Recession Proof?

The Portland Business Journal is reporting that Widmer-Redhook lost $33.2 million in 2008.

From the article:

In the [annual] report, the company said one-time charges related to the merger, the economic environment and fuller-flavored offerings from big-name domestic brewers have sliced into the company’s sales.

This is the first place where I have seen it said that offerings like Budweiser’s American Amber are starting to cut into craft brewer's markets. I hope this is not a reflection of the market, which only turned really grim in late 2008. As 2009 is horrendous, this would be very worrying for the state of craft brewers if it represents a general trend.

Back to the Future?

The craft beer cognoscenti often talk about how the new craft beer movement in America is a return to the past where breweries were decidedly local (and perhaps reflected local tastes though most beers were pilsner style beers imported by german and eastern european immigrants). I agree that the local brewery is a return to the past, but the localization of breweries in the late 19th and early 20th centuries was largely a consequence of the difficulty of transporting a bulky and heavy product. The modernization of transport, especially post WWII, in my mind at least, was a major factor in the consolidation of brewing which was able to exploit economies of scale in all aspects of the industry. But of course you loose something in the process: variety (such as it was).

But this supposes that there was a lot of variety in local markets prior to the great consolidation. I suspect not, for the very same reason that led to the creation of local breweries: transportation was costly. On most local shelves in the US in the early 20th century, I suspect, was a choice of only a few locally produced beers.

So really then, we are currently in an unprecedented era where we now have a dizzying array of beer choices available to us in our local stores. I used to buy Rogue in Ithaca, NY, and in Portland I can find obscure Belgian beers, microbrews from all around the US, and tons of special brews. What does it all mean? Well, for one, we can identify regional tends in styles and flavors more readily and as producers try and distinguish themselves in a crowded marketplace the incentives are probably to try and produce more and more unique beers.

Which is the point of this rumination: the rise in specialty brews (things like Deschutes' Dissident, Full Sail's Slipknot, etc.) is part and parcel of this newly crowded marketplace. I think breweries are finding it ever more important to create some buzz and attention through the creation and marketing of these brews. It is a wonderful trend for the beer enthusiasts, but is also a sign of an industry that is still evolving. I think a lot about where it will all settle (e.g. how many breweries can the market sustain), but I suspect that this is an industry that will always have a lot of churn - many new breweries starting up and many old ones closing. This is not necessarily a bad thing, it means lots of constantly changing variety. Or perhaps the big brewers will successfully capture the market by introducing their own micro-style brews, it all remains to be seen and is pretty fascinating.

Okay, so in the final analysis this post is pretty aimless, but this is what happens to someone shut in for over a week with sick kids. Hopefully it makes a little sense.

Death and Taxes and Beer

Well I am not dead, so I guess I had better turn in my tax forms. As I am not enjoying Bend and Mt. Bachelor as was the plan for this spring break and am instead dodging nasty germs that my sick kids are constantly releasing into the stale air of my house, I figured I might as well do my taxes. But now that they are done, my thoughts turn to beer. This begs the question, what is the best beer to have post-taxes? (And this year I don't owe any extra taxes so I don't have to go the malt liquor route to drown my sorrows, in fact I can be a bit profligate since I get a modest refund - permanent income hypothesis?, pah!)

Well, I had to go to the local Safeway for a prescription (see: sick kids, above) I figured I'd pick up some post-tax filing celebratory beer. Unfortunately, Safeway's beer selection is the worst in Portland, but I figured that among the many Widmer beers they sell would be the new 'Drifter' that I am eager to try. Nope. Dang.

But aha! Salvation. Of all random things they have a 22oz-er of Deschutes' hop bomb 'Hop Henge,' this is a perfect post-tax beer. A huge beer that will nuke your senses and rid you of that bad tax after-taste. I find 'Hop Henge' and the similar 'Hop Lava' from Double Mountain a wee bit much, yet I still enjoy them immensely and they are perfect for certain situations (and this is one). I love hops, but these are intentionally out-of-balance for the serious hop heads, so beware should you go looking for that perfect post-tax beer.

After my Hop Henge, all the nasty memories of the Form 1040, the Schedule A, the Form 2441, the Schedules SE and C-EZ and on and on and on fade away and my consciousness is transported to Bend - where I was supposed to be all along. Thanks Gary and the Deschutes crew! [BTW, be nice to my brother who is in the brewing program at UC Davis and going to be doing an internship with you in April]

So, what is your choice for your "Thank God I am Finished With My Taxes!" beer?

Pelican

Its Friday, so let's talk beer because I am just tired of talking about economics. John Foyston reports in The Oregonian that Pelican Brewery of Pacific City brough back 10 medals from their 10 entries in the Australia International Beer Awards.

This is some well deserved recognition for one of Oregon beers real treasures. Of course, somehow it seems unfair. Good beer should come from the dreariest, dankest corners of Oregon. Pelican, in a spectacular setting on the coast, should cook up some mediocre beer for the tourists and leave well enough alone. Well, they don't. Their beer is exceptional with an impressive range and amazingly consistent quality.

Economists know about compensating wage differentials - what about a compensating beer differential? Folks in Bend and Pacific City have it all, its not fair.

NB: Spring break is upon us so spotty blogging ahead for the next week. I am going to Bend to get my own dose of the good life.

3.2 Beer and Craft Brewing

[Note: Oregon economy is just too grim, so today let's think about beer!]

Beervana blogger Jeff Alworth sent along this little beeronomics puzzle: in Colorado, craft brewers have taken a stance against repealing the restriction that allows only beer with an alcohol content of 3.2% or less to be sold in grocery stores. See news reports on the story here and here.

What gives? Why are craft brewers afraid of this change? Here is Left-Hand Brewing's Eric Wallage: “It’s terrible, if it passes, it’ll completely junk up the market for craft beers.”

The premise is that the 3.2 law basically shuts out the supermarket market for craft beers. This is not really true, it is easy to make beer for this market. I asked my fellow L&C alum who is the brewmeister for Boulder Brewing how they made their 3.2 beer. "Just add water" he replied with a rueful smile... But it is likely that the distinctive flavors and qualities that are the hallmark of craft brews over macro brews are largely lost when drowned in water. So, essentially, they believe that this is not their market (though Fat Tire seems to sell exceedingly well in supermarkets). Thus, they perceive the liquor store as their 'turf' and they want to protect it.

But there is no economic reason to suggest that liquor stores have different incentives when it comes to selling beer, nor is it clear that the clientele is different than in supermarkets (or would be in equilibrium). My experience in Colorado was that liquor stores did not have beer displays that were substantially bigger than supermarkets (especially since groceries are constrained by the 3.2 law) and that liquor stores seemed to devote plenty of space to macro brews. They are profit maximizing firms after all, just like grocery stores, and in absence of the law, I would expect just about equal space being given to craft brews as macros in the groceries. It is all about the demand. In fact, I had a conversation with my local liquor store owner in Denver and it was clear that he was stocking only what sold well (we were talking about the removal of Full Sail), he did not express any real personal devotion to craft beers.

One would expect that being able to sell their beer to a broader market would be in the craft brewers interest. It certainly has not hurt the craft brewing industry in Oregon. This is particularly true because of the fact that demand for craft brew is a function of experience. Craft brew is an acquired taste and the more craft breweries can get people to try their beers, the more future demand they can expect.

So what gives? I suspect that this is a short-sighted political move by the craft beer industry in Colorado to curry favor with liquor stores in hopes that they will give deference to Colorado beers. This is dumb, because of its short-sightedness and because of the aforementioned fact that liquor stores are profit maximizing firms and will respond to demand. When push comes to shove, you can't take goodwill to the bank.

One thing is certain, the real looser in this fight is the consumer who will face higher prices and less convenience. Craft brewers ought to think about that.

Honest Pint in Salem

Beervana blogger Jeff Alworth's Honest Pint Project is gaining some serious traction. A new bill has been proposed that would require inspections of pubs and would certify their compliance with a true 16oz pint rule with a official decal (I imagine one like the state health 'complied' and 'exceeded' stickers for restaurants).

Though as an economist I support the Honest Pint Project, I do not support this legislation. I think it is costly, requiring inspections; I think it is not entirely effective, there are plenty of opportunities for cheater pints; and I think there is a better solution.

My solution has always been to do what the Brits do: require marked glassware like in the picture. Glassware suppliers can certify the volume and etch it on the glass itself. It is a lot easier to monitor a few glassware suppliers than hundreds of pubs and restaurants and etching adds very little to the extra cost of glassware (and can be phased in to save a big one-time cost to pubs and restaurants). Besides, having an Oregon state seal on a glass certifying its volume would be cool!


The reason I support this remedy is because it addresses the essential market failure: asymmetric information - drinkers do not know the volume of the glasses their beer is served in. Once full information is restored, the market will do the rest.

One More Comment About the Beer Tax

Usually taxes such as these are proposed to address some external costs. But the problem with making the leap from a beer tax to alcohol and drug abuse (and related crime and treatment) is that this is an external cost only associated with a small minority of beer drinkers. In fact as I mentioned in my earlier post, moderate beer consumption may actually cause a positive externality, suggesting (economically) government may wish to subsidize moderate consumption.

Other taxes are different. Take a gas tax, there is a large and recognized cost associated with the release of carbon into the atmosphere and it doesn't matter how much you drive, when you drive or how fuel efficient your car is - the carbon content of a gallon of gas is the carbon content of a gallon of gas. When you consume a gallon of gas in any manner of use, the cost to society is the same. Thus a tax on gas is purely Pigovian. We all pay a price that reflects the costs we impose on society.

Not all sin taxes are like beer taxes, the effect of cigarette smoke are harmful for even moderate smokers and also for those around them. So a tax is much more efficient in addressing the external costs here. But Beer is simply not the same thing. As a occasional and very moderate drinker of beer I impose no external costs - so making me pay a higher price is not Pigovian but simply an arbitrary, and distorting, tax.