Tuesday, January 5, 2016

Beer Industry Structure

Mark Perry at AEI keeps generating insightful graphs. This one commemorates that the number of breweries in the US has increased to its highest level ever. There is more information about one of my favorite industries here.

To me, the interesting thing is trying to understand why we observe such a stark decline in the number of breweries for 100 years and then a rapid increase over the last three or more decades. Some insights from others' research include:

  • Before 1900, the minimum efficient scale had been quite small with average cost rising sharply. Most cities supported multiple breweries and, because the product spoiled quickly, most breweries only served a single city.
  • In the late 19th century, the geographic scope of the market increased when spoilage was reduced due to increased adoption of pasteurization, refrigerated rail cars, and national marketing. This led less efficient competitors to lose out to more efficient producers in neighboring cities.
  • Throughout the early 20th century, innovations in the canning process led to even greater scale economies. This also broadened the market because patrons could purchase for home consumption rather than at a bar.
  • Until the late 1970s, home brewing was illegal at the federal level. With legalization came rapid experimentation and the development of the requisite skills among enthusiasts. This led to the founding of a few new breweries and a rapid expansion in variety - both in types of beer and in perceived quality. It was learned that yuppie beer consumers would pay a large premium for this variety.
  • Craft breweries were initially tiny compared to the national brands with 2,000 generating a collective 5% share of the market until the 21st century. Again, before the turn of the 21st century, these were predominately local operations with few shipments beyond the city that was home to the craft brewer. It appears that the quality premium more than compensated for the absence of scale economies. 
  • Currently, over 4,000 craft brewers have over 11% share and a few brands, like Sam Adams and Sierra Nevada, have become national brands.
  • The trick for these brewers is balancing any dis-economies of scope (Sam Adams brews about 50 varieties) with scale economies from national branding so as to achieve scale economies and not degrade the perceived quality.

4 comments:

  1. When it comes to beer, every beer drinker has their preference. Budweiser or Bud light drinkers stay loyal as do Coors and Miller beer drinkers, and in the US it seems Coors, Budweiser and Miller has dominated the US market for decades. Through acquisitions and mergers, this has consolidated the beer market for quite some time. However as the article states, there has been a rapid increase in the beer market and over the last decade it has been in the micro/craft beer market. Beer has become a passion and a lifestyle for many, much like wine has been for some. Micro and craft breweries have had a surge in popularity locally in many areas, but also nationally which has drawn the attention of the major brewers whom took notice and have acquired some of those breweries and added them to their national distribution. Looking at a brewery like Sam Adams, it started small and eventually found themselves on a national scale to where a Sam Adams is now common both on television advertising and in watering holes all over the nation.

    One example that ties in well with the argument of micro breweries and craft beers is Colorado where I did my undergrad and also lived out there for a while after college. Colorado is the birthplace of Coors and home to the Coors brewery, yet they are also one of the states with the most breweries per capita. How this ties in to the article and my response about beer becoming a lifestyle is that now instead of just ordering a beer, establishments and brewers have picked up on the fact that people want a good beer more than just an ordinary one and will not only pay a premium but also go into a place just because they carry certain beers. With that said, It is not uncommon to walk into a restaurant or bar and be offered an explanation of the ingredients, the location and the alcohol % which is a comparison to the wine lifestyle and wine aficionados

    In the market place and from a price point perspective, craft and micro brews are often priced at a higher price for a 6 pack than domestic beers and around the same price point for imported. Could this be an issue for the brewery if they priced too low to maintain a working brewery and its overhead and costs? Possibly, but also the key aspect for a micro brew or craft brewery would be about building a premium and not mass produced product which will tie into the lifestyle that those who may consider themselves to be “beer snobs” will appreciate compared to the Coors lights, Miller Lites and Bud Lights on the market.

    Whether the recent surge in breweries opening up is just a fad and will eventually flame out over time is yet to be seen, until that happens, with the popularity of beer as it is right now, I can only imagine the number of breweries will rapidly increase in the near future

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  2. It's so nice to be able to read about and comment on an entry about beer.

    I have another possible reason to add to the discussion of the ebbs and flows the beer industry. Certainly, legality and societal factors played a role in the decline of the industry during the first quarter of the 20th century. The temperance movement, having been established in the 19th century continually preached for liquor consumption to be abolished. Along with other factors, this brought on the passage of prohibition. This dry period devastated the industry and although it was eventually repealed a relatively short time later, the market was forever changed. What emerged was an industry dominated by mid-scale regional breweries, who, through years of consolidation and acquisitions, became dominated by a handful of large scale breweries.

    My suspicion is that there were two major societal factors that brought on the resurgence of breweries in the late 20th century and into the 21st. First came globalization. Tastes, palettesetes, interests began expanding. As travel abroad supplanted travel within the U.S., the thirst for different types of beers from around the world expanded. Where in the 1970’s it may have been tough to find Guinness on tap in Chicago, by the 1990’s it was fairly widely available.

    Second was the spread of the internet, because what else. The internet made it easier to discover new beer, share techniques for home brewing, connect like minded beer drinkers and create a culture which appreciated and celebrated beer. This in turn led to a market thirsty for more types of beers, brewedd by more breweries in more places.

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  3. I feel that the beer industry experienced significant changes over the last 30 years. The primary forces acting on the industry have been the removal of brewing restrictions, social media, technological advancements, and an increased demand for specialty beers. In the last 10 years of so I have seen micro / craft breweries popping up in cities and towns all over the country. A large majority of these breweries may distribute regionally or in the local cities but most don’t distribute on a national scale. The demand has skyrocketed for fresh beer and unique brews which are made locally with local ingredients. I believe the millennial generation has been a driving force in the specialty beer industry. The increased demand has allowed the breweries to charge significantly higher prices compared to what has typically been charged for the mass produced pilsner beer or even the mass produced specialty beers in the past. I am personally a big fan of craft beers and love being able to try new places and different brews. I hope to see a continued expansion of the craft beer industry and am excited to watch it evolve.

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    Replies
    1. The main reason that craft beer is more expensive than traditional lagers and pilsners is the ingredients used to make it. Craft beer is much hoppier than traditional beer styles, and to accomplish this, you need substantially more hops in the beer. Craft beers use between four and ten times the amount of hops per batch as compared to the traditional lager (Terazono, 2014).

      As someone who has owned a hop farm in the past and has also dabbled in homebrewing, I cannot begin to emphasize the importance of hops in craft beer. The craft beer craze began in the 1980's and picked up real momentum in the late 90's and early 2000's. This increase in craft beer consumption and production has shifted the supply and demand curve substantially. Hop prices were stable for many years at around $2-3 per pound. Now they are routinely selling for between $7-10 per pound (Terazono, 2014).

      If you look at the information from the original post provided by the Ameican Brewers Association, you can see that the United States has hit an all time high in breweries and there are still at least another 1,800 breweries in the works. This means that unless there are a lot more hops available for all of these new Brewers, then the price of hops and therefore craft beer will continue to rise.

      As a lover of craft beer, I could not be more excited by the prospect of more breweries and therefore more variety in this country. However, I hope there is a boom in hop production, because beer prices are getting very high, and soon they may reach their ceiling as consumers will begin to get priced out of the market.

      Reference:

      Terazono, Emiko (May 12, 2014) Hop Prices Soar as US Craft Beer Boom Takes Off. Retrieved on February 11, 2016 from: http://www.cnbc.com/2014/05/12/hop-prices-soar-as-us-craft-beer-boom-takes-off.html

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