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).
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?
“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.