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SUBMITTED BY Sam Holloway ON Mon, 12/14/2015 - 23:20
I get asked a lot to give advice on how craft breweries can respond to the moves being made by AB InBev and what the future may look like for small independent craft breweries. There is great concern among the Brewers Association and its members surrounding the merger of AB InBev and SABMiller and even greater worry about accusations that InBev is purposefully freezing out craft beer by instructing their company owned distributors to stop buying it. While the Brewers Association is doing its part to support our interests (you can read BA CEO Bob Pease’s full U.S. Senate Committee testimony about the merger here), what sort of strategic moves can we be making? What moves should we be making to protect our futures?
I am always inspired when I see creative entrepreneurs using business model innovations to overcome such constraints. My latest inspiration is Mr. Richard Doyle and his company, Enjoy Beer. Rich Doyle is a former CEO of Harpoon Brewing, who understands that the craft beer industry can’t simply wait around and hope for help from the Department of Justice. Those looming constraints from AB InBev’s merger with SABMiller – Mr. Doyle isn’t scared. Mr. Doyle sees those constraints as opportunities, and he’s building a new business model that overcomes these constraints through value chain innovations. Below I will describe how this works.
Value chain innovations look at the current supply chain relationships in the beer industry and seek ways to collapse or combine these relationships to allow a brewery to capture more value. (CAS members can click here for a 14-minute video on value chain innovations in the craft beer industry; non-members can click here for a free 45-minute presentation). Craft beer entrepreneurs should look at the looming constraints associated with the AB InBev & SABMiller merger and use these constraints as a source of inspiration that leads to innovation. Let me give you two business models that embody this type of innovation.
First, let’s look at a type of value chain innovation I like to call “Collapsing Value Chain Functions” or a “Collapsing Business Model.” The best example of collapsing value chain functions is the brewpub business model. By serving beer on site and directly to the consumer, brewpubs collapsed the value chain and removed the need for a brewery to use a distributor or retailer, since they perform both of those functions themselves. The value capture associated with the brewpub innovation is that the brewpub can now sell each keg for $500 - $600 instead of selling that same keg to a distributor for $110. This elegant innovation, collapsing value chain functions, is what has disrupted the traditional beer market over the last 30 years and continues to be the driving force of change in our industry.
Second, let’s look at a different value chain innovation: The aggregation of multiple functions into a distinct entity or what I call “The Aggregation Business Model.” Rather than collapsing value chain innovations like the brewpub business model, aggregation business models allow for purchasing efficiencies, increases in bargaining power, and thus, lower prices for all partners of the combined entity. Aggregation Business Models are a strategic response to shortages in supply, rising prices, and downstream pricing pressure from distributors. For craft breweries worried about access to hops and other inputs if the AB InBev merger is allowed to proceed, the Aggregation Business Model is a perfect strategic response. This is exactly what Abita Brewing Company did a few months ago by joining forces with Enjoy Beer.
Enjoy Beer is a classic Aggregator Business Model that uses value chain innovation to help breweries like Abita survive and thrive. Enjoy Beer buys supplies for Abita and other breweries, they also perform other value chain functions like bookkeeping, negotiating with distributors, financing expansion, marketing, logistics, you name it. This innovative business model has aggregated several value chain functions into one entity, and because they are buying for many breweries, they have greater bargaining power and can get a better deal. Further, this company does much of the “dirty work” or “boring business stuff” so their partner breweries can focus on the beer and the brand, without worrying as much about supply chain, purchasing, and marketing.
Want my advice for craft beer entrepreneurs and the overall craft beer industry? Follow the lead of innovators like Rich Doyle and develop new business models that aggregate value chain functions. Scale your brewery through brewpub business models (like Fathead’s is doing) and not via traditional wholesale distribution. Think differently, work together, and be innovative! You will insulate yourself and your partner breweries from fluctuations in supply and also increase your ability to bargain with distributors. Choose your partners wisely, but don’t simply keep doing the status quo. If you choose to do nothing, AB InBev wins.