R.I.P.(A) – Can Sierra Nevada lead the charge to give us cool craft IPA in a hotter world?
How kegsistential is the threat?
When brewing is your business, change in the supply of hops and water is bad news. The last five years have seen a ~250% increase in the number of US craft breweries [1], whose success is underpinned by the wide variety of tastes that comes from using more hops than traditional brewers and access to sources of clean water. The Pacific Northwest produces ~90% of the national hops yield [2] and is experiencing increasingly unpredictable weather and drought incidence. While overall hops production has risen in past years to meet increasing demand, yields in 2015 declined in tandem with unusually warm conditions, which scientists expect to persist in coming decades. This may constrain hops supply and continue the increase in prices of ~250% craft brewers have seen in the last decade [3]. Competitive responses to this have been startling, exemplified by ABInBev taking steps in May 2017 to effectively monopolize the production of South African hops and stop its distribution to US craft brewers [4]. Further down the beer supply chain, drought in Northern California is causing breweries to rely more heavily on groundwater. This can compromise both beer taste and production levels [5], exemplified by Bear Republic Brewing pulling out of distribution to 27 states in 2015 and digging wells in its hometown. As water and hops availability becomes challenged, how can craft breweries keep our favorite IPAs in stock and at low cost?
What is Sierra Nevada doing?
The US’ second largest brewer, Sierra Nevada (est. ~$250M sales in 2015), has long been heralded as an industry leader in embedding sustainable practices into its production processes and supply chain to drive down production costs and mitigate climate change risk. The Company’s approach is centered around (i) ‘closing’ its own resource loops to lower operating costs, (ii) working closely with agricultural suppliers to improve supply chain operations and, (iii) mitigating geographical risk by diversifying production facilities. To make brewery operations sustainable and cost-effective, since 2007 the company has reduced the amount of water required to produce a barrel of beer by 25% [6], has generated ~80% of its energy on-site and has reduced packaging and facility waste to drive savings of ~$8M annually [7]. To mitigate the impact of climate change on its supply chain, Sierra Nevada grows a portion of its own hops adjacent to its brewery to help control supply [8]. The Company also encourages suppliers to take up sustainable practices learnt from its own production efforts to mitigate the potential yield impacts of reduced water supply [9]. At a more strategic level, to diversify exposure to the climate risk of California and expand distribution, a second brewery was opened in 2014 in Asheville, NC [10]. Overall, Sierra Nevada’s actions provide a blueprint to craft brewers to minimize the impact of their own operations and those of their supplier base to adapt to the threat posed by climate change. The Company has simultaneously improved its bottom line in the process, becoming more competitive in a low margin industry facing increasing raw material pressures.
How can Sierra Nevada raise its bar?
Sierra Nevada’s blueprint is laudable, yet it can be improved. To-date, it appears that the Company sources a minority of its hops from outside the US, from large producers such as Germany and South Africa. Further diversifying its Pacific Northwest supply chain would reduce exposure to regional climate change risks. The Company has experimented with using temperature hardy wild hops yet with little evident success [11]. Pushing the take-up of more drought-resistant hops strains in Sierra Nevada’s supply chain remains an option. The Company is now reaching a point where it can have significant influence on the behaviors of its suppliers and fellow craft brewers. Most of its efforts with suppliers have been voluntary to-date yet a more impactful approach may be to mandate these changes. A last area of major effort is to continue reduction in water usage; in 2015, Sierra Nevada was asked by the City of Chico to reduce its water usage by 32% in response to prolonged drought [12]. The brewer was issued a reprieve, managing the aforementioned 25% reduction, but it is clear that the Company can still improve.
Too small to dream big?
While Sierra Nevada is leading the pack of craft brewers in terms of adapting to the cost and supply chain implications of climate change, it is only a small player in the wider brewing industry. It’s the poster child for craft brewing but it alone can’t win the battle to protect its supply chain; is Sierra Nevada doing enough to inspire others?
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[1] Brewers Association Insights. https://www.brewersassociation.org/statistics/, accessed November 2017.
[2] USDA National Hop Report 2016. http://usda.mannlib.cornell.edu/usda/current/hops/hops-12-16-2016.pdf, accessed November 2017.
[3] Maiolo, Derek. Ritchie, Anna. No Hope for Hops (Spring, 2017). http://emilieweiss.com/envision-journalism/, accessed November 2017.
[4] Notte, Jason. Anheuser-Busch InBev shuts out craft beer brewers by hoarding hops (May 12, 2017). https://www.marketwatch.com/story/anheuser-busch-inbev-shuts-out-craft-beer-brewers-by-hoarding-hops-2017-05-11, accessed November 2017.
[5] Ivanova, Irina. Climate change is hurting craft breweries (November 1, 2017). https://www.cbsnews.com/news/climate-change-is-hurting-craft-breweries/, accessed November 2017.
[6] Sierra Nevada Brewing Co. Biennial Sustainability Report 2015. https://www.cdn.sierranevada.com/sites/www.sierranevada.com/files/content/sustainability/reports/SustainabilityReport2015.pdf, accessed November 2017.
[7] Baldwin, Cheryl. Sierra Nevada: Brewing a Better Business Through Sustainability (June 24, 2015). https://purestrategies.com/news/2015-06-24-sierra-nevada-brewing-a-better-business-through-sustainability, accessed November 2017.
[8] Sierra Nevada Brewing Co. https://sierranevada.com/brewery/about-us/sustainability/beer-ingredients-agriculture, accessed November 2017.
[9] Sierra Nevada Brewing Co. Biennial Sustainability Report 2015. https://www.cdn.sierranevada.com/sites/www.sierranevada.com/files/content/sustainability/reports/SustainabilityReport2015.pdf, accessed November 2017.
[10] Notte, Jason. Sierra Nevada’s Brewing ambitions spill over to the East Coast (November 21, 2014). https://www.marketwatch.com/story/sierra-nevada-brewing-bridges-divide-between-east-coast-and-west-coast-2014-11-21, accessed November 2017.
[11] Shilton, AC. Meet the Wild Hop Hunters Saving Your Beer From Climate Change (December 14, 2016). https://www.outsideonline.com/2141991/meet-wild-hop-hunters-saving-your-beer-climate-change, accessed November 2017.
[12] Watson, Julie. California craft beer brewers balance drafts and drought (October 11, 2015). http://www.orlandosentinel.com/news/os-ap-california-drought-craft-beer-20151011-story.html, accessed November 2017.
It’s very interesting to see more examples of companies taking raw materials production into their own hands to make their supply chains more resilient and sustainable. Just as IKEA was considering taking over control of forests, Sierra Nevada and ABInBev are taking more control of their hop production. It’s notable that there is no sustainable, resilient supplier that can meet these companies needs. It raises the question: what value would a more sustainable raw materials supplier have to these companies and what premium could such a company charge? There may be a market opportunity for a company that can guarantee raw materials supply and is insulated from climate effects.
On the question of how can Sierra Nevada lead, I think the most important thing is to not worry about effecting change in the broader industry and focus entirely on preserving its supply chain. It must ensure its supply of hops is resilient, in areas that are protected from climate change, and which it can defend from other companies (eg, ABInBev). Proving the sustainability of its own business model will be sufficient example to the rest of the industry. Doing this will help it answer consumers’ primary concerns too: does the beer taste good and is there enough?
This was a fun read. I like your suggestion that Sierra Nevada could look to use drought-resistant hops strains to reduce its water usage, and think the point on diversifying the hops supply chain to include hops from other countries such as Germany or South Africa is valid. However, I worry U.S.-led isolationist policies may impact Sierra Nevada’s ability to source non-U.S. hops economically, particularly if additional tariffs are placed on products or raw materials imported into the country. Current talks include tariffs on German/Chinese steel, for example, but extension of potential tariffs to agricultural produce or commodities could impact Sierra Nevada’s ability to pursue such a strategy.
To your question on inspiring others to think about climate change or sustainability, it can be hard to do so as the underdog in an established industry. However, I thought of Patagonia as a company that prioritized sustainability and a “clean” supply chain in the outerwear/camping goods space, despite being the underdog. Many customers were willing to pay a premium for Patagonia jackets because they helped them feel good (or at least, less guilty) about their purchasing decisions due to their relative sustainability, and Patagonia is now a leader in the space because of this following. Sierra Nevada could charge a premium for its sustainably-brewed beers if customers prove willing to pay for the feeling that their beer is sustainable, and could earn better margins than peers who do not prioritize sustainability. If everyone follows the margins, it’s not a stretch to see how Sierra’s position as a leading craft brewer could inspire both larger and smaller brewers to do the same.
I’m intrigued by the question at the end of your post—“is Sierra Nevada doing enough to inspire others?”—because the competitive landscape you outline shows many players not only failing to inspire others, but in fact actively discouraging others from undertaking more sustainable and resilient practices. For instance, you note that ABInBev is working to stop the distribution of South African hops to other brewers. This raises the question: when is sustainability a good strategy at the industry level, and when is it a good strategy at the firm level? My hypothesis is that this question hinges on firm size: for smaller players, the economies of scale that result in industry adoption of sustainable practices (e.g. making it easier to find newer and more drought resistant hops) likely outweigh the loss of competitive advantage from industry adoption (e.g. the reputational benefits of being the only firm to adopt sustainable practices). For larger players, the opposite is more likely to be true. Of course, the total social benefit is maximized when all firms pursue sustainable practices, but this may be a question more of regulation than of business strategy.
Thank you, Fritz. Being that ~90% of national hops yield comes from the Pacific Northwest, I think that hops shortage is a shared concern for U.S. craft brewers that distribute nationally. If I were Sierra Nevada, I wouldn’t worry about ABInBev in South Africa, but rather attempt to organize with other prominent craft brewers like New Belgium and Stone Brewing Company. These leaders have a shared interest and value innovation in sustainability. Sierra Nevada could propose that they share their collective networks and buying power to push for innovation and problem solving with their suppliers.
I am more concerned about the prognosis for increased water shortages in California. Sierra Nevada could easily find themselves in a similar situation to Bear Republic. They have been smart to diversify and open an operation in Asheville, but I think they should plan for contingencies such as transporting water from elsewhere or moving their operations out of California altogether.
I believe a relocation of core operations to the PNW from California could drastically improve the Sierra Nevada business. Firstly, transportation costs could be drastically reduced for the majority of PNW located hops that need to be shipped to California. Secondly, the move would place operations in an area less strained by droughts. This move could increase their margins and allow them to reinvest in new hops growing locations that would further diversify location-based climate risk. Alternatively, Sierra Nevada could become an industry leader in GMO hops / drought resistant hops / temperature resistant hops. This course of action seems feasible due to their overall size and ability to invest in hops R&D. I believe these changes could put them at a competitive advantage relative to their competitors, but their sustainability efficiencies should be shared in principle in order to drive the entire craft beer industry towards a more sustainable future.
Thanks for this article Fritz – while sustainability in food production is often talked about, I have not given as careful consideration to the sustainability of beer as I have to the frequency I consume it with. I agree with many of the points that have been brought up in the comments regarding how their moves in sustainability could positively impact their brand. It seems there are many cases where companies have approached issues on sustainability and questioned to what extent they should be advertised – Ikea, Patagonia, Victoria’s Secret, Southwest to name a few. Companies wonder how important these approaches are to attracting a loyal customer base. I think your essay brings out a key consideration – who is your customer base? What do they care about? For many beer consumers that prefer small, locally-sourced drinks, sustainability likely is a key driver of a consumer’s choice in beer. To answer your last question, I do have hope that Sierra Nevada can lead the charge, establishing some best practices along the way, and showing that there is demand from consumers for sustain-ably-sourced drinking. (P.S. thank you for all the puns)
Given the severity of the problem, I don’t believe Sierra Nevada is doing enough to mitigate the impact of climate change on its supply chain. As you mentioned, Sierra Nevada is facing accelerating declines in the availability of hops and clean water. Since 2007, the company has made what I consider to be minor incremental changes in response to natural resource threats. Unless Sierra Nevada quickly diversifies the regions from which it sources its hops, the company will face increasing supply constraints, resulting in a costly ripple effect through the supply chain. In order to fully assess Sierra Nevada’s existing expansion strategy, I would want to understand management’s decision to open a second brewery in Asheville, NC. Did this make sense from a sourcing perspective? Who are the primary suppliers? Do we have any performance results from this experience?
Furthermore, Sierra Nevada has the potential to fundamentally change the craft brewing industry by forcing its suppliers to adhere to sustainability standards, rather than allowing suppliers to sign up for this voluntarily. The company should be more selective with its supply partners to ensure that their practices meet company standards. You also mentioned that Sierra Nevada grows its own hops adjacent to its brewery to help control supply. Can the company expand this effort to gain additional control of its hops supply or are there space and/or infrastructure constraints limiting Sierra Nevada from building out this capability?
Great summary of the efforts that Sierra Nevada has put into addressing climate change.
While I agree that there could be some variability in hops production due to global warming, I’m not sure that the severity of the problem is understood well enough to merit expanding their supply chain globally. Over the last two years, growth in the craft beer market has slowed substantially and may be approaching zero (1). If that trend holds, current supply within the hops market could be enough to source Sierra Nevada’s needs going forward without the expense associated with supply chain expansion. I think a more cost effective approach may be either to a) control more of their hops production, as Alexandra alluded to, or b) move their breweries closer to their hops growers to minimize transportation costs. In any case, the potential long term nature of climate change offers significant opportunity for Sierra Nevada to experiment over the coming years / decades to find measures to effectively mitigate the effects of increased temperature.
Conversely, I am far more concerned about water shortages in the near term. They have significantly higher and expensive mitigation costs that are not as cost-effective as outsourcing hops production. Ultimately, I think the only choice is to move your operations to an area that you anticipate will have long-term access to water, while continuing to refine production processes to reduce water waste.
(1) https://www.economist.com/news/business/21724864-slowing-beer-market-and-might-ab-inbev-has-small-brewers-worried-craft-beer-america
To answer your last question––no, Sierra Nevada isn’t doing enough to inspire others. While signing the Brewery Climate Declaration [1] is a good start, as we’ve learned throughout the semester, when a company is serious about influencing change, they hire an executive armed with a fancy descriptive title to help tackle the problem. In this case, a Chief Sustainability Officer would do the trick. After perusing their 2015 sustainability report, they have a sustainability manager, two coordinators, and someone in a support role, but no CSO [2]. Big mistake. I suggest hiring a CSO to help consolidate their climate efforts, differentiate their supply base, and negotiate mandates with suppliers.
[1] https://tools.ceres.org/declaration/about/climate-declaration-campaigns/brewery
[2] https://www.cdn.sierranevada.com/sites/www.sierranevada.com/files/content/sustainability/reports/SustainabilityReport2015.pdf