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)!

Coastal Beer

It is not often I pass on press releases in this blog but the Oregon Coast is a true treasure (especially in fall in my humble opinion) and now it is becoming a craft beer mecca as well.  So it is with pleasure that I pass on to you this info:

HEAD BACK TO BREW-NIVERSITY THIS FALL

FOR OREGON’S NORTH COAST BEER 101 WEEKENDS

Astoria, Seaside and Cannon Beach Brewers Collaborate on Commemorative Brew Served Oct. 18-20 and 25-27

WHAT:  As its number of breweries continues to grow, Oregon’s North Coast is gearing up to become one of the Northwest’s next great beer destinations. The communities of Astoria-Warrenton, Seaside and Cannon Beach invite beer enthusiasts to join the fun this fall with two weekends of sudsy events. Taste the Beer 101 brew crafted for the occasion by Astoria Brewing Company, Fort George Brewery, Seaside Brewing Company and Bill’s Tavern & Brewhouse. Meet the brewers and beer icons, learn about Oregon’s brewing history, enjoy beer dinners and get great deals on lodging.

WHEN: Friday – Sunday, Oct. 18-20 and 25-27, 2013

Events include:

·         Tasting trays, tap takeovers and beer-food pairings at North Coast restaurants and brew pubs

·         Educational talks on proper glassware, the history of brewing in Oregon and more

·         Contest to name the North Coast breweries’ collaboration beer

·         Brewers dinner in Seaside

·         Astoria and Gearhart lodging specials

Event locations and details are posted on http://visittheoregoncoast.com/north.

TOP EVENTS:  The Alchemy of Glassware and Tasting with Lisa Morrison, The Beer Goddess

Saturday, Oct. 19, 3:00 p.m. at Fort George in Astoria. Forget size. Shape matters. And not all beer glasses are created equal − nor are they "one shape fits all." Find out from Lisa "Beer Goddess" Morrison why glassware is an important component and how aroma plays a key role in how your beer tastes. Morrison, owner of Belmont Station Beer Store & Cafe, hosts Beer O'Clock Radio across Oregon on the Radio Northwest Network and is the author of Craft Beers of the Pacific Northwest. Cost: Free. Limited to 30 participants. Sign up at the counter in the pub.

           

Behind-the-Scenes and Tasting at U Street Pub & Eatery

Saturday and Sunday, Oct. 19-20 and 26-27, 2-3 p.m. and 3-4 p.m. at U Street Pub & Eatery in Seaside. Join owner Teri Carpenter for an educational talk about U Street’s intricate “MacGyver style” operational system, and an exploration of proper pouring techniques and equipment. Did you know that a stout is poured differently than an IPA or Lager? This session is perfect for home brewers and curious entertainers. Cost: Free.

Oregon Beer Through the Ages with John Foyston, The Oregonian

Friday, Oct. 25, 6:30 p.m. at Astoria’s Wet Dog Café.

Educational talk and tasting about the history of brewing in Oregon with The Oregonian’s “The Beer Here” columnist John Foyston, who will share insights gained from covering the local beer industry since its early years. Cost: Free. Limited to 24 participants. Food and beer can be ordered from the menu during the session.

Brewers Dinner at Seaside Brewing Company with John Foyston

Saturday, Oct. 26, 6 p.m. at Seaside Brewing.

This four-course, five-beer dinner features brews from Seaside Brewing, Bill's Tavern, Fort George and Astoria Brewing. John Foyston will comment on the beers and how they pair best with food. Cost: $50 per ticket. Limited to 30 participants

Register to attend these events and more at http://visittheoregoncoast.com/north.

BEER TOURS:  Transportation is offered for one of two 4.5-hour tasting tour routes Oct.19, 20, 26 and 27. Tickets cost $49 and must be purchased in advance; limited to 25 participants. Get details at http://visittheoregoncoast.com/north.

Ale of Two Cities Tour – Seaside and Cannon Beach – at the Wine & Beer Haus, The Lumberyard Rotisserie & Grill and Seaside Brewing. The tour begins at 12:30 p.m.at Astoria’s West Mooring Basin parking lot and returns at 4:40 p.m.

Astoria Ale Trail Tour – Astoria – at Wet Dog Café and Astoria Brewing, Rogue Ales Public House and Fort George. The tour begins at 12:30 p.m. at the Wine & Beer Haus parking lot in Seaside and returns at 4:30 p.m.

HOTEL

PACKAGES: McMenamins Gearhart Hotel Beer 101 Package Overnight stay, two brewery tasting trays of six McMenamins’ ales, growler filled with your choice; double occupancy; rates start at $136 per night; call (503) 717-8150 for more info and to reserve.

Holiday Inn Express Astoria Beer 101 Package

Overnight stay, two 12-ounce cans of Trolley Stop Ale, two Goonies collector pint glasses, two Astoria Riverfront Trolley passes and museum passes; double occupancy; rates start at $149 per night; call (503) 325-6222 for more info and to reserve.

Cannery Pier Hotel Astoria Beer 101 Package
Overnight stay in a riverfront deluxe king or double queen, two Fort George glasses, beer tasting tray onsite at Fort George and transportation in the hotel’s vintage cars; double occupancy; $219 per night; available Friday-Saturday, Oct. 18-19 and 25-26; call (503) 325-4996 for more info and to reserve.

Beer 101 packages must be mentioned at time of booking. Photo ID is required at check in. Registered guests must be 21 years of age or older. No further discounts apply. Based upon availability at time of booking.

CONTEST: Four brewers from Oregon’s North Coast have concocted a special recipe for a collaborative brew commemorating the Beer 101 weekends. Brewers from Astoria Brewing, Fort George, Seaside Brewing and Bill’s Tavern developed one recipe for the same brew. The yet-to-be-named collaboration beer will be available for tasting at the following North Coast restaurants and brew pubs, and people will have the chance to name this special brew. Come up with the most creative name and you’ll win one of three weekend getaways to Astoria/Warrenton, Seaside and Cannon Beach.

·         In Astoria: Fort George, Rogue Ales Public House, Wet Dog Café and Astoria Brewing.

·         In Seaside: Seaside Brewing, McKeown’s Irish Pub, McKeown’s Restaurant & Bar, Wine & Beer Haus, Twisted Fish Steakhouse and U Street Pub.

·         In Gearhart: McMenamins Sand Trap Pub.

·         In Cannon Beach: Bill’s Tavern, Cannon Beach Hardware & Public House, Driftwood Restaurant & Lounge, Lumberyard Rotisserie and Warren House Pub.

Collaboration beer description: Brewed with organic two-row malted barley, crystal malts, malted wheat, peat-smoked malt and five gallons of blackberry honey, this beer is a beautiful, deep, smokey-red Wee Heavy Scotch Ale that is slightly peaty and very malt forward. Brewers used just enough mildly spicy hops to balance and give perspective to this big ale.

CONTACT: For more information about the region, the event and local lodging options, call the Seaside Visitors Bureau at (888) 306-2326, email: info@seasideor.com or visit http://visittheoregoncoast.com/north