In an ice-fishing hut on Gull Lake, Alta., in 2014, Graeme Bredo, a pharmacy student, turned to his brother Charlie and asked if he wanted to start a craft brewery. The provincial government had recently removed limits that required brewers to produce 500,000 litres (or more than one million pints) per year to sell commercially. Beer aficionados Charlie and Graeme thought the easing of regulations created the perfect opportunity to join a skyrocketing industry.

Troubled Monk Brewery poured its first suds in 2015, making it Red Deer, Alta.’s second craft brewery. The city of 100,000 people now has five. “The industry has grown so quickly,” says Charlie Bredo, who previously ran an electricity retailing company. “It just exploded.”

The craft brewing industry has been on a decade-long tear, with an ever-accelerating pace of expansion. Bredo’s home province added 42 breweries between 2018 and 2019 alone – a 60-per-cent jump. Nationwide, the number more than doubled in the last five years to 972 breweries in 2019, up from 383 in 2015, according to IBIS World, a market research firm. Another 200 breweries are expected to open over the next year, according to the Canadian Craft Brewers Association. This wild success has bred anxiety.

“I’m constantly worried that the market is becoming very competitive and oversaturated,” Mr. Bredo said. “I don’t think it’s that there’s too many breweries for the market, I think that there are too many breweries opening too quickly for the market share to grow.”

There are many valid reasons to be worried. For one, Canadians are drinking less beer. Theories abound for why consumption is dropping, from marijuana legalization to younger consumers embracing wine and spirits over beer, to people just drinking less overall. Regardless, domestic beer sales fell nearly 4 per cent through November of last year, according to Beer Canada, a sudden drop after years of gentle decline. Fifteen years ago, beer accounted for half of all alcohol sales; it’s now 39.7 per cent, according to Statistics Canada.

Brewers and industry watchers have long warned of an industry-wide reckoning. It may have arrived – not just for craft brewers, but for multinational players as well. For all the buzz surrounding craft, Molson Coors Beverage Co. and Belgium-based Anheuser-Busch InBev SA/NV control 50 per cent of Canada’s beer market (Budweiser, made by AB InBev, remains the country’s best-selling beer). AB InBev reported flat earnings in its most recent quarter, but its business has been propped up by non-beer offerings. In contrast, Molson Coors announced a 3.2-per-cent drop in worldwide sales for its third quarter (and a 5.8-per-cent drop in Canadian sales).

Along with disappointing results, the brewing giant released plans for a corporate restructuring, plans to move its headquarters from Denver to Chicago and up to 500 layoffs. “Our business is at an inflection point,” Molson Coors CEO Gavin Hattersley told analysts on a conference call. “We can continue down the path we’ve been on for several years or we can make the significant and difficult changes necessary to get back on track.”

Those “difficult changes” will have implications for the burgeoning craft beer industry. Some will be acquired by larger players, others will go out of business. Some will continue as smaller retailers serving their local communities. The craft brewers with the most difficult path are those that dream of being something bigger, competing against the multinational corporations for taps and shelf space. “You’re going to see breweries start to shake up,” says Larry Plummer, an assistant professor of entrepreneurship at Western University’s Ivey Business School who focuses on the North American beer industry. “There’s only so much room for everybody.”

Over the past decade, craft beer attracted both investors and entrepreneurs with the allure of joining a growing sector (that also happened to look like a whole lot of fun). But it also enticed governments which saw a chance to create new jobs and generate economic growth. In Ontario alone, the craft beer sector contributes more than $1-billion annually to the provincial economy and employs more than 2,000 people directly, according to Ontario Craft Brewers. It helped that many of these upstart companies opened in gentrifying neighbourhoods and small towns transitioning out of slumping industries.

“The craft beer industry is a good one for the economy. It’s a manufacturing sector that’s producing value added products and they’re good jobs to have,” said Terri Mann, vice president of financing at the Business Development Bank of Canada. “It can also appeal from a tourism perspective because some of these breweries are marketing themselves as destinations. From an economic development perspective, that’s interesting for many communities who might not have that influx of tourism outside of that.”

Seeing this opportunity, government funds have flowed into the sector. In June, the governments of Canada and Ontario announced a $1-million investment in 20 craft breweries through the Canadian Agricultural Partnership – a program supporting the agriculture and agri-food sector – adding to a similar joint $1.6-million funding project in 2016. The federal government also invests through economic development arms like the BDC and the Atlantic Canada Opportunities Agency. Through its small business ministry, B.C. invested $10-million in 2016 in support to breweries through a 25-per-cent reduction in the provincial liquor distribution board’s mark-up for local beer. And Alberta launched a grant program for small brewers in 2016, which was shut down in October in an effort to save $123-million over four years as part of the province’s budget cuts.

But these funding agencies also seem to recognize the market’s growth may been unsustainable. Aspiring brewers Sonja Mills, a lawyer, and Alicia MacDonald, a nurse practitioner, tried to set up shop in Nova Scotia in 2015 when the province had only 30 breweries – compared to its current 60. Lenders such as the Community Business Development Corporation, a partner of ACOA, told the entrepreneurs that the province’s craft beer market was already too crowded.

“The message that we received was that we don’t want to lend any more money because we feel that the market in Nova Scotia is saturated and that there’s a competitive impact on other clients of theirs,” Ms. Mills says.

They later moved to Newfoundland and Labrador to be closer to family and took another shot. This time, with only four other breweries in the province, the CBDC obliged. In 2016, Ms. Mills and Ms. MacDonald opened Port Rexton Brewing in a former community centre in its namesake town of 340 people. The number of breweries in Newfoundland has since more than quadrupled to 19.

Private capital has also been keen on the industry. When Kensington Brewing Co. in Toronto wanted to move out from contracting other breweries to make its product and open its own shop, the company was unable to secure government funding, turning instead to angel investor networks. After raising an initial round of $500,000, and a second funding round of $700,000, it opened in downtown Toronto in 2017 at the height of the city’s influx of breweries and brewpubs.

“It took a bit longer and cost more than we thought,” said Doug Wyatt, angel investor and chair of Kensington’s board. “It got to the point where you have to keep on [raising] because you can’t have half a brewery. You can’t just scale down.”

Many craft brewers avoid external investment, even when trying to grow. Beau’s Brewing Co. in Vankleek Hill, Ont., a town of 2,000 people, has received several unsolicited investment pitches, from venture capital groups, individual investors and larger breweries, according to co-owner Steve Beauchesne. He turned down the offers, opting to keep Beau’s independently owned – a badge of pride for many craft brewers.

“The whole ethics and ethos of craft brewing has always been very firmly rooted in independence and authenticity. It was more important to me that we kept those things intact than it was to maximize growth,” Mr. Beauchesne says. He notes investors sometimes expect a promising brewery to scale like a hot tech startup, despite very different business realities. “To make next year’s sales targets, you have to always purchase more equipment and that’s not cheap.”

Here’s a hard truth: Only about 50 per cent of Canadian breweries were profitable in 2017, according to Statistics Canada. Typically, it takes five to seven years for a craft brewer to generate cash flow, according to Rick Dalmazzi, the executive director of the Canadian Craft Brewers Association. “The biggest challenges that craft breweries have is that most are still not yet profitable,” Mr. Dalmazzi said, echoing Beauchesne’s warnings about the costs of this business. “The reality is that manufacturing is very capital intensive and it’s often difficult to get the right level of funding.”

The end result is there are going to be casualties. In the past year alone, a cavalcade of breweries have either shut down or been put up for sale, including Beard Free Brewing in Peterborough, Ont., Savoy Brewery in Nelson, B.C., Hogsback Brewing Company in Ottawa, Scudrunner Brewing in Gander, Nfld., Lot 30 Brewers in Toronto, Red Bison Brewery in Calgary and Two Sergeants Brewery in Edmonton.

Big brewers have also been buying their craft competitors – which come with dedicated fans and brands built on high-quality products – as a solution to their own woes. Labatt purchased Toronto’s Mill Street Brewery in 2015, Molson Coors acquired Le Trou du diable Microbrewery in Shawinigan, Que., in 2017 and Sleeman (owned by Japanese giant Sapporo) bought Calgary-based Wild Rose Brewery in May. In the United States, where the boom hit much earlier than in Canada, major brewers have acquired the equivalent of seven million to eight million barrels of production as they purchased previously independent companies and added them to their rosters. That’s a significant shift in a roughly 25-million-barrel industry, said Brewers Association program director Julia Herz. (This data is not widely tracked in Canada).

“It’s gotten harder and harder to grow off a larger and larger base,” Ms. Herz said, adding “all four of the major brewing conglomerates have bought into independent craft brewers, procured them as their own, and now market those brands.”

Craft brewers that wish to remain independent – and to grow – now need to jostle for bar taps and shelf space. In most eateries and watering holes, a certain number of taps are reserved for a revolving selection of craft brews, while the others are held for the big players. Even in craft-friendly establishments, competition is fierce. Stillwell Bar in Halifax dedicates all 12 of its taps to craft brewers. During its first year in 2014, the watering hole had enough space to offer a tap to every craft brewer in Nova Scotia, but by its second year the surge in craft breweries was such that it had to turn some away.

“It changed immediately,” said co-owner Christopher Reynolds. “People come to our bar to drink the best because they don’t have time to sort through all these breweries themselves. So we try to do that for them and come up with a balanced list of extreme quality beers with some lagers, pale ales, stouts and sours.”

The transition comes at a cost in the tight-knit craft community. Winning a coveted tap usually comes at the expense of a fellow brewer, and friend. “For a lot of us, we’re competitors and friends,” Mr. Bredo of Troubled Monk said. “But we’re already stealing each other’s taps and competing with each other quite aggressively.”

Store shelves are just as crowded as the bar taps. Provincial liquor stores are adding retail space for craft brewers, but many are still unable to get their products on shelves. In 2019, the Nova Scotia Liquor Corporation (NSLC) reserved 32 per cent of shelf space for craft beers; 29 of the province’s 70 breweries split the allotted spots. The Liquor Control Board of Ontario has gone from stocking 33 craft beers to 180 over the past eight years, but that’s still far short of the 300 brewers in the province. Further, some brands are only sold at a handful of LCBOs and the number of beers available varies on a store-by-store basis.

“There’s no way that our industry can [grow market share] unless there are significant changes to how things are retailed,” says Craft Brewers Association of Nova Scotia executive director Kirk Cox.

And if a craft brewer tries to sell its beer in another province, its entire supply chain changes. Due to interprovincial trade regulations, out-of-province beers are taxed at a higher rate than homegrown breweries. Each province also has its own distribution, retail, warehousing and packaging requirements, adding significant time and cost for small brewers.

Ontario has loosened restrictions on retail by allowing grocery stores to stock alcohol, with plans to do the same with convenience stores. In a province where craft beer accounts for approximately 10 per cent of beer sales, retail restrictions have been keeping the industry “muted,” according to Ontario Craft Brewers president Scott Simmons. “If a lot of these things come to fruition, it will take that [market] share and double it,” he said.

Brewers still think there is room to grow, but it’s going to require strategies that go beyond big retail stores and restaurant chains. Many in small towns are hoping to become destination breweries to boost tourism and, in the process, create local jobs.

Port Rexton Brewery, located a three-hour drive from St. John’s in a region that sees about 80,000 tourists each year, has since brought on 15 employees. In March, it secured $865,000 in federal and provincial funding to expand its manufacturing facility and add a canning line. Toronto’s Kensington Brewery recently hired a sales manager to reach businesses in the Hamilton and Kitchener regions and is considering opening a second location or purchasing another brewery. And Alberta’s Troubled Monk is distilling craft gin to enter the growing spirits market.

Succeeding in a crowded market will require craft brewers to understand their local market, according to industry veterans. Not every brewery will be able to sell through other retailers or restaurants. In the end, they’ll need to rely on their own taprooms and stores to thrive.

“You might not be able to sell your product into multiple channels,” Mr. Dalmazzi said. “But I think there’s room for a brewery in every city, town and community in the country.”

Mixing cannabis and beer

This month, Molson Coors Brewing Co. adopted a new corporate name: Molson Coors Beverage Co. It’s a symbolic change to show the company is looking beyond beer for growth – including to pot. Molson, like some of its peers, has struck a deal with a weed company, hoping to boost lacklustre sales with cannabis-infused beverages.

In August, 2018, Molson announced it was pairing with Hexo Corp. to “explore the highly anticipated consumable cannabis market.” That same month, Constellation Brands Inc., which owns Corona and Modelo, invested $5-billion into Canopy Growth Corp; the company’s former chief financial officer is now chief executive at the Smiths Falls, Ont.-based cannabis producer. Meanwhile, Anheuser-Busch InBev paired up with Tilray Inc. in December, 2018. One exception to the trend is Diageo PLC, the maker of Smirnoff and Guinness, which has stayed out of the fray. (Although, the company has said it’s keeping an eye on cannabis.)

Nobody knows whether consumers will actually want to drink cannabis, however. In U.S. states, where weed drinks are available, beverages lag behind other edibles. Drinks make up only 6 per cent of ingestible products purchased from dispensaries, according to research firm BDS Analytics. Furthermore, the company’s research shows alcohol use remains twice as high as cannabis consumption in states with legalized marijuana, suggesting consumers aren’t necessarily trading one product for another.

Still, Canadian producers argue that adoption in the U.S. has been hampered by lousy products. To mask the pungent flavour of cannabis, some producers have loaded drinks with sugar. They take longer to produce a buzz than alcohol, potentially leading novice users to overconsume. And drinks have been marketed toward existing cannabis consumers, who are quite content to stick with smoking.

In Canada, companies are taking a different approach, hoping to attract new cannabis consumers with CBD beverages that do not produce a high. CBD has been touted for its supposed ability to reduce stress and anxiety, although the science is scant.

Fluent Beverage Co. (the joint venture between AB InBev and Tilray) is releasing CBD-infused teas, to be followed by sparkling drinks. Two flavours of CBD spring water have already been launched by Truss Beverage Co. (Molson and Hexo). Canopy, meanwhile, has two varieties of CBD-only sparkling waters under a label called Quatreau. The branding, with minimalist design and tranquil colours, seems engineered to convey wellness and relaxation. Marketing materials for Quatreau state the product is about “taking back me time.”

The company has a slate of beverages containing THC, too, though in much lower doses than drinks in the U.S. Federal regulations limit THC content in edibles to 10 milligrams for each package, whereas some drinks in the U.S. contain 100 milligrams or more.

But there are hurdles to consumer adoption. Cannabis beverages are only available at retail dispensaries and online, not bars and restaurants, and the rollout has been slow, particularly in Ontario.

Molson, for one, is not betting solely on cannabis drinks to improve sales. Hexo, meanwhile, expects cannabis flower to account for half of its sales with vaping, edibles, beverages and other forms to divide up the rest. Molson CEO Gavin Hattersley said on a conference call in October that cannabis beverages were just one new category outside of beer that it’s developing, including hard coffees and wine spritzers.

Canopy recently pushed back its beverage release date, which was supposed to be this month, stating “the scaling process is not complete.” Some analysts saw it as prudent to focus on quality rather than rush to market. But Jefferies Financial Group analyst Owen Bennett criticized a delay “caused by lack of clarity internally rather than unforeseen external factors.”

STEFANIE MAROTTA
The Globe and Mail, January 24, 2020