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SUBMITTED BY Sam Holloway ON Mon, 02/29/2016 - 23:03

Sam Holloway, Ph.D. - President, Crafting A Strategy - February 29, 2016

I believe that industry consolidation may be the death throes of mature industries as they struggle to compete with America’s return to a more entrepreneurial, craft economy.
--Nicco Mele, HBR Blogs, October 26, 2015

When I first read Nicco Mele’s article in October 2015, I was impressed with his arguments for why M&A activity might be a sign that craft beer was winning. In fact, I think these large scale mergers mostly function as a way to play for time before the big decline. I am guessing that in boardrooms in fancy office suites, executives with nice shoes are praying that craft goes away, somehow, during that time.

But it won't. It is not a passing fad. America's craft breweries are strong and getting stronger, and smarter about business, every day. The movement is spreading all over the world. Craftspeople are rising up all over the world, reclaiming their professions, and in turn offering customers products and services of real value. The maturity stage of the life cycle for the monoliths is ending. There is no place left to merge. Adding a few craft acquisitions here and there to extend their portfolios was/is a good idea, but this pulls their average margins down, not up. If I were a major brewer, I'd be a seller about now. Is there a place in the new reality for the monoliths? Yes. But it's going to be a lot smaller place than it was.

Since October 2015, I've seen several more signs that support Mele's claims and it's time I put these before our membership.

Mele suggests that the rampant M&A in the beer industry (most notably AB InBev’s acquisition of SABMiller) is a sign that scale is no longer winning. Economies of scale arise when greater quantities of production also result in lower costs per unit (Porter, 2008). Since the industrial revolution, scale was always expensive to maintain and served as a primary barrier to new entrants joining a market. Mele, with an assist from Maxwell Wessel, suggest that in a game where innovation is rampant (like craft beer with its sour beers, saisons, barrel aged, etc.) companies cannot rest. For companies that ignore innovation and focus on doing business the same way as before, then M&A is a value creation lever that can be pulled to appease shareholders – at least for a while. Wessel (2012) goes as far as saying that big incumbent firms turn to M&A as a last resort, referring to scale economies as a “last bastion of the competitive storm.”

A lack of innovation and a commitment to scale and extreme profits is what has historically killed big companies (Which I first blogged about in 2014).  However, I was still skeptical, especially when Matt Allyn of Men’s Journal suggested that the price AB InBev was paying for SABMiller could buy the entire American craft beer industry five times over! Where were more signs that the ideals of the craft economy were winning out over big business?

My next indication that the craft economy was winning came from our own Dr. Mark Meckler in February 2016. Mark suggested that most Americans are “addicted to efficiency” and their purchasing habit is always looking for a better deal, a cheaper price, a shorter route, or faster service. However, Mark said the craft beer industry was different. Rather than an addiction to efficiency, craft beer entrepreneurs accept lower profits and less efficiency if it means a better work life, better wages for employees, providing them health insurance, and raising everyone's overall happiness. According to Meckler, craft breweries can afford to do this because the public, going against their typical efficiency driven demand for the lowest price, is willing to pay a higher price for a pint or a six-pack of good craft beer. In this case of craft, they are not engrossed with bargain seeking. Why? Maybe it is because the beer is so much better, and maybe because they love the movement and the ethic behind it. Maybe it is because they know that even with that high price, craft brewers are not ripping them off. For me, craft brewers are my neighbors, working hard and making a living by providing value, something wonderful that has been missing from our community for so long. The Portland Tribune’s Peter Korn gave several examples of brewery owners choosing less efficiency for more happiness, which goes completely against conventional wisdom and economies of scale logics. Why is craft beer so different?

The latest indication that craft beer is changing the rules came from the last place I would ever look for innovation – Private Equity Investors. The news that Victory Brewing founders were able to cash out and still maintain control of decision-making completely knocked me over ( This merger was innovative and went completely against the cold-hearted traditions in private equity where transactions come with total control for the new money and the abdication of the founder’s and any residual brand nostalgia or authenticity. Big money wins out, scale wins again, and consumers complain that they’ve lost another one of their own to greed and a commitment to getting big – that’s the traditional narrative that was missing from the merger between Victory Brewing and Southern Tier. Why was Ulysses Management, LLC willing to do things differently?

Keep your eyes on the craft beer industry as it will teach us how innovation, inefficiency, people and happiness continue to win over money, scale, efficiency, and big.  I am starting to agree with Nicco Mele and Max Wessel, the end of big is upon us.

Works Cited

Korn, P. 2016. Brewing a new model for sharing the wealth. The Portland Tribune. February 9, 2016 accessed at

Mele, N. 2015. Why More M&As is a Sign That Scale Is No Longer and Advantage. Harvard Business Review Blogs. October 26, 2015. Accessed on February 28, 2015

Porter, M.E. 2008. The Five Competitive Forces That Shape Strategy. Harvard Business Review 86(1): 78-93.

Wessel, M. (2012). The Commoditization of Scale. Harvard Business Review Blogs. March 26, 2012. Accessed on February 28, 2015.