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Tuesday, November 17, 2009

Are Specialty Beers Underpriced?

There must be something in the air. A debate raged last week on the Brew Crew listserve about how expensive beer ought to be. (General sense: less.) Earlier, Alan voiced similar concerns on his Good Beer Blog. Now Stan alerts us to a similar debate that broke out on his blog.

I guess it's not surprising--mix a spike in beer prices overall with the worst recession in seven decades, and people are likely to grumble. With regard to regular beer prices--I feel your pain. This is a tough time to have to spend more for a sixer. But when the discussion turns to the price of specialty beers, those limited-edition 22-ounce releases, I have to dissent. Matter of fact, I think there's a lot of evidence that at even $20, these bottles may be underpriced.

Markets
I am not an economist, but I think I understand the basics of markets. When supply and demand are in equilibrium, prices stay flat. When supply exceeds demand, prices drop as retailers try to sweeten the deal. This brings equilibrium back to markets, getting surplus product off shelves. When demand exceeds supply, prices rise as a way of moderating demand. This is the healthy function of markets.

Last week, I reviewed Pelican's Perfect Storm, a beer now ranked by BeerAdvocate beer geeks as among the best in the world. It sold for $20 a bottle. Some beer drinkers who wanted a sip of that delicious potion found the price off-putting. By this reckoning, the brewery shouldn't be trying to gouge its customers. The Abyss, ranked even higher than Pelican but nine dollars cheaper, also fanned the flames of discontent. Why look, Pliny is right there in between them, and it's a bargain.

Cost and Retail Margin
Let's unpack this. There are several moving parts: cost, retail margin, and supply/demand. Most beer drinkers consider only the first one. If a beer costs a brewery two bucks to make and it sells for twenty, they're gouging the customer. But even here, you have to consider much more than what the final product cost. There's the development of the beer, test batches, marketing and printing costs. When I spoke to Gary Fish recently, he mentioned that Deschutes spent four years developing Green Lakes, their organic beer. By the time they get a gluten-free beer to market, it will have taken about the same amount of time.

Next, there's the issue of retail margin. Stan captures this nicely:
Distributors will mark up the beer 28 to 32 percent before selling it to retailers, and retailers will mark that up another 30 to 35 percent. Special beers, like Old Rasputin XII tend to get marked up more. Take the middle of both those ranges and you’ll see a bottle of beer delivered to a distributor (which isn’t cheap when the bottle starts in Fort Bragg) for $10 would cost you $17.29 (more likely $16.99 or $17.99). Who’s making the real profit along the way?
Compare beers a brewery produces at $5, $10, and $15. Adding a 30% markup at distributor and retail levels brings that $5 beer to $8.45. At $10 it balloons to $16.90. And at $15, it shoots up to $25.35. If the brewery raises the price per bottle from five to fifteen dollars, it makes ten bucks, but it costs the consumer more than ten more.

Demand
Now let's consider the supply and demand issue. A brewery like Pelican simply can't produce very much Perfect Storm. They have limited production and storage capacity. This year they made about eight barrels of it. The demand for this beer was such that fully half was committed by pre-orders and the rest sold in days. Confronted with a situation like this, a brewery should raise its prices. Markets adapt to price points. Looking at the rapid sales, I'd make the argument that the beer was under-priced. Would Pelican have sold the beer at $25? $30? Pelican would know that the price point was right when the beer sold well, neither leaving product on shelves nor causing riots.

There is a virtue to this system beyond just maximizing profits (which is what breweries should be trying to do--they're businesses, not social service agencies). For the customer, pricing beer at the top end means slowing down sales. I suspect there were a lot of people out there who regret not getting a chance to buy a $20 bottle of Perfect Storm. Pricing things at their value means customers have a chance to buy them. It's a bit Darwinian, admittedly, but that's the nature of markets. It's still the best system--by a long shot--humans have devised. When breweries over-price beers, they pay the price, which is how Darwinism runs backward, too. Recently I was in Belmont and noticed that they still had a half-dozen or more BrewDog Atlantic IPAs. Apparently $26 is too expensive for an 11-ounce bottle.

And let's be honest: most people can still afford $20. That's a cheap bottle of pinot. In absolute dollars, it remains affordable--all the more so when you consider that almost no one else on this blue planet had a chance to buy The Perfect Storm at all. If breweries were social service agencies, I would expect them to hold prices down. But then, if we demanded that they just keep prices down, would they really try to shoot the moon and make a beer worth $20 in the marketplace? Making a world-class beer is its own reward, sure, but it also means you get to reap the benefits. Those pretty, green, presidential benefits.

As long as the Perfect Storm and The Abyss continue to sell so well, they will and should stay expensive. And that's a good thing.

15 comments:

Anonymous said...

"And let's be honest: most people can still afford $20. That's a cheap bottle of pinot."

You don't have kids, do you Jeff? :)

From a market perspective, the supply/demand equilibrium should be working to find the right price for any beer. If you try to sell it at $20, and it vanishes, then you sell it at $25 next time. If it sits on the shelf, you finally arrive at $22.50 and you've found the right price.

Retailers can do this themselves of course, by discounting slow-moving stuff until it moves, but then they won't order any more.

I would like to try the new Pelican after reading your review, but if a bunch of breweries were trying to turn a buck by selling limited runs for $20, despite the relative quality? Wouldn't work for even a single selling season.

I could afford a $15 to $20 bottle a beer, maybe three to four times a year if I really was hot for it. But since I have a beer nightly, even $5.50 bombers start to look expensive. (I do have a couple of them kids.)

Similarly, I think it's crazy to spend more than around $18 for a bottle of wine.

The real scam here is Oregon's distributor system. 30% mark up for those monopolists? Screw that.

Anonymous said...

Limited edition and limited run products always demand a premium, regardless of the industry. Large scale production should drive the price of a product down.

I have a friend who doesn't care what beer he is drinking as long as it's beer. Since flavor is not a deciding factor, he solely uses cost to make decisions about what to buy. I could go buy 4 $3 pints of Butt Light at a bar or I could buy a $12 bottle of Abyss. My friend would opt toward the 4 pints but I imagine your readers might view it otherwise.

Anonymous said...

I think you have to be realistic, I feel that the pelican beers are over priced anywhay. Rouge charges what they do for a reason, I tasted a dead guy the other day and it was good. The abyss is expensive, but such a fine beer that I will drink two this year. But there is a price point that some of us just dont want to cross. Any bomber at 4.99 and under, goes in the shopping cart, north of 4.99 I have to think about it, and 7.99 and above, You really have to think about it.
If you start pricing the beer to high, you will lose a lot of your market.

Kevin said...

It'll be interesting to see if we experience another price creep in the near future because of the rising price of macros. I know Anheuser-Busch announced another increase a while back.

At the markets down here in Eugene; Bridgeport, Deschutes, Pyramid/Mac, Full Sail and Sierra Nevada are routinely $5.99-$6.99 for six packs. Half the time, this is less than a 12 pack of Budweiser Wheat, Bud Light Lime or whatever other "premium" beer the macros are pushing.

Even without an an increase from micro breweries, if I were a distributor, I would be tempted to hike craft brews when this increase occurs. People have it ingrained that micros cost more, so if macros go up, why not raise micros and pad the wallet.

The big problem is the requirement in Oregon for breweries to use distributors. Personally, I would rather spend $20.00 for a bottle from Pelican than the same price for something at a grocery store. Pelican's bbl output is still low enough that they can self-distribute, so most of the money is going to them. It makes me feel kind of dirty paying $13.00 for a bottle of Abyss at the market. It is worth every penny, but after the retailer and distributor, Deschutes is getting about $8.00.

Cheers!
Kevin
beerandcoding.com

Jeremy in SE PDX said...

It's vulgar to discuss the price of beer. :-)

Seriously, I can't think of any consumable that gives me more happiness per dollar than good beer.

I don't think premium beer is too expensive. If prices, oh, I don't know, doubled, I might start noticing them. For now I buy whatever sounds good.

And, yes, I have kids, and a job, and a mortgage, and no, I am not living off a trust fund. I just think good beer is easily worth what's charged for it. I mean, compared to what?

Have you gone out to a movie and dinner lately? My wife and I could buy a *six-pack* of Abyss for what an evening at a decent restaurant and a first-run movie costs. The Abyss would keep us happy for a week!

If brewers are reading this, go on and mark up! Stay in business! Get rich! You deserve it!

--JT

Jared said...

I'm on the fence about prices because quality doesn't always match up. I wrote a post about the $15 dollar magnum of Pelican Bridal I had. Was it good beer? Yes. Was it $15 good? Not really. I paid 12 somethin per bottle for Abyss. Was it amazing? It wasn't bad. But I'm trading some of those bottles for some harder to get east coast beers, so it's worth every penny. Heck if the price point on Abyss is so low then why did roths have no limit cases of the stuff priced at $11.99 sitting out so long?

Also I think part of the problem is breweries purposefully keep these beers limited. Yes a lot of time and effort is needed to make abyss, but could you imagine if Deschutes had batches of it going year around so it stayed on store shelves? You thing it'd cost $13 a bottle then? Would it rank so high on BeerAdvocate? I understand Pelican can't do a year around perfect storm, but I've always thought I'm paying for the view the brewers get when I buy their beer.

Beer has always been a product your average Joe can afford. So while I'm all for great beer and breweries making money I still want to see people be able to afford great beer. On my salary it's hard enough to justify great beer, and if prices go up I'm not sure how much I'd be willing to economize afford it.

Anonymous said...

The three beers mentioned, Perfect Storm, Abyss, and Pliny, are all priced well IMO.

Consumers (including myself) need to remember that Barleywines and Imperial Stouts require excessive amounts of malts to produce...two to three times as much as a typical offering.

Another major factor in the bigger price tag is the time and space used for aging. These beers sit around for months, if not more, before they're ready for consumption (e.g. Perfect Storm's base beer is '08 Stormwatchers). This is time and space that isn't being used for smaller beers with quicker turnaround.

Pliny's relatively inexpensive price tag comes in large part to the face that it takes mere weeks from grain to glass.

If I had to guess, I'd say your typical 6-pack Pale Ale has a higher profit margin than a $10-$20 bottle special release.

Jack R. said...

I strive to buy local. I typically pay 1.5X for a local [Montana or Washington] pilsner compared to Bavaria's Beck's premium pilsner or the Czech Republic's Pils Urquell [which are shipped 9X the distance].

However, if / when the price delta approaches 2X, I may be inclined to vote with my wallet.

Jason said...

If you had asked me a year ago if these beers were overpriced at over $10 a bottle, I would have said yes.

Until I gave in and tried them, in the midst of a overall food/alchohol change of tastes.

When you care about taste and quality, and you compare them with lower cost beers, you see why they cost more. Quality always will cost more - that's why a BMW costs more than a Hyundai.

The first time hurts, but after you see what you get for the money you will keep paying it if you like it.

It's a niche market - it always will be.

Average Bill said...

Are speciality beers underpriced? No, but I'd argue that most are priced fairly. There are plenty of great beers in Portland that I can get at Winco for $6-7 a six pack. But as great as these are, they're everyday beers, not the special beers you're highlighting here. $12-20 is a lot of money for many of us, but these are beers for special occassions and not for everyday drinking.

As others have pointed out, they cost more to produce and often require floor space for aging. That costs money and there's no reason why we as consumers should think that a brewery should sell a specialty beer for the same price as their everyday offerings. I have no issues with breweries making above average markups on these products either. They're generally seasonal and limited. Rarity drives price up in every market.

I'm reminded of what someone in the wine business told me years ago. When people asked him what they should spend for a bottle of wine for a dinner, he said the wine should cost roughly the same as the cost of the ingredients for two people. So with burgers you're having an everyday drinker, but with filet mignon, black truffles, and morels, you're drinking classified Bordeaux.

Same type of thing with these beers. They're meant to be special occassion beers, and the prices reflect that.

Jared said...

So the general opinion seems to be that these are rare high quality beers. I guess my question is why are they so rare? Deschutes as well as others have the production ability to keep batches aging at different stages year around so that the rarer beers could be on the shelves more often.

Breweries run these limited releases of great beers more so to generate hype it seems then to make great beer available. If people could only get away with charging $8 or $9 a bottle for these beers and not make much profit do you think they'd do it? But that's exactly what would happen if these beers were available more often. It is all about the hype and money.

Another issue is yes these are special occasion beers, but we're focusing on some amazing beers here with the 3 that are being brought up. The reality is that all the breweries that have been brought up produce other high price beers that don't preform nearly as well. Abyss for example cost me the same per a bottle as Black Butte XXI this year. Is BB XXI worth the same as Abyss? Are Pelicans seasonal bottles worth $15 per?

Jeff Alworth said...

I've been reading along and enjoying the comments, folks. Thanks for the thoughts--

joe said...

-The reality is that all the breweries that have been brought up produce other high price beers that don't preform nearly as well.

This is to me is the key point and was illustrated last night with my Pike Entire Stout. Not worth $10 bucks to me, not by a long shot. I think high price used to be a better signal for high quality. I think that link is broken and its buyer beware now.

Anonymous said...

Someone mentioned that Black Butte XXI is priced the same as Abyss. I may be alone but I think that the 2008 Black Butte XX is better than the 2008 Abyss but that's just me.

I've seen several people on the "$12 is too much" side of the argument mention that it's too expensive on their salary. Doesn't that argument have more to do with what the individual is willing to pay than the actual argument? Is a $20 beer worth it? To answer that question wouldn't you have to divorce yourself from your own financial situation?

Mark said...

Another element in the economic equation is how long the brewery expects to sell the brand or product. Green Lakes, in the works for four years, is probably going to be around for a while. Therefore, Deschutes will have more time to recoup costs and can, thus, sell a given unit at a lower price. They are amortizing that R&D over a longer period and a higher production run.
Oh, and I think craft breweries are social service agencies or at least great community building agencies, albeit with a profit at the end of the year if they are run well.

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