Friday, January 30, 2009

Why is Beer not Priced According to Cost?

Over on the Beervana blog, Jeff asks an interesting question about beer prices. No doubt his readers will flub the economics badly, so I expect astute economic analysis here.

The question is this: why do we typically see beers of the same brand all priced the same even though it typically costs a more to produce some beers than others, like an IPA versus a Pale Ale?

Part of this can be explained by supply and demand, but I don't think demand systematically falls the more ingredients a beer uses (then again, maybe it does - as you make more and more flavorful beers, perhaps the demand curve falls as fewer and fewer people like them). So there must be something about brand and consumer psychology. My guess is that stores have found that if one Deschutes beer (Inversion IPA) is priced above others (Mirror Pond), few people buy the higher priced one.


Tuesday, January 20, 2009

In a Tight Economy, Is Doing it Yourself a Good Idea?

It has been years since I brewed my own beer, but recently my son asked me the question I have been waiting a long time to hear: "how do you make beer?" "Well son," says I, "I'll show you." So off we set to FH Steinbart to load up on supplies.

[I had in mind something modeled on Ninkasi's Total Domination, which without a doubt is the best beer brewed in Oregon and possibly the country. On this I am sure there will be no debate. And by the way has Ninkasi, in a short time, become the best Oregon brewery? I think it might. Kudos to Jamie Floyd.]

Anyway Steinbarts on Saturday was absolutely crammed with people buying supplies. Unfortunately I was after Centennial, Cascade and Chinook hops to make a classic 'Three C' IPA but the Chinooks were gone. Thoughts of substituting Willamette, Newport and Zeus were also dashed, so I decided to pitch a curveball: up the hops (to compensate for the lost alpha acids) and use Mt. Ranier instead. I'll let you know how it turns out. But the point is that this economic naturalist started to wonder whether, as incomes get strained, people start to make their won rather than buy it in the bottle. Does it make sense to do this in tight economic times?

Let's do some back-0f-the-envelope calculations. To get all the ingredients for my beer, plus a few sacks for the grain and hops but basically nothing else (including bottles and caps) I spent about $65. Blame the hops which are not only scarce but expensive. I had some leftover ingredients and I have all the other equipment from before so we will consider it a sunk cost and ignore it. So let's say $60 for the ingredients. From this I make a five gallon batch and I will probably yield about 4.5 gallons after ditching the sediment - maybe less because I dry-hopped - and then some spillage due to inevitable personal blundering, so let's say 4 gallons at the end or about 7 six-packs or 23 22oz bottles.

A six pack of good beer is about $7-$8 in my local supermarket. So the retail cost of this beer is about $50. If I manage something sublime perhaps I can compare to Total Domination which costs about $3.30 for a 22oz bottle, so my beer would retail for about $75.

On a broad scale then, the cost of the ingredients are about equivalent to the retail price of the finished product. Include the opportunity cost of my time, the certainty that my beer will fall far short of Ninkasi's and the extremely high probability that I will have managed to acquire an unwelcome bacteria that gives my beer an off flavor, and it seems clear that brewing your own is NOT a way to save money.

The crowd at Steinbarts could still be an indication of a bad economy: many people with unwanted time on their hands might turn to brewing which is a nice hobby and also has the appealing aspect of providing a large amount of alcohol at the end.

This calculation is, by the way, why I have largely stopped brewing: for about as much money as brewing my own I can get super-fantastic beer in many varieties and I don't have to wait for it.

Wednesday, January 7, 2009

Complements: Beer and Cigs

OK, so I had to find some excuse to post this picture which is all over the Oregon beer-o-sphere. It is Don Younger striking a familiar pose on the last day smoking in bars was allowed in Oregon. How will the ban affect Oregon's bars, pubs and breweries?

Matthew Engle in the Financial Times, writes that beer sales in Britain have declined 10% since the smoking ban was imposed there. Why should this be so? It is certainly true that the two, beer and cigarettes, are complements and so increase the cost of one [smoking is more costly because you have to go outside and do it] and the demand for the other falls.

Will this have as big an effect in Oregon as in Britain? I think it unlikely as most of the ever-so-popular pubs and brewpubs are generally non-smoking establishments anyway. But I do imagine that some small bars could find business down. I guess the bigger question is: given that there are many alternatives to patronizing and working in non-smoking establishments, is the ban necessary? The free market side of me suspects not. But the ban is no so much about this, I assume, as about public health and the cost of caring for smokers later in life. If this ban manages to reduce overall cigarette consumption, then it could easily save the state a lot of money down the road.