Recession Blues Redux, All Bad News Edition

In my post below about how the recession is affecting local brewers, I offered the hopeful--and wrong, it turns out--news that craft breweries saw sales rise in '09. I spoke to the Oregon Brewers Guild's Brian Butenschoen and got the lowdown: craft beer sales are down 5% and 7% in January and February. The bit that confused me was that beer sales are up 10% and 20% in those same months. I asked Brian to explain, and he gave some more texture.

• He thinks sales of imports are down, as are national micros like Sam Adams and Sierra Nevada.
• He thinks the only windfall is in the "value segment" (PBR and the like).
• A big factor in Oregon's situation may be pub and restaurant sales, which account for just about half the beer sales. He wonders if the shift is coming as people forgo the $5 pint and buy an eight-dollar sixer instead.
• It's hard to know how bad things will get, but summer sales should be illustrative. If sales remain poor, it could mean we're in for a long down period. If they show signs of rebounding, that will be good news for breweries who make the bulk of their money during the sunny months.

As always, I'll keep you posted.

Recession Blues: Widmer Down, Others Up

Via the Oregon Econ blog, we have some mixed news about craft breweries and the recession. For Widmer, a dark cloud hovers over the bouyant anniversary celebration:

Less than six months after Woodinville, Wash.-based Redhook Ale Brewery Inc.’s merger with Portland’s Widmer Brothers Brewing Co., the new company has written down the value of the Widmer brand by more than a third.

Last week, the company that resulted from the merger, Portland-based Craft Brewers Alliance, released its 2008 annual report. For the year, the company lost $33.3 million on $86 million in revenue.

The loss included a $30.6 million impairment for Widmer assets acquired in the merger. Of the $30.6 million, $6.5 million is a write-down of the value of the Widmer brand, which the company valued at $16.3 million when the merger closed July 1.

The swiftness with which Craft Brewers restated the value of Widmer surprised analysts.

The whole article isn't available to non-subscribers, but Patrick posts this paragraph--hopeful signs for other breweries trying to weather the economic storm:

December and January shipments for all Oregon craft brewers fell by 5 percent and 7 percent, respectively. But in January and February, shipments for all beer in Oregon actually rose by 10 and 20 percent, respectively. “It would appear trading down from higher-priced, locally-made beer has already begun in earnest,” said Brian Butenschoen, executive director of the Oregon Brewers Guild.

I guess it's not surprising that a recession would produce winners and losers. Let's just hope there are no real "losers" and that everyone makes it through in the end.

The Price of Beer

Stan Hieronymus noticed that the comment threads to a recent story in the Chicago Tribune were pretty hot:

[I]t’s interesting to “eavesdrop” on comments posted about beer at a non-beer site.

Yesterday the Chicago Tribune published a story about two new microbreweries in the city. What seemed to get the most attention is that 6 packs of Half Acre beers cost $9. We’re not talking a knee jerk reaction about how that’s ridiculous, but a discussion. Check out the comments.

This in turn provoked some unusual commentary on Stan's own site. Every product has an invisible cost line, and when prices creep over it, there's a backlash. People thought it would happen with $3/gallon gas, but it actually too four to trigger the response. Nine bucks seems to be at or around the invisible line. Perhaps ten is the biggie.

For what it's worth, I think the outrage is misplaced. Until recently, beer prices have been artificially low. The hop and barley price hikes surely forced breweries to raise prices a bit, and the forces of inflation have their effect, too. But nine bucks is probably about right by historical standards. If you convert the price of a $9 sixer in 2009 back to 1990 dollars, you get $5.54. In 2000 dollars, it works out to $7.30. My memory is that the price of beer was probably hovering around six bucks and change a decade ago, and we regularly hit the $7 threshold a few years back. So prices have been low for awhile and now they're headed back to historical norms.

Beer naturally lends itself to class commentary. Beer is a blue-collar drink. This has long put craft brewers at a slightly uncomfortable crossroads--trying to appeal broadly to blue-collar drinkers while charging enough to pay the bills. The association between craft brewing and patronage by yuppies hasn't helped (an association I think is particularly weak in Oregon). But in any case, it looks like this isn't a function of real price inflation but rather a reaction to economic instability more generally.

Beer Sales Tanking

Via the political blog 538 comes this depressing news:

[T]here has generally not been much of a relationship between alcohol purchases and changes in GDP -- the correlation is essentially zero. Nor have alcohol purchases historically been any kind of lagging or leading indicator.

But something was very, very different in the fourth quarter of 2008. Sales of alcohol for off-premises consumption were down by 9.3 percent from the previous quarter, according to the Commerce Department. This is absolutely unprecedented: the largest previous drop had been just 3.7 percent, between the third and fourth quarters of 1991.

Beer accounts for almost all of the decrease, with revenues off by almost 14 percent. Wine and spirits were much more stable, with sales volumes declining by 1.6 percent and 0.9 percent respectively.

These are Commerce Department data, and we don't have details about which segments aren't selling well (if you follow the link, the relevant line is 85). Nor is it broken down by region or state, so we don't know if it's a geographic finding, either. What we do know is that things really took off in the second quarter of 2007, hit a high a year later, plateaued for two quarters, and then in Q4, fell off the face of the earth. Aggregate sales have fallen back to a level they were at before the spike in '07.

Much more to learn, but this isn't a good sign.

Variable Pricing - The Retailer Perspective

In the discussion of variable pricing below, Chris from Belmont Station gives a fascinating account from the retailer's perspective. I almost never bump comments up to the main page, but this one is exceptional. Thanks, Chris.

Saying "The grocer sets the price" isn't really reflective of reality. Admittedly, the final shelf price is up to the grocer, but the breweries know what margin the distributors will take, and roughly what margin most stores will take, and the price they charge the distributors determines what it will cost when it finally hits the shelves.

So, if the brewery wants their beer on the shelf at $8.99/6pk (assuming a 20-30% margin for the store and 20-25% margin for the distributor) they have to sell the beer to the distributor for around $18-20/case.

Some breweries (like Rogue) are quite proud of their beer, and regardless of whether or not Dead Guy cost significantly more than Inversion they want to project an image high quality, expensive beer, so they price it higher.

Simple socioeconomic research will tell them that a certain percentage of shoppers will always gravitate towards "the best" (i.e. most expensive), and while this might cause some folks to regard them as over priced, if they can sell everything they produce at that price then there's no reason to go lower.

Other breweries like Deschutes or Widmer want to be perceived as "great value for the money" so they set their prices to be competitive with most of the other 6pks in the store. Many of them will take it one step further by having what's called a "false front-line" price of say $27.99/case (wholesale), and put the beer on "post off" (on sale) every month. This gives the grocery stores more flexibility in their sale pricing and allows them to use the false front-line price as the "regular price" on the shelf tag and put it "on sale" at the post off price without actually sacrificing any margin.

Not only does this clarify some points, but it also raises some fascinating philosophical questions about pricing. Pricing a product at a premium to communicate quality is nothing new, so Rogue's strategy, while distinctive in Oregon, isn't surprising. This is particularly true given that Rogue has always wanted to be a national brand. Deschutes, by contrast, has focused primarly on local markets, spreading only when other states clamored for their beer.

Because I'm a beer geek, Rogue's communication never really worked--I didn't see their higher prices and think, "Hmm, this Younger's Special Bitter must be tastier than Mirror Pond." But if you weren't broadly familiar with the brands--the case with most consumers--this may well be effective communication. I will admit that the reverse is true: when a company consistently low-balls their price, I have the sense that it's a cheaper, cut-rate brand.

[Update: Economist Patrick Emerson expands on the Rogue strategy; turns out it's a theory known as "signalling." I will not summarize it here--go read his explanation.]

Variable Pricing?

So I had this thought. Why is it that beer isn't priced based on the cost to the brewery except in a very blunt way? If you go to a pub or grocery store, you'll find sixers or pints priced at roughly the same price. There might be a second category for specialty beers on which you pay a premium, but everything else is standardized.

To pull one case at not-quite random: Widmer Hef v. Widmer Brrr. In this corner, WidmerHefeweizen, weighing in 11.75P, 4.9% abv, and 30 IBUs. In the other corner, Widmer Brrr, 17 P, 7.2% abv, and 50 IBUs. For the sake of argument, let's imagine that the Plato and IBU values correspond to ingredients.* The ingredients alone would make Brrr the cost of 1.5 Hefs--if there were additional aging or other methodological complexities, the cost could be twice as expensive. Yet a sixer or a pint of these beers would cost you the same in a grocery store or pub.

I don't know that this is unique to the beer world, but it's odd. Tillamook doesn't charge the same price for its medium and sharp cheddar--it sets prices proportional to costs. So why is it that beer isn't priced proportionally?

I asked Rob Widmer, and he explained their method this way:

"For the beers that we focus on (our bottled beers) we spread the cost of more expensive beers over our entire portfolio rather than charging more for some beers and less for others. Our retail customers appreciate this consistency. An example might be a restaurateur who spreads a cost increase in beef over his entire menu instead of just charging more for a burger. However, at the Gasthaus we do charge a differential for more expensive beers."

(He also pointed out--delicately, after a boneheaded question on my part--that the brewery doesn't set the price at the grocery store, the grocer does.)

Which begs a point Rob already identified: what about brewpubs? They set their own prices and could sell beer at a variety of different points. Why don't they? Is this by convention or because of a business decision? Imagine walking into a brewpub and seeing a chalkboard with the following beer menu:

Best Bitter $3.50
Pale Ale $4.00
Pilsner $4.00
IPA $4.50
Imperial Stout $5.00

Would this offend you? Excite you? Assuming all were well-made beers, which would you order, and would price be a factor? Hmmm....

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*Brewing techies will point out that we can't know the correspondence without identifying the grains and hops, and I grant this. We're running a thought experiment here, though. Bear with me.

Is Homebrewing the Cheap Choice?

In these depressionary times, the mind of the young beer drinker turns not to fancy, but cheap beer. But not any cheap beer--good cheap beer. Sales, mooching; good options both, but they require serendipity's intervention. The young beer drinker does not like to wait for opportunity, the young beer drinker makes his opportunity. And so too shall he make his beer, cheaply!

Well. While I encourage every lover of beer to take up the ancient art--it aids enormously in understanding and, by consequence, appreciation--don't be lured by the promise of cost savings. There are ways to minimize cost, but there's an initial start-up cost. If you're a modest drinker, you won't make back your initial investment for months ... by which time the recession may be long over.

Initial Investment
In order to brew, you need equipment. A brew kettle obviously, and a carboy for fermentation, but also a lot of smaller objects that add up quickly: thermometer, tubes and canes, fermentation locks, a funnel, strainer, bottle-capper, etc. Once you buy all that, you're in the hole for around 150 bucks minimum (starter kits, usually around $100, don't include a kettle). That's 19 six-packs, and we haven't even bought the ingredients for our first beer.

Ingredients
Brewers generally start with extract-based recipes. Extracts are cheaper more expensive than whole grains, so your cost is a bit higher (but you didn't have to spend money on a mash tun). You also need hops, specialty malt, and yeast. All together, you can expect to spend at least $30--and if you're going for a high-gravity beer with a variety of different hops, liquid yeast, and specialty malts, you could easily spend twice that. If you're at the low end, you've cut your per-bottle beer price in half (yay!), but if you're at the high end, you're barely breaking even (hmm). Let's say you're saving an average of $2.50 a sixer. At this rate, it will take you eight batches of beer to make back your initial investment. Actually, it's your 38th gallon where the savings start. But that's if you haven't been spending money on things like wort chillers and imported hops and additional carboys, which, if you've made it to your eighth batch, you probably have.

Time
All other things being equal, this is the real investment. Homebrewing is labor-intensive. You'll put in six or seven hours getting a batch from store to basement. A lot of this time is scrubbing and lugging. If you mash your beer, it takes even longer. Many homebrewers find their interest waning because they don't just don't have the time.

Efficiencies
Eventually, homebrewing can really save you money. You can plant your own hops, transition to all-grain brewing, even recycle your yeast. Your equipment costs start to drop away. If you did all of these things, you could bring your costs down to $10-$20 for even the most expensive beers (mainly it's the cost of malt). It's difficult to start out this way, though--you tend to get to this place by increments.

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I am happy to be corrected on the following point, but it is my experience that no one who becomes an engaged, accomplished homebrewer does it because it's cheaper than buying beer in a store. If you take up the craft to save money, you'll instantly find everything working against you--it's expensive to get started, it's time-consuming, and it's almost a dead certainty that your first few batches will be inferior to beer you buy. (You aim for Pliny, you brew a murky paste. Tasty!) On the other hand, if you take it up because you have a fascination with beer and love tinkering with recipes, it will draw you in. Eventually, if you keep at it, you might notice that, hey, you're actually saving a few bucks. That's a pleasant by-product, though, not the real reason for the young beer drinker to brew. Go back to mooching if you just want to save money.

Recession and Beer

It occurred to me, only well after the fact, that I may have committed a causal fallacy. When I visited Max's Fanno Creek two Fridays ago and found the crowd wanting, I blamed it on West Side beer culture. It was only as I listened to the news of massive layoffs last week--including a thousand Oregonians Intel plans to lay off--that it dawned on me that we might be looking at the first signs of recession hitting the beer market.

I plan to delve a bit more into this possibility in the coming week. By way of adding to the conversation, what evidence are you feeling/seeing? Economists say the recession will last throughout the year, and the recovery, when it starts in 2010, probably won't produce an instant recovery among damaged industries. It may be instructive to try to find a few key indices now and follow them over the next 18 months.

Your thoughts?