Frothy Minnesota market might not bear much more craft beer

Craft breweries have grown over the past decade from a cottage industry into a cultural phenomenon, now producing more than one out of every 10 beers Americans drink.

More than 40 breweries opened last year in Minnesota alone. Surly's $30 million brewery and taproom in Minneapolis, one of the larger ones in the country, includes a kitchen, a gift shop and indoor seating for 600. New Minneapolis breweries Utepils, Wild Mind Artisan Ales and Venn Brewery will open soon.

But even as beer drinkers celebrate their constantly growing range of choices, caution signs are starting to appear. Some see a market nearing saturation. Liquor stores, the key sales outlet for brewers who want to expand, only want so much inventory. Bars, which give new brands exposure, can be choosy in what they'll sell.

"We're starting to see panic from breweries when we won't put their beer on tap," said Matty O'Reilly, co-owner of Republic bar in Minneapolis, which serves nearly 100 craft beers. "It's not my fault that there are 100 breweries in Minnesota. But brewers get angry when I tell them their beer is not as good as the ones already on our list."

Many craft brewers start with a taproom where they serve only their own beer or cider. That's what Surly did in 2013.

A few newcomers, such as Dangerous Man in Minneapolis, have chosen to stay very small. But most want to get bigger, and that is where they are starting to run into limits.

"There's only so much market share," said Emily Brink, general manager at the Happy Gnome craft beer gastropub in St. Paul. "We'll start seeing the smaller ones falling off."

In 2015, the industry added 620 breweries nationally while 68 closed, according to the Brewers Association. Locally, no breweries have shut down, and just one craft beer retailer and a craft-beer centric bar have closed so far.

For the Happy Gnome and many other bars, the problem is lack of space. There is a limited amount of room for taps, and the more beer choices, the more likely that some outliers will sell poorly.

"Once the seal is broken, we need to sell the beer within a week or it loses flavor. And some of these beers are too expensive to pour out," said Brian Ingram, chief operating officer at New Bohemia, a craft beer bar and restaurant with five Twin Cities locations and one in Mankato.

Demand for new and interesting beers, of course, remains high. Bar owners and managers feel constant pressure from new and not-so-new breweries to try their latest ale. Fortunately for brewers, consumer demand for new choices seems unquenchable.

"Craft beer consumers are constantly asking, 'What's hot? What's next? What haven't my friends tried?' " said Ingram, who plans to open four more New Bohemia locations — in St. Paul, Bloomington, Woodbury and Hudson, Wis. — later this year.

To meet demand, New Bohemia changes several of its tap assortment of 36 local and regional beers daily. Customers taking selfies drinking a new beer are routine. "There's always a new variation of 'I'm drinking Mini-Donut beer' to post on Instagram," Ingram said.

But it's the breweries concocting new flavor profiles that shoulder the heaviest burden.

"The thirst for something new and interesting never changes. There has to be novelty," said Ethan Applen, co-founder of Lakes & Legends Brewing in downtown Minneapolis. At the moment, he's looking at cucumber mint, rosemary and juniper berry.

The insatiable desire for new brews concerns analysts. The consumer research group Mintel found that craft brew drinkers are much less likely to be brand loyal in their quest for variety and experimentation. As more varieties are released and craft beer drinkers look beyond their neighborhood or their state, brands and varieties may begin to taste alike.

Even for established brands such as Surly and Minneapolis' Indeed Brewing, expanding beyond the local market has not been easy. Craft drinkers are twice as likely as beer drinkers in general to prefer a beer brewed in their home state.

"It's getting harder and harder to get tap lines and shelf space the further away you get from home," said Tom Whisenand, co-owner of Indeed and president of the Minnesota Craft Brewers Guild. Smaller breweries can get shut out of larger distribution channels controlled by larger beer companies.

Omar Ansari, founder of Surly, describes expansion as a battle that's getting tougher every day. "When you get to the bigger retail chains, they don't sell to the guy who walks through the door," he said. Craft beer is still in its honeymoon stage, he thinks, but the quality beers will survive. "If a beer isn't getting distribution, it doesn't deserve it. You've got to have a good beer."

Newer craft breweries that don't have the advantage of wider distribution may be finding too much competition in highly contentious markets. Last year, 64 percent of all craft beer was brewed in 10 states. In the Twin Cities, five craft breweries (Surly, Fulton, Bent Paddle, Indeed and Lift Bridge) are responsible for more than half of the growth in the Twin Cities market, according to the Minnesota Department of Revenue.

As Americans' desire for handcrafted, artisan-quality products with a back story expands, craft brewers continue to tap into it. But the most successful run the risk of becoming too popular to be considered small. Local brands such as St. Paul's Summit, now sold in 14 states, shrugged it off when they went regional, but 56 percent of beer drinkers believe that craft beer is synonymous with "small and independent," according to research from Nielsen.

With overall beer sales stagnant to declining, Anheuser-Busch's interest in craft beer is intriguing to brewers and consumers. Budweiser directly attacked craft beer in TV ads during the last two Super Bowls.

The recognition, although flattering, worries craft beer brewers as they consider new challenges. Since 2011, at least eight microbreweries — including Goose Island — have been swallowed by InBev, the company in Belgium that now owns Anheuser-Busch.

Another concern for craft brewers is that 44 percent of consumers probably wouldn't care if their craft beer were no longer small and independent, according to Nielsen. Ingram, though, believes Minnesotans are more loyal to homegrown beer than consumers in other markets.

Craft beer fan David Lindahl, 28, of St. Paul, who spent part of an afternoon at the Surly taproom with a couple of buddies recently, said nonlocal beers from a macro brewery hold no interest for him. "It's about civic pride," he said.

So far, there's no evidence that local brewers are hurting financially. They say they're making money but pouring profits back into the business. Initial investments can easily run more than $1 million, with annual revenue at some of Minnesota's top 10 brewers surpassing $5 million last year.

Utepils Brewing in Minneapolis, which is set to open this fall, cost $3.5 million, said co-owner Dan Justesen. He has no anxiety about the presence of too many breweries or the changing definition of craft beer. "I don't need the whole market to succeed, just a chunk of it," he said.

When it opens, Utepils will be the sixth-largest brewhouse in Minnesota. Justesen said he thinks the Twin Cities market is similar to that of Portland, Ore. "There are more breweries in Portland than in all of Minnesota, and they're still opening 12 a year," he said.

One difference in Portland is that it's hyperlocal. "It's only considered a local beer in Portland if it's less than 10 blocks away or on the same side of the river," Justesen said.

Minnesotans still show affinity for state or Midwestern brews such as Schell's from New Ulm, and Summit, but hyperlocal is taking root in cities such as Luverne, Bemidji, Mankato and Duluth.

The suburbs also want a brew to call their own. Minnetonka, Anoka, Shakopee, St. Louis Park, New Brighton, Lakeville, Excelsior and Stillwater have joined the beer run.

Republic's O'Reilly said he thinks that being the only brewer in a suburb or a small town is smart as metro competition intensifies.

"I think a brewer is better off being the first one in a neighborhood than to go in the North Loop or Northeast," he said.

John Ewoldt • 612-673-7633