Monday, March 25, 2013

Is It Still Worth It?

Wandering around one of the local supermarkets the other day, I instinctively took a detour down the booze aisle. I haven't been buying beer in the shops much lately, preferring to either have a few pints in the pub or when I am drinking at home mostly drink my homebrew and work my way through the cellar. What I saw in the beer aisle was quite the eye opener. Six packs of 'craft beer' in this neck of the woods seem to have jumped in price to $9.99. It didn't matter whether the beer was from one of our local breweries or from further afield, once you add on sales tax, a six pack of beer will now set you back more than $10.

Price, it seems, is becoming an issue in the craft beer world, with 22oz bottles of specials routinely costing between $8 and $10 by themselves, regardless of strength and ingredients, unless of course you are buying the big bottles of standard beers from the likes of Sierra Nevada, New Belgium and Samuel Adams. Of course smaller brewers can't enjoy the economies of scale that are afforded to the bigger brewers, and I really think we need to dispense with the myth that the major craft beer brands are anything but big brewers, not multinationals (yet) for sure, but still not exactly brewing on 10 barrel kits for their local markets any more.

I am perfectly open to the idea that I am more sensitive to price at the moment, given my lack of full time employment, but I wonder at times if the craft beer industry is in danger of pricing itself out of the market? I have to admit that prices are getting to the point that I seriously have to consider whether it is worth spending $10 for a 6 pack of craft beer or going Trader Joe's and getting their Gordon Biersch brewed German style beers for about $6, or their Unibroue made Belgian style ales at a third of the price.


Usually, it seems to me, when price is mentioned with regards to beer it is often in the context of the so-called 'wine-ification' of beer, because obviously bigger bottles and higher prices make it more like wine. As I discussed last week, this view, I believe, does a disservice to both beer and wine. Better, I would suggest, is to talk about the 'gentrification' of beer, like run down neighbourhoods into which artists and the like move and start making it a happening place to live, followed by the hipsters and eventually the more monied folks wanting the cachet of living there. There are certain segments of craft beer which are very much in the final phase, they have a certain level of cool which people want to be part of, and so up go the prices.

I have no problem with brewers making a living, perhaps in the US context part of the problem of price is really the three tier system, and the fact that a keg of a big hitting IPA will cost the same as a German Pilsner rather than having price based on ABV. Taking that into account though, it baffles me at times why more brewers don't push their session beers more, they are cheaper to make and the profit margin under such a single price system is much higher.

What then do you think is a sensible, fair price for a six pack of regular beer in the shops?

10 comments:

  1. Craft brewers have a choice, keep the prices high, stay niche, wide the wave while it lasts, and go back to the office job once its gone; or invest in measures that cut costs without cutting quality, keep the prices affordable, reach a wider audience, build a sustainable business.

    Its like any retail boom; its those that deny the nature of the boom that are setting themselves up to fall. So many brewers are delusional and think people will continue to pay significantly over the odds for their marginally nicer beers forever. They won't.

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  2. I think the $9.99 six- and four-packs are probably here to stay. A six-pack of Stone IPA is not just "marginally nicer" than Bud Light -- it deserves to be priced at a premium.

    I have bigger issues with the pricing of 22-ounce bottles and the inconsistency of the product that's *in* those six- and four-packs. The mark-up on the former is ridiculous and issues with the latter are why I'm hesitant to commit to a full six-pack from many smaller brewers.

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  3. At economies of scale, session beers are that much cheaper to make, actually. The cost of labour and energy (and I think water, too) stay more or less the same whether you are making a 11º or a 16º beer. (Once I asked a couple of Czech Brew Masters what was difference in costs to make those beers and they said something like 50CZK a hl).

    Belgian monks in the 16th century had already figured out that they could charge more for stronger beer than the increased cost to make it. Modern brewers are following the same wisdom, and as long as enough people stop believing that quality is relative to the % of ABV (or IBU's), things will not change.

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  4. Nothing "deserves" to be priced at any amount. Talking about the price something "deserves" to be is like talking about the direction a stone "deserves" to fall when you throw it out of the window. "This stone deserves to fall sideways". In a competitive market a product should - and will - be priced at its average cost to finance and manufacture. Any lower and its not worth making, any higher and its easily undercut by its competitors.

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  5. Oh, come on - in a perfect market, and with undifferentiated products, sure. But since neither of those two conditions ever applies in any market - and certainly not in the beer market - then the product will be priced at whatever people are prepared to pay for it. If you can convince people that your product is of equal or greater value than a rival's but at a cheaper price, you'll sell it. If you can convince them that even though it's a dearer product, the value differential is greater than the price differential, you'll sell it. But as Big Al is pointing out, there comes a point where the added value in a product is no longer seen to exceed the added price: at which point every sensible consumer switches. But "average cost to manufacture" has little or nothing to do with the perceived value to the customer in any of those instances.

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  6. Monopolistic competitive advantage tends to zero over time. Its fine to say that this 5.5% IPA with new world hops is worth more than this cardboardy macrobrewed lager, but is it worth more than all these other near identical 5.5% IPAs with new world hops that are flooding the market?

    Answer: you might be able to convince people it is for a while with novelty factor, clever marketing and pretty labels, but in the long run the informed consumer will figure out which beers taste the same as which and just buy the cheaper one.

    The beer market is not a single competitive market, no, but it is multiple overlapping ones. There are only so many ways you can differentiate your product.

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  7. Love that question / answer routine, py0. I say we all come back in 10 years and see what happened.

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  8. Considering the minuscule flavor differences between the light lagers that have dominated the American beer scene for decades and the literally billions that have been spent on "novelty factor[s], clever marketing and pretty labels" AND the strong brand preferences expressed by many consumers ... "the long run" looks to be a very long time indeed.

    You know, py0, there are entire areas of economics that deal with the concepts of luxury goods and imperfect substitutes. Perhaps time could be profitably spent integrating those factors into your model, rather than soapboxing about linguistic imprecision on, you know, a beer blog.

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  9. "Considering the minuscule flavor differences between the light lagers that have dominated the American beer scene for decades and the literally billions that have been spent on "novelty factor[s], clever marketing and pretty labels" AND the strong brand preferences expressed by many consumers ... "the long run" looks to be a very long time indeed."

    So go into an average bar, that offers 3 different macro lagers, and you think there will be a large difference in price between them?

    This is not my experience either in the US or the UK. Normally they will vary in price by no more than 5% either way - suggesting the pricing strategy of the firms recognises that the three brands are considered pretty good substitutes by your average punter.

    I'm not soapboxing, I simply think its an interesting discussion point.

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  10. No, they'll generally be base-priced pretty similarly, although at various times there will be various discounts that will make one or more options cheaper.

    When I was young and foolish, I'd just drink the deal. Now that I'm old and foolish in different ways, I ignore all the deals and drink my full-price IPA.

    But that's just me. I have, on numerous occasions, been with people who make what seems the irrational choice of ignoring the deal because "Bud Light is too sweet to me" or (perhaps more rationally) "I don't like what Coors stands for as a company."

    And that doesn't even touch the area of why people choose to drink Heineken or Stella *in the bottle* because they derive at least some of their utility from broadcasting those consumption choices to others.

    With all that said, I suspect you and I agree more than we disagree. There's currently a mania for craft beer, which is boosting demand, and limitations on supply, as every craft brewer in the country seems to be multi-batching and adding stainless as quickly as possible to keep up. As those factors recede, pricing will reach a lower point of equilibrium. And indeed, we'd expect larger operations that have better QC and lower per-unit costs -- e.g., Sierra Nevada -- to have an advantage in that market.

    But we'll still never see IPAs priced at a marginal premium based solely on manufacturing costs.

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