Vertical Integration

What is the value chain for beer?  Beer is essentially four main ingredients combined to produce a delicious product; grain, hops, yeast and water. What does this mean for a craft brewer like New Belgium?  They must source hops, grain and yeast from alternative sources.  Generally the water comes from wherever the brewery is located.  This too is important and water quality greatly affects a brewery’s decision where to build.  As for the other ingredients, yeast usually comes from one of the handful of commercial yeast labs, but many run in house strains selected in their own labs. Some breweries are even secretive and highly protective of their in-house strains as a portion of production that is impossible to replicate. The source for hops and grain are farms in the Northwest and Midwest respectively.  Once the beer is produced from these ingredients, it must be distributed to retailers through distributors.  Craft brewers reside firmly in the middle of this value chain with almost none participating in farming activities for hops or grains, nor owning the distributors who bring the finished product to retailers. New Belgium falls into this category as well, essentially eschewing vertical integration to maintain focus on the production of beer itself.  The large conglomerate of AbInBev is different in that they own over 500 distributors and their recent merger with SABMiller highlighted the concern in the craft brewing world that I wrote about here.  AbInBev’s vertical integration strategy continues to cause much angst among craft brewers as they must rely on those same distributors that big beer owns.