Will cost pressures decimate craft brewers?

Apparently, barley and hops prices are rising drastically due to poor harvests. This Financial Times article implies that the big four breweries will not be affected [at least not immediately] since barley and hops are hedged. However, this development will probably affect the pricing of craft breweries as per the WSJ they will try to pass on the higher ingredient prices to customers.

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5 thoughts on “Will cost pressures decimate craft brewers?

  1. I wonder if the craft breweries can really pass on any more costs to their consumers. The guy that gave us the tour, I forget his exact position in the company, said that they are charging almost the most they can charge, and that their pricing is based more on the standard price for the beers then their costs.

    • Well if the bad harvest affects all similar sized craft brewers the same, then it would make sense that they would all rise prices some. However, this would then cause them to have a larger price gap between themselves and the premium ‘cheap’ beers that dominate the industry, especially if the larger producers are hardly affected by the bad harvest.

  2. Note that $9.49 implies an after-tax price of almost exactly $10. My sense is that price points are fairly stable; I don’t know why. I may be wrong. It would be interesting to see a term paper or a senior capstone looking at the issue. Please engage in casual empiricism: what are the prices for standard six-packs? In the premium (craft) arena, are any other than an $X.49 or $X.99 price?
    With the changes indicated in this article, some firms are going to try to charge a higher price. Others won’t. So it will look a little bit like a price war.
    But who will dominate? Will the denouement be one of a niche that expands sufficiently for macrobrewers to enter? Will truly local brewers survive, alongside them? Or will we see a handful of regional and super-regional breweries?
    But we could also have a third model, harkening back to Sam Adams, which rented facilities too small for the macrobrewers. If these cost pressures continue (hops and barley are subject to new entry, so I doubt it) then a shakeout will leave empty breweries here and there. If DB does well, they would be able to add one more supermarket distribution regions quickly and at low cost by buying up another brewery. Going fully national might be hard, but my hunch is that a few more breweries will manage to do so. Down the road, then, we’ll have 8 or 10 mid-level firms that are national in scope, perhaps using different brand names in different regions to preserve “brand equity” built up by those they purchase. There will be modest gains on the cost side, bulk purchasing, lower marketing costs. The real differentiator will be firms that are well run, and that have patient investors to weather the coming shakeout.
  3. Given that the poor hops and barley harvest is a temporary supply shock to the micro-brewing industry, and most micro brewers like Devils Backbone are making a profit by charging based upon the standard market price and not their costs, I would not expect price to increase substantially.

    Looking at the high level of entry into the market, we know micro brewing is a profitable industry. But while it is profitable, it is also extremely competitive and full of start up companies like DB eager to expand their market share. If a Micro brewer tried to charge far above the standard market price in order to maintain his current level of profits, he would risk losing his share of the market to craft brewers, imports, and other super premiums, and would likely be forced out of the market.

    This being the case, I would expect most Craft brewers to only slightly increase price and absorb the majority of the cost increase hit instead of passing it on to consumers. Their profits may decrease until the supply recovers from the shock, but they will be able to continue to market their product and try to increase their market share. In the long run this is a much better strategy for a craft brewer.

    So while entry into the craft brewing market will slow considerably due to decreased profitability, and over-extended firms may be shaken out of the market, the majority of craft brewers will only raise prices slightly, as seen in Sam Adams raises price by only 3%, and take the majority of the cost increase hit from their profit margins b/c they know the supply shock is only temporary.

  4. Yes, if price points serve as a coordinating mechanism (at least vis-a-vis consumers) then the impact will be to lower profits, not raise prices. But remember that what DB and others see is the wholesale price that they receive from a Food Lion or a Krogers (or the Palms or Southern Inn for kegs). We don’t know what’s happening there, though maybe we can get Mr. Humphries to chat with us off the record.

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