The Incredible, Shrinking Glassware

Source

 An article by Fritz Hahn over on the Washington Post highlights a phenomenon to which I have been insensitive: shrinking glassware. (If I search my mind, I see that a dimly-dawning inkling of this phenomenon is present, but fetal.) Since I'm quoted in the article, I might as well comment on it.

But where craft beer is the focus, the pint is under threat. In the area’s beer bars and beer-focused restaurants, it has become next to impossible to find anything served in a 16-ounce glass. Go into ChurchKey, the Sovereign, Pizzeria Paradiso, City Tap House and RFD, and the scene resembles that notorious Budweiser ad: Guys swirling craft beers in snifters, pinkies aloft, because there’s no way to hold the stem of a nine-ounce snifter without your pinkie automatically popping out.

Hahn runs through some history of the pint and then comes to the key point.

The truth is, bars like smaller glasses because they create the illusion of lower-priced beer.... At Pizzeria Paradiso, at least a quarter of the beers sell for $5 and $6; the difference is they come in 12-ounce glasses. “Our goal at Pizzeria Paradiso has been to make craft beer more accessible, and that starts with the pricing,” says Fernands. Deciding to set beer prices by the ounce “allowed us to pick up more esoteric and expensive stuff, because we can put it in a smaller glass.”

Long ago, I made a quixotic charge at bringing clarity to glassware sizing by promoting the Honest Pint Project, and at the tail end of the article, Hahn mentions me and this. But what he's talking about is actual a new and different phenomenon. The Honest Pint Project was an effort to get publicans to serve a pint when they called a beer a "pint." What Hahn's identified is something else--keeping prices down by shrinking the size of the package. This has been going on for years in food packaging, and it makes sense it would come to beer, as well. People go to the store or pub and they expect a unit of goods to be roughly a certain price. Raising that price means the customer buys less, so if you can fudge the size and keep the price low, voila!--you've raised prices without alerting your customer.

If you buy a sixer of beer for ten bucks, you're getting your beer at about 14 cents an ounce. If you buy a pint of beer for five bucks, you're getting it for a bit more than twice that--31 cents. But if you buy a "glass" of beer, you have no idea how much you're paying.

Five Dollar Glasses
Imperial Pint - 26 cents/ounce
US Pint - 31 cents/ounce
12-ounce glass - 42 cents/ounce
8-ounce snifter - 63 cents/ounce

Six Dollar Glasses
Imperial Pint - 31 cents/ounce
US Pint - 38 cents/ounce
12-ounce glass - 50 cents/ounce
8-ounce snifter - 75 cents/ounce

Seven Dollar Glasses
Imperial Pint - 36 cents/ounce
US Pint - 44 cents/ounce
12-ounce glass - 58 cents/ounce
8-ounce snifter - 88 cents/ounce

 To the punter, the difference is a buck or two a pour. To the publican, it's a good deal more than that. If a pub pours imperial pints, the retail value of a standard keg at six-dollar pints is $619.50. If they're pouring US pints, it's $744. If they're pouring 12-ounce glasses, it's $992. Kegs come in different sizes and prices, and often publicans have to charge and arm and a leg. I'd love it if the US just backed away from standard pricing. I've never understood why you pay the same amount for a 4.5% kolsch as you do for a 7.5% IPA, which has twice the malt and many times the hops. If we got used to paying different amounts for a glass of beer, we'd be better consumers.

And in any case, it's worth at least thinking like better consumers. Imagine if a $6 US pint were a standard measure. This is what you'd expect to pay for the following measures if pricing were linear:

Imperial pint: $7.20
12-ounce glass: $4.50
8-ounce glass: $3.00

I actually love smaller glasses. I'd prefer it if ten-ounce glasses were offered everywhere, at roughly linear pricing. That would set me back about $4 a glass, and I could have four in a sitting for a reasonable price. Better yet, if pints of low-abv beer were cheaper, I'd buy more of those, too. So consider this a vote for both--cheaper small-pours and different prices per beer. There, it's only Monday and I've already solved your worst problems.

Markets Don't Care How Much It Cost To Make That Beer

There is an ancient debate among beer geeks about "forced scarcity"--the idea that breweries do special releases of special beers in limited volume just so they can charge twice the money for it. Riffing in part on a discussion we recently had on the Beervana Podcast, Bryan Roth runs down the main points. He even uses one of my quotes from the podcast. But the most interesting part of all that was Patrick's response. Patrick is, in addition to being the co-host of the podcast, an econ professor at Oregon State. And his response was both surprising and illuminating.

A pour of Pliny the Younger last year at Roscoe's

To set it up, I was arguing that I wished consumers understood how expensive it was for breweries to make barrel-aged beer. That would help them judge whether a $15 bottle of beer was "worth" the price--particularly when compared to a $15 bottle of double IPA that may have been comparatively cheap and easy to produce. Patrick said that, from an economics perspective, I was missing the point. (All bolds are added for emphasis.) From the podcast (slightly edited for clarity):

"The economist in me would say it's all just about the beer itself: is it good or is it bad. If it's good, even if it took you two weeks to ferment and package and you're done, that's what should determine the price. What you're saying is that the process that goes into it matters to you. Obviously the process can add to the cost, so that will drive up the price anyway. But you're more willing to pay a higher price if you know [that it cost more to produce]?"

I answered, yes, I am willing to pay more if I know a beer costs more to produce--arguing a pretty standard beer geek position. Patrick continued:

"Well, that's okay; I can understand your philosophy. And there's actually some sort-of economics in there in the sense that efficient markets require complete information. And that requires that you know what the product means to you. As an economist, it's the market that determines the price. So when you say a brewer wants to charge you this much, it's true--you put a price out there and it sells or it doesn't at that price."

"What I would say is that it's clear barrel-aging imparts very distinct flavors that you can't get elsewhere. If A-B had figured out how to make a chemical and added it to a beer, then you'd have all kinds of 'barrel-aged' Bud. It imparts unique flavor characteristics and profiles that you can't get any other way and those are clearly something consumers are willing to pay for. And that's a good thing, because otherwise you wouldn't see barrel-aged beers; it just wouldn't be cost-effective. There wouldn't be any economics behind it. The market, at least now, values them [barrel-aged beers]. If there comes a time when the market gets tired of these flavors, they'll suffer."

Patrick's making a very interesting distinction here. If I think about other product categories, I can see how often cost and price are not highly correlated. A bag made by Prada may be priced at $1500 but only cost a bit more to make than a bag made by Michael Kors that sells for $150. More Patrick:

"Talking to beer people about beer prices is fascinating, because it's not really about beer markets. They take this stuff very seriously. You get into things like the morality of these prices. But to an economist it's all quite clear--there's a supply and there's a demand. So for something like Pliny the Younger, they keep the supply down and the demand huge and boom, prices skyrocket. It's the beauty of markets at work."

Patrick made one final comment about the economics of pricing that is very important to consider in all of this. We used Pliny the Younger as the example in the podcast, and it's actually not a very good one. Something bottled like Three Floyds Dark Lord. But don't pay attention to the beer, pay attention to the principle Patrick's describing.

"One of the other points I wanted to make about prices is this. You have to ration Pliny the Younger somehow. Think of different ways you could ration Pliny the Younger.  You could make everyone line up three days in advance--sure, that's one way you can ration. But typically markets ration through prices. The way the market rations it is that the people who value Pliny the Younger the most are the ones who get Pliny the Younger."

Food for thought. None of what Patrick says here necessarily negates the points many beer geeks make about pricing--except to say that they are not making arguments relevant to economics. Markets have an elegant simplicity about them, but as citizens we don't have to submit to their tyranny. They do ration, and we may not agree with the way they do it. In the US, the way we ration health care is by providing extremely expensive services to the people who can afford it and nothing or very little to those who can't. Other countries choose to address the rationing question differently, by offering slightly less expensive services to a wider variety of people. But I find Patrick's points of view so valuable because they clarify my own thinking.

Of course, I would be horribly remiss if I didn't plug the podcast here. You can listen to this episode here, or subscribe to the podcast on iTunes or Soundcloud. And please do!

There Are No Good Arguments For Overpaying

Yesterday's light post--part of my only half-serious whinge series--provoked a surprising amount of very serious pushback.  A few of the comments appeared here, but far more on Facebook--the platform to which most discussion seems to be moving.  That pushback flowed down three main channels, and we shall deal with them all in due course.  However, just so we don't bury the lede too deeply: they're all wrong.  In this omnibus response, I explain why.

Filling Bombers is Ungodly Expensive
This is the most superficially persuasive case. In comments below, Frank White (who sent us unnecessarily down the rabbit hole of the culture wars), puts it this way:

A small brewery using a third party to bottle beer in small batches -- beer that cost the small guy a lot more per oz to produce, due to diseconomies of scale -- is going to have WAY higher costs of production than even a good-sized craft brewery. Try 2x.

On Facebook, TS, a brewery insider, statted it out:

For reference, let's consider a 10 BBL system. Considering grain, taxes, labor the cost per BBL is approx $105.00  Adding the costs of bottles, crowns, labels, packaging labor (assuming $12.00/Hr) this extrapolates to approx. 1,800 22 ounce bottle sales units.... If we use $5.58 as a retail price point for the 22 ounce bottle ... that yields the following Gross Marginal Profits: $10,064.29 per batch bnd Net a Marginal Profit of $6,644.86.

I truncated the quote because he also gave the stats on ten barrels converted to six packs (net marginal profit of $4,684.44 per batch).  Others made similar points, but these are the most cogent.

I think it's pretty clear from TS's numbers that 22s are plenty profitable.  But that's actually beside the point.  It's irrelevant what it costs the brewery.  If a certain package is twice as expensive as a competing package for the consumer, then it's too damn expensive.  Why on earth should anyone pay twice the cost for the privilege of drinking someone's beer?  If your business model depends on selling in a package that is twice as expensive as a competing package, maybe you need to rethink your business model.  But that is, in no case, the consumer's responsibility.  


You Need to Pay More or Risk Losing Your Fave Little Brewery
This is related to the point above, at least in spirit, but it is no more correct:

Here's an interesting thought, if the market says a 22 is worth $5.50 and your a small brewer struggling to make every dollar count, why would you price your beer less? Ever hear the one about an artist who wasn't selling any paintings until he tripled his prices?

I think everyone needs to reconsider this idea that small breweries are such hopeless business ventures.  There are struggling breweries in Oregon, but their numbers are dwarfed when compared to businesses struggling in any other market system.  You are a customer, not a brewery owner, and you need to think of your own interests. You are not responsible for keeping them in the black.  There's an obvious reason breweries are opening so fast: they're very lucrative businesses. If you want to frequent your corner brewpub to make sure they stay around, great.  But don't feel like you need to pay extra to subsidize breweries who would otherwise instantly be forced to make Hamm's.  



Other People are Paying a Lot for Beer, so You Should, Too
That title pretty much rebuts itself, but I'll go ahead and give you the arguments first:

Isn't all pricing based upon what people can get?

and

The people in just about every other major city in the country must be laughing hard at these PDX price complaints. Beer is more expensive just about anywhere else, and we shouldn't be surprised that as our city gets more media attention, more people move here, and property values, costs, etc. increase, that the beer prices will too.

This point contradicts the first point, which contended that small breweries have to charge a lot or face doom.  Here the argument is, "breweries can get away with huge mark-ups, so why are you bitching?"  Well, yes, they are getting away with large mark-ups.  That was the point of my earlier point--it feels price-gougey and I'm not high on it.  Arguing for price-gouging is an odd position to stake out.


Who Cares About a Few Bucks?
Some folks apparently have lavish beer budgets and so don't mind over-paying.  They think you shouldn't mind, either:

If you're pinching pennies to such an extent where you're seriously worried about a dollar here or there going toward supporting the bottom line of breweries you like (those guys aren't exactly getting rich and rolling in money), you should probably consider cutting beer out of your budget altogether.

and

Oh, FFS... people pay $5.50, or even $8.99, for a bomber because it simply isn't worth quibbling over the spare change between that and what they "ought" to charge. Is it less than 2 pints at the pub? Yes. Do they like the beer? Yes. Buy it, drink it, stop whining. If you're really that price sensitive, maybe you should be drinking water instead.

Okay, first of all, there are a lot of people pinching pennies.  We've just come out of the worst recession since the 30s.  Young people are living at home and working three part-time jobs.  They do not have tons of extra money laying around in piles on the floor.

But there's a reason everyone should care about this.  One of beer's central selling points is that it's a working class, everyday drink.  You buy a sixer for the week, you go to the pub after work.  It's affordable.  Craft beer is enjoying a moment of huge popularity right now that is almost certainly evanescent.  How long the moment lasts depends in some large part on how long people continue to invest in it.  All this excitement and growth depends on consumer interest.  If you start pricing beer like wine, you will lose the bottom half of your consumer base.  Beer has always swung back and forth between being a commodity product and a craft product.  We're in a craft phase right now, but there's absolutely nothing that says we have to remain in it.  If breweries start charging the same amount for a bottle of beer that good wineries do, the jig is up.  Price inflation is bad for beer, not good.  

I await your merry agreement in comments--

What's Time Cost?

Again, my busy-ness prevents proper blogging (although this may actually turn out to be an above-par week, so stay tuned), but I pick up a meme in the air.  Max discusses the issue from the cost side:

The beer in question has been aged 4 years in whisky casks. Though 4 years wouldn't have raised any eyebrows in the past, nowadays it is something very much out of the ordinary (with the probable exception of some Lambics), and this alone is enough to this beer quite interesting, at least on paper. Shame about the price, though; roughly, the equivalent of 750CZK for a 330ml bottle. Pfff!

It caught my eye because yesterday I was sitting in Beermongers and the very same idea came up.  Someone noted that a large bottle of Rodenbach (750 ml) went for nine bucks. This is a beer for which 2/3s of the bottle is aged two years in wooden vats before it's shipped across an ocean and a continent.  But domestic beer--some of it not even aged!--routinely goes for $12 now.  And the approach to $20 is not far in the future.  Which takes us to this story (hat tip to a regular reader):

Boulder police have arrested a former Avery Brewing Company employee suspected of stealing more than $15,000 in rare beers.  

Police recovered more than 570 bottles of beer at Dickinson's Fort Collins home, with some of the bottles estimated to be worth anywhere from $200 to $300 a bottle.

Okay first of all: $300?   I'd give you $300 for an original bottle of Pilsner Urquell or, say, one filled with Apple stock certificates, but beyond that, someone's paying at least 10x too much for a beer.  (Fermentedly Challenged has more on beer theft if it's a topic you wish to pursue.)  

I will add this, though.  Let's say a barrel of beer is worth $100 to a brewery.  Of that barrel, let's say the ingredients cost an average of $10.  (These are fake figures.)  Now, let's say it takes the brewery three weeks to get the barrel from the grain mill to the bottle--that's the standard economics of a bottle of ale.  A second barrel of beer costs the same amount to make, but it's barrel-aged.  It spends an additional 18 months ripening in the brewery.  How much is that time worth?  This is one element I think people sometimes fail to include in their cost-calculators.  Because in the time it takes to get that 18-month-old beer to market, the brewery will have been able to use the same equipment to put 26 barrels of regular ale to market.  The wood, the tank space, the refrigerant--all those things add money to a bottle of aged beer.

What's it worth?  Whatever the customer will pay.  What's it cost?  Probably more than the average drinker guesses.

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.

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.]