UO MNCH 'Ideas on Tap' Talk Slides: The Future of Craft Beer

Here are the slides from my talk in Eugene for the University of Oregon's "Ideas on Tap" series.  Mostly just stuff cobbled together from the Brewer's Association and Josh Lehner at the Oregon Office of Economic Analysis.  Thanks to both parties.

UO MNCH Ideas on Tap Presentation: The Future of Craft Beer by Patrick Emerson on Scribd

New Pod! Beeronomics 2: 5000 Breweries, M&A Mania and Scarcity in Beer

Live in Eugene! The Future of Craft Beer

I will be talking and answering questions about the economics of craft beer and the future of the industry at the University of Oregon Museum of Natural and Cultural History's Ideas on Tap series this coming Wednesday (Dec 7) at 6pm at Sprout! Regional Food Hub in Springfield (I really hope Mayor Quimby is coming).  This is a science pub-type event where you come, eat and drink, listen to a short presentation and then join in a conversation about the future of craft beer.  Come and join the fun!

If nothing else, the beer will be good...

Brewing in Europe: Old and New

Jeff and I had hoped to have a new pod ready for public consumption by today, but circumstances beyond our control have pushed that back another week.  It is entirely my fault, not Jeff's, as I have had a ridiculously busy fall and have had a number of unforeseen bumps along the road - the latest being my son's pneumonia.

So, to keep you engaged in the beery world I bring you two interesting articles about beery things from two august institutions.

Fist, the BBC has an interesting and very well-written article on the origins of brewing in the British Isles.

One of the homes excavated at Scotland's Skara Brae, a village that dates back to 3200BC and where people may have malted grain (Credit: Alamy)

Second, the New York Times has a rather sad-yet-hopeful article on the Benedictine monks of Norcia Italy who had their monastery destroyed by an earthquake.  Beer might just be their path to salvation:

After the Oct. 30 quake, one of the few things left standing at the monastery was a small brewery, where for the past four years the monks have been making Nursia, a beer named for Norcia’s ancient Latin appellation.

 Interestingly, the monks that populate the monastery are all American.

Check out this video:

New Pod -- Finally! The Mystery of Lambic

Jeff and Patrick solve the mystery of the lambic, the spontaneously fermented beer of Brussels. They talk to Frank Boon of Brouwerij Boon and Jean Van Roy of Cantillon about the process and art of lambic and describe the complex processes by which it is made.

Beervana Podcast: Historic Beer Re-Creations

The new Beervana podcast is out. In it Jeff and I explore Goose Island's new stock ale, their attempt, with beer historian Ron Pattinson, to faithfully recreate the lost style. The podcast includes interviews with Pattinson and Mike Siegel, Goose Island Brewing Innovation Manager. Enjoy!

New Pod: Women in Beer

New Pod: Alan Taylor

New Pod: Your Guide to the Oregon Brewers Fest 2016

New Podcast - Your Summer Tour Guide to Portland Beer

One Year Anniversary Pod - The Best Beers in the World! (Number 3 will blow your mind!)

New Pod - Czech Beer!

New Pod! How to Taste Beer

From NZ

A colleague sends me this photo from Auckland:

I assume the Pilsner is excellent.

New Pod - Mughal Cistern Beer

New Pod: Beeronomics!

Beer Taxes!

Update: The Tax Foundation sent out a corrected map this morning (3/18)

This was prepared for St. Patrick's Day, no doubt (thus the green):

New Podcast: Barrel - Aged Beers

Spatial Economics and Where to Locate a New Brewpub

Migration is my bell-weather:
questionable quality, but great location
and lots of punters despite a lot of local competition.  

Recently I was chatting to a fellow who is planning on opening a new brewpub in Portland.  A discussion ensued about whether it is better to find a nice untapped neighborhood or locate near other brewpubs.  There are really two aspects to this question that, to my mind at least, relate immediately to economics: location theory and externalities.

Location theory is pretty straightforward at first.  Imagine a city being one big circle with people distributed evenly within that circle.  If you are the first brewpub in Portland there is a strong incentive to locate centrally to minimize the average distance from customers.  In Portland density is not uniform and there are lots of natural barriers to travel that make it more complicated but to a first approximation, this is essentially correct.  Now what if you are the second brewpub?  Should you try and distance yourself from the first to set yourself apart?  Well if you do, you have to go nearer to an edge of the city and you potentially lose customers.  So the interesting result is that, in general, the best move is to move in next door and share the customers.

The easiest way to conceptualize this is to think of a long linear boardwalk (a la the Hotelling model) where there is a hot dog vendor right in the middle.  If you are another vendor where do you set up?  Well suppose you set up half way between the existing vendor and one end.  Assuming the hot dogs are the same and you are charging the same price then customers will simply come to the closer one (and we will assume that for those customers for whom the two vendors are equi-distant will split evenly between the two carts), you get all the customers between you and the end and, between the two carts, you get the customers that are nearer to you.

Now, is this the best you can do? No. If you move a bit closer to the one in the middle, you'll get more customers between you and the end - all of which buy from you - and the cut off point between your customers and the other stand's gets closer to the stand in the middle.  Thus you sell more hot dogs by moving closer.  This is true as long as there is some distance between you and the other stand.  The end result is that you end up right next to each other.  

There are, of course, lots of strong assumptions here (uniform distributions, same product and price, low enough prices that all customers want to buy, etc., etc.) but next time you are traveling around to smaller towns and see two supermarkets located near each other, you'll have an idea why (this was true, for example, in Ithaca, NY where I lived for 5 years).

Is this applicable to the brewpub market?  Not entirely because you would not expect to divide up customers by traveling distance alone and density of brewpub customers varies a lot.  So you probably face the trade off of finding a neighborhood with no brewpubs to locate in and capturing most of the local custom versus sharing the customers in a high brewpub goer density market.

Which brings us to the other aspect I mentioned: externalities.  Most people think of smokestacks and smog when they hear the term, but externalities can be good as well.  In the case of brewpubs, I tend to think neighboring brewpubs compete for customers but they also bring more potential customers to the neighborhood.   So the presence of one more brewpub in a small area with existing brewpubs increases the total demand for all of them (though it may well diminish the individual demand as you are dividing the customers by a bigger number).

In the end then there is no right answer but, all else equal, my instinct would be to try and stay pretty central Eastside - very high density of brewpub customers, thriving existing brewpubs.  Especially starting up, you need folks to discover you. I would be very hesitant to locate too far afield as I might capture the local market but not attract any others and it might be hard to make a reputation that would get people to come from other neighborhoods. That said, there are still many pretty close-in neighborhoods that are, as yet, untapped or barely so.  I would think that there are still some sweet spots in Portland.  Good neighborhoods with no pubs.  Or, perhaps even better, one with just one pub where a second would boost the custom for both. 

Of course, if it were me and I was a great brewer that was going to start an exceptional brewpub there is one obvious choice: Sellwood.  Yes, that's it - Sellwood.  Sellwood is the clearly the best place for a great brew-pub.  You could not do better than Sellwood.  Unless your beer is going to be mediocre then Sellwood is not for you.  Stay away.

Signalling With a Bottle

If you didn't know anything about the beers, which one would you assume is the lowest quality?

ANOTHER ONE FROM THE ARCHIVES

I am sure I have written about this before, but I am too lazy busy to look, but this New York Times article about craft breweries move to bigger bottles seems to resonate with the economic theory of signalling.

In the signalling theory it is the act of signalling itself (thought replicable by anyone) that provides credible evidence of quality. 

The classic example is in education:  One reason we go for higher degrees is to demonstrate that we are smart and productive workers to would be employees.  We can show them a college degree, for example, and from this they can take away that I must be a  high 'quality' worker.  Why? Well it is not the stuff I learned necessarily but that getting a degree is costly, it takes time and money.  But it is MORE costly for less smart and motivated people because they make take longer, have to study harder and so on.  In equilibrium it turns out that the degree is indeed a signal because only the smart productive types will bother to get them.  The lower types will not because if they do they will have wasted time and money because once they join in the degree getting crowd, the degree is no longer a singal of quality.

[Clever theory eh? Clever enough to win the Nobel prize...]

What does this have to do with bottles?  Well, suppose that bottling in fancy bottles with corks and foil and stuff is more expensive.  Good breweries want to signal their high quality by packaging their beer in fancy bottles.  Bad breweries would like to do the same.  The problem is that bad breweries face the exact same cost of sticking it into a fancy bottle (and even the premise isn't always correct - a simpel 22oz bottle is cheaper to sell beer in than a 12 ounce bottle).

So signalling alone doesn't explain this but the idea of experience goods can potentially reconcile the theory.  Since beer is a repeat purchase, consumers are quick to learn abut the type.  So packaging in a fancy bottle might work once, but not over time.  In the end the low quality brewers abandon the big more expensive bottles because they are not fooling anyone anyway and it is more expensive, while high quality maintain it because after the low quality ones leave a fancy package is, in fact, a credible signal of quality. 

The subtle point in all of this is that these are equilibrium outcomes - that in the end there is an equilibrium where high quality brewers choose fancy bottles and low quality brewers do not and both are content with their decisions. 

For me though, I tend to concur with the big bottle critics: I am the only beer drinker in my household and thus I cannot buy more than 12 ounces of a big beer without wastage (of either the beer or me). 

What Something is 'Worth' - The Westvleteren Question

Update: Here is one from the archives that matches the recent pod.  With an update at the end. 

Sometimes being an economist makes life very simple (some might say overly simplistic) but I am amused by the frantic talk about the release of the Westvleteren 12 in the US.  I'll riff off of Jeff at Beervana:

The cost is dear ($85 for six), but it goes to the monks at Sint Sixtus as a part of their capital fundraising effort to build a new roof. So you could think of it as a donation in which the monks give you a token for your support. I would strongly urge you to consider that when weighing the question of "worth." (You might also compare it against the price of a plane ticket to Brussels.)

Fortunately, the question of worth is something long ago settled by economists. Worth is a function of supply and demand.  There is nothing intrinsic to gold that makes it worth more except the fact that is is malleable, shiny and rate.  So demand is high because of its good attributes and supply is scarce making it an expensive little item.  Water is absolutely vital to life but not very scarce and so we buy it very cheaply and so on...

So is Westvleteren 12 worth $85 for six?  Well that is for you to decide, for some it will not be and for others it will. This will be a function of how much enjoyment you'll get from drinking it, how much you cherish the opportunity to try it and your ability to pay for it (among other things).  Whether the market thinks it is worth it depends on whether there are enough people who think so relative to the amount for sale.  I suspect the answer will be a resounding 'yes.' 

Class dismissed.

This is also apropos to the discussion in the previous podcast, is there a craft beer bubble.  If it is the market and the market alone that establishes the market value of a good. In this sense if the market price of something seems absurdly high it is odd to call it is bubble.  

But here is a thought question: Do you value something simply because of its scarcity?  Would you, for example, be willing to pay extra for a bottle of beer simply to be able to say you have tried it?  I think that for a number of consumers the answer is yes and this inflates the price?  But is this any less of a reason to play for a beer than the actual quality of the beer inside?  To an economist the answer is no.  It doesn't matter.  We are agnostic about where preferences come from.  Which is why I say sometimes being an economist makes things simple - we tend to look at the world without any judgement, we just try and explain the phenomena we see - for better or worse.  

New Podcast! Trappist Ales