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Brewing industry in Canada, craft beer leading the race

  • Origin of the beer industry in Canada
  • Changing drinking pattern of consumers and emergence of craft microbreweries
  • Key growth drivers for the beer industry
  • Industry’s growth prospect as a whole

 

The discovery of brewing techniques is one of the most notable technological achievements of mankind and as per few theories led to the Neolithic Revolution (~10,000 BC), this was characterised by a transition of humans from hunting and wandering to living in stable settlements. It was the discovery of alcohol in beer (associated intoxicating effects) vis-à-vis use of grain for other food materials that provided a key incentive for the domestication of various plants, animals and helped in the emergence of agricultural techniques.

The beer industry in Canada had humble beginnings as a cottage industry, but it has become an important part of the Canadian economy (1.2% GDP [2017], Source: Brewers Association of Canada). The brewery industry generated $6.3 billion in annual revenue in 2017 (at a CAGR 2.64%, 2012-17) and is estimated to grow at CAGR of 1.24% ([up to 2023], [Source: Conference Board of Canada]). The industry is a focus area for the government as it brings in annual tax revenues ($5.7 billion, 2016) as well as supports around 149,000 jobs. While it is also highly regulated as there are a lot of social stigmas associated with the use of alcohol, which may lead to significant health and social problems. The brewery industry consists of beer, malt liquor and non-alcoholic beer (excluding wines and spirits). These products are primarily made with the use of water, hops, yeast and barley.

Canada had 117 independent breweries before the First World War, but by early 1980s only 10 brewing companies remained on the back of prohibition and consolidation. Further, all of the 10 breweries belonged to the three largest companies: Molson, Labatt and Carling O'Keefe. Moreover, since the 2000s, the sales of craft beer have risen tenfold owing to a double-digit growth witnessed by microbreweries, while there was a simultaneous decrease in the sale of commercial beer during this time. In the past few years, the craft beer sales have outpaced other traditional premium and light beer segments on the back of incentives and subsidies from the government.

Furthermore, Canadian beer market has been dominated by big international players in the last few decades as stated above, these produce major brands and boast of a varied product portfolio, while the smaller microbreweries offer craft beers. However, there is a gradual change backed by consumers’ preferences towards craft beer, which is brewed by brewers that are usually small players (annual production of 6 million barrels or less), these have independent businesses (25% of the craft brewery is owned or controlled by a beverage alcohol industry member which itself is not a craft brewer) and provide traditional beer (has a majority of total beverage alcohol volume in beer, its flavours are derived from traditional or innovative brewing ingredients). Craft brewers incorporate historic styles with unique twists and differentiate their product based on local tastes. The craft beer is although costly, it offers an enhanced taste that matches the local preference of consumers.

In addition, for the beer industry as a whole, the key external drivers are per capita disposable income, per capita alcohol consumption, the price of the major beer ingredients such as wheat and price of aluminium (for canning). The per capita alcohol consumption has declined over the last few years and the trend is expected to continue as people have reduced their drinking frequency due to the health concerns. While, the per capita disposable income in Canada has grown over the years and this trend is expected to continue and will lead to a steady growth. While, the per capita alcohol consumption has fallen, the consumer purchasing power has increased and boosted their discretionary alcoholic beverage purchases. This indirectly aided a shift in the consumer focus towards costlier craft beers to satiate their taste buds. Which, in turn, affected sales of traditional light and premium beer producers, which play on volumes both in terms of production and sales.

The number of breweries in Canada has gone up from 380 (2013) to 817 (2017). Further, most of these are small microbreweries producing less than 50,000 hectolitres, which focuses on local brands and product differentiation, while selling their products at a premium price. These small breweries represent over 95% of all breweries in Canada. Further, large players have also ventured into the craft brewing segment to cater to the changing consumer preference, although this segment, at least until now is controlled by the small players. 

The small brewers are also supported in terms of tax benefits. Canadian beer drinkers are among the highest taxed in the world with the tax burden rising at a dramatic and unsustainable rate (the federal tax continue to rise every year in line with the inflation). On an average, provincial and federal taxes in Canada are five times higher than the United States federal and state taxes on beer. These taxes represent around 47% of the price on a typical case of beer. In order to promote local craft breweries, the government has reduced tax burden on microbreweries in terms of subsidies vis-à-vis the large beer manufacturers. This can also be seen below for Ontario, which has the highest number of craft breweries in Canada.

  

While prospects look good for micro-breweries backed by increasing popularity of craft beer in the short to medium term, its growth raises doubt over the long-term growth outlook of the overall industry. Amid high prices of these local craft beer, consumers tend to buy beer in small quantities, which had and is continuing to lead for the reduction in the overall consumption of beer. This is a major threat to the big international producers, which depend on large volumes to ensure a healthy profit margin. The overall growth is expected to further slowdown as the craft beer market reach a stage of maturity.

Canadian beer industry is almost locally managed with around 84% (2017 data) of the total beer revenues being dominated by the domestic players, while the balance of 16% depends on imports. Canada mainly imports beer from the Netherlands, the United States, Belgium and Mexico. A very low percentage of the beer market is backed by exports, which ranges as low as 5-7% of the total industry revenues. The US market is the biggest importer of the Canadian beer. Further, most of the exports consist of traditional premium and light beer, wherein too the overall export growth is expected to remain limited in the medium term. 

Going forward, the beer industry in Canada is likely to face significant challenges as international competition increases and consumers continue to shift away from traditional premium and light beer consumption. Although, the trend of shifting to craft beer has significantly benefited the small producers in the industry, this has negatively impacted the industry's premium beer brands that generate most of the revenue. Addedly, consumers are unlikely to buy craft beer in large quantities as these are more expensive than premium beer brands. In the long-term, the industry is also expected to be affected by substitution of beer with wine, this is due to the growing perception that beer is less healthy than wine. Therefore, the growth in the industry’s revenue is expected to slowdown on the back of changing drinking pattern (reduced overall beer consumption owing to a shift towards costly craft beer) and lower growth in international markets (as demand for local taste is largely confined to the domestic consumers as well as ‘to consume fresh’, limits beer’s transportation distance).

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