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Wednesday, October 01, 2014

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?

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.
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--


  1. A couple points: Many cities are paying more per bottle due to local and production taxes being higher. It's not that they are more greedy.

    And the 22 ounce profits at that price point are gross marginal profits not net corporate profits.

    The company still needs to pay their lease, their loan(s), their labor, their utilities, their taxes.

    I know you are seeing this as a consumer with a perception of value. But take it from someone with 13 years of being a head brewer and brewery consultant who has drafted dozens of financial projections for startups.

    If it's a small startup you are not "overpaying" for $5.50 a bottle. There is no price gouging here.

    Now the "big guys" with their economy of scale have the ability to drop their prices and they do. I see 22 ounce standard fare bottles on the shelf for $2.99.

  2. I could be reading things incorrectly or not as deeply as I should (I'm on hold with my bank and the tender sounds of Kenny G may be unduly messing with my cognition) but it seems to me that if 10BBLs converted into 22oz bombers yields $6,644.86 marginal net profit and if the same 10BBL converted into 6-packs yields $4,684.44, doesn't that *precisely* prove your point? The beer isn't getting *any* better and I don't see the experience being at all improved by moving to bombers. So what exactly is that extra $2k paying for? Nothing. Am I reading this incorrectly or did that commenter just QED your argument while trying to attack it?

  3. Jim, yes. It was confusing to quote someone who was supporting my point in there.

  4. My numbers didn't come across well in your post. Using a 10 BBL batch as an example and retail price points of $8.50 a six pack and $5.58 a 22 ounce bottle

    Net sales of six packs: $4,684.44
    Gross Marginal Profits: $888.75

    Net sales of 22 ounce bottles: $10,064.29
    Gross Marginal Profits: $6,644.86

    Now the GMP is profit after Cost of Goods (Bottle, label, cap, holder, labor etc)

    And this is -before- distributor fees which will chunk another 30% off the GMP. This puts six packs in the red all together and makes that GMP of 22 ounce bottles look less profitable.

    Now, a brewery could self-distribute, of course, saving that 30%. But now we have to factor in sales, storage costs, point of sale material, limited market ability...

  5. And an important distinction to keep in mind GMP is before paying your other bills: Lease, NNN's, taxes, utilities, marketing, design, etc...

    So a small startup on a 10 BBL system who signs with a distributor, can't produce six pack bottles. It simply doesn't pencil out. And the revenue they project from 22 ounce bottles is roughly $6,600 per batch (less if abundant hops is used) Minus 30% for distributor fees - the GMP is $4,620.

    Lets say they are producing 300 BBL. Thats a GMP of $138,600 annually for a monthly average of $11,550 a month

    Their lease and NNN's is $9,000 a month. Their loan is $5,000 a month and their utilities are $1,000 a month. They are probably also working 80 hours a week and not paying themselves

    Still think you are getting gouged?

  6. I think overall the point, which I agree largely with, is that from a bang-for-your-buck perspective, bombers are more expensive than many discerning beer buyers (like myself) find reasonable. Therefore I don't buy them. Would I buy them if they were cheaper? Perhaps, though I'm not a fan of large-format bottles from a consumption perspective generally.

    Given that they should be more efficient delivery vehicles than 6-pks for packaging and shipping reasons, bombers should actually be cheaper by the ounce for the same beer. I don't understand why there's a market for this product per se, but I don't begrudge the producer; most brewers I know are not overpaid.

    I also don't worry about this product hurting the craft beer market overall as overpriced bombers are not likely to cause a shift in consumer sentiment (I worry more about the proliferation of mediocre beer causing that!). I would, however, predict that overpriced bombers will be the first casualties when we reach Peak Craft Beer.

  7. Something else to note - The Net Sales price points in the example above reflect what the retail price point is. The brewery would get less. The brewery gets, as gross marginal profit, what is left after retail and distributor (if not self distributing) markup.

  8. "One of beer's central selling points is that it's a working class, everyday drink."

    And there's the rub, some people want to take beer away from its traditional constituency and make it something aspirational.

  9. ...There's always Old German

  10. You can justify those prices with any argument you find most convenient or reasonable, but not a single one of them should be of any concern to us, the consumers. The fact is that those containers offer poor value for money (because it's not about the price, it's about the value).

    That being said, the best way to deal with this (quite minor) problem is to vote with your wallet. Those who are happy to support a business model based on an overpriced product, are free to keep on supporting it. Those who are wiser with the way they spend their money, have, I believe, plenty else to choose from. The market will eventually decide.

  11. There is nothing particularly 'working class' about craft beer, any more than there is anything particularly elitist about drinking wine. For those reduced to living in momma's basement, I highly recommend Olympia-- or possibly Night Train, if wine's your thing.

    I can think of few things more directly responsive to market forces than the pricing of locally produced beer. Certainly, those local producers will charge as much for their product as the market will bear-- as is their right.

  12. And this is why I do home brewing. Not only is the beer penciling out cheaper then some craft beer, and it's made to my personal tastes and has an inherent value to me in the sense that I produced it rather than purchased it. That being said with malt and hop prices even home brewed beer is becoming to pricey for me. I love craft beer and support it when I can, but considering the state of Oregon just released a ReBAR assessment saying private companies that they pay in my field should be making $10-$12 an hour without raises when they pay their own people in the same positions $13-$17 an hour starting it looks like beer will be becoming a luxury item for me. The increasing price of beer played a large part in my withdrawal from beer blogging

  13. One quick question Jeff, how much is a bomber of Sierra Nevada Pale Ale in your neck of the woods?

    Here in Central Virginia it is usually about $3.50 in the supermarket, which makes it excellent value, especially considering the quality of the beer.

  14. $3.50 bomber = $11.45 six pack equivalent.

    I don't see Sierra Nevada Pale bombers around Portland too often, perhaps because six packs are frequently available for $7.99.

  15. I remember maybe 18 years ago when the price of wholesale pork fell sharply in Atlantic Canada where I used to live that a bunch of neighbours were in trouble and a few farms went under. Because they had over invested and budgeted for a higher price point. One old guy in church I knew just smiled when I asked how he was doing. Bred his own, owned his land, grew his own feed, still pulled his own weight in the barn in his 80s. This conversation reminds me of that. Who promised new brewers a marketplace? Who told them to move past growlers and into store shelves so quickly. Are they all in Denver this weekend pretending they are jet setting craft brewers, too, and not just a neighbourhood micro? Like with anything in life, you over spend and under earn, you career path ain't going to be pretty. I don't care what all expenses we can roll out explaining, even justifying over-priced beer. If the next brewery's beer is cheaper and just as good they should get the business.

  16. Your second point is one I encounter far too often. Why is it that overpaying for beer is somehow considered a societal good?

  17. Kevin Scaldeferri5:09 PM, October 06, 2014

    As one of those quoted in the "Who cares about a few bucks?" section, I don't find your counterarguments particularly compelling. There's lots of cheap beer out there for those who really do need to watch every dollar.

    Furthermore, when you say "If you start pricing beer like wine, you will lose the bottom half of your consumer base", I think you're displaying a misconception about the nature of the wine industry, wine sales, and wine drinkers. Most wine sold is plonk, just like most beer. The existence of $100 bottles of wine (even in pedestrian wine shops and grocery stores) does not somehow scare people off from buying a jug of Gallo.

    Finally, there's a related issue, let's call it the "Econ 201" argument, which you've left out. This is that in comparing prices only, you assume that all beer has fixed utility per oz (or even per oz of alcohol) to all people in all situations. It does not.

    For example, say I'm heading to a BYOB party and stop into Freddies to grab some beer to bring. They don't sell single 12oz bottles, and I'm not planning to drink a whole 6-pack. I could go out of my way to a specialty beer shop that sells singles, at the cost of extra time and gas and maybe annoying my wife, or I can just grab a bomber. Sure, it is more expensive per oz, but if I was just going to leave the rest of that 6-pack behind at the party it seems like the real waste of money would be paying twice as much total for the 6-pack.

    Another possible source of utility is limiting downside risk. If I haven't had a beer before, it might be worthwhile to only buy a bomber rather than a six-pack that I might not care to finish.

    Still another is novelty. 3 different bombers vs a 6-pack of the same beer may provide enough utility to make it worthwhile to someone.

    When people shake their fists and say "people are overpaying and they shouldn't!" it ignores all of these -- entirely valid -- reasons why a person might rationally choose to not maximize oz/$.

  18. I think if you're in the "industry" (read a brewer or brewery owner) it's hard to remove yourself from your work and see the consumer's perspective. The point many miss here is if you look at the price per ounce, why does it go up when you stick the same beer in a larger format?

    Even the big breweries are guilty of this? Sierra Nevada Pale in a 22oz format has a higher price per ounce than a 12oz bottle. It's the same liquid in the bottle, but somehow I'm expected to pay more just because it's in a big bottle? That is just ridiculous.

    This isn't the first time this topic has been hotly debated. Michael Tonsmeire who writes the blog The Mad Fermentationist had the same basic issue about a year back. There was a lot of opinions on both sides. He was even quoted in a NY Times article. It's worth reading all of the chatter there too.

  19. Complaining about $5.50 for an average 22oz Bomber!?!?
    Here in Ohio the average cost is around $10 for a good craft made 22!
    And that's with State minimum pricing!!!
    While I've known for some time that our State regulations for alcohol were out of whack with the rest of the country, this disparity just seemed like a slap of reality to how criminal our state politicians really are!