Canada’s craft brew market leads to new business models | Crain's Toronto

Canada’s craft brew market leads to new business models

Small-batch beers, which once were hard to find, have come to dominate among discriminating brew consumers across Canada – and the major players have responded in several ways including acquisitions. | Photo by Pixabay.

The Canadian craft beer market is bubbling over with a frothy enthusiasm, brewing new business models and capping the revenue of the multinational companies Canadians call “Big Beer.”

Beer is big business in Canada. According to Beer Canada, an industry trade group that represents 40 Canadian brewing companies that together account for 90 per cent of beer made in Canada, the sector supports 163,200 Canadian jobs, $14 billion in real gross domestic product and $5.8 billion in tax revenues for federal, provincial and municipal levels of government.

Central to the craft beer narrative, however, is the mythology of David and the three Goliaths. The three largest Canadian-based breweries (Labatt, Molson and Sleeman) are owned by foreign, multinational companies, which dominate the domestic market.

In comparison, the country’s largest, fully Canadian-owned brewing company, Moosehead, owns just 3.8 per cent of the market.

According to research conducted this year by Research and Markets, the big brewers are facing stagnation in sales owing to the rise of craft beer, particularly in Ontario. The Ontario Craft Brewers lists 241 brewers in its directory, with roughly 120 more in Ontario expected to open in 2018.  

“The market has continued to accelerate,” says Jeff Dornan, chair of Ontario Craft Brewers (OCB). “We have a ton more shelf space in the market now, due to the government’s help. And we’ve had tons of support from grocers. They realize that craft beer consumers are their No. 1 customer, and they’re clamouring to get those customers into their stores.”

New distribution channel

Dornan is the president and co-founder of All or Nothing Brewhouse, which was founded in 2014 in Oakville, Ont. The company sees itself as an “underdog” in the “Better Beer Revolution.” Its website claims “the Goliaths of beer have finally met their match, and we’re just getting started.”

Until recently, Ontario’s craft brewers were limited to three distribution channels for their product: restaurants and bars; the government-owned Liquor Control Board of Ontario (LCBO); and The Beer Store (TBS), a distribution network owned by the three macrobrewers but regulated by the government.

The craft brewers often complained that TBS squeezed them from shelf space and overwhelmed their products with advertising. They relied instead on the LCBO network of roughly 600 stores for wider distribution of their product.

That all changed in 2015, when the Ontario government, under increasing pressure from the public and the craft beer industry, introduced a “master framework” that legislated balanced representation at the Beer Store, more shelf space for craft beers at all distribution outlets and, most importantly, the licensing of grocery stores to sell alcohol, a first in Ontario.

Dornan calls the new distribution channel a win-win for craft brewers and grocers.

“The grocery stores love it because their overall basket size has increased,” he says. “An average customer used to spend $40. They are now spending $80. Twenty dollars is food and twenty is beer. They keep giving us more shelf space and more market share in these channels.”

Dornan believes the “explosive” growth will only increase as more grocery stores are licensed to sell beer. He credits the grocery chains for realizing that their customers want to buy local.

“At some of the major grocers, we’re seeing 30 to 40 per cent market share for craft brewers. For comparison, craft brewers at TBS are in the single-digit range, and in the LCBO we’re in the 15 per cent range.”

Some analysts have pointed to recent microbrewer bankruptcies in Canada to suggest the industry is reaching a saturation point. Dornan doesn’t buy it.

“What has happened in the market is a differentiation of business models,” he said. ““Some are contract brewers. Some are built to distribute to a wider geographic area. Then there’s others that are focused locally, with pop-up stores and maybe a local restaurant. There’s no cookie-cutter design anymore for the business model.”

Big Beer makes it move

For midsized, independent brewers like Toronto’s Steam Whistle Brewing, the craft beer industry is business as usual. It has defied convention by brewing the same craft pilsner, which it ships to every province in the country except Quebec, since it opened in 1998.

According to Adrian Joseph, the chief financial officer at Steam Whistle, the grocery channels have expanded distribution channels but not the size of the market.

“Everyone is taking a piece of the same pie,” says Joseph. “It’s just that people are finding it more convenient to buy through the grocer. The buying patterns have shifted a bit but it hasn’t resulted in industry volume growth.”

That may be why one of Steam Whistle’s Toronto-based competitors, Mill Street Brewery, was bought by Labatt Breweries in 2015. The privately owned Mill Street began as a small brew pub in 2002 and grew to become Canada’s largest producer of certified organic beer.

Its acquisition by Labatt – itself acquired by Interbrew, now Anheuser-Busch InBev, in 1995 – continues a trend seen in the U.S., where macrobrewers acquire craft brewers for their brands, leading to labels like Labatt's Mill Street.

The U.S. Brewers Association introduced a new seal this year to distinguish its craft brewing members from the bigger brewers. Its logo features an upside-down beer bottle with the words "Certified Independent Craft."

“They’ve done a fantastic job launching their independent seal,” says Dornan. “A lot of our members at the OCB thinks it’s a fantastic idea and would like to adopt something similar.”

He believes more transparency is needed. “Customers are paying a premium for this product, believing in the branding and the messaging, and they’re getting lied to. They want to keep their money local, keep more jobs in the province.

“When you’re supporting the bigger brewer, the majority of your money just goes right out of the country. My personal view is that it’s wrong and not fair to the consumer.”

The industry may be a victim of its own success, at least for those who don’t cash out to Big Beer.

“If you think back 20 years,” says Dornan, “it was a lot easier to define what a craft beer was versus a macrobrew. There’s was flavourless and ours was flavourful. Nowadays, with the explosion of different beer styles, it’s harder to define what a craft brewer is. But it’s easy to define an independent, small brewer.”

December 12, 2017 - 11:55am