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Wednesday, November 06, 2013

What's a Label Worth?

When's a dollar not worth a buck?  When everyone begins to doubt it.  Money, in its most basic sense, is a collective agreement about value: we exchange it for hard goods because it stands for something with real, external value.  This is why, on the assumption that the zombie apocalypse is nigh, goldbugs hoard shiny metal (even though the value of that shiny metal is as provisional as the value of a Ben Franklin).

How does this relate to beer?  In a very direct and possibly unsettling way.  First, let me quote from John Foyston's great article about the 20th anniversary of Hair of the Dog.  He cites an anecdote:
Owner/brewer Alan Sprints recently put a dozen 12.7-ounce bottles of Dave, a 19-year-old Barleywine of nearly 30 percent alcohol, up for sale. The price? $1,500 a bottle if you drank it at the tasting room, $2,000 to go. Needless to say, he expected to have them available for a little while, but they all sold in five hours. 
The value placed on that liquid--$118 an ounce--was not purely intrinsic.  There was some combination of extrinsic factors that convinced people to pay such an extreme amount (call it liquid gold).  What they are is not so clear, but when you strip the liquid of them, the value would drop precipitously.  The artist-provocateur Banksy recently demonstrated this phenomenon with his original works:



In case you skip the video, this is the upshot: sold on the street, without the Banksy name attached to them, original works went for 1/500th their actual value. 

I doubt anyone's unfamiliar with the phenomenon, but the Banksy stunt made me stop and think.  At the moment, beer drinkers have set a valuation of "craft" beer that has in many cases been inflated by extrinsic factors.  (It explains why the Brewers Association is keen to popularize their fixed meaning of the term.)  It's not true for every beer in the grocery store, but when you start looking at bombers and special releases, you see that breweries are getting a lot more than the intrinsic value of the beverage--which is often no more than the value of the regular sixer of craft beer.  Like a Banksy canvas, that label means a whole lot to the consumer.

Why is this unsettling?  Because some beer has far higher intrinsic value.  It dawned on me when I stood in one of the 33 vast cellars underneath the Rodenbach brewery. In those gigantic foeders sat ale, aging for two years.  Every bottle of regular Rodenbach had 25% of the two-year-old stuff, and the Grand Cru is made up largely of it.  Yet to Belgians, it's just beer.  Rodenbach competes head-to-head with Stella Artois, a beer that can be made for a fraction of the cost. 

Beer made in small breweries is more expensive than mass market lagers.  Right now, the extrinsic value of "craft beer," small breweries can charge enough to make their business profitable.  If Budweiser makes an imperial stout, they won't be able to charge as much as Deschutes for it.  Right now.  But all that could change.  Beer sits on the borderline between a craft product and a commodity, and it seems like the market swings back and forth.  If people start thinking of even "craft beer" as a commodity and make purchasing decisions solely on price, small breweries will be screwed. 

8 comments:

Brad said...

"Right now, the extrinsic value of "craft beer," small breweries can charge enough to make their business profitable. If Budweiser makes an imperial stout, they won't be able to charge as much as Deschutes for it. Right now. But all that could change."

Yes it could. Which is what those of us who believe that craft beer is in a bit of a bubble are arguing.

Jeff Alworth said...

Hey, HEY. No using my own arguments against me. :-)

Unofficial blog motto: I promise opinion, not consistency of opinion.

Alan said...

What makes you think that the extra craft value is what edges small brewers into profitability? After all, there is no evidence of any actual struggles short of the incompetent.

Rich Isaacs said...

MillerCoors charges as much for the sours and bourbon barrel stuff, but they do it by releasing it under the AC Golden moniker. Or something similar to that. Guess that actually proves your point in that they needed to invent a brewery name to sell their beers at a higher price point.

Anonymous said...

HotD Dave is a bad example to use. The $2000 price tag is for charity, not just beer.

Rob Fullmer said...

Time spent in barrels is somewhat extrinsic since that knowledge may influence our perceptions. All you have to do is put BA infront of a beer these days and it gets everyone's attention.

The cost of production isn't always related to how the beer tastes. I follow your observations but I don't agree with the degree of caution that you've argued. AB will never be able to provide extrinsic value to me (funny Super Bowl commericials et al).

Jeff Alworth said...

Alan, my point is that if small brewers had to compete based on price with no market differentiation, they'd get killed. The economies of scale are what drove brewing to get gigantic in the first place. When beer is treated as a commodity and the market is hugely price-sensitive, breweries need to cut costs to the bone. In that environment small brewers are always at a disadvantage.

Rob, what happens if you flip it. AB may never provide extrinsic value, but will craft breweries always provide it? Once they begin to get sold off or absorbed by large companies (see Anchor, Pyramid, Boulevard, and Goose Island as examples/models), what happens to their extrinsic value? That's more what I''m talking about.

Jared said...

I don't think your giving either the big guys or the little guys much credit here. The economies of scale are ever prevalent in "craft" beer as they are with the big guys, even if the sizes are not even close. More and more craft breweries are pushing growth (New Belgium, Deschutes, etc) in order to cut the cost of manufacturing their beer. This doesn't drop the price though for craft beer.

Also scale only played a small part in the death of smaller breweries prior to prohibition. The biggest blockades were government regulation, some of which was put their by the big guys to up the ante for joining their club.

The extrinsic value in "craft" beer is what allows poor brewers and/or businessmen to stay afloat. It's what allows small brewers to offer decent pay and benefits. It's also what lines lines the pockets of investors and CEO's for some of the more popular. I don't think the extrinsic value of craft benefits beer in terms of actual value except to offer a incredibly ridiculous amount of choice.

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