Price Fixing and Beer

Finally a sexy Beeronomics headline to spice up an otherwise dull week [and to rouse me from my blog stupor - I have been just crazy, crazy busy….sorry]

Anyway, Bloomberg has the gen:

Five German breweries, including the country’s largest family-owned beer maker, and seven people were fined 106.5 million euros ($145.5 million) for illegally colluding to raise the price of beer.

Anheuser-Busch InBev NV (ABI) escaped a fine for being first to report the cartel, which triggered the investigation, Germany’s antitrust watchdog said in a statement today. A probe into two other companies continues, the office said.

“Our investigations have allowed us to prove there were agreements between the breweries based mainly on purely personal and telephone contacts,” Andreas Mundt, president of the German cartel office, said in the statement.

The breweries fined include family-owned Krombacher Brauerei GmbH, Bitburger Braugruppe GmbH, C. & A. Veltins GmbH & Co. KG, Warsteiner Brauerei Haus Cramer KG and Privatbrauerei Ernst Barre GmbH. The companies had their penalties reduced for cooperating with the probe.

This is reminiscent of the old airline price-fixing scandal which was all done by CEOs on the telephone as I remember.

There is not a lot a economics professor can add to this, the motivation and benefit of price fixing is pretty clear - if we all agree to keep price high we can get monopoly-like rents.  Yeay.  But economists also know that price fixing is very hard to sustain because there is always the individual incentive to cheat.  If all others companies keep their prices high, the best individual strategy is to undercut their price slightly.  So these types of arrangements actually are a lot harder than they sound.

But the fact that they engaged in this illegal activity tells us a lot about the competitive nature of the German beer market.  There is so much competition that rents are hard to acquire.  And, once again, the specter of economies of scale mean that it is hard to sustain a number of smaller breweries in this environment.  Just like what happened in the US, the beer industry's natural tendency is consolidation and scale.  So this is evidence that all breweries are feeling the pressure.

A Bubble or a Maturation?

Some further thoughts on the whole bubble question.

My conversation with Noah Davis focused on what the maturation process for this industry might look like.  As an economist I see a number of interesting forces at work and I try to read the tea leaves as best I can.  The forces I see are as follows:

One, supply in this case spurs demand.  As an experience good, customers have a fairly steep learning curve.  They have to be taught what beer can taste like and develop a taste for these new flavors.  How far this demand curve can be shifted out is impossible to say, but if you come to Oregon and compare it with most other markets I think the conclusion is that it can go very far.  Shopping at a suburban Safeway yesterday on my way into Portland from Corvallis I noticed the sign above the beer isle said "Beer" and then "Micro Brew" and that the isle was about 2/3rds micro brew.  That is a pretty phenomenal extent to the amount of growth the market has made.

Two, the extremely strong force of economies of scale that will put pressure on packaging breweries who are going to face more and more competition in the market.  Novelty buys you some tap handles and shelf space but keeping them requires sales.  Especially in retail, stores care about what is moving off the shelf and maintaining a price point a buck or two above other similar brewers is probably unsustainable.

Three, the direct to market brewpub model is able to avoid the economies of scale and retail problems because the profit center in such a model is generally the kitchen.  These markets are intensely local and thus the expansion opportunities for these 'breweries' is almost unlimited.  There are still many areas in Portland, perhaps the most saturated market, that could sustain a brewpub.

When I mentioned to Noah that I expect to see some breweries failing, we were talking about packaging breweries - thus my reference to $11 six-packs.  I was not suggesting that we are in a bubble or that the bubble was about to burst, far from it.  I was saying that this is a natural process of a maturing market not an overheated one.  Overall brewery numbers might continue to grow thanks to the lumping of brewpubs in with packaging breweries, but I think there will be consolidation among the packaging breweries.

One interesting question that I keep wondering is if will only be the smaller packaging breweries or will we see a relatively big one go down.  For example, a number of west coast breweries (e.g. Sierra Nevada) are building east coast breweries.  Soon, I expect to see buy-outs of existing mid-sized breweries by competitors from more distant markets.  I also expect to see a couple of the newer packaging breweries to fail ofter a few years.  But this is what a mature market looks like, not a bubble.

Finally one more pedantic note: a bubble in economics terms is best described as a situation where the prices have become detached from fundamental values buy some kind of irrationality.  So a bubble in beer would be a situation where folks are currently paying much more for beer than they really value it. I don't see this at all.  Craft beer is a premium product that commands premium prices because people value drinking it.  Over time these prices will probably fall as the competitive pressures of having more larger craft breweries that are able to keep unit costs down.  This will not be a sign of a past bubble but again a maturing of the market.

A Craft Beer Bubble?

A really nice piece by Noah Davis in Business insider magazine.  Here is a great little taste:

Stone, it must be said, is one of the few beer-making outfits that has successfully made the transition from local to national. Seventeen years after it was founded, it's now the 10th-largest craft brewery in the country. But even Koch is feeling the squeeze from all the new, local breweries popping up across the country.

"I just got back from a short trip to Minnesota," he recalls. "A couple of the beer bars that have our beer on tap pretty regularly, just happened to not have our beer on tap. Why? Because their taps were filled with the new guys. It's not that they don't like Stone. It's not that they aren't going to be putting Stone back on tap. But when you have just so many physical tap handles — and now you have this rush of new stuff and everybody is in a shiny-new-object mode — it creates competition. You can't sell beer if it's not available."

The flooded market has bred a generation of beer fans with no allegiance to a particular brand but an unquenchable thirst for the latest and greatest. As a result, many beer bars regularly rotate kegs, meaning that breweries need to constantly innovate to maintain sales. "We usually won't keep the same beer around for a long time," says Joey Pepper, the lead bartender at Brooklyn's Torst. "We'll do one initial purchase of it and then maybe come back to it later."

Of course, it is particularly good because he quotes me.  Though when he quotes me as saying "We're starting to see some closings. As a cold-hearted economist, that's a good thing — it increases the pressure to be exceptional," either he or I made a mistake.  I meant to say that I expect we will start to see some closings not that we already have.  I thought this is what I did say but I am probably wrong about that, anyway the point is the same.  I do expect some bloodletting even as the overall market grows.

Holiday Ale Fest 2013

One of Portland's real treats of a beer fest starts tomorrow and runs through the weekend.  The Portland Holiday Ale Fest takes place beneath the Portland Christmas tree on Pioneer Courthouse Square in tents with clear plastic roofs that are kept warm by body heat and heaters.  It tends to be a fairly civilized fest and a nice way to spend some quality time with humongous beers.

In my humble opinion big winter beers does not always bring out the best in brewers: under the cover of copious malt and alcohol they tend to…ummm…lose some restraint.  But not always.  In my experience about 1/3 of the beers are exceptional 1/3 passable and 1/3 dreadful.  The trick is to do a little advance research, avoid things with peppermint and that are double bourbon barrel aged, and bring friends who are easily duped into trying stuff of dubious provenance or who like the wilder stuff so that you can see if the canary lives after tasting it.

But I digress… go to the fest and enjoy it all especially the lights of the Christmas tree twinkling overhead as you stroll with your tipple.

Eat, Drink and Help a Friend in Need: Drink for De Ieso, Bridgeport, Thurs. Nov 21

This Thursday, Nov 21, Bridgeport will be the next in line to host a benefit for local beer Blogger/Writer/Promoter Angelo De Ieso.  The Facebook link to the event is here.

The event is intended to help Angelo pay for his mounting hospital bills from 5 – 10 p.m. at Bridgeport Brewpub in the Pearl. All proceeds from sales the new IRI beer will go straight to De Ieso along with 20% of food purchases made by customers that mention Angelo that night.

To get the backstory on Angelo's health troubles, go here.  Unfortunately, Obamacare comes a little too late for Angleo, though he'll be pleased that his now pre-existing condition will not exclude him from the new affordable health insurance in the future.

So go and drink lots of IRI, and eat some grub while you are at it and help out one of Oregon's biggest beer boosters and therefore a friend to all NW beer enthusiasts.

Defining "Craft Beer" - An Economic Analysis

Once again the debate over the term 'craft beer' is on the front-burner after another missive by the godfather: Charlie Papazian.  See also, John Foyston's article that includes a counter-argument by a "gobal beverage consulting firm."  Here is an excerpt:

In the US, the Association of Brewers defines craft brewers as small (annual production of 6 m barrels of beer or less), independent (less than 25% of the brewery owned or controlled by an alcoholic beverage industry member who is not a craft brewer), and traditional (a brewer who has either an all malt flagship or has at least 50% of its volume in either all malt beers or beers which use adjuncts to enhance rather than lighten flavour). Whilst this definition has worked well locally, transferring it to other markets can prove problematic. Most consumers would define a brand such as Leffe as a “craft” beer, however, the brand is produced by A-BInBev, and therefore would be excluded. Similarly, when the UK DoomBar brand was acquired by Molson Coors, it would have ceased to be a “craft” beer.

Which is a pretty good point. The Brewers Association's attempts at coming up with a workable definition has problems.  Widmer is out, but Full Sail and Deschutes are in.  Goose Island is out simply because of ownership and so on.  And by the way, is sugar really an adjunct?  There are a lot of Belgian and British brewers who would disagree.

The problem for me is that it is not clear what we are trying to accomplish by creating a term that defines group membership.  It appears to be because the BA wants to establish a signal to the consumer  that the beer they buy was made by a small, independent brewery.  But of course they can say that right on the label if they want so trying to create a term for this is an unnecessary exercise.

For me, as an economist what is interesting is the "craft beer market."  This is what I think brewers really want to know - who are their competitors?  In fact trying to subjectively define craft beer is a waste of time.  Trying to be sure we exclude Blue Moon from the definition of craft beer is stupid when consumers are considering it at the same time they are considering an Allagash white.  It is, by revealed preference, a craft beer to consumers that are making that choice.  Artificially excluding it from the definition does not help the brewer that is competing against it.

That said, defining markets in economics is not easy either.  Is a land line phone in the same market as a smartphone, for example?  We generally collect information from cross-price elasticity estimates - what happens to the sales of smartphones when land-line phone prices change?  If nothing, then we can comfortably say that they are not in the same market.  If they change a lot, then that is good evidence that they occupy some of the same demand space of consumers.  [I tried to do this once by asking for scanner data from New Seasons - but they blew me off]

In beery terms what I want to know is how much the price of Blue Moon affects sales of other beers like Allagash.  Because in the end the craft beer market is defined by consumers who ultimately vote with their wallets based on their tastes.  If Coors can create a beer that consumers think is a reasonable substitute for Allagash, then a craft beer it is.

So I believe that the attempt by the BA is a bit misguided.  You cannot fool consumers into consuming based on an arbitrary definition.  I am no more likely to purchase a Deschutes beer over a Widmer beer because BA considers only the Deschutes the "craft beer."  All else equal, I like to support small independent breweries because it is part of my utility function, but that is not the same thing as craft beer and I can do so regardless (and yes, I consider Widmer a small and local brewery).

The fact is that beer is more science and industry than art.  Anyone can make an all malt, no adjunct, fantastic beer regardless of the size of the brewery.  What I like about the beer scene is that I can have a relationship with a brewer or brewers from small places, I can taste their personality and their own tastes through the beer, and I am willing to pay for that.  But if AB creates a fantastic beer I probably won't buy it much but I have no objection to calling it a craft beer if that is the market it inhabits.

In the end, I think this fear of macro brewers invading the 'craft beer' market is misguided.  It is not that they cannot create great beer if they want, it is that their size and scope make them unsuited to produce lots of variety, experimental beers, different labels, etc.  They are not flexible and agile, they are not local and they are not personality driven - all of which are things I think of as keys to the local beer scene.  Can AB create a small one-off?  How do they market it, distribute it, get it in bars.  To do so they would have to reinvent a small company inside the big one.  Alternatively, they can just buy breweries like Goose Island and let them do what they do.  But this is not an invasion as much as a capital infusion into a market that has real potential.  I see no reason to worry.

Oregon's GABF Haul

Here is the list of Oregon's winners at the 2013 Great American Beer Festival in Denver.  

Apparently I must get myself some Barley Brown's IPA!  Also, it is nice see Flat Tail's Kölsch, of which I have waxed rhapsodic, win a well-deserved silver.  Ditto Pelican's Silverspot IPA.

And I have been ordered quite ardently by Jeff to try The Commons Brewerys Urban Farmhouse Ale.  Will do.

Nice showing and kudos to all the winners (and the myriad other fantastic brewers in the state)!