Anheuser-Busch InBev (ABIB) announced a couple of days ago that come fall, their prices would be going up. MillerCoors also made it clear that they would be taking a price increase as well. The Wall Street Journal reported that “Anheuser-Busch InBev NV, the largest U.S. beer seller by revenue, and MillerCoors LLC will increase beer prices in the majority of their U.S. sales regions, the two companies said Tuesday.” Bloomberg added that, at least for ABIB, “the plan has met with “general acceptance” from retailers.”
Finally. This will probably end up being controversial — though it shouldn’t be — but I think that’s very good news. For a long while now, the major beer companies have all kept their prices to consumers artificially low to maintain their volume sales. Part of the reason is simply the competition among one another — the big guys that is — and none of them wanting to be the company that blinks first. I’ve watched this for many years, especially when I was a beer buyer for a chain of California stores, when each year the big companies would try to keep their price increases as small as possible. Now obviously, no company wants to raise its prices too much, but in the big beer business the increases over time have not kept pace with inflation and especially with the rise of ingredient costs and other factors, such as transportation, fuel, etc. There are likely several reasons for that, but chief among them is needing to keep sales volume up in order to maintain and increase the share price. And so over the past decade or two, none of the big beer companies have taken prices increases up as far as they otherwise would have if they were just looking at the cost to wholesale/retail price ratio. Even with the economy tanking, eventually someone has to blink. ABIB, with the InBev predisposition toward profit at all costs, seems poised to end this period of artificially low price points.
A side benefit for them, though most likely merely an externality, is that the price difference between the average big beer and a craft beer has widened, giving the impression that the macro beers are a far greater value. That’s because most craft brewers have not had the resources to do likewise and the price of their beer is more realistic, taking into account all their costs for ingredients, transportation, staff, and costs of doing business. A few have tried to keep the price to wholesalers down, but the increase in hops, barley and fuel over the last two years has made that increasingly difficult, even for the larger craft breweries. If ABIB raises their price (and MillerCoors follows suit, as they usually do) to more realistic levels, the price differential between a big beer and a craft beer should decrease, making it more likely that consumers might trade up to a craft beer, if the difference isn’t as great in doing so. Because of the economy, that’s already happening to some extent, with craft beer being seen as an affordable luxury from two directions. One, some people are trading down from more expensive bottles of wine or spirits to more affordable craft beer and, two, people trading up and treating themselves to a nice of bottle of beer, which isn’t stretching their wallet as much as a more expensive beverage. But if the price gap shrinks, we should see an increase in craft beer sales.
On the other hand, although it’s not a popular stance, I’ve long thought that craft beer should be more expensive than it is. It should be priced according to its value instead of against the more popular, but inferior tasting products. Organic food offers a good analogy. Organic food is more expensive to grow for a variety of reasons and thus costs more in the grocery store. But if people aren’t willing to pay a little bit more for it, it will disappear entirely and we’ll have little choice in the food we eat. Luckily, many people recognize that organic food, despite its more expensive price tag, offers additional benefits that make its increased price worthwhile. In a sense, you get what you pay for. If organic food tastes better, is healthier for you, often keeps money in the local economy, and is better in the long run for the planet’s sustainability, paying a little bit more for it isn’t just a good idea, but a moral imperative. I believe the same applies to craft beer.
We all tend to look for whatever is the cheapest and often forget about what “value” even means. I’m as guilty as the next guy, but I try to consider it whenever possible. We’ve all been indoctrinated with the idea — the “Wal-Mart Syndrome” — that value means cheaper, but that’s just not the case. If I pay more for a better constructed (and probably more comfortable) pair of shoes, and they last twice as long as the cheap pair, the expensive ones are the better value. Similarly, if I spend more more for a bottle of good beer, it will taste better and I’ll enjoy it more, making it a far better value.
A motto for this idea could be “drink less, enjoy it more.” That might not work for large companies that depend on volume, but there plenty of small sustainable craft breweries for whom that model would work perfectly. All we have to do is be willing to pay the price.
UPDATE: The L.A. Times ran a story yesterday entitled Is the Price Increase Justified?, citing a supply management expert, Bob Zieger, who took “issue with the idea that “general commodity prices” are behind beer price increases.” He continued:
“After all, beer is not made from a combination of pork bellies, copper and cocoa. Its key price drivers, like hops and barley, are actually not experiencing a serious price increase right now. If there was ever a time to blame commodity costs for a necessary price increase, it was last year,” Zieger said.
As any brewer can tell you, hop prices have not returned to the levels they were three years ago, nor have barley prices, though they have abated a little better than hops. Of course, hops and barley aren’t the only cost increases, as fuel and transportation costs have skyrocketed, too. Naturally, Zieger has a blog — doesn’t everybody? — called Supply Excellence where he expands his criticism. I think it’s unfortunate that the L.A. Times cited him as an expert because while he may know a lot about supply management and commodities generally, he doesn’t know the brewing industry, its particularities and the history of this issue. This gives a bad impression, I think, since it’s the only criticism they cite and in fact his thoughts were the story. While he’s certainly welcome to voice his opinion — and it was interesting to read his full blog post — it seems odd, and perhaps even a little wrong, for the L.A. Times to do a story calling into question one of the reasons given for an increase of beer prices without having any contrary opinion or indeed any person connected with the beer industry who knows anything about it. That just seems like irresponsible journalism to present one man’s opinion as a news story. Isn’t that what the op-ed section is for?
Could not agree more. Actually I think I was writing a borderline mirror image post at the exact same time you were.
One thing I did notice where we differed was the pricing structures. I feel that you charge what you can get and no more. Although the value for a craft beer is far more then that of a macro, I think if anyone tired to do that sort of pricing structure they would be out of business in a minute. The level of consumer education is not high enough for that to make sense.
This is a great opportunity for micro breweries and I hope they take full advantage of the situation.
Actually, I don’t think we differ so much as are saying the same thing in a slightly different way. I agree that brewers should “charge what [they] can get and no more.” When I say that craft beers should be more expensive, I mean that so far I don’t believe they have been pricing as high as they should, but instead have been reacting to the lower prices of macro beers, in a sense holding themselves back because of them. But as we know, the customer is different, and they should base their price on perceived value instead. Obviously, they can’t go too far and price themselves out of business, as you suggest, but I think they’re still quite a bit of room in between those two positions.
problem i have is price collusion by two industry giants with 80% of us market. seems against the law; do hope it helps the local brew scene though.
While I agree with much of your post, I don’t think I can agree fully with the idea that craft beer should be priced higher. As it is now I struggle to justify spending $12 for a 6-pack. Just for fun a year ago I did a blind taste test between Stone Pale Ale and J.W. Dundee’s Pale Ale. The Stone cost almost $12 and the Dundee’s at that time was about $5. Each participant assumed the Dundee’s was the Stone and were shocked to find out the truth. As the beers warmed up some, the Stone started to pull away, but the point was made. It was no way close to being worth an extra $7 per 6-pack. Here in Indiana we have Three Floyd’s Brewing who routinely come out with 22oz bombers of specialty brews. Average price per bottle is anywhere from $11 all the way up to $18 or so. There are definitely beers in the world that are worth that kind of price. But when Three Floyd’s sells Munsterfest, which is a Marzen style beer, for $13 a bomber.. something is wrong.
I know a lot of the beer blogs I read are based on the west coast and I think the economies for craft beer are very different there then here in the midwest. All I know is the average price for a sixer around these parts is pushing $10 and a pint at the local pub is usually $4.50 and up. My opinion is prices are already high enough for the time being.
The Professor says
I have to agree with Erik. Prices on a lot of the micro product is just way out of line, and quite frankly more and more, at prices not always indicative of the quality you get. The notion that smaller is _always_ better is at worst fiction, and at best, a real stretch. Consumers initially buzzed by the new range of choice brought by the micro explosion are now getting more hip to the fact that much microbrewed beer is something of a crapshoot (especially these days, when the wallet is hit a little harder). The big brewers these days are making some excellent “craft” beers (the craft being in the making, not the size of the plant) that equal or exceed the quality of those made by the smaller brewers. And again, the competition is good for both segments.
But judging from conversations I’ve had with many beer lovers and home brewers, I think there is a growing impression that at least some microbrewers (not all) seem to be taking advantage of their niche status to jack up prices a bit more or to sell some of their products at ridiculously inflated prices. But, as long as people are willing and able to pay that premium, I’m sure the trend will continue.
The late P.T.Barnum, wherever he is, is probably having a big ol’ cosmic chuckle as he sips his beer .
While it’s true that hops and barely prices haven’t dropped to the levels they were before 2008 , prices are lower than last year. Even during the 2008 crop crisis, big brewers had multi-year hop contracts in place that minimized the impact and were able to wield their weight to limit the cost of new contracts. Ditto for barley. Those price increases did not hurt the big brewers as much as the little guys. As for gas prices, they did hit everyone hard, but again prices are now lower than a year ago (right now by at about a dollar, and for the past 10 months its been lower than the same date a year before (http://www.api.org/aboutoilgas/gasoline/upload/PumpPriceUpdate.pdf). So for AB-I , Zieger’s viewpoint seems pretty valid. I think AB-I is just currently tired of the price war, and the Brazilians want more cash which they know they can get, but don’t worry they’ll get back to the war in another year two (I think one of the company press conferences mentioned this was a “cyclical” pricing adjustment).
For MillerCoors, a big driver for the JV was transportation and they’re still in the process of realizing the 500 million saving, so this drop in fuel price actually makes it harder for them to hit their JV numbers, but then again their current transportation costs are lower because…kind of of a damned if you do damned if you don’t situation. They had hop and barley buffer contracts, so again Zieger’s point of view holds. The reason they follow AB-I pricing is they don’t want to look like too much of a bargain (i.e. cheap).
Zieger ‘s criticism may not hold true for the crafts that have a difficult time staying level in still choppy waters, but things have calmed considerably (at least on that front) for the big brewers.
My two cents,
Thanks for that thoughtful comment. I think you’re correct that the hop/barley costs are not the chief reason for the price hikes, just the one that the L.A. Times seized upon, probably because it played to consumers better. I think what bothered me was that Zieger took that one aspect of the price hike and made it sound like the whole thing wasn’t valid, a canard, whereas I think it is. I’m not in the habit of defending big breweries, but I think in this case they’re right to stop artificially keeping their price to wholesalers low, which in turn hurts craft brewers, IMHO. I don’t think it’s a simple as ingredient prices aren’t as high now, considering how they’ve held back on price increases for almost twenty years. It’s really the newspaper that took his opinions and turned them into “facts” that readers will rely upon, giving them a false perception of the beer industry.
As for gas prices, I just paid $3.19 a gallon yesterday, which seems none to low to me.