Craft Beer v. Mass-produced Beer: Close Substitutes or Distinct Products?

The craft beer market is currently in a state of growth as more new breweries and brew pubs launch every year. According to the data from Mintel (2015), craft beer is predicted to have a 22 percent sales growth in 2015. One of the reasons could be the homogenization of mass-produced beer according to Tremblay and Tremblay (2005). This creates opportunities for microbreweries in the market. An infographic from Statista (2015) below summarizes the growth of craft beer production quite well as the number of barrels of craft beer produced increased from 9 million in 2008 to 22 million in 2014 (a more than 140% increase).

Infographic: 2014 Was Another Great Year For U.S. Craft Beer | Statista
Source: Statista.

Although there is no doubt that craft beer will keep growing, keep in mind that the majority of U.S. beer sales is still dominated by mass-produced beers. Advertising plays a crucial role in the mass-produced beer market (and obviously, price). One might have never seen craft beer Super Bowl commercial, but it is well-known how Budweiser mocked craft beer in its Super Bowl ads at least two years in a row. For example, in the most recent Super Bowl commercial, Budweiser claims that it is not small, not sipped, not soft, not a fruit cup, and not for everyone. Microbreweries, in contrast, advertise their products through social media, radio stations, and festivals.

Everyone can agree that mass-produced beer and craft beer are not the same thing, but whether they are close substitutes remain unclear due to the rather significant differences in taste and cost.

A study by Toro-González, McCluskey, and Mittelhammer (2014) suggests that beer in general has a highly inelastic demand (-0.1771), so the response of consumer demand to a change in price is minimal; however, consumers are much more responsive to price change in craft and imported beer partially due to the higher price of craft and imported beer. Income elasticities are almost identical for all types of beer (≈0.58), suggesting that beer is a normal good. Furthermore, the close to zero value of cross-price elasticity implies there is hardly any substitution across different types of beer.

One of the questions that can be raised from the study above is that if craft beer and mass-produced beer are not substitutes, who is driving the demand for craft beer? The answer might be the millennials. Voight (2013) suggests that half of millennials over the age of 25 drink craft beer and United States Census Bureau (2014) predicts that the number of Americans in their 20s will hit 50 million in 2016. As more millennials are reaching the drinking age every year, there is much potential in the craft beer market.

Can one conclude that craft beer and mass-produced beer are two distinct products that do not serve as substitutes? Not necessarily. It is worth noting that Toro-González’s study (2014) constructs its database on the information from a large supermarket chain (Dominick’s) from the Chicago area. In states or cities with longer brewery history or culture, such as Oregon and Boston, the conclusion might be very different.

An interesting question that is not answered in this blog post is the dynamics within the craft beer market. Clearly the big brewers are major players in this game too, such as Shock Top from AB InBev and Blue Moon from SABMiller. Would the merger between the two beer giants affect the craft beer market? Can we expect to see a price drop of craft beers as a result of the merger?

Sources:

“Craft Beer Drinkers Go Beyond IPAs This St. Patrick’s Day; 83% Admit to Drinking Non-craft Beer.” Mintel. 10 Mar. 2015. Web. 17 Feb. 2016.

McCarthy, Niall. “Infographic: 2014 Was Another Great Year For U.S. Craft Beer.” Statista. 18 June 2015. Web. 17 Feb. 2016.

“Projected Population by Single Year of Age, Sex, Race, and Hispanic Origin for the United States: 2014 to 2060.” United States Census Bureau. Dec. 2014. Web. 17 Feb. 2016.

Toro-González, Daniel, Jill McCluskey, and Ron Mittelhammer. “Beer Snobs Do Exist: Estimation of Beer Demand by Type.” Journal of Agricultural and Resource Economics 39.2 (2014). EconPapers. Web. 17 Feb. 2016.

Tremblay, V. J., and C. H. Tremblay. The U.S. Brewing Industry: Data and Economic Analysis. Cambridge, MA: MIT Press, 2005.

Voight, J. “Big Beer Brands Are Fooling Us with Their Crafty Looks.” AdWeek (2013). Web. 17 Feb. 2016.

12 thoughts on “Craft Beer v. Mass-produced Beer: Close Substitutes or Distinct Products?

  1. The Brewers Association defines craft breweries as those which annually produce less than 6 million barrels. In addition, a craft brewery must be independent, meaning that only 25% or less can be owned by a non-craft brewery organization. According to the Brewers Association website, these are the only two requirements for a brewery to be defines as craft. Often times, however, people associate high prices and unique flavors to craft beers. As your blog mentions, Blue Moon and Shock Top are both pricey and fruity beers, but neither are craft beers. Sam Adams, on the other hand, is not often thought of as a craft beer, but it was perhaps the first nationally successful craft brewery. Sam Adams, owned by Boston Beer Co, pioneered seasonal beers and aging techniques using spirited-barrels. The Brewers Association originally defined craft breweries as those which annually produce less than 2 million barrels. When Sam Adams sold 2.7 barrels, the Brewers Association adjusted their definition to 6 million barrels. With the rise of the craft beer market, increased demand may force many craft breweries’ production to exceed 6 million annual barrels. I look forward to following if another change to the craft brewery definition is on the horizon.

    Sources:
    http://fivethirtyeight.com/features/is-sam-adams-too-big-to-be-craft-beer/
    http://www.cnbc.com/2013/09/13/sam-adams-and-the-data-defining-craft-beer.html
    https://www.brewersassociation.org/statistics/craft-brewer-defined/

  2. Great analysis of the substitution effects of different beers as well as explaining how the rise in millennials may explain the increase in craft brew sales. One aspect of this market that would be interesting to further study is the exact demographics of beer consumption and their respective elasticities. For instance, in your post some of the data provided discusses the percent of millennials who consume craft beer. Another factor that should be studied (which may explain some reasons why macro-brew is still so large) is the preference of beer in college aged students. This demographic on average consumes the lowest price product, and identifying their own elasticity could provide some more revealing data on macro-brew sales.

  3. Indeed, as you note towards the end of your post, the rise of the “mass crafts” Blue Moon and Shock Top is interesting. It seems as if the macro players are trying to diversify down into a craft-esque segment – keeping the prices relatively competitive as compared to other craft varieties. It will too be interesting to see how the craft sector shakes out as growth continues. Unlike steel in the late 20th century, when integrated firms really couldn’t go after the minimills because they had two very different processes, the macro brewers are going after craft brews. In addition to the rise of the “mass crafts,” this probably explains some of the central reasoning behind the AB InBev and SAB Miller’s merger – it seems that if they combine they are better suited to undermine the craft market. Beer is also different from steel in that beer demand is not stagnating. But the craft end of the spectrum is interesting too – as these beers face increasing difficulty as macro brewers respond, will they too begin to merge in order to best present formidable competition to the big shots?

    • Could be interesting to note–
      AB InBev just purchased our own local craft Devil’s Backbone. As an addition the the enormous company’s High End unit, Devil’s Backbone will join the likes of Goose Island and Golden Road. I wonder if this will continue to occur as AB InBev reaches the merger with SABMiller. Are these companies buying to increase their size before regulatory concerns actually stop the deal? Do small breweries such as Devil’s Backbone even have any impact on something with a scale as large as AB InBev?

      source:
      http://www.wsj.com/articles/ab-inbev-to-buy-devils-backbone-brewing-1460473040

  4. I wonder about the ability to test for substitution effects across craft brewers – I suspect you can’t get price increases for all craft beer at the same time, but only for individual brands or even beers within a brand (when I last looked at Krogers, different DB beers had different prices). If you like several beers, and prices vary, then you buy the cheapest, so you need to look at relative prices within craft beers. That’s an awful lot of pairings, more than data would allow. (Now 3 beers –> 3 relative prices, 4 beers –> 6 relative prices, 5 beers –> 10 relative prices, 6 beers –> 15 relative prices and so on … doesn’t a decent supermarket now stock a few dozen craft beers? 24 = 300 cross-prices, 36 = 630 cross-prices, 48 = 1,128 cross-prices).

    Now this is pretty obvious, so I assume the author has a few tricks to keep the empirical problem tractable. I point it out not because I want to delve into the econometrics, but to indicate that estimating elasticities isn’t easy, even if Chicago is totally prepresentative of the US as a whole.

    So, do these results make sense? What’s happened to overall beer consumption – is that consistent with beer as a normal good? Or are we assuming that at a given point in time it’s normal, but over time tastes shift (year dummies or year fixed effects)?

  5. It seems there is a consensus that millennials are driving the demand for craft beer, but my question is why? I think craft beer and craft breweries fit in with the preferences of millennials. After reading this post, I thought about Sweetwater Brewing Co., a craft brewery located in my hometown of Atlanta, GA. They are currently ranked the 18th largest craft brewer in the nation according to the Brewers Association. Upon doing some snooping on their website, I found that they are dedicated to being a green company. They boast an all green trucking fleet as well as recycled cardboard boxes. They even go as far as to ship out their used grain to farmers across the nation to use as cattle feed. I believe this business process is very much in line with the preferences of millennials. We’ve seen a push by most companies to become more green as well as using fresher ingredients and being less wasteful. While I’m sure macro-brewers claim they are dedicated to sustainability, the preferences of millennials are much more in line with craft brewers that are seen more in that light when compared to macro-brewers.

    http://sweetwaterbrew.com/brewery/
    https://www.brewersassociation.org/press-releases/brewers-association-lists-top-50-breweries-of-2014/

    • Shipping the solids to dairy farms and the like is in fact standard practice in the beer industry. Similarly, in Japan the remains from brewing sake are used (among other things) to pickle vegetables – narazuke – and to marinade / preserve fish as kasuzuke. Doing all this dates back centuries, good business practice is not to let things go to waste.

  6. I think you can argue that craft beers have successfully differentiated themselves in the beer industry but I don’t think you can say they act as a distinct product. While there is a difference in flavor and who is willing to pay the price differentiation, the market is still generally the same. Also while millennials may enjoy craft beers, I think that it is important to consider that this may simply be because new drinkers tend to enjoy experimentation, therefore this may not serve as concrete evidence that they prefer craft beers over mass-produced beer.

    • I think you definitely have a point about the two products. As I mentiond in the post, I drew the conclusion from a specific paper that collects its data from a regional supermarket chain around Chicago, so clearly it cannot explains national product markets. The paper provides an interesting insight but its data are limited both geographically and in terms of time span.

  7. It is interesting to think about how the pricing of craft beer will change as its consumption and production grows. These higher quality craft beers often have expensive inputs, and due to the lack of production size, they cannot take advantage of economies of scale. As macro brewers attempt to shift into the craft beer market, it will be interesting to see where the distinction between craft and macro beer is drawn. If they successfully complete this shift and are able to take advantage of their size advantage, will price decreases affect the image of the product? Craft beer is certainly a superior product to macro-brews, but how much of demand is based on a consumer image of higher quality? If consumers don’t have to pay much more than what macro-brews cost, how will their perception of the product change?

  8. With Anheuser-Busch’s new advertising against , I think both macro and craft beers have decided that they want to differentiate their products. Considering how these companies view themselves and each other can help us define their products. With this in mind, I would argue that craft beer and macro beer are indeed different products.

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