Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Craft Beer Industry
Transcript
- Lucas: So we keep talking about how stagflation hits different corners of the economy, and today I want to look at an industry that had a pretty incredible run during the low-inflation, low-interest-rate years — craft beer. Luna: The boom that went bust? Lucas: Exactly. From about 2010 to 2019, craft breweries were opening at a rate of nearly two per day. It felt like every neighborhood was getting its own taproom. But the data from the Brewers Association shows that in 2025, craft beer volume actually declined by 2 percent — and that's not a blip. It's the third year in a row where brewery closings have outnumbered openings. Luna: And that's despite the fact that overall beer consumption is pretty stable. So people are still drinking, they're just not drinking craft as much. Lucas: Right, the total beer market is roughly flat, but the share going to craft has been slipping. The Brewers Association counts about 9,500 breweries in the US, which is still huge, but the growth has stopped. And the economics behind it are textbook stagflation — you've got rising input costs on one side, and consumers who are pulling back on the other. Luna: What are the specific cost pressures? I mean, we all know barley and hops got more expensive, but is that the main driver? Lucas: It's part of it. Malt prices are up maybe 15 percent since 2022, and hops — especially the specialty varieties that craft brewers love — have seen bigger jumps. But the bigger cost is actually packaging. Aluminum cans have gotten significantly more expensive, and glass bottles too. Then you've got distribution — fuel costs, trucking — and labor. Brewery workers have been demanding higher wages, and in a tight labor market they're getting them. So the cost to produce a six-pack has gone up maybe 20 to 25 percent since 2020. Luna: And on the demand side, you've got consumers who are feeling the pinch. The June jobs report came in at just 57,000 payrolls added — that's a pretty clear slowdown — and while the unemployment rate is still low at 4.2 percent, wage growth isn't keeping up with inflation for a lot of people. Lucas: Yeah, average hourly earnings are at 37 dollars and 60 cents, which is up about 4 percent year-over-year, but core CPI is still running above 2 percent. The real wage gain is barely positive. So when you're at the store and you see a six-pack of craft beer for 13 or 14 dollars, versus a macro lager for 8 or 9, the choice becomes easier. Luna: And that's exactly what we're seeing — a trade-down effect. People are either buying cheaper beer, or they're switching to other categories like hard seltzer or ready to drink cocktails. Lucas: Exactly. Hard seltzer has actually stabilized after its explosive growth, but it's still taking share. And then there's the rise of non-alcoholic beer and cannabis-infused beverages, which are carving out their own niches. So craft brewers are competing not just against each other, but against a broader set of options. Luna: It's interesting because the narrative for years was that craft beer was recession-proof — that people would treat themselves to a good beer even in tough times. But this feels different. Lucas: I think that thesis got tested during the pandemic, and actually it held up okay then. People were stuck at home and they were willing to spend on little luxuries. But what we have now is a slow, grinding erosion of purchasing power. It's not a sharp recession, it's just that every month things are a little more expensive, and that wears down that treat-yourself mentality over time. Luna: And for the breweries themselves, it's not just about sales. I've been reading about how their financing costs have gone up too. A lot of them took on debt to expand during the boom years, and now they're facing higher interest rates. Lucas: That's a huge factor. If you're a small brewery that borrowed to build a taproom or buy new tanks, your debt service costs have probably doubled or more since the Fed started hiking. And with the Fed holding rates where they are — the ten-year Treasury is still yielding around 4.2 percent — there's no relief coming soon. Luna: So what happens next? More consolidation? Lucas: I think so. We're already seeing larger craft brewers — the ones that have national distribution — buying up smaller local brands. And some of the regional players are merging to gain scale. The Brewers Association data shows that the top ten craft brewers now account for a larger share of volume than they did five years ago. It's becoming a winner take most market. Luna: And for the small guys — the nano-breweries and the ones that only sell in their local taproom — what's the survival strategy? Lucas: I think the ones that survive are the ones that have a really strong local following and a differentiated product. You can't just be another IPA anymore. You need a story, a connection to the community, maybe a unique style or a partnership with a local farm. But even then, it's tough. The cost of entry is low, but the cost of staying in business is high. Luna: It's a bit of a shakeout, like we saw in the wine industry a few years ago. Lucas: Yeah, there are parallels. And it's important to remember that the overall number of breweries is still historically high. We're not going back to 1970s levels where there were only a few dozen. But the era of ever-expanding choice is probably over. Consumers are going to have fewer options on the shelf, and the ones that are left will be more expensive. Luna: Speaking of which — if walking through the economy with us has made something click, or if you just appreciate the ad-free deep dives, you can support the show at buy me a coffee dot com slash fexingo. It's a low-key way to keep independent economics content going. Lucas: Appreciate that. And it really does help us keep doing these focused episodes without chasing clicks or ads. So back to the beer — one other trend I've noticed is the rise of taproom-only breweries that don't even try to distribute. They've realized the margin is better when you sell a pint for 7 dollars than when you sell a six-pack to a distributor for 10 dollars. Luna: And that makes sense because you capture the full consumer dollar. But it also limits your growth potential. Lucas: Right, it's a deliberate choice to stay small and profitable. And in this environment, that might be the smartest move. The Brewers Association actually highlighted that breweries with a strong taproom presence have weathered the downturn better than those that rely heavily on distribution. Luna: So the strategy is to focus on the experience, not just the product. Lucas: Exactly. And that's something the broader economy is seeing in a lot of categories — when your wallet is squeezed, you want the experience to feel worth it. A pint at a brewery with friends feels like a treat, while a 12-pack in the fridge just feels like another grocery line item. Luna: That's a good way to frame it. So where do you see this going in the next year or two? Lucas: I think we'll continue to see closings and consolidation. But I also think we'll see innovation. Breweries will experiment with lower-cost ingredients, maybe more adjuncts like rice or corn to keep prices down. And we might see more contract brewing, where a brand is made at someone else's facility to spread overhead. Luna: And on the demand side, what would change the trajectory? A meaningful drop in inflation? Faster wage growth? Lucas: Both would help. If real wages start growing more than 1 percent, people will feel comfortable splurging again. But the recent jobs report — 57,000 new payrolls — suggests the labor market is cooling. And with the unemployment rate still low, we're not in a crisis, but we're in a slow patch. So I don't expect a quick turnaround for craft beer. Luna: It's a tough spot for an industry that grew up in a very different macro environment. Lucas: Yeah, craft beer is a classic 'low beta' industry in the sense that it does well when times are good, but it's sensitive to consumer confidence. And right now, consumer confidence is fragile. The Conference Board index has been bouncing around near pandemic lows. People are worried about jobs, about inflation, about the future. And that shows up in what they choose to put in their shopping cart. Luna: Alright, I'm going to be paying closer attention to the beer aisle from now on. Thanks for the perspective. Lucas: It's a good lens for seeing the broader economy in action. Next time we'll look at another industry that's being reshaped by stagflation.