Specialty Beers Still Too Special to Become a True Market Force

Just a few years ago, connoisseurs thought small breweries and their tasty pale ales, amber lagers and dark stouts were going to transform the beer industry.

But the country’s thirst for specialty beers has never fulfilled expectations, and many small breweries are cutting back after an industry shakeout. Nationwide, more than 300 brew pubs and breweries have shut down since 1996, the year sales peaked for four of the largest specialty brewers: Boston Beer Co., Pete’s Brewing Co., Redhook Ale Brewery Inc. and Pyramid Breweries Inc.

The latest casualties include Vermont’s oldest brewery, the Catamount Brewing Co., which shut down last month. And the Miller Brewing Co. has given up its stake in Maine’s largest brewer, the Shipyard Brewing Co., after distribution was scaled back in the Midwest and the Middle Atlantic states.

Some brewers learned the hard way that they should have focused on their local audiences instead of trying to grow too fast.

“The lesson is: Devote your time, your money and your effort to your core market, and you’ll be fine,” said David Geary, who opened D.L. Geary’s Brewing Co. in Portland in 1986.

But some closings were inevitable because the market could not support the entry of more than 900 brew pubs and microbreweries over a three-year period leading up to 1998, when sales went flat, said David Edgar of the Institute for Brewing Studies in Colorado.

Back then, observers thought specialty or craft beers could obtain as much as 10% of the national beer market, but the market share of these beers remains below 3%.

“I think what you’re finding in this segment of the beer market was more of a flash in the pan,” said Skip Carpenter, an analyst at Donaldson, Lufkin and Jenrette in New York.

What exactly constitutes a craft beer is murky, but connoisseurs say they know it when they taste it.

Geary defines it as traditional beer brewed by traditional methods with traditional ingredients. Edgar says craft beer is produced with 100% malted barley instead of the 30% to 40% rice or corn found in the nation’s top-selling brands. Another difference is price, about $6 to $7 for a six-pack of craft beer, compared with about $4.50 or $5 for a six pack of traditional American brews in 12-ounce bottles.

The cluttered marketplace was one of several problems facing the new entrants. Analysts said some of the companies lacked a hands-on knowledge of the industry; they didn’t have a good grasp of large-scale transportation and distribution issues, and the quality of the beer suffered.

Meanwhile, some fair-weather beer drinkers moved to the next fad: flavored drinks like “Hooper’s Hooch” and “Bodean’s Twisted Tea” that are filling shelf space to the detriment of brews.

For breweries, it was a case of survival of the fittest, and that’s not necessarily a bad thing for the 1,447 brew pubs, microbreweries and regional specialty brewers still in business, analysts said. Scaling back means many of the breweries are getting back to their original goal of producing local beer for local people, according to Geary.

“It’s fairly clear that when people get excited about something being good, they think, ‘If some is good, more is better,’ ” he said. “That’s not the case.”

Geary’s business grew 10% last year, and the company always kept its focus on Maine, New Hampshire and Massachusetts, which account for 95% of sales, he said.

The Shipyard, which sought to grow aggressively with Miller’s financial support, saw production drop from 39,500 barrels in 1996 to 25,300 barrels in 1998 after it pulled out of a number of unprofitable markets, President Fred Forsley said.

Forsley and Alan Pugsley, the company’s master brewer, bought back full ownership from Miller Brewing Co. last month, and they plan to devote greater care to their core market. Shipyard sales grew 10% last year under the new strategy, and the company hopes to return to the New York market, albeit with lower expectations, Forsley said.

“The brewers who stay aggressive and stay exciting will continue to capture their market,” he said.