Ah, beer. The necessary lubricant of science. Always the unacknowledged collaborator in the Nobel Prize. Whether critical to the formulation of quantum mechanics in the pubs of Copenhagen, smoothing the way to the discovery of the double-helix in Cambridge, or helping celebrate an iGEM victory in that other Cambridge (congratulations again, almost-Dr. Brown and team), beer is always there.
And now it is helping me think about the future of biological manufacturing. Not just by drinking it, though I can't say it hurts. Yet.
Anyway, the rise of craft brewing in the US is an interesting test case, and a proof of principle, of distributed biological manufacturing successfully emerging in a market dominated by large scale industrial production. To wit, Figure 1:
A Short, Oversimplified History of Craft Brewing
Before Prohibition, the vast majority of beer produced in the US was brewed by relatively small operations and distributed locally. There was no refrigeration, nor were there highways and trucks, so beer had to drunk rather than produced and stored in large quantities (modulo some small amount of storage in basements, caves, etc.). Moreover, the official count of breweries went to zero during the years 1920-1933. After Prohibition, brewing was regulated and small scale producers were basically shut out of the market.
With the aid of refrigeration and transportation, large scale breweries took off. Consolidation took its toll -- beer is pretty close to a commodity, after all -- and the number of breweries in the US shrank until about 1980. In 1979, Jimmy Carter signed legislation reopening the market to small brewers. This is an interesting and crucial point, because as far as I can tell nothing else substantive changed about the market. (OK, so it was more complicated than this -- see updates below.) Deregulation reopened the market to craft brewers and the industry blossomed through organic growth and the preferences of consumers (more on this in the Update below). (Conclusion: Emerging small scale, distributed production can compete against an installed large scale infrastructure base.)
(Update 18 Aug 2010) There seems to be some upset out in blogland about the idea that Carter deregulated craft brewing. See the first comment to this post. I don't think it changes my story about biological manufacturing at all, but for the sake of clarity, here is this: On February 1, 1979, President Carter signed the Cranston Act, which allowed a single adult household to brew up to 100 gallons of beer per year. A household with two adults could brew up to 200 gallons per year. For more, see here, or this nice 2009 article from Reason Magazine by Greg Beato, "Draft Dodgers: For DIY brewers, Prohibition lasted until 1978. But onceunleashed, they revolutionized the industry." From Beato's article: "After Prohibition ended, the Federal Alcohol Administration Act
of 1935 laid out a new set of liquor laws. Home winemaking for
family use was granted a tax exemption; home brewing was not. If
you were making any amount of beer, you had to obtain a permit and
comply with a long list of regulations." Prior to the Cranston Act, brewing beer at home, or in small volumes anywhere, was hard to do because of federal regulations. After the Cranston Act, people could concoct all kinds of interesting liquids at home. So it sounds to me like Carter deregulated craft brewing.
(re-Update 19 August, 2010: Tom Hilton, at If I Ran the Zoo, makes some nice points here. Namely, he observes that there were additional changes at the state level that legalized brewpubs. Note that not all craft brewers are brewpubs, and this distinction appears to be glossed over in much of the criticism of this post. Anyway, it is pretty clear that reality was more complicated than the summary I gave above. No surprise there, though, as the heading of the section contains the word "oversimplified"...)
Better yet as a reference is a peer-reviewed article by Victor Tremblay and colleagues entitled "The Dynamics of Industry Concentration for U.S. Micro and Macro Brewers." (Link. Review of Industrial Organization (2005) 26:307-324) Here is their description of what happened in 1979 (the original text contains an obvious typo that I have corrected in brackets):
Changes in government policy also benefited micro brewers. First, the legalization of home brewing in February of [1979] stimulated entry, since most early micro brewers began as home brewers. Second, states began lifting prohibitions against brewpubs in the early 1980s. Brewpubs were legal in only six states in 1984; Mississippi was the last state to legalize brewpubs in 1999. Third, the government granted a tax break to smaller brewers in February 1977. According to the new law, brewers with annual sales of less than 2 million barrels paid a federal excise tax rate of $7.00 per barrel on the first 60,000 barrels sold and $9.00 per barrel on additional sales. Brewers with more than 2 million barrels in sales paid an excise tax rate of $9.00 on every barrel sold. In 1991, the tax rate rose to $18 per barrel, but brewers with annual sales of less than 2 million barrels continued to pay only $7.00 per barrel on the first 60,000 barrels sold annually. This benefited the specialty sector, as all micro breweries and brewpubs have annual sales of less than 60,000 barrels and all of the larger specialty brewers have annual sales of less than 2 million barrels.
So a combination of changes to federal regulations and federal excise taxes enabled small players to enter a market they had previously been prohibited from. That home brewing had been almost non-existent prior to 1979 points to another interesting feature of the market, namely that the skill base for brewing was quite limited. Thus another effect of legalizing home brewing was that people could practice and build up their skills; they could try out new recipes and explore new business models. And then, wham, in just a few years many thousands of people were participating in a market that had previously been dominated by large corporate players.
(end Update)
The definition of a "craft" brewer varies a bit across the various interested organizations. According to the Brewers Association, "An American Craft Brewer is small, independent, and traditional." Small means less than 2 million barrels a year (at 26 Imperial gal or 30.6 31 standard gal per barrel); independent means less than 25% owned by a non-craft brewer; traditional means either an all malt flagship beer or 50% of total volume in malt beer. There is a profusion of other requirements to qualify as a craft brewer, some of which depend on jurisdiction, and which are important for such practical concerns as calculating excise tax. Wikipedia puts the barrier for a craft brewer at less than 15,000 barrels a year. According to the Brewers Association, as of the middle of 2009 there are about 1500 craft brewers in the US, and about 20 large brewers, and about 20 "others", with brewpubs accounting for about 2/3 of the craft brewers.
Show Me the Hops. Or Wheat. Or Honey (if you must).
Brewpubs and microbreweries are so common that the majority of Americans
live within 10 miles of a craft brewer, and it is a good bet that there is one quite close to where you live. The Beer
Mapping Project can help you verify this fact. Please conduct
your field research on foot.
Beer generates retail revenues of about $100 billion in the US (brewery revenues are probably less than half that), contributing combined direct and indirect jobs of about 1.9 million. But craft brewers account for only a small fraction of the total volume of beer brewed in the US. According to the Beer Institute's "Craft Brewers Conference Statistical Update -
April 2007" (PPT), three brewers now supply 50% of the world's market and 80% of the US market. See Figure 2, below. The Brewer's Association clarifies that only 5% of the volume of beer brewed in the US is from craft brewers, who manage to pull down a disproportionate 9% of revenues. (Conclusion: Small scale producers can command a premium in a commodity marketplace.)
Figure 2. US beer market share. (Click on image for full-size.)
Here is an interesting question to which I do not have an answer: how
much beer brewed by large producers is actually bottled and distributed
locally? "Lot's of beer", where I don't have any real idea of what
"lot's" means, is produced via contract brewing. It may be that "large
scale production" is therefore not as centralized as it looks, but is rather the result of branding. This
makes some sense if you think about the cost of transportation. As
beer (regardless of its source) is mostly water, you are paying to ship something around that is
usually plentiful at the destination. It makes a lot of sense to manufacture locally. But, as I say, I have yet to sort out the numbers.
Brewing as an Example of Distributed Biological Manufacturing
All of the above makes brewing an interesting test case for thinking about
distributed biological production. Craft brewers buy feedstocks like everybody else, pay for bottles and probably for bottling services, and ship their product just like everybody else. They may be much smaller on average than Anheuser Busch, but they survive and by definition make enough money to keep their owners and employees happy. And they keep their customers happy. And their thirsts quenched.
Above, I identified two important conclusions about the craft brewing market relevant to this story: 1) Craft brewing emerged in the US amidst an already established large
scale, industrial infrastructure for producing and distributing beer. 2) Small scale, distributed production can command a premium at the cash register.
As we look forward to future growth in the bioeconomy, more industrial production will be replaced by biofactories, or perhaps "industrial biorefineries", whatever those are supposed to be. Recall that the genetically modified domestic product (GMDP) now contributes about 2% of total US GDP, with the largest share for industrial products.
This story becomes particularly relevant for companies like Blue Marble, which is already producing high value, drop-in replacements for petrochemicals using biological systems. (Full disclosure: Blue Mable and Biodesic are collaborating on several projects.) As feedstocks, Blue Marble uses local waste agricultural products, macro- and micro-algae, sewage, and -- wait for it -- spent grains from the microbrewery next door. (How's that for closing the loop?) Products include various solvents, flavorings, and scents.
The craft brewing story tells us that consumers are quite willing to pay a premium for locally produced, high quality products, even before they learn -- in the case of Blue Marble -- that the product is organic and petroleum-free. It also tells us that small scale production can emerge even amidst an existing large industry.
Can Blue Mable and other companies compete against enormous, established
chemical and petroleum companies? In my experience, the guys (and they are nearly universally guys) at the top of the oil industry don't even get this question. "It is all about steel in the ground", they say. In other words, they are competing based on the massive scale of their capital investments and the massive scale of their operations and they don't think anybody can touch them.
But here is the thing -- Blue Marble and similar companies are going to be producing at whatever scale makes sense. Buildings, neighborhoods, cities, whatever. Any technology that is based on cow digestion doesn't have to be any bigger than a cow. Need more production? Add more cows. This costs rather less than adding another supertanker or another refinery. Blue Marble just doesn't require massive infrastructure, in large part because they don't require petroleum as a feedstock and are not dependent on high temperatures for processing. Most of the time, Blue Marble can do their processing in plastic jugs sitting on the floor, and stainless steel only comes into the picture for food-grade production lines. This means capital costs are much, much lower. This is a point of departure for biomanufacturing when compared to brewing.
(Update: Perusing old posts, I discovered I did a decent job last year of putting this scale argument in the context of both computers and the oil industry, here.)
Beer is close to a commodity product, and it is the small scale producers who get a better price, even though their costs will be roughly the same as large scale producers. Blue Marble generally has substantially higher margins than petrochemical producers -- and by focusing on the high margin portion of the petroleum barrel they are going to be stealing the cream away from much larger companies -- but Blue Marble's costs are much lower. What is the financial situation of a large petrochemical company going to look like when they lose the market for esters, which can have margins of many hundreds of dollars per liter, and are left with margins on products closer to gas and diesel at dollars per liter? This is a different sort of play than you would see in brewing.
Now, I am not guaranteeing that distributed biological production will win in all cases. Large beer brewers clearly still dominate their market. It may be that
biological manufacturing will look like the current beer industry; a few
large players producing large volumes, and a large number of small
players producing much less but at higher margins. But craft brewing is nonetheless an existence proof that small scale, distributed production can emerge and thrive even amidst established large scale competition. And biological manufacturing is sufficiently different from anything else we have experience with that the present market size of craft brewing may not be that relevant to other products.
