Friday, December 11, 2015

Craft Beer Bubble Redux

I was quoted in a Los Angeles Magazine article that makes me sound like a doomsayer when, in fact, I am still quite bullish on craft beer so I just thought I'd share the Q&A I had with the writer to make sure my opinion is clear.

- Is it possible to have too many breweries in a given market?

Yes, of course, it is possible but I don’t think we have reached that point in even the most mature markets like San Diego and Portland. The main reason for this is the fact that it is not just the supply of craft beer that is growing, the demand itself that is growing dramatically and this growth shows no sign of slowing down. Until we reach the point where demand appears to be leveling off, I think it is premature to talk about too many breweries. Now, this doesn’t mean that we won’t see a lot of failure along the way, there will be increased competition, and this competition will result in weaker breweries exiting the market because of poor relative product quality or lack of business acumen. But this is more a sign of a robust market than of an ailing one.

 - If so, how do you know that the market has reached brewery carrying capacity?

You don’t and never really will because there are a lot of dynamics in the craft beer market that make it very hard to predict what the mature market will look like. There is the increasing demand, as I mentioned before - who knows where it will level off? But then there are a couple of competing trends as well. One, brewing is an industry that has massive economies of scale, meaning that the bigger the brewery is, the more efficient it is and thus big breweries can produce at a lower cost per ounce. This means that there is incredible pressure on breweries to grow and suggests that in the end there might be only a few breweries. However the second trend is the strong demand for local and more artisanal beer which is associated with smaller more personality-driven breweries. This suggests that smaller boutique brewers might be able to continue to charge a premium for their product which can compensate for their relative inefficiency - they can sell their beer for more because of their connection to the local market.

- Early Los Angeles breweries were mostly hobby home brewers looking to go legit. But the breweries opening today are investor-backed ventures with a lot of money behind them. Is the era of the home brewer going legit over in places like San Diego, Portland and LA?

 This is the most fascinating trend in brewing today, the question of what all this macro brewing industry money and venture capital money will mean to craft beer is an open one. It also speaks to my point about local versus big - what we don’t yet know is if these investors can turn a local brand into a successful national brand. As they grow big will the consumers lose their appetite for the beer? I think there may be a few more national craft beer brands on the horizon along the lines of Sierra Nevada, Sam Adams (Boston Beer) and New Belgium but I think in local markets there will be a lot of room for small, local breweries. In fact, AB appears to be placing their bets on establishing a stable of local brands rather than trying to take one or two and turn them into national brands, which to me suggests that they believe in the inherent local-ness of craft beer. I do think that the marketplace will become more and more competitive over time and these breweries will no longer be can’t-miss opportunities and the new generation of successful breweries will be characterized by great beer, great marketing and great business acumen. It will no longer be possible to fumble your way to success. That said, I think in most markets, with the year over year increase in demand, there is still a lot of room for new ‘homebrewer gone pro’ businesses.

Pod 14 - Flavors in Beer: From Brewhouse to Bottle

Monday, August 24, 2015

Thursday, July 9, 2015

Quick Hit: Buoy Brewing in Astoria

180 degree panorama from Buoy Brewing - Astoria, Oregon
Astoria has been a popular destination for sweltering Portlanders looking for a respite from the unrelenting heat of the last few weeks.  So popular that when I visited Buoy Brewing on Monday in my own attempt to escape the Portland heat, they were out of about half their beers. Our server said the weekend had been 'nuts.'  Fortunately, she said, they have recently doubled the capacity of their brewery and soon such shortages should be a thing of the past. Nevertheless there was still lots of wonderful beer to be had: their exceptional Pilsner and IPA were on tap as were a nice session IRA and a lavender saison among others.

The space on a quay on the river is second to none, the interior is lovely and includes an amusing glass floor through which to see seals and sea lions (who were not in residence when we were there but we spotted at least six sea lions in the water just out front).  The atmosphere is wonderful in the art of the pub that faces the water and they can open a big sliding door when it is warm enough (as it was for us).  

The beer, the space and the location are all exceptional, but the food is just as good.  From the hot and freshly made pitas that came with their delicious homemade hummus to the salad, to the entrés that were excellent across the span of burgers, fish, and steak.  It was the nicest dining experience we have had in Astoria and anywhere else for a long time for that matter.  

Astoria is now blessed with an extraordinary beer scene and has a great partner to the wonderful Ft. George Brewing, whose outdoor patio on a sunny day cannot be beat, and the good old Wet Dog/Astoria Brewing which is always a great stop as well.   

Consider Buoy Brewing a must if you find yourself in Astoria.

Tuesday, July 7, 2015

AB InBev Craft Aquisition Binge Goes Global: AmBev Buys Cevejeria Colorado in Brazil

News from Brazil: AB InBev's Brazilian subsidiary AmBev is buying Cervejaria Colorado, a São Paulo state micro-brewery.  When I lived in São Paulo, Colorado was one of the most available beers in local shops and one I sought out as their Indica (pictured below) was my go to hop fix.  Here is a little review of Indica.

The article is in Portuguese but the script is familiar to followers of the AB purchases of breweries like 10 Barrel: Colorado founder Marcelo Carneiro will continue to run the brewery and the implication is that it will be allowed to continue to run as an independent subsidiary.

AmBev makes some of the most popular beers in Brazil like Brahma and Skol but clearly sees craft as a growing trend in Brazil.  What is most interesting is that this is an even bigger deal in Brazil than the US as in Brazil most bars and restaurants are tied to a major brewery and so it is very hard to find craft beer in Brazil.  Access to AmBevs distribution and network of tied bars and restaurants is potentially a game-changer that could really spark the rise of craft beer.  So it will be interesting to see the reaction among the craft enthusiasts as it has the reek of corporate sell-out but also the potential to really create a growing market for craft beer which currently is very niche.

Wednesday, July 1, 2015

Type 1, Year 1

Exactly one year ago, my older son was diagnosed with Type 1 Diabetes (T1D).  As with all such diseases, this one came completely out of nowhere.  It started typically, excessive thirst and frequent urination, and ended up with a four-day stay in the hospital.  He was healthy before and remains healthy to this day, in fact we caught it early enough that he was never sick with ketoacidosis, the potentially fatal complication from excessive sugar in the bloodstream.  We were lucky in that respect.

The reality of a life with T1D is difficult, it means a lifetime of careful management of blood sugars, of always thinking carefully about what you are eating and how to dose the appropriate amount of insulin, of carefully managing the carbohydrate demands of exercising muscle tissues when he plays soccer. But the emotional toll is far worse. A parent never, ever wants to hear that their child has a potentially fatal autoimmune disease and, as an adult you mind immediately wanders to the next 10, 20, 50 years of your child’s life and you feel overwhelmed and panicked.  I spent a week in tears, trying to me strong in front of my son, but feeling crushing panic, sadness and despair inside.  I would take bathroom breaks to go and cry.

Amazingly the center of strength in the family was my son himself.  Well, I imagine it is not amazing to anyone who has dealt with a similar issue – they know firsthand how amazingly resilient are kids.  He cried exactly once – when he was told the diagnosis – and has never felt sorry for himself save for a couple of moments here and there when the burden of having to deal with diabetes when his friends do not becomes too big a drag.  But from day one he took charge of his own care, began administering his own injections, calculating his carbs and testing his blood sugar.  He has risen to the challenge and his determination not to let it derail him has been an inspiration to us all.

 In the past year I have never stopped marveling at how well he has dealt with such a life-changing event.  Modern medicine and technology has helped.  He now has a sophisticated insulin pump that attaches directly to his body and allows him to be active and avoid needles, injections and having to carry around too much equipment.  He can even swim with it, which is good because he likes to swim more than anything.  We have, as a family, adjusted to the new reality and are now used to counting carbs, making sure he has his bag with supplies and emergency glucagon and helping with pump changes that occur every three days.

As an economist I marvel at how difficult this diagnosis must be for families without excellent insurance, stable jobs and local medical expertise.  We are incredibly fortunate to have the time, the resources and the help near at hand.  Something like this makes one appreciate the need for universal access to health insurance.  This is a disease that is unpreventable.  A bad RNG as my son calls it, referring to the random number generator code that determines the bonus prizes he gets in his favorite video game.  [This has led to the discussion of how it is not possible to program true randomness, and whether there is any such thing in the world anyway – but I digress]

I have learned to be patient with those who don’t know the difference between Type 1 and Type 2 Diabetes, as I was completely ignorant of it prior to my son’s diagnosis as well.  For the record, they are entirely different diseases common only in the fact that they both involve your body’s ability to deal with sugar.  T1D is an auto-immune disease where, for reasons still unknown, your body’s immune system decides to attack the cells in your pancreas that produce insulin – eventually destroying them all. Insulin is the hormone that allows your body to process the sugars in the bloodstream and move them to the cells where they are converted into energy.  The key with T1D is that the body processes the insulin just fine; it just doesn’t make any itself.  My understanding of T2D is that the body commonly does not process insulin effectively so even though the pancreas is making it, the body cannot metabolize the carbohydrates.  Thus, while people with T1D can essentially eat as they normally would, taking insulin injections to match the amount of carbs, people with T2D often have to heavily restrict carb intake.  So yes, my son can have the cake at the birthday party, but thanks for asking.

I write this all here because after a year of minimal blogging I felt I should explain the inactivity.  My inattention to the blog has a lot to do with time – management of my son’s diabetes at first was very time consuming.  It also has to do with energy, when my son switched to his pump I was waking up three times in the night to check his blood sugar for three months.  But largely it has to do with priorities.  I am chair of the OSU economics department, I am a full-time professor, I have numerous ongoing research projects, I am writing a textbook and I am, most importantly a dad who puts his kids ahead of anything else.  So the blog suffers and I regret it, but not that much.  I keep it alive because I do hope to return to regular blogging someday – it is something I enjoy a lot.

In the meantime, I hope you can all enjoy the podcast Jeff Alworth and I have begun.  This allows me to take a two-hour lunch break and record a conversation primarily about beer but also about the business and economics of brewing.  Please check it out.

I thank you all for your support of this blog.

-Patrick Emerson

Thursday, June 25, 2015

Beervana Podcast #4: Session IPAs

The Economics of Scarcity

Today I was on Vermont Public Radio's "Vermont Edition" talking about the economics of craft beer.  [Here is the link to the audio - my bit starts at 32:10] All good fun and thanks to the good folks at VPR for having me as a guest.  They did throw me a curve ball, however, as they had told me to expect for the conversation to be focused on the Heady Topper phenomenon. The Alchemist's Heady Topper, as you may know, is one of those 'it' beers in the craft beer enthusiast world - you simply have to try it if you are a self-respecting enthusiast.  And so the buzz is created and people do crazy things to get their hands on some.

Another similar beer for left-coast folks is Pliny the Elder, the Russian River creation that is similarly a buzz beer and has been for a remarkably long time.  Both beers are big double IPAs, both are very good (though I can only vouch for Pliny the Elder personally - but I have it on good authority that Heady Topper is similarly wonderful), and both are extremely scarce.

So how does the fact that it is scarce contribute to the popularity and demand for the beer?  Well there are a number of economic factors that come in to play. The first is that since beer is an experience good (a good you cannot put a value on without actually trying it) you have to look for signals of its quality.  I have talked before about how price can be a signal of quality, and so can visible excess demand.  If people are willing to drive hundreds of miles and wait for hours, it must be an exceptional beer.  So scarcity can actually drive up demand.

Psychology also plays a factor as well: it turns out that scarcity/excess demand can actually cause you to enjoy the good more.  If you believe the good is exceptional it actually changes the way you perceive it and you are more likely to think it is excellent.  In economics terms, you get more utility from drinking Heady Topper simply because it is scarce!

Finally, buzz is still a mysterious and perplexing thing to economists (despite lots of fancy modelling with information trees, information cascades and the like) but it is elusive and when you have it it is hard to maintain it.  One way to maintain it is to keep the good scarce and so scarcity has another benefit it that it can sustain the demand for a good. 

Having said all of that, I don't think in either The Alchemist or the Russian River Brewing case there is a master play to maintain scarcity.  In many cases, the allure of making a profession in craft beer is the ability to be a small businessperson doing something you enjoy and can share with others while feeding your family.  They are not out to maximize profits but their own utility. But if they were crass capitalists, either one could have the beer contract brewed in mass quantities and flood the market for a quick payout (or more likely these days - sell the brewery to a big conglomerate or venture capitalist firm). However, this would likely be self-defeating in that the scarcity would be gone, the mystique of the beer shattered (let's face it, we are spoiled for choice with exceptional big IPAs these days) and the buzz that surrounds the brewery name lost.  

Friday, May 22, 2015

Beer Taxes by State

The Tax Foundation has produced another Beer Tax Map to show taxes on beer per state. 

Oregon ranks quite low and has a big industry (by number of businesses at least) so I imagine that the causality runs both ways.  I enjoy looking at the South and wondering if the high taxes on alcohol were fundamental in creating the black market that led to the moonshiners (my knowledge of whom is largely from the "Dukes of Hazard") .

Friday, May 15, 2015


Jeff Alworth and I have decided to have a little go at podcasting.  Might not last long, but as I am interested in the economics of the brewing industry and he has loads of knowledge about beer and brewing we decided to collaborate on a blog wherein he and I discuss brewing, the economics of beer and beer itself.

We are rank amateurs but we gave it a go.  Let us know what you think.

The first episode is on parti-gyle brewing.


Friday, April 24, 2015

There Will Be Blood

Dave Infante has written the best piece on the evolution of craft beer market I have read in quite some time (and not just because he quotes me).  I get asked all the time if I think there is a craft beer bubble and my answer is always no, but that I think the market is maturing to a point where price competition is coming and it will put a lot of pressure on small-scale breweries.  I expect that we will see a fair number of breweries closing but because of this dynamic, not because of a bubble. 

Go and check it out. 

A Visit to Growlers Hawthorne and the Wonder of Digital Pour

I found myself at Growlers on Hawthorne yesterday at the invitation of Jim Hillman, the owner, and came away impressed by the business in general, but particularly impressed by the Digital Pour system they have installed.  The place is simple and elegant: you come in, choose from about 40 different beers and ciders (and a separate kamboucha station that even includes craft root beer), fill your growler and off you go. You can sample anything you want  They even have parking right in the heart of Hawthorne.  They have a cute bike like painted on the floor from door to door inviting you to roll your bike right on up to the filling station so you don't have to lock it up outside - brilliant.  A growler fill starts with at CO2 purge and then a fill using a freshly sterilized hose each time, as good as it gets. 

But what really caught my eye was the Digital Pour system for displaying the beers.  As you can see above the information includes a logo (which allows Growlers to avoid tap handles and yet still let customers identify the brewer by logo), the brewery name, the beer name, a description of the beer, the place of origin, ABV, IBU and an icon that gives the customer an idea of the SRM or color of the beer and then the price of a growler fill for that beer.  Finally, there is an icon that describes the state of the keg - how much beer is left.  This information is uploaded in real time to their - wait for it - iTunes App, so you know exactly what choices your have when you go in (or if you need to hurry before a keg blows). The display also have a twitter feed that displays any tweets that mentions the store and information about what is on deck - beers about to be put on.

Turns out Digital Pour is a Portland company, as you might expect, and I have a feeling we will be seeing a LOT more Digital Pour displays around town very soon.

In the meantime, I recommend you check out Growlers.

Friday, January 23, 2015

Why AB is Buying Up Craft Breweries...and Why You Shouldn't Be Too Concerned.

News today that Anheuser-Busch InBev NV has agreed to buy Seattle's Elysian Brewing Company has, once again, rattled the craft brewing community as it follwos closely on the heels of the acquisition of 10 Barrel and, a couple of years ago, Goose Island.

This has arisen me from my stupor and prompted me to do an actual blog post which, ironically, follows my remembrance of Jack Joyce with whom I once had an extremely interesting conversation about the big breweries and craft beer.  The crux of the conversation was this: macro brewers could, if they wanted, brew outstanding craft beer: they have ultra-modern brewhouses, amazing brewing talent, access to the very best ingredients, fantastic distribution networks and the resources to invest in craft beer.  So why don't they?

Jack's answer was that their corporate structure, all centered around mass sales was not conducive to growing a new beer or brand.  The corporate culture insists on clear sales goals and to displace Bud Light on shelves and tap handles any new beer had better taking off flying.  There is no patience for slowly establishing a beer or brand.  Not to say their efforts have not been somewhat successful - Blue Moon and Shock Top are two moderate success stories but ones that have not really broken into the craft market.

So what does acquisition do that in-house cultivation doesn't?  First and foremost it solves the impatience problem.  By buying an established and respected brand you already have a proven winner to show the bean-counters and share holders. 

Which is why I am not worried about this that much.  They have learned that they cannot replicate craft brewing within the macro brewing corporate structure.  This has been a lesson that has taken some time to learn but I think has sunk in.  I think the attitude is, therefore, not to try and bring these craft brewing companies into the corporate fold, but to let the operate independently - to continue to do what they do and help them grow with capital infusions and improved distribution.  If you can't beat them, join them (or have them join you).

I don't know how long the corporate restraint will last, but it is quite possible that it will continue to last for a long time if the Goose Island experience is any guide.

Time will tell, but for now, I personally have no qualms reaching for a 10 Barrel or Elysian beer.

P.S. My apologies for the lack of blogging - it has been a combination of: becoming chair of the econ department, writing an economics textbook and a major family health event that has caused a lot of adjustment and changes (all is well - no worries).