By: Bill Pike
Ok, let’s start with transparency.
I have a deep appreciation for the American beer revolution that has taken place over the last twenty plus years. I don’t consider myself a beer snob, as I don’t have a discriminating set of taste buds. But in a social gathering if light beer is the only beer available, I can be snobby, I’m not drinking.
I have no brand loyalty as I enjoy trying different breweries and their beers. In the summer of 1980, on a trip with my wife to visit her sisters in California, I had my first Anchor Steam. That beer moment will always be special to me, so if I have any slight allegiance, Anchor Steam is a favorite.
And while, I admire the explosion of breweries across our land, I do have a concern about the craft brewers and their beers, and that is pricing.
Now, I know you are probably thinking, Bill, you are just a cranky, 64 year old guy, who is worried that Social Security will truly dry up, and you want be able to afford even a pony bottle of beer. For you youngsters out there, a pony bottle was 7 ounces of beer bottled for a lot of sound economic reasons by big breweries.
Seriously, I have a lot of questions about the pricing of beer.
What drives the pricing of a six pack, a bomber bottle, a growler fill, or a keg of beer at your local retailer? Same question for a food establishment, what drives the cost of that draft beer? Are these prices driven by the brewery, the distributor, or the retailer?
Why might a six pack of a craft beer at my local retailer from a craft brewery west of the Mississippi River cost less than a six pack of beer brewed in my own city? I would think shipping the beer across the country would force a retailer to charge a higher price. I hope transportation isn’t a factor in setting a higher cost for a beer brewed within a few miles of my local retailer.
But as a consumer, I believe that the beer brewed in my own city should cost less than the one shipped from Utah. At times, even a quality import can be less expensive than a craft beer. Why is this?
I have asked this question to my craft beer loving friends and sporadically to people with knowledge in the industry. Some of my pals think I’m just a whining cheapskate, but others are curious about the pricing question too.
In researching this article, I started by e-mailing three beer distributors in the Richmond area. In my first attempt, I simply identified myself as a consumer. My second attempt, I referenced the development of an article for Virginia Craft Brews. None of the distributors responded to my e-mails. I did have a brief conversation with a friend who works for one of the distributors, but he didn’t share any significant insights other than the brewery sets the price for selling to the distributor.
I did e-mail another friend who has a close working relationship with one of the craft brewers in Richmond. His very guarded response focused on the following: “Pricing structure for their beers is confidential as is the cost accounting associated with it, and releasing that information would impact their competition which is steep.”
I respect that answer, and I respect the right of the brewery to pursue turning a profit. But, I also suspect that a six pack of beer priced in a range from $11.99 to $13.99, or beyond, might drive a consumer away.
My wife and I attended an event sponsored by the Richmond Times-Dispatch that focused on Virginia wine, beer, cider, and distilled spirits. This panel discussion featured insights from leaders in each area cited, plus a representative from the Virginia Alcoholic Beverage Control Board (ABC). I asked my question about the pricing of beer, and prefaced the question by acknowledging the right for the brewery to make a living/turn a profit.
One of the panelist responded, and the answer stated pretty much what I have heard before: cost of the ingredients, intensity of the labor to brew a quality product, size of the brewery, obligations in some instances based upon state grants to use locally sourced farm products, and standard business operation costs related to property, insurance, employees, taxes, marketing, and debt.
During that discussion, it was clear that the representative from the Virginia ABC board had good insights and expertise. The quality of his answers provided a helpful perspective for any consumer who supports local producers of wine, beer, cider, and distilled spirits.
Not long after attending this forum, I reached out to the ABC board for clarification about beer pricing in the Commonwealth of Virginia. Here is their response:
Beer prices are set by the wholesalers (distributors) and retailers of the product. The state’s primary pricing regulations are 1) wholesalers must charge the same price to all retailers for beer (with some exceptions such as discounts for quantity purchases) and 2) on premise retailers cannot charge reduced prices (happy hour) after 9 pm.
The ABC Board has no control over pricing other than mentioned above.
So, based upon those regulations, and the earlier reference to a highly competitive market, it isn’t likely that the formulas and calculations used to set the price of craft beers are going to be shared. They will remain a closely guarded crafter’s pivot point scribbled on a stirring paddle found deep inside a brewing kettle.
Ok, I can respect because of a competitive market keeping confidential how a craft brewer establishes its pricing. But, that seems counter to an industry that has prided itself in transparency. In fact, the recently introduced Brewers Association seal is “designed to designate beers that are produced by independent craft brewers.”
In the press release, transparency is a consistent reference related to consumers having a clear understanding of who is brewing the beer. Is the brewer a true independent or a brewery acquired by one of the big box brewers? The Brewer Association’s definition is clear, and the new symbol makes sense in providing that clarity for the consumer.
Shouldn’t that same transparency about who is brewing the beer be applied to pricing for the consumer?
Somewhere down the road, there will be an implosion or a significant correction with craft beer sales. I’m sure savvy breweries will hold on and ride the upswing for as long as possible, but at some point, the momentum is going to shift.
Might craft brewers be wise to start carefully evaluating their pricing strategies? Is now a good time to test some different price points that could positively impact consumers?
I’m no expert, so I don’t have an answer.
But, I suspect that craft brewers throughout Virginia worry about a retail account that might push the cost of their beer to an unacceptable mark up. Consumers who carefully monitor pricing would easily recognize such a markup, as would a sales rep for the brewery. In those instances, I sense that a no win situation is being created for the consumer, the brewer, and the retailer.
A significant markup will possibly push a knowledgeable purchaser away. An interested, but new to craft beers consumer might also be reluctant to make a purchase. If the foot traffic in the retail space doesn’t have consumers with deep pockets, then the product will continue to sit and age.
Makes me wonder if the beer was fairly priced from the start, might the consumer buy two six packs instead of one?
Again, I’m guessing that sales reps from craft breweries must lose some sleep over retailers who have demonstrated a propensity for pushing the mark up to unacceptable levels. Sales reps probably have in their repertoire carefully chosen words of diplomacy for such retailers.
And you know what else might keep craft brewers and distributors, sleepless—a knowledgeable retailer like the “deep throat” informant from Watergate.
Part II-- Long Neck
A retailer who has access to insider information, and who might be willing to blabber the industry’s stirring paddle secrets. In this case, we’ll call our informant “Long Neck”.
It was an exceptionally warm and humid summer night in Richmond. Thunder rumbled in the distance, and I’m in an alley that is spooky even in daylight.
I’m at the front corner of a dumpster looking down the alley waiting for the strike of a match. At this point, I’m not sure if my sweat is from the humidity or my fried nerves.
Finally, I see the quick flicker of flame, and reluctantly my feet move me down the alley.
Long Neck is like a Navy Seal on recon, covered in darkness.
Before I can even spit out my first question, he whispers, “Margins, it’s all about the margins. It’s an industry rule, don’t divulge the margins.”
I scan the alley, and ask my whiny second question, “Why does my local craft beer cost more than a craft beer shipped in from Utah?”
Long Neck sighed, and stated, “I wish I knew.” And he continued, “But the size of the brewery out west might have an impact in combination with their ability to purchase in larger quantities their brewing ingredients.”
The lightning and rumbles of thunder were inching closer. The wind was picking up.
I was ready to ask Long Neck my final question, and I looked back and he was gone.
In an article written for the Huffington Post back in September 2014, Joe Satran calculates a very insightful breakdown of the cost for a six pack of craft beer. With his analysis, Satran cites the margin breakdown in the following ranges: brewer 8%, distributor 21%, and retailer 31%.
As a consumer, I will probably continue to find something to whine about related to craft brewers and their beers. Clearly, I hope craft brewers and their breweries will continue to thrive. But, I also believe craft brewers might be able to extend and sustain their growth further into the future by paying closer attention to their pricing philosophies.
Remember, consumers are watching and calculating, and so is Long Neck.