Tuesday, October 27, 2015

Cost, Price, and Value

Yesterday on the Yours For Good Fermentables Facebook page, Tom Cizauskas posted a 2014 article from the Huffington Post which purported to breakdown the cost of a 6 pack of beer. Below is the chart from that original article.


This chart got me thinking more about the cost of being a craft beer drinker, and frankly I find some of it really rather disturbing.

We hear much about craft beer being expensive because of the use of expensive ingredients, but if this chart is correct then the ingredients themselves constitute just 10% of the cost of the beer in your 6 pack. The bottles and the cardboard carton said beer is sitting in is far more expensive than the beer itself. I would love to see a comparative chart about the cost of creating a 6 pack of industrial beer and see what proportion of the final cost is the ingredients.

More disturbing is that the cost of labour is a mere 1% of the overall cost of a six pack, think about that for a moment, that six pack in your hand at the shop contributes just 9.9 cents to someone's pay cheque. Add that 1% to the ingredients and only 11% of the cost of the six pack is actually involved in the production of the beer, everything else is margin, distribution, and tax. The actual cost of your beer is likely not much more than $1.09, chuck in the packaging costs and the total package on that six pack is $2.39, and that's before the brewery themselves have added a markup, which takes the total so far to a mere $3.19 for a six pack, less than a third of the final cost.

Why then is craft beer so expensive? It's really quite simple. 52% of the cost of a six pack of beer is margin added by the distributors and retailers. Now, I understand that businesses need to make money to survive, but when more than half the cost of my six pack is being taken up by people not actively involved in the production of the beer then I start to wonder whether that is really justified or whether they are just scalping the consumer because the product is so popular at the moment? It also reinforces my belief that the 3 tier system that exists in the US booze industry simply serves to line the pockets of middlemen. Imagine a world where breweries could sell directly to retailers and a healthy chunk of that 21% distribution markup saving could be passed on to the consumer, thus the 6 pack drops to $7.82 in the store.

By removing the distribution channel and letting the breweries sell directly to retailers like bars and stores you actually encourage genuinely local breweries whose products are primarily available in the brewery's catchment area. This also means that breweries are not encouraged to expand their presence into markets they can't support sufficiently, sure it might mean a slow down in growth but I would rather have fewer high quality brewers like Sierra Nevada than multitudes of third rate 'craft' swill.

For me, the 'more expensive ingredients' as a primary driver of the cost of craft simply fails to stand up to scrutiny, if this chart is accurate, and having seen the cost per barrel of the leading beers at a local brewery it sounds about right. The true reason for the cost of craft beer is that the people that control the beer once it is out of the brewery door can basically set the price at whatever they feel the market will bear, and as long as consumers keep stumping up the cash without criticism the more the price will rise. That is the very nature of the market, it will charge whatever it can get away with and that will only change when people start voting with their wallets and refusing to pay sucker prices.

4 comments:

  1. I'd like your thoughts on why the prices are the same at the brewery and at Harris Teeter (6-packs) or draft houses?

    They're not winning any friends by charging $5-8 for pints or $9-12 for 6 packs!

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    1. I've heard the breweries and wineries for that matter make deals with retailers they sell to to not undercut the price. Pretty lame but maybe explainable, b/c of the greTer distribution of product? I wish a draft pint was cheaper at brewery, but often isn't.

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  2. To make up for the fact they aren't making money elsewhere on the product?

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  3. Good writeup. A few thoughts.
    i) I guess "brewery markup" could be considered as part of "labour", depending on the ownership structure of the brewery?
    ii) It's interesting to compare Yvan's breakdown for the UK cost of a pint in a pub: http://ale.gd/blog/2014/05/who-gets-how-much-of-your-beer/
    (once his host is back up...)
    The fact that the distributor's cut is much smaller here in the UK is consistent with your idea that the three tier system is to blame - because here, the distributors are in competition with local brewers dropping casks off to local pubs, which keeps them on pretty tight margins to avoid being priced out of the market.
    iii) The three tier system does look mental at first glance, but even within it, if a given distributor is charging more than they're worth, what's to stop someone opening up in competition and undercutting them? I think this is a question that always needs to be answered for a given situation (and I'm not saying that it can't be answered) before you can reasonably complain about price gouging.

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