California Craft Brewing: Future and Challenges. Bart Watson, PhD Chief Economist Brewers Association

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1 California Craft Brewing: Future and Challenges Bart Watson, PhD Chief Economist Brewers Association

2 Zeroing in on Industry Challenges 1. All Beverage Alcohol 2. All Beer 3. Craft Competition 4. What s Next

3 The Beverage Alcohol Market 3

4 Percent who said Yes 8 Alcohol Consumption Over Time Do You Have Occasion to Drink Alcohol? Source: Gallup Poll, 216.

5 U.S. Population By Single Age, 215 Hispanic and Non-Hispanic 5,, 4,5, 4,, 3,5, 3,, 2,5, 2,, 1,5, 1,, 5, U.S. Hispanic U.S. Non-Hispanic Source: U.S. Census and NBWA 215.

6 An Aging U.S. Population 2 to % 73% 73% 72% 72% 71% 71% 7% 7% 69% 69% 68% LDA Share Median Age Source: U.S. Census Bureau (LDA = Legal Drinking Age Population)

7 Index Base = 1 Differences in Alcohol Consumption Across Generations in Gen Y (21-29) Gen X (3-49) Boomers (5-69) Silent (7+) Liquor Past 7 Days Beer in Past 7 Days Wine Past 7 Days Source: Scarborough Research, 215

8 Gallons of Ethanol Per Capita (LDA) 3. Per Capita Consumption of Ethanol U.S. from 2 to 215 ABV for Beer 4.6%, Wine 11.5% Spirits 38% Beer Wine Spirits

9 Pennsylvania Colorado Oregon Massachusetts Idaho Vermont Washington Montana Nebraska Maine Wisconsin New Jersey New Hampshire Michigan New Mexico Wyoming Connecticut Delaware California Iowa Hawaii Minnesota Illinois Ohio Georgia Arizona District of Columbia Virginia West Virginia New York Indiana Maryland Utah Missouri North Carolina South Dakota North Dakota Rhode Island Alaska Texas Tennessee Nevada Florida Kansas Kentucky Mississippi South Carolina Oklahoma Alabama Louisiana Arkansas 1% Craft Brewer/Beer Share of Beverage Alcohol By State 9% 8% 7% 6% 5% 4% 3% 2% 1% % Craft Other Beer Other Bev Alc

10 The Beer Market & Craft Brewing 1

11 ,5 Number of Breweries, Sources: Brewers Association and Beer Institute 4, 3,5 3, 2,5 2, 1,5 1, 5

Domestic Imports Craft US Shipments All figures in s of bbls (1 bbl = 31 gallons) 1981

12 Domestic Imports Craft US Shipments All figures in s of bbls (1 bbl = 31 gallons) ,34 5, , ,8 31,245 24,5 25,545 Change -27,234 26,24 24,465 23,255

13 5, Brewers Association Active Breweries, June 211-June 216 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5

14 , Breweries and Brewery Permits, , 5, 4, 3, 2, 1,

15 12, Wineries in the US, , 8, 6, 4, 2,

16 , Specialty Coffee Locations in the U.S., , 25, 2, 15, 1, 5,

17 ~6 active breweries 7+ State licenses ~8 Federal licenses

18 TTB Permitted Brewery Counts 6,8 as of December 215 State Count State Count State Count Alabama 3 Kentucky 48 North Dakota 11 Alaska 35 Louisiana 25 Ohio 187 Arizona 91 Maine 84 Oklahoma 21 Arkansas 29 Maryland 73 Oregon 281 California 788 Massachusetts 124 Pennsylvania 278 Colorado 352 Michigan 316 Rhode Island 15 Connecticut 59 Minnesota 142 South Carolina 51 Delaware 21 Mississippi 14 South Dakota 19 DC 13 Missouri 9 Tennessee 88 Florida 25 Montana 74 Texas 22 Georgia 54 Nebraska 39 Utah 29 Hawaii 26 Nevada 39 Vermont 66 Idaho 57 New Hampshire 63 Virginia 155 Illinois 21 New Jersey 71 Washington 383 Indiana 151 New Mexico 71 West Virginia 17 Iowa 71 New York 329 Wisconsin 189 Kansas 37 North Carolina 27 Wyoming 32 Source: NBWA and TTB, 216.

19 Total Industry Volumes By Size CY 215 Brewers By Size of Tax Paid Withdraws Share Share Volume in Barrels (31 gallons) Brewery Count Tax Paid Volume Brewery Count Tax Paid Volume < , % % 1-1, 3,97 772, %.4% 1,1-7, ,9, % 1.1% Small Breweries 4,475 2,767, % 1.6% 7,51-15, 122 1,95, %.6% 15,1-3, 7 1,31, %.7% 3,1-6, 54 2,11, % 1.2% Medium Breweries 246 4,517, % 2.6% 6,1-1, 21 1,393,286.4%.8% 1,1-1,999, ,918, % 1.8% Large Breweies 82 2,311, % 11.6% 2,, - 6,, 6 23,12,416.1% 13.2% 6,,1 plus ,544,161.3% 71.1% Extra Large Breweries ,646,577.4% 84.3% Total Breweries 4, ,243,6 1.% 1.% Source: U.S. TTB, April 216.

20 3 25 # of CA Licenses by Size (215 data) to 1 11 to 1 11 to 1 1 to 1K 27 1K to 1K 6 4 1K to 1M 1M+

21 # of CA Licenses, and % of Production by Size to 1 11 to to to 1K 27 1K to 1K 6 4 1K to 1M 1M

22 Within 1 miles = 89.6% Within 5 miles = 78.7% Within 1 mile = 21.6%

24 CA as Many States Can t think of CA as a single market San Diego as OR/CO Central valley as NM or TX LA/Bay Area hard to compare Northern CA as rural parts of West

25 CA Markets for Craft Sales IRI defined markets Dollar Share Change vs YA Los Angeles, CA Food 15.5% 1.8% Los Angeles, CA - Multi Outlet + Conv 1.9% 1.2% Sacramento, CA Food 37.9% 2.4% Sacramento, CA - Multi Outlet + Conv 23.3% 1.7% San Diego, CA Food 37.% 3.5% San Diego, CA - Multi Outlet + Conv 25.9% 2.4% San Francisco/Oakland, CA Food 35.6% 1.1% San Francisco/Oakland, CA - Multi Outlet + Conv 25.5%.9% Total 4 Markets Food 23.5% 2.% Total 4 Markets - Multi Outlet + Conv 16.3% 1.4% Source: IRI InfoScan IRI FOOD Markets, YTD ending August 28, 216

26 How important is local in purchase decisions? Nielsen Surveys: Sum of very/somewhat important Total Craft Beer Wine Spirits Source: Nielsen Quick Query Omnibus Survey, 12-17, 215. (Base: LDA consumers who drink at least several times per year)

27 Broader BA Craft Source: IRI Group (216), MULO+C through 8/7/16 CA as a % of Volume Growth Growth Rate In CA Not in CA Overall CA Breweries 11.6% 12.9% -1.1% 5.4% Non-CA -.8% -1.8% 7.8% 7.5% CA Breweries 67.3% 16.3% 7.7% 12.% Non-CA 1.8% 4.6% 9.% 8.8%

28 1 9 % Sold in CA, by % of Breweries

29 Reported Gallons Reported Gallons Reported Gallons Reported Gallons 4,, 3,5, 3,, 2,5, 2,, 1,5, 1,, 5, 9, 8, 7, 6, 5, 4, 3, 2, 1, Changing On Premise Landscape Brew Pubs and Tap Rooms - DTC California Texas ,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, 7, 6, 5, 4, 3, 2, 1, Florida Iowa

30 Changing On Premise Landscape % Premises Use ( ) Still 38% with 8%+ premises use % More than, less than 1% 1%

31 Bbls (215) On-Site vs Outside the Brewery Sales By Brewery Type 25,, 22,538,834 2,, 18,854,78 15,, Onsite Distribution 1,, 5,, 3,32,63 1,75, 9, 381, , 225, Brewpub Microbrewery Regional Total Craft

32 25,, 2,, 15,, 1,, 5,, TTB Data, Premises Use vs Kegs 6.3% 8.3% 1.8% 2.5% (adjusted) Premises Kegs Premises Use Share 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% %

33 A Changing Market 33

34 Growth Rate (%), Comparable Base Annual and Average Growth Rate, (Mid-Year) (MY)

35 3,5, Craft Barrel Domestic Barrel Additions, ,, 2,5, 2,, 1,5, 1,, 5,

36 2, Average Barrels Added, Production Breweries 1,8 1,6 1,4 1,2 1,

37 Styles (aka the IPA Show) 37

38 3. IPA Volume Share of Craft, ~2X

39 25,, 2,, IPA Cases, IRI MULO+C, ~4X ,, 1,, 5,,

40 IPA vs Non-IPA Growth, , IRI MULO+C IPA Growth Non-IPA Growth 36% of Volume Growth

41 IPA vs Non-IPA Growth, 216 YTD, IRI MULO+C 95% of Volume Growth IPA Growth Non-IPA Growth

42 4,, Volume Change, IRI MULO+C YTD ( ) 3,5, 3,, 2,5, 2,, 1,5, 1,, 5, -5, -1,, -1,5, Source: IRI (216)

43 Craft IPA Sub-Styles Overview Total US Food Channel Fruit/Veggie/Spiced IPA s remain the fastest growing IPA Sub-Style. Dollar Sales Dollar Sales % Chg YA Dollar Share of Craft IPA Dollar Share Chg YA American Imperial Session Fruit/Veggie/Spiced English Belgian White Other Black $6,64,31 $23,256,891 $22,86,69 $1,248,716 $6,793,466 $1,987,378 $1,383,763 $25,44, % 61.8% -3.7% 6.9% 18.2% -2.7% 32.4% 7.%.5% 662.8% 6.9% 5.8% 55.3% 3.1%.6% 6.7% 2.% -.3% 33.3%.6%.% -15.6%.4% -.2% Source: IRI InfoScan Total US FOOD, YTD ending July 1, 216

44 Questions? Bart Watson, PhD Chief Economist Brewers Association

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