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Macro Beer Prices Finally Going Up

(updated below)

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?

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