Friday, May 20, 2011

On the Rising Price of Beer

(AP Photo/Mark Humphrey)

Loren Berlin in the Daily Finance writes about the economic forces that determine beer prices. It starts with the usual suspects: the inputs. But first, are beer prices rising? Yes, says she:

...the average prices for a case are $20.34 at the supermarket and $19.92 at a convenience store, up 3% and 2.3% respectively from a year ago.


...I began to wonder why my brew was getting more expensive. Turns out, a lot goes into the answer.

Three years ago, Bavaria, the largest state in Germany, suffered a bad hops harvest. These green, pine cone-shaped flowers are the essential ingredient in brewing beer, and because Germany alone provides roughly 35% of the world's supply of hops, the crop shortage created an immediate and significant problem for beermakers who found themselves suddenly scrabbling to locate this key ingredient. And as we all know, when supply decreases and demand doesn't, prices rise. To cover those new higher costs, brewing companies added a few cents to the price of our beer.

Of course it was not just the hops crop in Bavaria, but a fire in Yakima and bad weather in other hops producing regions down under.

the other key commodity that goes into our beer are grains -- most often malted barley, but sometimes wheat or even rice.

...a heat wave in the Ukraine can directly add to the cost of beer -- and is doing so right now. Global grain production is down, thanks in large part to unusually brutal heat in the former Soviet Union and droughts in China. See the previous discussion of supply and demand, but in this case, the effects are wider, because unlike hops, which is mostly used in beer, we've got a few other uses for grains.

Next she pinpoints other cost factors like the price of oil:

Then there's transportation. All those raw materials have to be shipped to the brewers, and the finished products shipped to the retailers who sell it to us, all of which requires fuel. Fuel, that, until very recently, had been getting steadily more expensive this year. Yet another addition to the price we pay for our beer.

Of course brewing beer uses lots of energy as well...

But here is the really interesting stuff:

Beyond simple responses to these market forces, price increases may also be a conscious move on the part of the large beer manufacturers. According to Benj Steinman at Beer Marketers Insights, Anheuser-Busch InBev (BUD), for example, made a "strategic shift," to shrink the price gap between the company's more and less expensive brands to avoid "trade down," a term used to describe the consumer's tendency to purchase the less expensive of two beers manufactured by the same company. Given that Anheuser-Busch InBev controlled 48.3% of the U.S. beer market in 2010, any strategy they follow is sure to have wide effects. It's likely other manufacturers will follow suit, further raising the cost of our beer.

This is fascinating and can be applied to a familiar 'spatial' model of product variety. It says that firms provide consumers with lots of variety because consumers are quite different in their tastes and if you give them something in their sweet-spot, you can charge them a premium for it. Of course consumers are value conscious as well, so if the thing that doesn't match their preferences perfectly is much less, they may just switch - which defeats the purpose of providing the variety in the first place.

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