Beeronomics and Eco-nomics: Craft Beer in Cans

John Foyston has an article in today's Oregonian business section about the growing trend of craft brewers putting their beer in cans.  His article focuses on Fearless Brewing of Estacada, but Caldera in Ashland cans as well, as has MacTarnahan's and Mac's owner, Pyramid, will soon.  From Foyston's article:

"I expect this whole market just to explode," said Johnson, who owns Fearless Brewing in Estacada with his wife, Barrett. "And I'll be the first one in the local market with cans. Cans are perfect for the way we live out here because you can't take bottles to the golf course, you can't take them out on the river and you don't want to pack them into your campsite. Cans are lighter, they chill faster and they don't break."

Johnson is the latest convert to the craft canning revolution. Although the beer can celebrated its 75th anniversary in late January, it has long been associated with insipid, mass-market lagers. But brewers began to realize that it absolutely protects beers from its two greatest enemies, oxygen and light, and that modern linings eliminated any metallic taste. And about a decade ago, craft brewers tumbled to the fact that if you pour good, flavorful beer into a can, that's what you'll pour out.

Cans have many advantages, and they can be recycled (but not reused).  The fact that this is a cheap method of bringing craft beer to retail outlets may be a boon for craft brewers and for enthusiasts who are always looking to try different beers.  I haven't had any Fearless beer, for example, but will certainly try it if it reaches my local stores.

But it is not all good news and for this reason I think brewers should be cautious.  Currently, as far as I can figure out, most or all aluminum beverage cans are lined using BPA.  Nicholas Kristof did a good job explaining the current concern over BPA in food, and here is a report on the now famous Canadian study of soft drinks in aluminum cans:

The first comprehensive testing of bisphenol A (BPA) levels in canned soft drinks in Canada has found that most contain the controversial chemical.

While the levels are low, some environmentalists say the levels may very well be enough to cause harm to children, especially those who drink a lot of pop or energy drinks.

The study, the largest test of its kind, was conducted for Health Canada as it investigates Canadians' exposure to BPA, which has been linked to cancer and reproductive problems.

The study tested bisphenol A levels in 72 samples of canned drinks, including carbonated, non-carbonated, diet, non-diet, fruit-flavoured and energy drinks. The survey represented at least an 84 per cent market share of canned soft drinks sold in Canada.

The chemical was found in almost all of them, and was particularly high in the energy drinks sampled.

The only exceptions were two samples of tonic water. The researchers suggest the quinine in tonic may have interfered with BPA extraction.

BPA was detected at levels between 0.032 and 4.5ìg/l (micrograms per litre). The highest levels of BPA -- 4.2 and 4.5ìg/l -- were detected in two energy drinks - drinks that are popular with teens and university students who often used them to stay alert as they cram for exams.

The authors calculated that an adult weighing 60 kg consuming one canned soft drink per day would, at the average BPA level found, consume only 0.0034ìg/kg body weight per day and 0.027ìg/kg body weight per day at the highest BPA level.

Now, the final piece in the puzzle - the definitive study that either links BPA consumption with adverse health outcomes (or finds no such adverse outcomes) - has not yet been found, it is likely that cautious consumers will avoid exposure to BPA.  So, until there is a source of BPA free cans for craft brewers, I think it would pay for them to be cautious about moving wholeheartedly into cans.

Update: Over on the Beervana blog, commentator Stan Hieronymus points out a New Belgium blog post on this very issue.  They think the science is pretty clear: no problem with BPA in the lining of cans (they also confim that you can't get non BPA lined cans).  Though they can also say, "get yours in a bottle if you are worried" as they do both.

Fighting

Time to return to the beeronomics gig. Perhaps you have heard of the new pint glass technology in the UK that prevents them from shattering. The idea being that this will reduce the incidence of serious injury from drunken fights. And if you have ever been in London (prior to the change in the law in 2006) at the 11pm closing time for bars, you know just how violent and ridiculous bedrunken Brits are as they spill on to the street with bellies full of beer and nothing to do for the remaining hours of the night. The new glassware technology may help avoid some of the more serious lacerations but will it help reduce drunken violence?

I am not sure. For many years I have had a theory about this which I first developed in a conversation with my British cousin. By cosmic chance we both happened to attend graduate school at Cornell at the same time and he was the absolutely stereotypical upper class Brit (he is Welsh he would want me to make clear), right down to his first in physics from Oxford and love of long walks in the woods. Anyway, he lamented the gun culture in the US and I said that it may be true that we have a problem with gun violence but based on personal observation, the US had a much smaller problem with casual violence than did the UK. My theory was that it was guns that made the difference.

The idea is essentially a game theory idea: the prevalence of guns in the US make the probability that any violent confrontation may turn lethal much greater in the US than in the UK - in other words the stakes are much higher in the US. So you don't engage in casual violence nearly as readily.

Here is a normal form game representation of what I am talking about:

In the UK, if drunken posturing occurs and the choices are to fight or walk away (run perhaps?), the payoffs might be something like the above. Walking away invites social opprobrium so it is particularly bad if you are the only one to do it: you get a payoff of negative 50 and the opponent gets 0. If both of you walk away then the stigma is attached to both but not so bad: negative 5 for each. If you fight I will assume you both get hurt, but nothing so bad that a little ice and time won't fix: negative 10 for each. Note that I have designed this as a prisoner's dilemma game where fighting will take place even though it is a second best.

Now let's consider what the game might look like in the US where guns are common.

The only difference here is that now the expected payoff to fighting is much worse because of the possibility of guns leading to hospitalization or death. Notice that the Nash equilibrium is now not to fight (and it is Pareto efficient). So the threat of death that guns provide actually prevents the engaging in violence in the first place.

A DISCLAIMER: This is all in fun - I know that this is a lot like gun advocates' claim that guns lower crime, a claim that has been shown to be false by serious study. But it is possible that in this context, the presence of lethal weapons lowers the incidence of minor violence between two willing parties.

So what will the new glassware do? It may in fact encourage more fighting by lowering the stakes. Now that you don't have to worry about getting seriously cut, why not engage in a little of the ultraviolence?

Time will tell...

Signalling Redux

The blogger and graphic artist whose "nom de plume" is Samurai Artist popped me a note to inform me of his very interesting interview with Brett Joyce of Rogue (the above is a sample of his work). During the interview he asked Brett about a post I had done in the past about Rogue and signalling. At the time Brett appeared quite annoyed by my post, and I was completely perplexed. But then I realized the problem, people were not understanding it as an equilibrium concept. Anyway, here is the exchange:

SA: There was another blog post (on the Oregon Economics Blog) that suggested that you guys use the economic term 'signalling' by pricing yourself higher to signal to consumers that your beer is of a higher quality. I know that you said that wasn't true, but I would like to see if you have more of a response to that.

Brett: Yeah, I'm not smart enough to know what 'signalling' is, but I would just say this, there is a lot that goes into the packaging, there is a lot of hops and malt that goes into our products. We have never told John in 21 years what to put into the beer. He is an artist, and it is our job to get out of the way and let him practice his craft, and it is our job to go sell it, go market it. Our beer is not inexpensive to make. It's because of ingredients and because of packaging, not because of 'signalling'. I don't even know what that means!

This is a good illustration I what I mean. I would not say that Rogue 'uses' signalling. What I was trying to provide an explanation for was the popular beer blogger complaint that Rogue is too expensive. Given that the craft brew industry in Oregon is intensely competitive it is hard to see how Rogue's prices are sustainable in the free market of beer. Signalling provides a potential explanation (not necessarily the right one or the only one, but a possible one): if people think price contains some information about the quality of a product that they cannot themselves determine before they purchase it (as opposed to something like a new shirt that you can touch feel, try on, etc.) then they may act on that information by purchasing it. Of course, all beer companies could try this, but the companies with a lesser product would find out quickly that consumers learn and their sales would plummet. Packing plays a similar role - Rogue's packaging is more expensive and a signal of the quality of what's inside. Other breweries could do the sam but if their beer is of inferior quality than their attempt to signal becomes a costly waste of time.

If the consumer tries the expensive beer and likes it then their assumption about the price being indicative of quality is correct. Only though repeated tries would the consumer learn that price is a reliable signal. And this confirmation will happen only if it is truly just the better beers that are more expensive (in general). So you see, signalling is essentially an equilibrium where better beers are priced higher, and consumers act on this knowledge.

This is why I was perplexed about Brett's annoyance with the story: it is an equilibrium story that is not an explicit strategy by Rogue. In fact it happens simply because Rogue responds to the incentives that are already in the market. And it only works if Rogue's beer really is thought of as that good once buyers purchase it. I think he thought I was saying it is an explicit strategy you can use to fool consumers and get a higher price. Precisely the opposite: it is a market outcome whereby better beers price higher and lesser beers price lower and it works because in equilibrium consumers are then correct about how price and quality are related. [Note that good and bad craft beer aren't necessarily any more or less expensive to produce so there is more to price differentials than the cost of ingredients clearly]

Full disclosure, I love Rogue and Brutal Bitter is among my top five favorite beers, but that has nothing to do with it. The answer to "how do they get away with charging so much?" is simple: the market thinks their beer really is that good. And as good beeronomists we should know not to question market outcomes, our task is to simply try and understand them better.

Finally, this model was originally applied to education: people get college degrees because they want to gain more skills and knowledge but (perhaps unbeknownst to them) it also serves as a signal to firms that they are smart and worthy of hiring. Getting a degree is hard, however, but a lot harder if you are not smart than if you are truly smart. So firms take the degree as a signal of quality and they are right to do so - because, in equilibrium, only the smart ones will find it worthwhile to spend the time and effort getting the degree.

Economies of Scale?

In the past year or two, under the 'Bond Street Series' moniker, Deschutes has sold a marvelous beer in 22oz. bottles: Red Chair IPA. I used to find it in my local Safeway and New Seasons for about $5.50. I loved it, but would buy it infrequently as the price was pretty intimidating. Now Deschutes has rechristened it 'Red Chair Northwest Pale Ale' and has placed it into their seasonal line-up and is selling it in six packs. A few days ago I bought a 12 pack for $12 in my local Safeway.

In the 22oz bottle it was going for $0.25 an ounce, now it is selling for as low as $0.0833 an ounce. First off, this is a fantastic beer selling at a regular price and I can't be happier. Second, unfortunately this is a Jan through April release, so start hoarding now - I don't think there is anything 'seasonal' about this beer and it should sell year round. But lastly, what can possibly explain the fact that the new price is 1/3 the old? Partly this has to do with niche marketing - going from a specialty beer aimed at the top of the demand curve to a mass market beer aimed at the heart of the demand curve. But, it probably has a lot to do with scale as well. Estimates exist of scale economies in brewing overall (i.e. the size for the brewery), but I wonder if any beer geeks can enlighten me about scale economies when it comes to producing a particular beer? It seems to me that this must be a big part of the story.

Finally, some gripes: I am pretty sure that it was I that came up with the whole concept of the 'Northwest Pale Ale,' I have been advocating for a long time for smaller but hops infused beers - hoppy beers don't have to be super-big. In fact I have been trying to perfect this concept in my kitchen and decided to call the result a 'Northwest Best Bitter,' the idea being a best bitter taken to the land of hops and given a re-education but with about the same alcohol content of an English version. I have every intention of creating a new category of beer. Of course my result pales in comparison to the Deschutes offering, but I await my royalty check for the NWPA idea.

Anyway, Red Chair is one of my favorite beers ever and the Deschutes move to more mass production is wonderful - so thanks Deschutes!

Hops May Help Prevent Prostate Cancer

USA Today reports that an ingredient in hops, xanthohumol, may help prevent prostate cancer by acting as a testosterone blocker. From the article:

An ingredient of beer may someday help ward off prostate cancer, new animal experiments suggest.
The compound in question, xanthohumol, is found in hops — the bitter flavoring agent in beer — and is known to block the male hormone testosterone, which plays a role in the development of prostate cancer.

"We hope that one day we can demonstrate that xanthohumol prevents prostate cancer development, first in animal models and then in humans, but we are just at the beginning," said lead researcher Clarissa Gerhauser, group leader of cancer chemoprevention in the division of epigenomics and cancer risk factors at the German Cancer Research Center in Heidelberg.

The findings were to be presented Dec. 9 at a conference of the American Association for Cancer Research in Houston.

Xanthohumol is a flavonoid, a group found in many plants, fruits, vegetables and spices. Studies of xanthohumol have shown that it blocks estrogen by binding to its receptor, which may lead to prevention of breast cancer, the researchers say. It's known that estrogen and testosterone receptors react in similar ways.

As always, I bring such good news at perfect moments in which to conduct your own experiments. Quick, run out and get yee to Belmont Station and load up with a crate full of Hopopotamus® and hunker down for the ice storm of the century! Your prostate will thank you (and will probably get a lot of exercise as well as you make many trips to the bathroom - okay, a little too much: getting giddy from the end of the term euphoria).

[HT: John Foyston]

New Pubs Aplenty

Friday. Beeronomics day. But I am busy and later I shall be making my own beer, so I'll farm this beeronomics post to the Portland Biz Journal.

Here is a teaser:

Even though it won’t open for two months, success could be on tap for Coalition Brewing.

The new brewpub will occupy a neighborhood, near Portland’s East Burnside Street and 28th Avenue, known for innovative restaurants and bars. Coalition’s space is also well known because it formerly housed the popular Noble Rot wine bar.

Coalition will join an industry that, thanks to Oregon’s brewing pedigree, is sizzling. Coalition is one of 15 breweries or brewpubs — which sell beer made on the premises and food — that will have started operating in Portland between summer 2009 and early 2010.

The 2009 openings, which roughly double 2008’s, defy national trends. Just 80 such operations will open across the country this year, down from 112 in 2008.

The openings stretch from Portland, where eight new pubs or breweries have begun or will begin operating, to Joseph in northeast Oregon.

“To see so many opening in one state is highly unusual,” said Paul Gatza, director of the Boulder, Colo.-based Brewers Association. “But Oregon does continue to be fertile ground for craft brewing.”

Artisanal Products and the 'Novelty Curve'

Busy day today (week actually) so I'll farm this one out to Beervana blogger Jeff Alworth who has a fascinating tidbit about what Karl Ockert of Bridgeport calls the 'novelty curve.'

Here is Jeff's quote from Karl:

"Every beer that comes along goes through a novelty curve, and ours is no different. [Brewery X] is the current big one on the streets. They’re going through a novelty phase where people are out there trying and sampling. All breweries go through that. If I left BridgePort now and went out and started a new brewery, I could do the same thing. I could take tap handles right and left and get a lot of sampling. But it’s that “stayability”—being able to develop loyalty. That’s the tough part."

This is true of lots of industries, especially ones in fashion (Crocs), technology (Palm) and food (restaurants in general). There is always a new trend, fad, technology, chef, whatever that captures the attention of consumers. But artisanal products like beer are particular in my mind. They can be recreated faithfully over time like cheese, bread, etc., but are always subject to new varieties and tastes. So it has always seemed to me a challenge to stay faithful to the core products and yet maintain interest through new creative pursuits. Bridgeport and Deschutes seem to me the exemplars of this strategy at the moment with their core beers and their special offerings (Stumptown Tart, The Abyss).

But overall this says to me that the market for craft beer is exceptionally healthy. From a Schumpeterian point of view this innovation and creativity will leave some breweries behind, but this is all part of a healthy creative destruction process. So it is both a pretty exciting time and a pretty scary to be in the business, bit overall it seems lie a market that has huge potential to keep expanding for a long-long time and the winnowing out of less exceptional and creative breweries will actually help this process.