On Beer Pricing

Michael Kiser has a provocative post at Good Beer Hunting. It's a long piece and he makes a number of points, but the thrust is basically this:

I’m arguing for a greater tolerance among consumers and retailers toward the costs associated with certain beers, or the revenue opportunities they legitimately represent for those breweries in a wider spectrum of considerations. Otherwise, this industry you’re claiming you have passion for and want to see grow is being held back by your own narrow idea of “what beer costs."

I think there's some basic economic misunderstandings along the way--which (plug alert!)--you can learn about in our latest Beervana Podcast. But that's not my major concern. For me, the problem is that Micheal's looking at the consumers, not the breweries.

Somehow these guys stay in business.

Pricing is an interesting issue, and customers would do well to understand that some beers necessarily cost more than others to make. But here's where Michael and I part ways: the beer industry should not depend on the kindness of customers to keep them afloat. They are not charities we need to support with our dollars. And indeed, to do so perverts the market and keeps weaker (and less scrupulous) players in the game.

I'd point people to Oregon as a great rebuttal to his thesis. Here breweries must compete on both price and quality. Our supply is insane. Breweries that overcharge or make mediocre products don't sell a lot of beer. (Rogue is basically the only brewery that overcharges, and their Oregon sales have been in decline for years.) We have natural ceilings on what breweries can charge for standard and specialty beers, both in pubs and on the grocery shelves. Specialty beers can't fetch more than about $15 (in a very few rare cases slightly more) without getting stuck on shelves--and breweries in other states where super-premium pricing in the norm avoid Oregon. Why would we pay $30 for a wild ale from Allagash when we have Block 15, De Garde, Solera, Logsdon, and Cascade here at home?

Here's a good example. Josh Pfriem recently released his first batch of barrel-aged beers, and he sold cork-and-cage bottles (12 ounce), for under $10. The quality was spectacular. He priced the beer to earn a profit. And in this market, he needed to: as good as his Flanders-style beers are, he couldn't have charged much more for them. And yet Josh seems to believe he can make a profit this way, shocker of shockers. When I toured the brewery this summer, he took me to his barrel rooms (he has two), where all manner of wildlings lay ripening. Josh has spared no expense at the brewery--he even has a centrifuge, which I've never seen in a brewery that small--and is busy expanding the barrel-age program. And he can make a nice profit doing it. You could also look to Belgium, where the lambic-makers somehow manage to put together spectacular gueuzes (blends of vintage lambic, portions of which are aged three years) that they can ship to the US and sell for under $20.

No brewer in Oregon to whom I've spoken has complained about price pressures. There's no danger that Oregonians are about to see their wonderful beer go extinct. But even if there were price pressures, it's not the consumer's responsibility to subsidize (or even worry about) the brewery with inflated prices. Beer is a good, honest beverage and it is quite possible to make it well and profitably. If it weren't, there wouldn't be 3,500 breweries in the US with just a handful of annual failures. As the market tightens, the best breweries will, like Josh Pfriem, learn how to continue to brew spectacular beer and sell it at a price consumers will pay. That's how markets work. Not by charity.

A Bomber Bubble?

If you keep your eyes cast upward as you hike the wooded forests (or cities) of Oregon, you will occasionally see an ancient tree that appears dead at first glance.  But then you spy one small branch with glossy, green leaves.  That's more or less what's become of one of my favorite blogs, It's Pub Night, on which blogger Bill Night has managed just four posts in 2014.  Ah, but what posts.  This week he updated his Portland Beer Price Index, the leafy branch he has sworn to keep alive.  (And he's only barely managing it, having missed the first quarter's report.)  Nevertheless, Monday's results were most interesting:

• 6-packs: $9.66, down 3 cents (Q1: -.01, Q2: -.02)
• 22-ounce bombers: $5.54, up 30 cents (Q1: +.30, Q2: -.00)

Bill has data going back five years now, and that gives us a pretty decent sense of what's been happening in the market.  (Although Bill's numbers are based on Portland prices, the trends should be interesting to everyone in the country.) If you look at the long-term trend, prices tend to bounce around.  Surprisingly, they go down as well as up.  If you look at the results from any single quarter and try to extrapolate out, doom is liable to follow.  You can also make mistakes if you compare trendlines between any two categories over a short period (bombers down 9 cents, sixers up 12 cents--the bomber market is collapsing!). 

Nevertheless, I am prepared to stride boldly toward the doom and ask a question: are we approaching a bomber bubble? 

Source

Several factors are at play here.  For one, bombers are a fantastic deal for breweries.  They retail, on average, for 25.2 cents an ounce; six-packs fetch just 13.4 cents.  Or to use Bill's other fantastic innovation, the equivalent six-pack cost for a $5.54 bomber is $18.13.  So long as people are buying bombers, breweries are happy to earn nearly twice the value on a barrel of beer.  But equally important, bombers allow a lot more participants to enter the grocery-store market.  A great many of the Portland-area brewpubs use mobile bottling for 22 ounce bottles, and some grocery stores have divided their beer aisles nearly in thirds, with equal portions devoted to mass-market beer, craft sixers, and 22s.  Breweries make more money, and consumers have greater variety with this surfeit of bombers.  But therein lies my worry.

Psychologically, a big bottle that retails for nearly half the cost of six small bottles sort of seems like a decent deal.  It also facilitates sampling from more local breweries.  But there is a ceiling here.  Who among us hasn't taken a few bombers to the cash register, only to discover we're dropping $25 on three or four bottles?  (And then sigh disappointedly when we find they contain fairly average beer later that evening.)  At what price does the bubble burst?  $5.75, $6, $6.50?  I am not quite so foolish as to wander into the doom of that prediction, but I can say confidently that there is a price.  And the faster the price rises, the quicker the bubble will burst.

I'll keep watching Bill's PBPI--when the price of an average bomber drops thirty cents, that'll be a sign the bubble is bursting.

Portland Beer Price Index

Bill from It's Pub Night has provided an invaluable service to Beervana: he's created the Beer Price Index. Like other indices, the BPI is a collection of prices averaged together. In this case, Bill is tracking prices on six-packs, 22-ounce bottles ("bombers"), and pub pints. The function of such indices is to track prices over time. The structure is similar to the Dow Jones. It's not designed to be comprehensive--it won't tell you the average price of all stores and pubs in the city or state. What it will do is allow us to see how prices change over time for the beer he included in the index. So here we go--the Autumn '09 BPI is:

• $8.85 - six pack (average of six brands)
• $4.90 - 22-ounce bottle (average of seven bombers)
• $4.27 - pub pint (average pint in nine establishments)
  

I will avoid summarizing his entire post--you should go read his methodology and definitions there. He has more fine-grained detail and analysis (all useful), including six-pack equivalent prices on bombers and pints.

This is very cool. A hearty cheers to Bill for putting it together.