The Return of American Breweries

A recent blog post by Jon Murphy caught my attention. Since the late 1970s there is a comeback of smaller breweries in the US. Before, since prohibition times, the industry was dominated by only very few players.

I know some older data on the US brewery industry from the FIVE project. Until 1988 the story of the brewing industry looked like a classical shakeout:

My intuitive explanation for the shakeout would be the improvement of supply chain management and distribution channels which allowed more efficient producers to penetrate the market effectively. Jon Murphy mentions regulation by the US government after the prohibition as another reason. But as the figure shows, the overall trend was already determined long before that. In fact, it is striking how fast the number of breweries finds its way back to the pre-prohibition trend in the 30s.

It’s very interesting now to see that the tiny upswing at the end of the time series became a major revival of the industry in terms of its number of producers (click the link above to see the picture). The reason was that breweries started to offer a larger variety of products. Horizontal differentiation created niche markets in which smaller players could excel.

What do I take away from this? As we show in one of my research papers shakeouts are very likely in markets where products are homogeneous and businesses are easily scalable. But horizontal differentiation can stimulate market fragmentation and thereby keep a larger number of players in business.

Update: Mark Perry was so kind to share his data with me. So here is the complete time series until 2015 (The numbers differ from the FIVE data but the overall trend is the same. It’s always difficult to compile exact historical data about the evolution of industries):