Introduction

The initial motivation for this project came from a number of brewery tours and fascinating barstool conversations with individuals connected with the Pioneer Valley’s craft beer manufacturers, including Berkshire Brewing Company (BBC), Opa Opa, and High and Mighty Beer, as well as other brewers outside of that region. While no notes were taken in any of these interviews, most of which took place before any decision had been made to write a thesis and nearly all of which were conducted in noisy and distracting environments, a few observations about the industry, at least in New England, seemed to hold across the industry. The first is that craft beer manufacturing is not seen as a business particularly friendly towards businessmen. Due to high consumer standards and a very differentiated product, those hoping to succeed must be skilled brewers first and foremost, a craft that takes years of practice to hone. Few showed any interest at all in discussing economics, and it was difficult to get in-person interviews with the minds behind this growing industry. Finally, when they were willing to discuss economics, they seemed to agree on only two things: beer is very hard to distribute, especially for a small company, and no brewery can succeed without a local support base. The first point is really somewhat obvious; beer, like any liquid, is heavy. It is also perishable and various municipalities regulate it differently. So while there certainly are battles over various legislations affecting the ability of craft brewers to distribute, and while that may be an interesting paper on its own, the focus of this paper will be the second point; that a successful craft brewer requires a strong local support base.

Given the propensity of many craft brewers to associate their brand name with their region (Berkshire Brewing (MA), Bear Republic (CA), Motor City (MI)) it may seem obvious that many craft breweries hope to win over those looking for a locally made beer. The more important question is whether or not they need to. One thing that can be said is that this sort of behavior is not ubiquitous among beverage manufacturers. The wine industry, for instance, is located where it is because those are the best places to grow grapes. It may be the case that the residents of those areas, being so immersed in wine culture, may be particularly partial to wine in general or local wine in particular. However, it would be silly to claim that these regions would not be wine producing areas were all the locals to suddenly become sick of wine, so long as global demand continued. Likewise, when Anheuser-Busch decided in the 70s to open a brewery in Merrimack, New Hampshire (Anheuser-Busch), it was probably not because Merrimack, a town of about twenty-five thousand residents, had a uniquely high demand for beer, relative to the larger metropolitan areas south. Large beer manufacturers and liquor distillers are assumed to make their choices of where to locate their manufacturing operations based on the local prices of inputs, in this case water, electricity, barley, yeast, hops, labor, etc.

Craft breweries, however, are smaller, younger and have considerably less capital than large manufacturers like AnheuserBusch. When the twenty-first amendment was passed and breweries began opening their doors again, there were notably fewer breweries in the United States than before Prohibition (Brewers Association). Presumably, some did not have the capital to start back up, had sold off their assets, repurposed their facilities, or simply retired. This began a trend of increasing industry concentration that saw the market go from almost 1000 breweries immediately following prohibition to less than 100 in 1970. The reversal of this trend, beginning with the revival of Anchor Brewing in San Francisco (Elzinga, 132) and continues into the present day with the over 1700 breweries currently in operation (Brewers Association), has been well documented elsewhere and is a very interesting read for anyone interested. The overwhelming majority of breweries currently operating in the United States are less than twenty years old. In those last two decades, certain metropolitan areas have become known as “brewing hot spots”, while others have not. While every area would love to boast about how great their brewing culture is, it wouldn’t be prudent to simply take their word for it. A good place to get a look at what the actual climate for craft beer in American cities is like is a group of publications sent out by an organization called Brewing News. Each of one of these publications (Great Lakes Brewing News, Southwest Brewing News, Mid-Atlantic Brewing News, Yankee Brew News, Northwest Brewing News, Rocky Mountain Brewing News, and Southern Brew News) covers everything related to craft beer and the culture surrounding it in a total of 43 States. Each one also features a map of the locations of breweries and beer-related businesses in each of those states. With an edition issued every two months, these journals, when taken as a whole, form a rather remarkable picture of where craft breweries are located, which are far from homogeneous. Well known beer meccas such as Portland, Seattle and Denver are hard to see under the mass of markers, while Mississippi features only one solitary brewery. Moreover, it was clear that population was not the sole driver of brewery location. Some major metropolitan areas, such as Dallas or San Jose, had only a few breweries, while smaller areas like Austin and Boulder, CO had many more. It was these maps which inspired the hypothesis that this paper will explore: that craft breweries, despite being manufacturers whose product markets often extend far beyond their locality, are clustered in a manner that would reflect a strong interest in local demand. In one terminology, their behavior is more consistent with “firm behavior” than the “industry behavior” of their larger competitors.² This terminology, as it is central to the hypothesis, requires a certain amount of explanation.

For these purposes, “firm behavior” should be defined as behavior in which a local firm is competing for local demand with other local firms. Examples of this could be a restaurant, a pharmacy, or a hotel. There are more pharmacies in Boston than there are in Amherst because there are more people demanding pharmacy services in Boston than there are in Amherst. Thus, for a firm producing a good or service for which the demand is about the same for any given individual, the output of firms in that sector should be about proportional to the amount of people in that region. However, demand can vary across similarly sized populations. An example of this would be theaters. While theaters certainly display firm type behavior, competing with each other for the patronage of the nearby residents and tourists, demand for the theater performances is much stronger in certain areas than others. This shows in the fact that certain large cities (like New York and Boston) have many theaters while others do not.

Industry behavior, on the other hand, refers for our purposes to businesses that, while based locally, compete for market share in a much larger geographical area, and thus are less concerned with what is occurring locally that a firm type business might be. Perhaps the best example of industry behavior for many people would be the Detroit area in the 20th century. Here, America’s auto manufacturing giants based huge operations that sent cars all around the globe. They were (and still are) no doubt fierce competitors in many ways, but their competition was not limited to the auto market of the Detroit area. If GM decided to move all of their operations to Texas, assuming no difference in the cost of production, Chrysler and Ford would not be particularly bothered or delighted over this news. Likewise, if MillerCoors, Anheuser-Busch’s main competitor today, were to open up a factory right down the road from the AB plant in Merrimack, New Hampshire, it’s unlikely that there would be much of a reaction. Anheuser-Busch already competes with MillerCoors in New England, as well as presumably every other part of the country, so where the beer is being made makes little difference to them unless it brings with it a significant cost difference. So while “clusters” of businesses - that is to say, a surprisingly dense grouping of businesses in a certain sector - mean an especially high demand for that good or service when discussing firm level behavior (theaters in New York), they can signify notable cost advantages to producing in this area over others in the case of industry-behavior firms (automakers in Detroit).

Obviously, a company does not need to perfectly fit into one definition or another. A company could rely primarily on a larger market for revenue, but gain some amount of business from a stronger-than-average local demand. Alternatively, there could be a sector for which there is strong demand in all parts of the country, but whose intermediate inputs only exist in certain areas. Craft beer absolutely falls between firm and industry behavior, and after a certain point, it may exhibit almost exclusively industry behavior, as in the case of Boston Beer Co. (Sam Adams),³ Sierra Nevada, Anchor Steam, or other hugely popular craft brands. For the purposes of this paper, the firm versus industry paradigm will be used only to look at a brewer’s choice of location.⁴ This requires a few assumptions that should be addressed now. 

The first assumption regarding brewery location is that the founders of the brewery were free to move where they pleased, and chose their location based on strategic behavior and not necessity. There may be some brewers to whom that does not apply to, who started brewing in one location because they wanted to brew beer and, for whatever personal or financial reason, did not have the ability to uproot and move to a different location, despite knowing that it would be a better place to have a brewery. Lacking a broad survey of brewery owners, it is difficult to test the truth of that assumption.

The second, perhaps more tenuous, assumption, is regarding brewer distribution. The assumption here is that brewers either learned their trade on the job at established breweries or traveled to strategic locations in order to start their own. If the craft beer industry were similar to, for example, the technology industry, this would be obviously untrue. Technology company clusters exist in places like California and Greater Boston in part because they are within close proximity to what are understood to be the most elite educational institutions in their fields, and they are the easiest places to find an abundant, skilled labor supply. While various vocational programs for brewers do exist, we will assume here that those programs are not so established that they draw all of the nation’s prospective craft brewers into certain areas where they will then be recruited to work. Therefore, anywhere where there is adequate demand for craft beer, people will either learn to brew or they will migrate into that area to meet the demand.

One final assumption must be made to adequately explain the hypothesis. While the other two assumptions address beer supply, this one must address beer demand. The assumption is that certain demographics demand craft beer more than others. That is to say, while all sorts of people may like craft beer, certain groups are more likely to enjoy it over other types of beer. The demographics in question, for these purposes, are not really important. All that matters is that there is a certain demographic makeup which would characterize an area as more demanding of craft beer than another.

With those assumptions in mind, the Brewing News maps of craft brewery locations can be given a possible narrative, as follows: As craft beer re-emerged in America as a product, certain demographics seem to have adopted it as a regularly consumed beverage with far more regularity than other demographics. Brewers, eager to ply their trade in this hip new market, started breweries all over the country. In certain areas, the breweries were supported by local demand, became profitable, and soon thereafter took off and began distributing to a larger market. In other areas, where there was less demand, the breweries did not succeed. Over time, more and more breweries began to take hold in those areas which had become “craft beer meccas” and industry clusters emerged as a result of this growth. Although the breweries in question may have been able to produce at a lower cost by locating their brewery elsewhere, they would not have been able to realize the immediate demand, and would have ultimately failed.

The historical side of this paper is very difficult to test. The main reason for this is that the key data source being used here to show craft brewery location, the Brewing News periodicals, only has online archives of their periodicals going back to 2009. There is not much clear data about exactly when each regional affiliate of the periodical was founded. If, in fact, archives do exist dating back to the late eighties or early nineties, it would be far easier to actually see how the market took off over time. This paper will instead focus on a specific point in time in the life of the craft beer industry and examine it for evidence in order to test the hypothesis.

² The “firm” vs “industry” terminology used in this paper was borrowed from the methodology of the REMI model, developed by Regional Economic Models, Inc. and should not be confused with more commonplace uses of the terms.

³ Boston Beer is notable for its early adoption of “contract brewing”, a practice shunned by many craft beer enthusiasts (Elzinga, 132). For the purpose of simplicity, this won’t be addressed in this paper, but may be an interesting topic for further research. We will assume that in the case of breweries like Sam Adams, all beer is brewed on location. The main reason for that is the lack of adequate resources to check if each of the over 200 breweries used in the sample have ever used contract brewing services.

⁴ This is to say that “firm” vs “industry” type companies behave differently on a number of other levels which are not being addressed here. The paper only addresses whether craft breweries display “firm-like” behavior when making their location decisions.