The History of the Brewing Industry

By Eric McKay'03

Introduction
During the past 120 years, America's brewing industry has grown over five major periods of transformation. Until 1880, a large number of firms operating throughout the country and producing only enough beer to serve local markets defined the American brewing industry. Starting in the late 1880s, innovations in transportation fueled the trend of consolidation of breweries which gained momentum until the U.S. government established Prohibition in 1919. During the time leading up to Prohibition, Milwaukee also established itself as the brewing capital of America. From 1920 until 1933, the American beer industry fizzled, with few breweries surviving the era through production of "near-beer" and other non-alcoholic malt products. The repeal of Prohibition in 1933 rejuvenated the industry and the number of American breweries exploded and beer production steadily increased until the mid 40s, with major production centers forming in St. Louis and Golden, Colorado. From the 50s to the early 90s, a few breweries drastically increased their market share to the point that an oligopoly formed in the brewing industry. By the 70s, a small handful of companies from Milwaukee, St. Louis, and Golden produced a large majority of domestic beer. Finally, starting in the 1980s, the appearance of Micro Breweries across the nation spawned a rebound in the number of independent breweries held in the United States. This trend continues today.

Pre-Prohibition Trends
In 1879, the number of breweries in America reached an all time peak of 2,520, with neighborhood breweries operating in nearly every urbanized area. According to an 1880 report, almost 700 breweries operated in New York and Pennsylvania alone. As noted in the same publication, George Ehret's Hell Gate Brewery, the largest producer of beer in America at the time, "made only about 1.5% of the country's beer," revealing that even large breweries produced a relatively small portion of the total market share. A period of major change in the brewing industry began in 1880, coinciding with major progress in transportation and advances in mechanization of brewing that enabled more efficient large-scale production of beer.

From 1880 until 1920, the number of breweries in America steadily decreased, while the quantity of beer produced drastically rose. The expansion of the railroad system in the northern states largely fueled this trend. Increased availability of railroads as a relatively inexpensive method of shipping drastically expanded the distribution radius for firms that were previously limited to horse-drawn carriages. The new potential for a broader market instigated breweries located along railroad routes to develop more efficient production techniques. Mechanization of certain steps of the brewing and packaging process increased output and decreased costs for more innovative breweries. Certain firms developed comparative advantages in production and distribution, and as they increased output, smaller breweries drowned. As a result, a fewer number of firms in the industry produced increasing quantities of beer, as illustrated in Graph 1 below.

Innovative industrialists developed new techniques for more efficient brewing, however, breweries without access to railroads produced more beer than their local markets demanded, and in turn, they failed. The location of a brewery played a major role in profitability and growth at the turn of the 20th century. Due to a number of factors, Milwaukee stood out as an ideal location, as the city became known, for a long time, as the Brewing Capital of the World. The city's location along a major railroad route provided a larger market for Milwaukee breweries. Proximity to major barley producing regions in Illinois and other parts of Wisconsin, and substantial natural water sources ensured that Milwaukee breweries faced minimal raw material costs. Milwaukee's nearness to Lake Michigan's icehouses also helped to reduce distribution costs, as substantial quantities of ice were required to cool freight trains full of beer. With a relatively small population compared to Chicago, Milwaukee aligned their focus toward wide-range distribution immediately after the Great Chicago Fire of 1871, which "boosted sales of Milwaukee breweries enormously". The conversion of Milwaukee breweries to "nationally-minded" organizations gave these firms a head-start on their competitors. According to Thomas C. Cochran's 1948 book, "once begun, the strategy of long-distance shipping did not cease for Milwaukee's brewers until their beer was being sold in every corner of America".

Prohibition
The ratification of Prohibition in 1919 came as no surprise to Americans. Over 30 years, the Temperance movement, protesting alcohol consumption, developed into a national force. Groups such as the Anti-Saloon League and the Women's Christian Temperance Union formed in the late 1800s to fight drunkenness. Their mission, which started as blockades at regional taverns, entered the political realm in 1915, and finally led to the 18th Amendment, Prohibition, which passed in 1919.

Breweries and beer drinkers alike were furious that the bill illegalized beer, as the "Prohibition Amendment itself made no reference to alcohol content, citing only 'intoxicating liquors for beverages purposes' being illegal". Anti-prohibitionists argued that due to the low alcohol content in beer compared to whiskey and other hard alcohol, beer should be exempt from the new legislation. Jacob Ruppert, a New York beer tycoon, the owner of the New York Yankees, and an anti-prohibitionist leader, argued to the Supreme Court that "beer that contained 2.75 percent alcohol or less could not be considered intoxicating". Despite fierce opposition, Prohibition continued for over two decades.

While a huge number of breweries collapsed or bailed out of the business during Prohibition, some found refuge through production of non-alcoholic goods. Several breweries took advantage of a new demand for a malted barley-syrup that could be used to make home-brewed beer. They also utilized existing machines to produce "near-beer", a beer with lower than 0.05% alcohol. These "near-beers" never became widely popular, and those who sought alcohol were usually able to attain it, however illegally, without too much hassle. The failure in enforcing no-alcohol laws, combined with the steady opposition to the legislature, led to the end of Prohibition in 1933. Prohibition represented a drastic change in the brewing industry for over two decades, however, after its repeal, the industry emerged as vibrant as ever.

Post-Prohibition
In 1933, America's brewing industry experienced a period of rebirth, characterized by the strong firms getting stronger, and the weak firms dying out. Existing breweries produced at full capacity, while new breweries sprouted up across the nation. The number of American breweries immediately exploded to a 23-year high, a figure that would not repeat for another fifty years. As shown in Graph 2 below, after an over-zealous rebirth in the brewing industry during the year following the repeal of Prohibition, the pre-prohibition trend of decreasing numbers of breweries producing increasing quantities of beer continued. Trains no longer served as the essential distribution method for breweries. According to the Brewer's Almanac, by 1935, over 75% of breweries did not rely on trains for distribution. Trucks revolutionized the brewing industry, as they could travel far beyond the limited reach of railroads.

The largest breweries strategically expanded brewery locations to enable nationwide distribution of beer. This trend of consolidation continued through the 50s and slowed until 1966, when federal courts finally took action to prevent breweries from breaking anti-trust laws. As huge breweries acquired and built additional production and distribution sites, the significance of beer company location became unclear. Five companies from Golden, Colorado, St. Louis, Missouri, and Milwaukee, Wisconsin, utilized real estate throughout the nation. Their location resulted primarily from past consequences. Market conditions remained fairly stable for the brewing industry until the end of World War II.

An Emerging Oligopoly
From 1944-1945, tens of thousands of American soldiers returned to their homeland, providing the brewing industry with an impressive demand for low-priced beer. In an industry where economies of scale now gave significant cost advantages to large scale production, the biggest breweries began to swiftly drown-out smaller competitors and drastically increase market share. The consolidation era following Prohibition created the "Big Five" breweries: Anheuser-Busch, Miller Brewing Company, Adolph Coors, Schlitz, and Pabst. As illustrated in Graph 3, these five firms steadily gained market share from 1950 through 1980.

The government first intervened to prevent the largest breweries from further consolidation through mergers and acquisitions in 1966. A. M. McGahan's article, "The Emergence of the National Brewing Oligopoly" argues that policy implementation was too late to prevent an oligopoly in the market. The nation-wide recognition and brand loyalty earned by the "big five" breweries created momentum, and these firms demonstrated that consolidation was no longer necessary to gain market share. By 1980, the combined production of the "big five" breweries accounted for 75 percent of all domestic beer produced. The top ten largest breweries produced 93 percent of the nation's beer.

The Rebirth of Micro Breweries
In 1984, a newborn demand for unique, flavorful "specialty beers" served as the driving force behind Micro Brewery growth. For the first time since Prohibition, small-scale breweries began to sprout up nationwide. An early 1984 tally counted only 83 operating breweries, the lowest figure in over 120 years. That figure sprang up to 1,800 by 2001, due largely to the booming success of "micro breweries" or "brewpubs" designed to service local markets. Unlike the mid-scale brewers drowned out of the market by the industry leaders in previous decades, micro-breweries do not aim to compete with the low cost brands produced by the "big five". Instead, they focus their small-scale production on niche markets. In a sense, micro-breweries have uncovered a hidden demand for unique, high-priced beers. Just as clothing and automobile industries have created "luxury" sectors, so too has the beer industry. The exponential growth in numbers of small breweries over the past fifteen years suggests that this new sector is propelling the market quite well. According to the Beer Institute's 2001 State of the Industry address, "Microbreweries and brewpubs account for this increase [in number of domestic brewers], and their presence has helped the industry's long tradition as a dynamic part of the American economy". Microbreweries seem to be the newest form of growth in an ever-developing national industry.

Conclusion
The American beer industry has grown tremendously during five major stages of development. The introduction of new mechanized brewing techniques and the expansion of America's railroad system in the late 1800s started a trend of fewer breweries producing more beer, while a national brewing capital developed in Milwaukee. The "noble experiment" of Prohibition paused beer production for over 23 years, a time in which small breweries collapsed, and the largest ones barely survived by producing non-alcoholic food products. Major consolidation by large brewers characterized the electrifying recovery of the beer industry following Prohibition. From the 1950s to the 1980s, the five largest breweries in the nation formed an oligopoly in the market, claiming more than 75% of domestic beer production. Finally, from the 1980s until today, the reappearance of a huge number of small, local breweries producing specialty beers has redefined the brewing industry. While economic law may argue that an oligopoly in the brewing industry would block entry to the market by smaller firms, the recent trend of flourishing micro-breweries provides evidence that intervention is unnecessary. With the exception of Prohibition, the American beer industry has thrived without any government intervention, and the industry should continue to grow without any policy implementation.