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Consolidation, Eh?

Via Beervana I learn about the purchase of Pyramid and MacTarnahans by Labatt.

Nothing much to add to my previous post about this type of consolidation when Widhook announced the purchase of Kona: it is all about the economies of scale.

Now, when I used to spend my summers with the Canadian side of my family outside of Smiths Falls, Ontario, there were no two ways about it: you were either Molson people or Labatt people.  My family were Molson people.  So I guess I will continue to not purchase Macs and Pyramid.

Apparently there is no plan to change the current breweries. This is startlingly similar to the previous era of big brewery consolidation whereby popular regional brands were snapped up by big breweries with national ambitions.  Interesting to see it all happen again.  It is also a good example of what economics is all about relative to business.  Economics is all about understanding the fundamental forces behind market interactions.

Washington's Initiative I-1100

On BI with the moms - she is doing better, thanks for all your well wishes - so I'll free ride on Jacob Grier and his take on Washington's initiative I-1100, which would, as I understand it, essentially do away with their version of the OLCC, or at least the part that controls sales.  Washington's craft brewers have come out against it, apparently because it would allow for market based wholesale pricing.  Here is Jacob:

At issue is a section of the initiative that would allow breweries to self-distribute and offer discounts to bulk buyers like Costco, grocery stores, and bars. Beer in Washington must currently sell at a uniform wholesale price: Costco pays the same amount for crates of it that a small retailer pays for a few cases. As a result, beer prices at large retailers are higher now than they will be if I-1100 passes.

Eliminating the uniform price requirement might make it harder for craft breweries to compete with the big beer companies who can offer greater discounts and benefits. Does this make the initiative anti-consumer? Only if you look exclusively at craft beer drinkers. Craft beers currently make up about 7% of the US market (probably somewhat higher in beer savvy Washington). The vast majority of beer consumers will benefit from being able to buy macrobrews at lower prices.

To put this another way, the Washington Brewers Guild is saying that the state should keep beer prices artificially high for 93% of the beer market in order to maintain the same broad selection for the remaining 7% (or whatever the actual figures are in Washington).

Personally, I doubt that the results will be as bleak as the WSG predicts. Craft brews are growing in popularity while macros are declining, and that’s unlikely to change. Smaller breweries are also starting to merge, operating independently while taking advantage of economies of scale. There may be some closures — this is true regardless of I-1100 — but craft beers don’t show any sign of going away.

My take on this part of the issue is that craft brewers' market has always been fairly distinct from macros, so they shouldn't start worrying about craft beer being more expensive, it always has.  Lower prices will allow them to grow their markets, in fact I think in Oregon at least, Ninkasi is being sold in Costco -something that will give them exposure to a whole new set of consumers.  The point is, if craft brewers have a superior product, they shouldn't be relying on arcane laws to be competitive.  Last time I looked, the craft beer industry in California, which has about the most liberal laws in the nation, was thriving.  In fact the modern craft beer industry started in California.  Craft brewers in Washington are making a mistake in aligning against consumer friendly reforms.  As Jacob says, it is about the consumer.

Journeys

My mother found herself in the hospital over the weekend with a debilitating illness and she has yet to fully recover so off I go to Bainbridge Island help her out. I'll be doing it for the first time all by bike and train and ferry so it should be a fun test of my fitness, which I like to think is pretty good - I am on a geriatric soccer team after all. But I may be singing a different tune by the time I reach Blakely Elementary school, man that is one long hill.

Anyway, that is all to say that I may not be blogging as much for the next couple of days.

Craft Brewers Alliance Buying Kona

The Portland Business Journal is reporting that the Craft Brewers Alliance (Read: Widmer/Redhook) is buying Kona Brewing Company.  Interesting.

This type of consolidation is not unexpected given the economics of the beer industry (read: economies of scale).  The economies are both internal to firms (brewhouse volume) and external to firms (distribution and marketing).  Obviously CBA believes that the latter will help both companies.  But is not just external economies.  Kona has made pretty amazing inroads in the mainland beer markets, and they do so by the way by contracting with US brewers to brew their beer and, you guessed it, Widmer is the contract brewer (and the Redhook facility is Portsmouth, NH is the other apparently).  So both internal and external economies of scale are huge drivers of the economics of beer and will continue to shape the craft brewing industry.

Which is why I anticipate the continued shake out of the industry.  Small packaging breweries are going to be constantly faced with pressure to expand or die.  It is just economics.  So I think you'll see that the only small brewers that remain are the brewpubs - who can package as well but it is the pub itself provides the stability.

Should be an interesting decade.

Econ 101 - The Cost of OBF Beer

By the way, as an aside, with my little rumination on the price of a token at the OBF remaining the same for eons, it occurs to me to point out that while the price may not have risen for beer the cost certainly has.

To phrase this as a question for my students and other economics groupies: the buzz tent aside, all of the beer require one token a pour, so do all of the beers cost the same? Answer: no.

To see why you have to think like an economist. In economics the true cost of something includes the opportunity costs, what you have to forego to get it. Well, at the OBF some popular beer have long lines while for others you can walk right on up. Thus the costs are different - the more popular beers cost more because you have to wait longer, thereby foregoing the opportunity to chat with friends and the like.

So when I say the price of the tokens has not changed, that is not the same as saying the cost has not gone up - it has, in the form of bigger crowds and longer waits.

Class dismissed.

The Oregon Brewers Festival

I got back from my little vacation just in time to fulfill my annual obligation to meet up with old Lewis & Clark College buddies at the OBF.  We bumped our little rondez-vous up to Thursday this year as it has gotten so popular that even meeting on Friday at the Noon opening exposes us to uncomfortably large crowds.  Fortunately Thursday is still reasonable and the weather yesterday couldn't have been more delightful.

But this raises the question in my mind (and in the mind of my fellow economics major): why after all these years is the price essentially the same as it ever was - or in real terms even cheaper? Put another way, why don't they double the prices and start to limit the crowds?  This suggestion was met immediately with derision form our humanities major friends who considered the suggestion elitist and just the sort of crap you could expect from economists.  I suspect that the answer is in the objective function of the OBF organizers.  The festival is supposed to be a showpiece for craft beer and the more people they can expose the better.  They want the festival as big as can be.  For those of us who dislike crowds fortunately there is still Thursday, which is reasonable in terms of population.  I shall get nowhere near the festival today or this weekend.

But you should: there are some great beers to be sampled.  I particularly liked Boundary Bay's German Tradition Double Dry Hopped Pale Ale.  It was excellent and the German Tradition hops interesting if a little astringent.  This year's Collaborator Pilsner is a real winner and will be an excellent choice for the weekend which is supposed to get hot.  Green Flash's LeFreak is interesting and great - hoppy Belgian.  FInally for you hop heads look no farther than THE HOPOPOTAMUS inspired Hop Valley Alpha Centuri Binary IPA.  Er, what were those hops again?  Ah yes, Simcoe, Cascade, Amarillo - a coincidence? I think not.  And I have become a huge fan of Kolsch, especially on hot summer days, so if you are looking for a refreshing beer in the 90-something degree heat try the Three Creeks Creekside Kolsch.  You will not be disappointed.

Oh and for the love of all that is good and true: avoid the Three Skulls Hop The Plank IPA, it is horrible.

Sadly THE HOPOPOTAMUS was not invited, but based on the AGs recent interpretation of the homebrew law, the OLCC would have banned its consumption anyway.

Anyway, go, have fun and explore good beers.  One obvious trend that mimics the local scene is the rise of Belgian styles, so this is a great opportunity to get to know those as well as the traditional hop forward styles we Northwesterners love.

Oh and check out all of the banners flying in the tents.  These things are getting seriously old now and there are as many defunct breweries represented as thriving ones.  Which just goes to my point about the inherently turbulent nature of the business.