Good News

The Portland Business Journal is reporting that the Craft Brewers Alliance, created in the merger of Widmer and Red Hook, which had had to weather some merger related bumps in the road, has had a very strong quarter and has returned to strong profitability.

This is a much more complicated business structure than most, but to the extent that it shows craft beer sales are remaining strong in the recession, it is welcome news.

Good on ya Bros.

Coopetition

Beervana, the Blog has a nice follow up on the state of the Green Dragon, an independent tap house in SE Portland that was treasured by the beergnoscenti, but which ran into financial trouble and was bought out by Rogue. You might expect Rogue to transform the Green Dragon into a Rogue house featuring all or mostly Rogue beer. You would be wrong. They have kept it largely as it was and sometimes it can be hard to find Rogue beer there at all.

In fact as, Jeff points out, Rogue is going one step farther and hosting an 'Indie Beer Fest,' and wonders why they would highlight their competition? Well it is likely because they are cool and don't see their business as a zero-sum game. And they might be right.

There are many instances in economics where business relationships are both competitive and cooperative. One example is where there are network externalities: the more people use a product the more other potential buyers value it. Consider the very first phones, if you were the first person to own a phone in the US, it wasn't worth much, but once your entire community got one, everyone got more value from it. So if you were a single phone manufacturer, sure you wanted to get as many sales as possible for yourself, but the price you could charge and the number of potential customers increased with the number of sales your competition made as well.

Another example is where you have a demand that evolves, like from weak diner coffee to strong Starbucks coffee. Customers learned to prefer strong coffee and began to demand it everywhere. So if you were a coffee house selling strong stuff, having Starbucks expand locally was both direct competition, but it also served to increase the demand for your coffee.

Both of these type of situations are probably relevant for the pub business. A pub business specializing in craft beer in Portland will be enhanced the more good beer there is to serve and the more people have learned to prefer craft beer. Even if you brew your own beer, exposing more people to good craft beer might lead to a net increase in demand for yours as well.

I doubt that Rouge thinks in these terms, but that is the thing about economics - understanding why patterns exist even if the participants don't understand the incentives involved. Jack Joyce once described the craft beer industry as jerk-free (OK, he used slightly more colorful language). I think that this is partly that there is a recognition that while there are many competitive aspects of the business, each individual success bleeds over to group success. With the focus on taking away market share from macro-brewers and creating more demand, there is just less focus on internecine battles.

OK, head too full of economics, getting too serious about all of this. Time to relax and have an Oregon beer. Cheers, and have a good weekend.

...and This Just In

From the New York Times:

"[Professor Gates] said that instead of his usual Red Stripe, he drank a Sam Adams at the meeting in honor of an ancestor who fought in the American Revolution."

So apparently he reads the blog.

Normal and Inferior Beer

Speaking of macrobrewing...

And so it come to pass: sales of beers like Bud, Corona and Miller are falling precipitously, while sales of beers like Busch and Keystone are up. Inferior goods are goods for which demand rises when incomes fall. Of course these infoerior beers are made by the same folks that make the normal stuff, so there is no reason for the beer companies themselves to be hurting.

I keep getting mixed reports about how craft beer is doing. I know anecdotally that some company's sales are soaring, like Ninkasi (proving that there is justice in the world) whole some are struggling. The question is, do consumers of craft beer think of it as distinct from macro lagers (as I do) or just a bit better? In economics terms, how close a subsitiute are macro lagers to craft beers (especially ales)?

At any rate, the recession is proabably a prime motivator behind the 'session' beers that are now becoming popular with craft brewers. I would be interested to know, for example how Full Sail's Session sales are doing compared to its regular line-up. My guess is pretty well since they just introduced a second Session.

None of my attempts to collect data to answer this question have yielded any fruit, so we can only wonder...

Anyway, my advice: if you are 'trading down,' go for the Session and skip the Keystone.

Being a Populist in a Globalized World

There has been a lot of media coverage of the 'beerfab' that President Obama, Professor Gates and Sargent Crowley shall partake in this afternoon. Many media outlets are examining their choice of beer and what each symbolizes: Jamaican Red Stripe for Gates, Blue Moon for Crowley and, of course, the uber-populist choice of Bud Light for Obama (Bud light being the number one beer in America in terms of sales).

But if Obama were trying to go for the all-American beer, he missed the mark. Budweiser is owned by parent company InBev which is headquartered in Belgium. And if Gates's pick were seen a symbolic nod to the African diaspora, well, this too falls a little short. Red Stripe is owned by Diageo, the beverage giant that was formed in a merger of Guiness and another company and is headquartered in London. Even Blue Moon, which tries to sell itself as a microbrew is a Coors product. At least that is American, right? Umm...no. First, a merger of Canadian Molson with Coors created MolsonCoors which has a headquarters in Montreal. Then South African giant SABMiller, which is now headquartered in London joined in a joint venture called MillerCoors. So the simple story is that the world of macrobrewers is completely globalized now and 'local' brands are more about marketing than substantive differences in the beers.

What a shame. With a thriving industry of craft beer producers in the US, they have to go for the conglomerate beer. Sam Adams Founder Jim Koch was magnanimous on NPR about the shunning of US craft beer, but he shouldn't have been. Given that the kerfuffle that lead to this meeting happened in the Hub, a Boston lager would have both been appropriate and much more enjoyable.

Oregon Brewers Fest

Its Friday, sunny, and the Oregon Brewers Festival is on - what are you doing reading a blog?

I could wax economic about optimal beer company strategy, the state of the craft beer industry, but now is simply the time to go forth and enjoy the bounty. Read this and you are ready to set out for Waterfront Park.

Employee Owned Companies

Yesterday, Full Sail Brewing celebrated 10 years of employee ownership. They have a lot to celebrate. Full Sail appears to be thriving largely because they seem to have an exquisite sense of the market and have made some pretty savvy commercial decisions that seem to have worked out very well (e.g. the logo and packaging redesign of a few years ago - including the cringe inducing "Brewed to Stoke, Stoked to Brew" slogan - and the successful release of Session). Of course, they also produce excellent beer... But should we expect employee ownership to make a company like Full Sail more or less commercially savvy?

Economists in general have always been fairly skeptical of employee owned companies. The dominant theme in the literature is generally that the incentives of employee owners are to reward themselves at the expense of the firm and to be more interested in the short term success of the company than its long term growth, as well as to have too diffuse a decision making structure and to have too little independent supervision of employees. For example, can employee owned companies make the hard decision to cut positions in economic downturns?

On the other hand, employee-owned companies can be seen as a solution to a classic principal agent problem in that they tie employee compensation to the economic success of the firm. In this theory, employees should be more motivated, disciplined and productive as they understand that their effort is directly linked to firm performance. This incentive is amplified for smaller companies. [One reason why economists tend to be skeptics is that this incentive is often pretty small at the individual level, so would seem to be dwarfed to the incentive to give yourself a big raise regardless of firm performance, for example]

So is Full Sail the exception the the rule or a classic example of the sensibility of employee ownership? Well, it turns out that almost every study of employee owned firms has found that they are either no worse or slightly better than non-employee owned firms in terms of firm performance. [See this nice meta-study for some evidence] It appears that ownership in companies can, in fact, boost firm performance be giving employees a larger interest in the success of the firm.


It is particularly interesting that in an industry that is artisanal in nature this should be true - you might expect another tension between making distinct beers with small market potential and more mainstream beers. Full Sail seems to be mastering both, they were pioneers in developing the more macro-style 'Session' beers, and yet produce some of the most distinctive beers in their 'Brewmaster's Reserve' series. How much does all this have to do with being an employee-owned company is impossible to say, but perhaps it is not too surprising after all.

Regardless, here is to another 10 years of success to Full Sail. Cheers!