000 barrels to just over 1,000,000, and increased production volume to over 824,000 barrels. By

⁷ ⁸ ⁹ ¹⁰ ¹¹

Redhook Ale Brewery Inc. (2008) “Form S-4” p. 47. Redhook Ale Brewery Inc. (2008) “Form S-4” p. 47. Redhook Ale Brewery Inc. (2008) “Form S-4” p. 92. Craft Brew Alliance Inc. (2011) “Form 10-K” p. 3. Craft Brew Alliance Inc. (2011) “Form 10-K” p. 3.

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the end of 2015 the Craft Brew Alliance employed 820 people, more than double its 2008 numbers. Sales had jumped from $86,000,000 in 2008 to more than $218,000,000, and the firm was consistently profitable as it averaged a profit of $2.4 million. In 2012 the company changed its name from “Craft Brewers Alliance Inc” to “Craft Brew Alliance Inc.” and changed its NASDAQ symbol from “HOOK” to “BREW” to reflect the integration of its various brewing traditions. One of those traditions was A-B.

5.3 Anheuser-Busch and Acquisitions A-B held a dominant place in the brewing industry of America. In the postProhibition era the company took a lead role through scale production, national distribution, and national advertising (Tremblay and Tremblay, 2005). The company’s dominance created conflict in the industry. At the product level, many aficionados held A-B’s beers as bland, homogenized, mass-produced products that commodified away all the flavors, special notes, mouthfeel, and distinctive characteristics that make beer beer (Choi and Stack, 2005; Dighe, 2016). Indeed, it was in reaction to this bland beer that brewers such as Fritz Maytag, Jack McAuliffe, Jane Zimmerman, Suzy Denison, Ken Grossman, Paul Camusi, and others were motivated to start a “revolution” (Hindy, 2014). The company’s place in the industry may also be explained by an organizational culture bent on dominance. Taplin, Gammelgaard, Dorrenbacher, and Geppert (2013) attribute A-B’s acquisition by InBev to the “corporate arrogance of key Busch family members whose single-minded pursuit of domestic market share blinded them from the realities of an increasingly international brewing industry undergoing consolidation” (p. 270). One means by which it achieved domination was distribution practices that marginalized craft brewers. Craft brewers struggled with the perceived lock on distribution held by big brewers like A-B. The three-tier distribution rules prohibited brewers from owning a distributor or retail license.¹² Tripp (2015) writes that the “bulk of the nation’s beer distribution is handled by distributors with agreements to sell either ABInBev or MillerCoors beers.” Hindy (2014) captured the frustration of craft brewers and their concerns with big brewers such as A-B when it came to distribution: “Distributors were supposedly independent businesses, but in practice they were quite beholden to the large brewers. They dutifully pushed whatever the large brewers produced . . . The Budweiser distributor was often 100 percent focused on Anheuser-Busch (AB) brands. Indeed, August Busch III, with his 1996

¹² The Federal Alcohol Administration Act https://www.gpo.gov/fdsys/pkg/USCODE-2014-title27/ pdf/USCODE-2014-title27-chap8.pdf

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“100 percent share of mind” campaign, seemed determined to enforce that restriction with all his distributors” (p. 156). A-B’s acquisition of craft breweries was another contentious practice. A review of select headlines provides an indication of this concern: “Craft Buyouts are Turning AB InBev into the Walmart of Beer” (Hines, 2017) “AB InBev Buys Stakes in Craft Beer Sites, Provoking a Backlash” (Schultz, 2017) “Can Craft Beer Survive AB InBev?” (Leonard, 2015) “A Tiny Craft Brewer Sells Itself to Anheuser-Busch, A Beer War Erupts” (Notte, 2014b) And, in reference to the appellation coined for A-B’s investment in Redhook: “Before the Panic over 10 Barrel, There was ‘Budhook’ ” (Acitelli, 2014). Stone Brewing’s Greg Koch accused big brewers of obfuscation and trying to marginalize craft brewers through acquisition (Notte, 2016a). More recently, Hines (2017) described the fallout after A-B purchased Wicked Weed of North Carolina in 2017. Brewers “dropped out of Wicked Weed’s sour beer festival, and craft beer shops and bars in North Carolina, Texas and Colorado stopped selling Wicked Weed and other AB InBev products” (Hines, 2017). The reaction included Clown Shoes brewer Gregg Berman, who said his brewery “was not going to lose our identity and no, we are not ‘selling out’ ” (Hines, 2017). Of course, in terms of acquisitions, A-B’s initial forays into craft equity were Redhook and Widmer Brothers, the brewers that would eventually become the Craft Brew Alliance. What are the most prominent aspects of the Craft Brew Alliance’s corporate governance? To what extent had the corporate governance at the Craft Brew Alliance been influenced or driven by the producer of Budweiser? The ownership, Board, and executive management for 2008–17 are described next.

5.4 Corporate Governance at Craft Brew Alliance: 2008–2017 5.4.1 Ownership During the 2008–17 period the Craft Brew Alliance grew in terms of the number of common shares outstanding, but remained relatively constant in terms of number of shareholders (~700). The number of common shares outstanding increased by more than 2,000,000, from 16,948,063 to 19,179,006, in large part

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due to the issuance of shares as part of the Kona acquisition in 2010/11. During this 2008–17 time period A-B’s ownership remained constant at 6,069,047 shares, varyingly holding from 35.8 percent to 31.4 percent of the company’s shares, but never increasing or decreasing the volume of ownership. This was always more than three times the concentration of shares held by the next biggest shareholder, and in recent years more than four times. Thus, A-B was the major shareholder in the Craft Brew Alliance, albeit a minority shareholder. In 2008 Kurt and Rob Widmer of the Widmer Brothers brewery collectively held about 18 percent of shares, but by 2016/17 this had been reduced to about 8 percent as both brothers gradually sold off shares. The brothers’ shareholdings for 2017/18 were not provided. By contrast, the Widmers and their sister held 43.5 percent of Widmer Brothers prior to the merger.¹³ With the acquisition of Kona, the Craft Brew Alliance gained a new corporate shareholder in the form of the Healy Trust. Unlike the Widmers, Kona/Healy Trust maintained its shareholdings over the time period. As the largest shareholders of the Craft Brew Alliance, A-B, the Widmers, the Healy Trust, and an institutional investor—Dimensional Fund Advisors—always held more than 50 percent of the common shares in each year of the 2008–15 period. So, while each was a minority shareholder, collectively the group held a majority. In the most recent two years the concentration of ownership of the four largest shareholders dipped below 50 percent (Table 13.1).

5.4.2 Board of Directors As built into the terms of the merger, the new Board had two directors from Redhook, three from Widmer Brothers, and two appointed by A-B. As a company listed on the NASDAQ, the Craft Brew Alliance was obliged to uphold board independence requirements. These requirements included a Board composed of a majority of directors who were not employees of the company, were not affiliated with company executives, and did not have business dealings with the firm. In each year of 2008–17 the Board maintained at least 57 percent director independence, and sometimes as high as 85 percent (Table 13.2). Independent directors came with experience in various industries and companies, including Pioneer Newspaper of Washington, Lile International Moving of Oregon, First Call Heating and Cooling of Oregon, and Columbia Sportswear Company of Oregon. Further, independent directors came with management experience from roles such as president, CEO, and legal counsel. In other words, these individuals held executive roles in companies from different industries and brought this experience to the direction of the Craft Brew Alliance.

¹³ Redhook Ale Brewery Inc. (2008) “Form S-4” p. 147.

Healy Trust/Kona %

Percentage Ownership AB %

Robert Widmer

Kurt Widmer

Dimensional Fund Advisors Timothy Boyle

Healy Trust/Kona

Schedule 14-A Schedule 14-A

Schedule 14-A, March Notice of Annual Meeting Schedule 14-A Schedule 14-A Schedule 14-A Schedule 14-A Schedule 14-A Schedule 14-A

Common Shares Outstanding

AB

Source

Shareholder Ownership

7.3%

2017/18 31.4%

480,897

483,675

7.3%

2016/17 31.5%

753,103

784,789

1,225,242

1,401,860

6,069,047

19,261,245

2016/17

1,269,327

1,401,860

6,069,047

19,309,829

2017/18

7.3%

2015/2016 31.6%

910,000

1,312,231

475,989

1,078,300

1,401,860

6,069,047

19,179,006

2015/ 2016

Table 13.1 Craft Brew Alliance Inc. ownership data, 2008–17

7.3%

2014/2015 31.7%

910,000

1,312,231

472,751

1,016,586

1,401,860

6,069,047

19,127,999

2014/ 2015

7.4%

2013/2014 32.0%

900,000

1,312,281

469,947

992,685

1,401,860

6,069,047

18,972,247

2013/ 2014

7.4%

2012/2013 32.1%

965,000

1,637,145

466,631

963,889

1,401,860

6,069,047

18,911,081

2012/ 2013

6.3%

2011/2012 32.2%

995,000

1,749,281

463,354

1,193,030

6,069,047

18,844,817

2011/ 2012

6.3%

2010/2011 32.2%

1,000,000

1,759,881

460,660

1,193,030

6,069,047

18,823,053

2010/ 2011

—

—

Continued

2008/2009 35.8%

1,099,820

1,969,881

2009/2010 35.5%

1,099,820

1,969,881

454,660

—

—

457,660

6,069,047

16,948,063

2008/ 2009

6,069,047

17,074,063

2009/ 2010

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47.8%

693

Calculation

Annual Report

Source: Created by author using Schedule 14A and Form 10-K by year

696

49.3%

4.3

3.9%

4.1%

2.5%

2.5%

4.3

Times, AB ownership to next largest Shareholder Concentration of Four Largest Shareholders Number of Shareholders

Robert Widmer %

Kurt Widmer %

6.4%

2016/17

6.6%

Schedule 14-A Schedule 14-A Schedule 14-A Schedule 14-A Calculation

Dimensional Fund Advisors Timothy Boyle

2017/18

Source

Shareholder Ownership

Table 13.1 Continued

703

51.3%

4.3

4.7%

6.8%

2.5%

5.6%

2015/ 2016

696

51.2%

4.3

4.8%

6.9%

2.5%

5.3%

2014/ 2015

683

51.5%

4.3

4.7%

6.9%

2.5%

5.2%

2013/ 2014

53.1% 677

—

3.47

5.3%

9.3%

2.5%

2011/ 2012

53.3%

3.71

5.1%

8.7%

2.5%

5.1%

2012/ 2013

684

53.1%

3.45

5.3%

9.3%

2.4%

2010/ 2011

682

56.1%

3.08

6.4%

11.5%

2.7%

2009/ 2010

690

56.6%

3.08

6.5%

11.6%

2.7%

2008/ 2009

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2 25.0%

75.0% 2 25.0%

Calculation

Schedule 14-A, Jozwiakowski resigned Sep 15, 2015 Calculation

Source: Created by author using Schedule 14A by year and calculations as noted above

75.0%

8 6

8 6

Schedule 14-A Schedule 14-A

Number of Directors Number of Independent Directors Number of Independent Directors % Number of AB Directors % AB Directors

2016/ 17

2017/ 18

Board

Table 13.2 Craft Brew Alliance Inc. Board of Director data, 2008–17

14.3%

1

85.7%

7 6

2015/ 2016

25.0%

2

62.5%

8 5

2014/ 2015

25.0%

2

62.5%

8 5

2013/ 2014

25.0%

2

62.5%

8 5

2012/ 2013

25.0%

2

62.5%

8 5

2011/ 2012

14.3%

1

71.4%

7 5

2010/ 2011

28.6%

2

57.1%

7 4

2009/ 2010

28.6%

2

57.1%

7 4

2008/ 2009

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Even so, the Board of Directors during the 2008–17 time period displays several notable characteristics. The composition of the Board did not change much during nine of the ten years. Four individuals—David Lord, John Rogers, Kevin Kelly, and Timothy Boyle—served as Director through nine of the ten years. Mr. Boyle and Mr. Kelly were Directors of Widmer Brothers Brewing Co. prior to the merger, so their direction dates back two decades. Over 2008–17 the A-B appointees were always employees of A-B. Three of the A-B appointees also contributed long-term service—Andrew Goeler, Anthony Short, and Thomas Larson had all served as directors of Widmer Brothers Brewing Co. or Redhook prior to the merger and for several years following it. Anthony Short served on the Board of both Redhook and Widmer Brothers prior to the merger. Thus, the direction of the Craft Brew Alliance was for the most part in the hands of a few individuals who, while meeting the criteria for independence, demonstrated long-term associations with A-B in one form or another. Board committees were an important means of governance. Craft Brew Alliance Inc. maintained four standing committees; (1) Audit, (2) Compensation, (3) Nominating and Governance, and (4) Strategic Planning. In all cases one of the A-B designees observed the meetings of the committees and participated in an advisory capacity. In 2012/13 A-B’s status in the Strategic Planning Committee changed from observer to voting member. This is important because the Strategic Planning Committee had special oversight of equity decisions at the Craft Brew Alliance, to be considered following the next section.

5.4.3 Executives Diverse leadership had become one of the firm’s stated strategies. In its Schedule 14-A submissions, the Craft Brew Alliance designated those employees considered “executives.” These individuals were hired by and reported to the Board of Directors to manage the business. The Craft Brew Alliance generally employed four or five executives, though it also had a cadre of other senior managers. As is evident in Table 13.3, a notable characteristic of the executive composition of the Craft Brew Alliance, however, was the gradual but decided shift from executives with craft beer experience to executives with big beer experience. In 2008 none of the seven executives of the merged firm had any significant work experience in A-B, Miller, Heineken, or a big beer firm. They were executives from the craft beer firms. In 2011 Andrew Thomas was hired as President of Commercial Operations following his work, among other jobs, as an executive at Heineken. Thomas was brought in to oversee growth and brand development (Business Wire, 2011). Part of the growth involved focusing on successful brands, shifting away from traditional brands, and leading partnerships/acquisitions of other breweries in what Furnari described a “transformation” of the Craft Brew Alliance (Furnari, 2019). In 2013/14 another executive with experience at

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 ,    ,  -

315

Table 13.3 Craft Brew Alliance Inc. executive data, 2008–17 Year

Number of Execs

Number of Execs from AB/ Heineken/MillerCoors

Number of Execs from Widmer/Redhook/ Kona

2017/2018 2016/2017 2015/2016 2014/2015 2013/2014 2012/2013 2011/2012 2010/2011 2009/2010 2008/2009

6 6 5 4 5 4 6 3 3 7

5 5 5 4 4 1 1 0 0 0

1 1 0 0 1 3 5 3 3 4

Source: Created by author using Schedule 14 A by year

Heineken was hired, as were two former A-B executives. By 2014/15 all executive positions were held by former big beer employees, including two former A-B executives. It appears, then, that Craft Brew Alliance Inc defines “diversity” in terms of professional big beer experience more than in terms of craft beer experience (with the exception of a recent VP addition in the form of a longtime employee). In its Form 10k annual report the company routinely acknowledges that “the loss of Andrew Thomas as our Chief Executive Officer, and the failure to find a replacement satisfactory to A-B, would be a termination event under the A-B Distribution Agreement.” Thus A-B wields executive influence over the Craft Brew Alliance in direct and indirect ways.

5.4.4 Strategy For much of the 2008–17 time period, the Craft Brew Alliance espoused a “differentiation” strategy focused on six main elements: an innovative, complementary portfolio of beers; distinct, authentic craft beer brands; a national brewing footprint; nationwide sales activation; national seamless distribution; and a diverse leadership team. In 2017 the company subsumed these elements into three new strategic priorities: • Continue to focus on strengthening the topline. • Strengthening the core health of our business. • Actualizing the future.¹⁴

¹⁴ Craft Brew Alliance Inc. Form 10k 2017 p. 3.

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This change may reflect a general retrenchment by the company in the wake of capacity utilization challenges, declining core brands, and growing competition in local markets. Responsibility for strategic planning was held by the Strategic Planning Committee of the Board of Directors, the only Committee in which A-B had a voting member (as opposed to observing member). The committee advised management about capital investments, acquisitions, partnerships, joint ventures and alliances, and dispositions of capital assets.¹⁵ Numerous major equity and debt-financed deals were completed with A-B’s involvement. Extending back over the lifetime of A-B’s association with Redbook, Widmer, and the Craft Brew Alliance, these deals include: • The minority acquisition of Redhook in 1994 for $30,000,000 • The Redhook IPO in 1995 for $46,000,000 (included A-B 1994 acquisition) • The minority acquisition of Widmer Brothers in 1997 for a reported $18,300,000 • The minority acquisition of Kona in 2003 for an undisclosed amount • The creation of Craft Brands Alliance LLC joint venture in 2004 • The minority acquisition of Goose Island in 2006 by Widmer Brothers and A-B for $3,600,000 • The creation of the Craft Brew Alliance in 2008 for $50,000,000 • The acquisition of Kona in 2010 for $17,900,000 • The sale by Craft Brew Alliance (and, indirectly or directly, A-B) of Goose Island to A-B in 2011 for $16,300,000 • Acquisitions of Appalachian Mountain Brewery of North Carolina, Cisco Brewers of Massachusetts, and Wynwood Brewing of Florida in 2018, following several years of distribution agreements with each firm (and a minority stake in Wynwood since 2016) • Sale of Woodinville brewery to Sound Commercial Investment Holding (a non-brewing, real estate firm) in 2018 for $24,500,000 following the expiration of an option to sell the facility to Pabst Brewing Company. During this time period, the Craft Brew Alliance regularly invested in its breweries’ efficiency. It launched a Redhook innovation brewery in 2017, and invested $10,000,000 in its Portland operation and $20,000,000 into a Kona Hawaii operation. While it cannot be claimed that A-B caused any of these events to happen, it can be claimed that A-B consent was required for major activities and investments, and, as stated in annual reports since 2008, that A-B effectively held

¹⁵ Craft Brew Alliance Inc Schedule 14A 2017/2018 p. 9.

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317

the power of veto for major transactions. Thus, for a strategic area of the Craft Brew Alliance’s corporate governance extending back, in reality, almost twentyfive years, A-B held a prominent guiding influence, if not control. This dynamic may be equally evident in a key component of Craft Brew Alliance strategy—production and distribution. The Craft Brew Alliance indicates in each Annual Report from the 2008–17 period that it is dependent on the big brewer for many aspects of its business. Even more telling, the company discloses that there are effectively no company products distributed in the United States or internationally that are not distributed pursuant to the A-B distribution agreement. This is clearly evident from its operational data: 87–8 percent of sales and 91–2 percent of production were distributed via the Master Distribution Agreement signed with A-B. Besides a decided dependence on A-B for distribution, the Craft Brew Alliance paid the firm more than $2,000,000 a year in margin fees and about $400,000 a year in handling, inventory management, and royalties. The Craft Brew Alliance Inc declared in its Annual Reports that substantively all of the company’s dealings were through A-B. This is all the more interesting because A-B was a notable supplier of materials to the Craft Brew Alliance, which declared $17,100,000 and $22,600,000 purchases of kegs from A-B in 2008 and 2009. The data is presented in Table 13.4. In 2016 the distribution agreement with A-B was extended to 2028. That means that Redhook, Widmer, and the Craft Brew Alliance will have distributed the vast majority of its beer through A-B for more than thirty years. While for many years Redhook co-founder and CEO Paul Shipman decried the practice of contract brewing as potentially deceptive to craft beer consumers, subsequent leadership at the Craft Brew Alliance has shifted its position on the topic. In 2016 the company signed a contract brewing agreement with A-B Commercial Strategies LLC, an affiliate of A-B. The agreement gives the Craft Brew Alliance the option to brew up to 300,000 barrels at the A-B facilities in Fort Collins, Colorado—300,000 barrels is about 28 percent of the Craft Brew Alliance’s 2016 capacity and 35 percent of its 2017 capacity. The 2017 capacity was reduced with the closure and eventual sale of its Woodinville facility—which was, ironically, the beloved brewery built by Shipman. Thus, the company transferred its brewing capacity from its own state-of-the-art craft facilities to the contract facilities of its major shareholder and industry leader Anheuser-Busch. If the Craft Brew Alliance were to fully utilize this contract option, 40 percent of its 2017 output of “craft” beer would have been brewed in A-B facilities. The “initial term” of the agreement extends through 2026. The Craft Brew Alliance is in fact no stranger to contract brewing. In 2016 the company entered into a contract-brewing agreement with Pabst Northwest Brewing Company, a subsidiary of Pabst Brewing Company, to brew selected Rainier Brewing Company brands. The agreement included an option to sell Pabst the Woodinville facility. In 2018, the Craft Brew Alliance entered into a “Contract

2016 775,600

693,300

89.4%

$202,507,000 $167,725,000

82.8%

$2,420,000

$377,000

2017 748,300

654,200

87.4%

$207,456,000 $164,491,000

79.3%

$2,277,000

$384,000

$393,000

— —

— —

$2,644,000

88.1%

$200,022,000 $176,161,000

92.3%

766,000

2014 830,200

$396,000

$2,594,000

86.9%

$204,168,000 $177,380,000

91.4%

753,400

2015 824,400

—

—

$402,000

$2,009,000

88.7%

$179,180,000 $159,001,000

93.6%

708,100

2013 756,600

—

—

$449,000

$1,864,000

87.2%

$169,287,000 $147,628,000

91.0%

660,000

2012 724,900

—

$10,432,000

$490,000

$2,777,000

87.2%

$149,197,000 $130,137,000

90.9%

611,200

2011 672,600

Note: Included in Widmer Exec information is Mark Moreland who served as CFO for Widmer Bros for two months prior to merger

Source: Created by author using Schedule

Production Volume (BBL) Barrels distributed through AB and AB related Percent of production Net revenue Revenue generated through AB and AB-related Percent of net revenue Margin fees paid to AB Handling, inventory management, royalty, and other fees paid to AB Sale of brewery to AB Unique purchases from AB

Sales and Distribution A-B, 2008–17

Table 13.4 Craft Brew Alliance Inc. operations and A-B data, 2008–17

—

—

$632,000

$5,600,000

86.8%

$131,731,000 $114,296,000

94.6%

574,900

2010 607,800

$22,600,000

—

$941,000

$5,800,000

88.6%

$124,713,000 $110,515,000

97.6%

573,200

2009 587,500

$17,100,000

—

$1,444,000

$3,100,000

78.2%

$79,761,000 $62,364,000

77.3%

328,600

2008 424,900

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319

Brewing Agreement” with Anheuser-Busch Companies LLC, another A-B company, “pursuant to which we will brew, package, and palletize certain malt beverage products of A-B’s craft breweries at our Portland, Oregon and Portsmouth, New Hampshire breweries, as selected by ABC.”¹⁶ This is not the first time the Craft Brew Alliance has brewed A-B beer. In its 2007 Form 10k Redhook disclosed a twenty-year agreement, dated from 2003, in which the company brewed the A-B Pacific Ridge brand on behalf of A-B and fees of $70,000–80,000 per year were paid to A-B. As a result, the Craft Brew Alliance brews beer for the biggest brewer in the world. Thus, many aspects of corporate governance of the Craft Brew Alliance are dominated by or clearly influenced by A-B. It holds a controlling minority ownership of 30+ percent of the firm; 25 percent of the Board of Directors are A-B employees; the composition of the executive management group is subject to A-B approval and several executives are former A-B employees. Product distribution is almost solely in the hands of A-B and its network of wholesalers. The Craft Brew Alliance’s portfolio witnessed the decline of its core brands and a shocking shift to growth brands, as presented in Table 13.5. The company has also sold off key Redhook assets and shifted production of beer to A-B contract facilities, while at the same time contracting brewing of A-B products in the “craft” facilities of the Craft Brew Alliance Inc. A-B not only obtained ownership of Redhook, Widmer, and the Craft Brew Alliance but also directly influenced investment decisions pertaining to Kona, Goose Island, Appalachian Mountain, Cisco, and Wynwood breweries. Its agreements are projected to extend over a thirty-four-year time period from 1994 through to 2028. A-B ultimately holds the power of veto over the “craft” brewer and had the option to exercise a complete buy-out of the Craft Brew Alliance at a set price of $24.50 a share (Furnari, 2018). In the fall of 2019 A-B exercised its option with an offer to buy out all remaining shares. Put another way, there is practically no evidence of independence of governance at the Craft Brew Alliance. Whether the company could have adjusted A-B’s ownership percentage to comply with Brewers Association independence criterion and thereby retain “craft” status appears to be a pointless consideration. By almost every measure of corporate governance, the Craft Brew Alliance is dependent on A-B. This suggests a power dynamic with a big dominant brewer that defies the principle of independence enshrined in the Brewers Association charter. What makes this outcome particularly strange is that the original name of the company—before it was the Craft Brew Alliance and before it was Redhook Ale Brewery Incorporated, and before the company lost its “craft” status with the Brewers Association for failing to meet the independence criterion—was “Independent Ale Brewery.”

¹⁶ Craft Brew Alliance Inc, Form 10k, 2017, p. 10.

665 855,000 748,300 60.0% 87.5%

2017

2016 775,600 397,400 148,100 127,200 51.2% 19.1% 16.4%

800 1,075,000 775,600 67.0% 72.1%

2016

2015 824,400 352,000 198,100 185,900 42.7% 24.0% 22.5%

820 1,075,000 824,400 71.0% 76.7%

2015

Source: Created by author using Form 10-K annual reports by year

Shipments by brand, 2008–17 2017 Production volume (BBL) 748,300 Kona (BBL) 424,600 Widmer Brothers (BBL) 123,300 Redhook (BBL) 94,200 Kona (%) 56.7% Widmer Brothers (%) 16.5% Redhook (%) 12.6%

Employees Capacity (BBL) Production volume (BBL) Stated capacity utilization Capacity utilization

Production

Production 2008–17

2014 830,200 300,600 217,000 223,100 36.2% 26.1% 26.9%

785 1,075,000 830,200 75.0% 77.2%

2014

Table 13.5 Craft Brew Alliance Inc. production and product data 2008–17

2013 756,600 256,800 252,600 216,900 33.9% 33.4% 28.7%

745 1,075,000 756,600 70.0% 70.4%

2013

2012 724,900 220,000 264,300 191,000 30.3% 36.5% 26.3%

740 1,075,000 724,900 73.0% 67.4%

2012

2011 672,600 172,800 271,200 179,300 25.7% 40.3% 26.7%

675 900,000 672,600 75.0% 74.7%

2011

2009 587,500 113,200 285,700 183,600 19.3% 48.6% 31.3%

63.2%

66.9%

2010 607,800 133,400 277,200 174,100 21.9% 45.6% 28.6%

400 929,000 587,500

2009

600 909,000 607,800

2010

2008 424,900 46,600 177,500 200,800 11.0% 41.8% 47.3%

53.3%

400 797,000 424,900

2008

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6. Discussion The small-cap craft brewery, and perhaps publicly traded craft firms in other artisanal industries, are at the crossroads of contentious approaches to financing. These organizations seemingly aim to balance all that is craft with what some deride as craftiness. Based on the cultural values of the craft beer industry, it is tempting to declare the Craft Brew Alliance a crafty sellout for its relationship with A-B. The evidence of dependence presented to this point certainly supports that conclusion. Based on public market norms for corporate governance, it may be tempting to dismiss such criticisms in view of the maxim to maximize returns for shareholders. While this chapter is not about the Craft Brew Alliance’s performance, there may be support for the company’s success, as its stock price has generally appreciated over the ten years. It is the argument of this chapter that such polar dichotomies miss the point. The Brewers Association currently recognizes brewers that produce up to 6,000,000 barrels as “craft.” While only a few members come close to this level of production, since 2012 the number of regional breweries has doubled to more than 200. Further, the Association is actively supporting its members with export training. This inherently suggests growth by market development. If the Association is actively promoting growth then there are certainly craft brewers that that are committing equity; taking on debt; investing in increasingly more advanced facilities; pursuing regional, national, and perhaps international market development; and managing increasingly complex distribution and logistics. Yet, at the same time the craft beer industry faces looming challenges of competition resulting from the number of breweries that have launched and the very real prospect that these breweries may fail due to poor governance. Since 2012, 310 microbreweries and 250 brewpubs have closed operations. While the choice of the Craft Brew Alliance to align itself with A-B may be held in contempt by the Brewers Association and (some of) its members, the company also aligned itself with professionalization of management and governance. Small business growth can be impaired by under-experienced management (Ang, 1991). As firms go through the lifecycle of growth, the professionalization of management may be a necessary change (Bonn and Pettigrew, 2009; Wellalage and Locke, 2011). The business model of established craft breweries such as Redhook and Widmer mentoring emerging breweries such as Kona and Wynwood as part of an alliance may merit further investigation, but craft companies undertaking growth need to address professionalization of management and governance. Strangely, the literature and the industry are notably quiet on this front. There is also a gap in the literature and industry regarding public market brewers or any listed artisanal organization. The case of the Craft Brew Alliance demonstrates the perilous crossroads of craft and commerce when it comes to corporate governance. While it is clear that the influence and control of a large

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shareholder was a significant factor, there is another important theme that emerges from this story. Governance that maximizes shareholder value at the expense of the cultural values of a craft industry in which the company exists fails, to some degree, to uphold the trust or fiduciary responsibility to a key stakeholder. While nebulous in some ways, the industry culture of craft beer is a stakeholder that demands fiduciary consideration. The Brewers Association’s decision to exclude the Craft Brew Alliance as a “craft” brewer was based on the 25 percent equity position of A-B. In reality, the industry regards independence beyond mere equity terms, and the Craft Brew Alliance shows little in the way of independence at all. Quite the opposite—in almost no meaningful way was the Craft Brew Alliance independent of Anheuser-Busch. As a matter of business, this may have strategic and operating value. But as a matter of governance within the industry of craft beer, the entire dependence of the Craft Brew Alliance on A-B is evidence of the smaller brewer’s ignorance of—that is, the act of ignoring—its fiduciary responsibility to the distinct culture of independence. Governance of craft organizations in the truest sense of mission and vision means upholding the fiduciary responsibility to industry culture. While this responsibility is not enshrined in federal, securities, stock exchange, or accounting policies and practices, the trust is derived from the environment in which craft organizations are conceived and developed. If craft organizations undertake regional, national, and international growth, requiring asset acquisition and diversification of financing, and, potentially, the public listing on a stock exchange, such organizations will face the governance challenges faced by the Craft Brew Alliance. Effective governance of publicly traded craft organizations, with sufficient and sensitive attention to all stakeholders, is theoretically possible. The Craft Brew Alliance was not, by this reasoning, incapable of upholding its broad fiduciary duties to the culture of the industry. Rather, it opted not to. The corporate governance of a publicly traded craft organization involves comprehensive attention by executives and Board members to optimize returns to all of its stakeholders, with notable attention to the tradition and values of its craft culture. With the growth of artisanal industries, this area of research and practice may become very important indeed.

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Index AB InBev see InBev acquisitions see mergers and acquisitions adulteration 172–3 advertisements see brands Albrecht I, Duke of Bavaria 75 Aldi (company) 127 Allied Breweries (company) 226 Allsop (company) 173 American Homebrewers Association 263 American Society of Brewing Chemists (ASBC) 110 Anchor Steam Beer Brewery 114, 218, 262 Anheuser-Busch (company) 192, 227 Argentina, spread of hopped brewing 77 Asahi (company) 273 Australia beginning of brewing industry 138, 139 brewing industry concentration 139–41 brewpubs 7 craft breweries 7, 9, 219 effect of excise duty 161–4 excise duty after Federation (1901) 156–61 excise duty bonds 149–50 excise duty legislation 138, 141–6 excise duty payers 151–6 excise duty records 150 excise stamps 148–9 license fees 150–1 penalties for excise duty noncompliance 150 secondary costs of excise duty 149–51 sources of excise duty law 146–9 spread of hopped brewing 77 Baker, Robert 172 Barleywine 84 Bass (company) 104, 173, 179, 180, 226 Beachwood BBQ & Brewing 302 Beck’s (beer) 127 Beer Judge Certification Program (BJCP) 83 beer market concentration and product homogenization (1900–1980) 217–18 Croatia 26–8 decline of traditional beer markets 221, 226 Germany 120–2, 199

globalization and consumption changes 199–202 globalization and growth of 193 globalization and market power 206–12 home markets, definition of 120 lager beer 213 beer parks 227 Belgium contract brewing 242, 246, 251–2 craft breweries 219, 227, 228 European Brewery Convention, and 105, 108 gypsy brewers 241 internationalization of research, and 113 introduction of hops 74, 75–6 lager branding 204 mergers and acquisitions 227 tied-house systems 225 Berliner Weisse (beer) 102 Bishop, L. R. 104 Blue Moon (beer) 226, 264 board of directors see directors books on beers and brewing 263 bottled beer see Whitbread and Co. Boulevard Brewery 263–4 brands advertisements 174, 179–80 brand building 173–5 brand equity 25, 29 definition of ‘brand’ 28 gender differences in preferences 26, 31–3, 37–8, 41–3 globalization, and 194–9, 202–6, 214 loyalty 37–42, 118 management of 25, 28–31 performance factors 177–9 ‘phantom’ (‘faux’) brands 226 preferred brands, existence of 33–4 theory of price promotion, and 122–6 trademark litigation 173 young adults’ attitudes to 31 Brasseries de la Meuse (company) 103 Brazil, craft brewery mergers and acquisitions 227 Brewers Association 257, 267, 302 Brewers of Europe (organization) 107 Brewery Convention of Japan (BCOJ) 110, 113

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Brewery History (2011) 263 brewing industry beer production evolution worldwide 114–15 books on beers and brewing 263 contribution by current volume 1, 13–18 costs of production 235 dynamics of 13, 18 economic importance of 25 globalization see globalization historical overview of 2–3 ownership see ownership pre-World War II brewing practices 102 production limits 225 regulation see regulation science see science of brewing suitability for study 1 tied-house systems 225 see also corporate governance; institutions brewpubs density of 8 emergence of 7 sales by 48 British Hop Association 79 Brooklyn Brewery 267 Brouwerij Anders (company) 241 Brown, Meredith 104 Brussels Beer Project 242, 246 Camden Town Brewery 227 Campaign for Real Ale (CAMRA) 219 Canada craft brewery mergers and acquisitions 227 spread of hopped brewing 77 Carlsberg (company) 7, 12, 103, 104, 198, 226 Celis, Pierre 264 Centre Continental de Brasserie 103 Černý Potoka (company) 250–1 Chandler, Alfred 169–70, 177, 184 Charlotte (NC), craft breweries 53–7, 64–5 Chicago (IL), craft breweries 57–60, 64–5 China globalization, and 197–8 introduction of hops 73 recent industry changes 11–12 Cincinnati (OH), craft breweries 60–5 Clipper City Brewing 245 Colombia, craft brewery mergers and acquisitions 227 Complete Joy of Home Brewing, The (1984) 263 Confédération des Brasseurs du Marché Commun (CBMC) 107 consumer review websites 228 consumption see beer market

contract brewing advantages of 240, 252 agency issues as to 244 case studies of 250–2 contract brewers 240–1, 244 contracting brewers 241–4, 244–7 disadvantages of 244, 252 economic underpinnings of 237–40 future of 248–50, 252 gypsy brewers 239–40, 243, 250–1 introduction to 235–7 legal environment of 247–8 minimum efficient scale 238–9, 242 practice of 240 rise of craft brewing, and 252 Coors see MillerCoors corporate governance brewing industry research on, lack of 11 contribution by current volume 18 definition of 9–10 directors, and 10–11 diversity in 170 hybridized model of 274, 275–6 institutions, and 2–11 internationalization, and see Japan Japan see Japan liberal model of 274 mechanisms for 10 non-liberal model of 274 ownership, and 1, 10 recent institutional changes 11–13 styles of 274 see also supply chain governance costs of production 235 Courage (company) 226 Craft Brew Alliance acquisitions by large breweries, and 308–9 American beer industry, and 301–3 board of directors 310–14 corporate governance 300–1, 309–20 executive composition 314–15 foundation of 306–8 impact of 321–2 introduction to 299–300 origins of 304–6 ownership 309–10 research methodology by current volume 303–4 strategy 315–20 craft breweries beer and craft beer distinguished 256–7 beer parks 227 beginning of 218, 229 beginning of craft beer market 258–9, 270

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 consolidation of large breweries, and 228–9 consumer involvement in 229 consumer review websites 228 contract brewing see contract brewing ‘craft,’ meaning of 301 Craft Brew Alliance see Craft Brew Alliance definition of 216–17, 302 deregulation, and 6 distribution networks 228 excise duty 224–5 foreign direct investment by 268 future of 230 global impact of 216 globalization, and 216–30 growth of 47, 218–21, 229 growth of market for 259–61 homebrewing, and 229, 263 hops industry, and 72, 82, 97 internationalization of 255–71 large breweries, and 9 large breweries’ responses to 226–8, 230 large brewery acquisitions of 227 market opportunities for 221–4 mergers and acquisitions 8, 225, 268 ‘phantom’ (‘faux’) brands 226 production limits 225 regulation of 47–65, 224–5, 230 revolution of 8, 114 Stage 1 markets 258–9 Stage 2 markets 259–61 stock exchange listing 303 tied-house systems, and 225 two-stage model of internationalization 257–61 Croatia beer industry and beer retail structure 26–8 brand choice, availability of 34–7 brand loyalty 37–42 brand management 25 economic importance of brewing industry 25 gender differences in beer preferences 26, 31–3, 37–8, 41–3 preferred beer brands, existence of 33–4 research methodology by current study 31–3 young adults’ attitudes to brands 31 culture see drinking culture Czech Republic gypsy brewers 250–1 hop markets and pricing 90 hops supply 90 lager branding 204 Czechvar (beer) 204

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Damme see Bruges De Clerck, Jean 106, 108 De Ranke (company) 251 Delbrück, Max 102 demand see beer market Denmark craft breweries 268 gypsy brewers 239–40, 243 ‘phantom’ (‘faux’) brands 226 recent industry changes 11–12 science of brewing 102 deregulation, effect of 6, 224 directors board membership composition in Japan 282–4 corporate governance, and 10–11 Craft Brew Alliance 310–14 distribution craft breweries 228 inefficiency in 175–7 networked 181–4 supply chain governance (SCG) 171, 177, 181, 186 drinking culture and revolution of craft breweries 8 duty on beer see excise duty Eastern Europe privatization 8 western investment in 9 Eckhardt, Fred 263 Edeka (company) 127 Edgar, David 264 Elsevier (company) 106 European Brewery Convention (EBC) 1st Congress (1947) 104 25th Congress (1995) 108 35th Congress (2015) 115 36th Congress (2017) 116 assessment of impact of 116 changes in brewing industry, and 114–15 Congress attendances 111–12 Congress format and schedule 111 creation of 102 global meeting trends, and 110–14 links with other organizations 110 location of 105, 107 management of congresses 105–7 mission of 104–5 move to Brussels 107 naming of 104 network-building 106 origins of 103–5 presidents 106

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European Brewery Convention (EBC) (cont.) publications 106 research perspective on congresses 107–10 Secretariat 105–7 standing committees 104, 108 European Community of Steel and Coal (ECSC) 103 European Economic Community 107 European Union contract brewing, regulation of 248 food retail pricing research 118 hop markets and pricing 95 Evil Twin (company) 240 excise duty Australia and New Zealand history of 138–64 beer strength-based charging 148 bonds 149–50 craft breweries 224–5 effect of 161–4 historical overview of 3 hops industry 74 liable persons 151–6 license fees 150–1 penalties for non-compliance 150 recent changes in 8 records of 150 secondary costs of 149–51 specific gravity-based charging 147 stamp-based charging 147–9 Fachverlag Hans Carl (company) 106 Feinberg, Don 265, 266 Finkel, Charlie 265 Flanders see Belgium Flensburger (beer) 119 foreign direct investment craft breweries, by 268 Japanese breweries, by 273 France European Brewery Convention, and 103 introduction of hops 74 number of breweries 121 science of brewing 102 GATT 192 gender differences in beer preferences 26, 31–3, 37–8, 41–3 Germany beer market 119–22 brand loyalty 118 concentration of ownership 208 craft breweries 121, 219 European Brewery Convention, and 103, 104, 106

hop markets and pricing 95 hops supply 89, 91 internationalization of research, and 113 introduction of hops 74, 75, 76 number of breweries 121 Pilsner beer market 126–35 pre-WWII leadership in brewing science 102 pricing and price promotions 118–35 Reinheitsgebot 76, 219, 225 spread of hopped brewing 77 Thirty Years’ War (1618–48) 77 tied-house systems 225 ZIP codes 121, 127 globalization beer consumption changes, and 199–202 beer market growth, and 192–4 brands, and 194–9, 202–6, 214 concentration of ownership 217–18 concentration of ownership, and 194–9, 214 craft breweries, and 216–30, 255–71 internationalization by Japan firms see Japan introduction to 192 liberalization of trade, and 192, 194, 213 market power, and 206–12 mergers and acquisitions, and 192, 193, 194, 212–13, 214 overview of effects of 213–14 pricing, and 200, 211, 214 product homogenization (1900–1980) 217–18 Grand Metropolitan (company) 226 Grant’s Brewery 265 Great American Beer Festival (GABF) 84 Grossman, Ken 262 gruut 74, 75 Gruuthuuse family 74 Gruutrecht 74 Guinness (company) 104, 173, 268 gypsy brewers 239–40, 243 Hanseatic League 75 Heineken (beer) 204 Heineken (company) 12, 198, 226, 227 Henry Lovibond (company) 172 Hertog Jan (company) 227 historical overview of brewing industry 102 historical perspectives bottled beer 169–87 excise duty in Australia and New Zealand 138–64 growth of brewing industry 2–3 hop usage 73–7 Hodgson, George 77 Hoegaarden (company) 227, 264

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 homebrewing craft breweries, and 229, 263 growth of 114 promotion of 223 regulation of 224, 230 Hop Growers of America (organization) 79 hops industry changes in markets and pricing 93–7 changes in production and supply 86–93, 97 craft breweries, and 72, 82, 97 demand for hoppy beers 81–6, 97 excise duty 74 hops in beer production 72–3, 97 introduction of hops into brewing process 73–7 popularity of 72 spread of hopped brewing 77–9 types of hops 79–81 InBev (company) 47, 192, 198, 227, 228, 249, 264 India, development of IPA (Indian Pale Ale) 77 Institute for Brewing Studies 264 Institute of Brewing and Distilling (IBD London) 110, 113 Institute of Brewing (IoB) 102, 103 institutions brewing association meetings worldwide 113 contribution by current volume 13 corporate governance, and 2–11 historical overview of 2–3 importance of institutional change 3–7 informal institutions 4, 7, 13 recent changes in 7–9 recent industry changes relating to 11–13 see also brands; corporate governance; craft breweries; European Brewery Convention; excise duty legislation; hops industry; ownership; pricing Interbrew (company) 198 International Hop Growers’ Convention 80 internationalization see Japan IPA (Indian Pale Ale) development of 77 United States 83–6 Ireland, and European Brewery Convention 104 Italy craft breweries 219, 227 mergers and acquisitions 227 number of breweries 121 ‘phantom’ (‘faux’) brands 226 Jackson, Michael 263, 264 Japan beer parks 227

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beginning of brewing industry internationalization 273–4 board membership composition 282–4 craft breweries 6 deregulation 6, 224 extent of firms’ geographical expansion overseas 287–9 internationalization affecting corporate governance 289–90 internationalization entry strategies 286–7 internationalization strategies analyzed 290–4 internationalization strategy 276–7 internationalization timelines 285–6 links between corporate governance and internationalization strategy 277–8 literature on corporate governance in 274–6 literature on internationalization strategy and corporate governance 278–81 non-liberal model of governance 275 organizational culture 285 ownership structure 284–5 research methodology by current volume 281–2 shift from exports to outward foreign direct investments 273 see also Kirin; Suntory Jester King (company) 264 Kirin (company) board membership composition 282–4 internationalization affecting corporate governance 289–90 internationalization strategy 285–94 non-liberal model of governance 282 organizational culture 285 overseas expansion 273–4 ownership 285 Knox,Diana 169 Kreiss, Philippe 103, 104, 106, 108 Kronenbourg (company) 7 Lactobacillus delbrueckii 102 lager beer branding 204 consumption of 199–202 hop content 83, 97 production of 8, 47, 78, 82 L’Annexe (company) 251 large breweries beer parks 227 branding 202–6 contract brewing see contract brewing craft breweries, and 9, 226–8, 230 decline of traditional beer markets 221, 226

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large breweries (cont.) globalization, and 192, 198 growth of 114 lager beer production 8, 47, 78, 82 multimarket contacts by 211 ‘phantom’ (‘faux’) brands 226 regional breweries, and 9 ‘largest beer bottler in the world’ see Whitbread and Co. Leffe (company) 227 Leinenkugel Brewing Company 227 liberalization of trade see globalization license fees 150–1 Lidl (company) 127 Littlefield, Wendy 265, 266 localities see municipalities Lovibond, Frederica 172 macrobreweries see large breweries Manning-Needham, Frederick 172 marketing see brands; pricing Masterbrewers Association of the Americas (MBAA) 110 Maytag, Fritz 114, 218, 262 McAuliffe, Jack 262 Merchant du Vin (company) 265 mergers and acquisitions consumer review websites 228 craft breweries 8, 227, 268 globalization, and 192, 193, 194, 212–13, 214 western investment in Eastern Europe 9 microbrewing industry see craft breweries Mikkeler (company) 239 MillerCoors (company) 226, 227, 228, 264 minimum efficient scale (MES) 238–9, 242 Mitchell, John 173 Monnet, Jean 103 municipalities regulation by 48 zoning and craft breweries 52–3 zoning case studies 53–65 zoning regulations generally 48, 51–2 Narziss, Ludwig 106 Netherlands craft breweries 219, 227 European Brewery Convention, and 105 homebrewing 224 introduction of hops 74, 75–6 lager branding 204 mergers and acquisitions 227 tied-house systems 225 New Albion Brewing 262 New Belgium Brewery 263

New Zealand beginning of brewing industry 138, 139 brewing industry concentration 139–41 effect of excise duty 161–4 excise duty bonds 149–50 excise duty legislation 138, 143 excise duty payers 151–6 excise duty records 150 license fees 150–1 penalties for excise duty non-compliance 150 secondary costs of excise duty 149–51 sources of excise duty law 146–7, 148 spread of hopped brewing 77 North, Douglass 4 Odell’s Brewery 263 Ommegang (company) 266 Omnipollo (company) 240 ownership concentration in Australia and New Zealand 138–64 contribution by current volume 13 corporate governance, and 1, 10 globalization, and 194–9, 214 market power, and 206–12 recent changes in 7–9 recent institutional changes 11–13 see also contract brewing; Craft Brew Alliance; craft breweries; Kirin; mergers and acquisitions; privatization; Suntory; Whitbread and Co. Papazian, Charlie 263 Pease, Bob 302 pH value, concept of 103 Pilsner beer 126–35 Pliny (Plinius) the Elder 73 Poland, hops supply 90 Portugal craft breweries 219 European Brewery Convention, and 115 pricing bottled beer 180–1 changes in hops industry markets and pricing 93–7 complexity of 118 Germany 118–35 globalization, and 200, 211, 214 research conclusions 134–5 research estimation results 128–34 research methodology by current study 126 theory of price promotion 122–6 privatization in Eastern Europe 8 production costs 235

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 Proefbrouwerij (company) 241 Prohibition see United States Protz, Roger 263 RateBeer.com 228 Redhook Brewing Company 227, 299, 304–6 Rees, H. Powell 179 regional breweries, large breweries and 9 regulation contract brewing, of 247–8 craft breweries, of 47–65, 224–5, 230 high level of 5 municipalities, by 48, 51–65 political motives for 5 see also deregulation; excise duty Reinheitsgebot 76, 219, 225 research see science of brewing retail pricing see pricing SABMiller (company) 192, 198, 206, 227 Sapporo (company) 273 science of brewing European Brewery Convention, and 107–10 German pre-WWII leadership in 102 global meeting trends, and 110–14 internationalization of researchers 113 network-building 106 pre-World War II brewing practices 102 Scottish and Newcastle (company) 226 Shewell, Thomas 170 Sierra Nevada Brewing 262 Slovenia European Brewery Convention, and 115, 116 hop markets and pricing 91 hops supply 91 Smith, Adam 3 Snow Beer (company) 198 Sørensen, Søren 103 Spain, craft breweries 219 Stella Artois (beer) 198, 204 Stillwater Artisanal (company) 240 stock exchange listing by craft breweries 303 students see young adults Suntory (company) board membership composition 282–4 hybridized model of governance 275–6 internationalization affecting corporate governance 289–90 internationalization strategy 285–94 organizational culture 285 overseas expansion 273–4 ownership 284–5 supply chain governance (SCG) 171, 177, 181, 186 Sweden, gypsy brewers 239–40

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taxation see excise duty Thirty Years’ War (1618–48) 77 tied-house systems 225 trademarks see brands traditional breweries see large breweries transport see distribution Trends in Brewing (meeting) 113 Truman (company) 180, 187 Tsingtao (company) 11–12 United Kingdom adulteration 172–3 ‘Big 6’ large breweries 226 books on beers and brewing 263 brewing industry corporate governance 170 brewing industry regulation 174, 178 colonization of Australia and New Zealand 138, 139 craft breweries 219, 226, 227, 268 development of IPA (Indian Pale Ale) 77 European Brewery Convention, and 103, 104 excise duty 146, 147, 148 internationalization of research, and 113 introduction of hops 75, 77 mergers and acquisitions 227 multimarket contacts by firms 211 number of breweries 121 spread of hopped brewing 77 trademark litigation 173 see also Whitbread and Co. United States Barleywine 84 beer consumption changes 200 books on beers and brewing 263 branding 205 brewing industry regulation 49–51, 64 brewpubs 8 Charlotte (NC), craft breweries 53–7, 64–5 Chicago (IL), craft breweries 57–60, 64–5 Cincinnati (OH), craft breweries 60–5 Craft Brew Alliance see Craft Brew Alliance craft breweries 8, 47–65, 82, 114, 218–19, 227 craft breweries, internationalization and 261–71 demand for hoppy beers 82 distribution networks 228 European Brewery Convention, and 113 excise duty 147–8 excise stamps 147, 148 food retail pricing research 118 homebrewing 82, 114, 224 hop markets and pricing 93–7 hops supply 89 internationalization of research, and 113

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United States (cont.) IPA (Indian Pale Ale) 83–6 mergers and acquisitions 227 number of breweries 114 ‘phantom’ (‘faux’) craft beers 226 pricing 200 Prohibition 3, 5, 49, 78, 262 spread of hopped brewing 77–9 zoning and craft breweries 52–3 zoning case studies 53–65 zoning regulations generally 51–2 urban areas see municipalities Vanberg & DeWulf (company) 265 Veldhuizen, Herman van 104 Watney (company) 104, 226 websites 228 Whitbread, Samuel 170 Whitbread and Co. advertisements 174, 179–80 availability of product 181–2 bottling operation 169–87 brand building 173–5 brand performance factors 177–9 craft breweries, and 226 distribution inefficiencies 175–7 distribution networking 181–4 employment 175

European Brewery Convention, and 104 foundation of 170 historiography of bottling 169–70 information systems, investment in 184–6 ‘largest beer bottler in the world’ 169, 187 management, investment in 184–6 ownership 170 pricing 180–1 success factors summarized 186–7 supply chain governance 171, 177, 181, 186 Widmer Brothers Brewing Co. 227, 299, 304–6 Wilhelm IV, Duke of Bavaria 76 withier (beer) 264 World Brewing Congress (WBC) 113 World Guide to Beer, The (1977) 263 World Trade Organization (WTO) 192 young adults attitudes to brands 31 gender differences in beer preferences 26, 31–3, 37–8, 41–3 Young Scientists Symposium in Malting, Brewing and Distilling 113 zoning case studies of 53–65 craft breweries, and 52–3 regulations generally 51–2