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Wednesday, September 07, 2011

Black Market for Beer, or Good Old-Fashioned Arbitrage?

Note: post has been updated below.

I would very much like the Beeronomist to comment on this Washington Post article, but in the meantime, I'll do it myself. You are well aware of the issue: reselling "buzz" beer on the internet at an extravagant mark-up. Some breweries, apparently, are apoplectic:
Last month, for example, San Diego’s Stone Brewing Co., whose rare Vertical Epic beers are sometimes listed on eBay for more than $1,000 per bottle, began selling the first beer in its new Quingenti Millilitre series via a lottery system, and Stone has announced that people who try to resell it will be banned from future drawings. “We have involuntarily been a part of the eBay aftermarket for many years,” says Greg Koch, Stone’s co-founder and chief executive. “This is the first time we’ve come out, laid it on the table and said very point-blank, ‘Please, do not resell.’”
Daniel Fromson, who wrote the article, diligently follows the breweries' pique and ventures into the weeds of law and interstate commerce. The conclusion is a kind of moralistic/legalistic scolding of customers who are, in his words, "exploiting" the breweries.

Hogwash. In economics, there's this concept called "arbitrage," which is exemplified precisely in the act of buying underpriced specialty beer from the brewery and reselling it for fantastic sums online. (Here's Patrick using an example from the Portland Timbers.) Usually, people exploit loopholes for arbitrage opportunities. NPR recently reported that people were using a government incentive of free delivery to sell unwanted silver dollars; people were buying them in massive quantities with credit cards to get frequent-flier miles and then just spending the dollars or taking them to banks.

But here's what I don't get: why don't breweries just charge more for their beer? No one's exploiting a loophole; they're buying beer at prices way below their market value and reselling them instantly at their market value. Prices always find a point of equilibrium between supply and demand, and if breweries are going to leave all that money sitting on the table, people are going to capitalize on the chance to snatch it up.

There's a secondary thing I don't get. The article mentions a bunch of the classic beer geek celestials, like Russian River, Lost Abbey, and Cantillon. These breweries attained their status principally by offering beer so good it could command these prices. There's a clear halo effect when you are regarded as producing ambrosia that's very good for business. The whole purpose in creating rare specialty beers--from a business perspective--is to create buzz and bring attention to your product. It creates fanatics who will go online and buy your beer at $400 a pop--which in turn gets you more attention as the Washington Post writes about your beer.

If breweries were honestly losing money on the resales, that would be one thing, but they're not. They sell a product at a price they believe is reasonable and they make a tidy profit doing it. At any point, they could charge more for their beer if they wanted to do it and remove the incentive for people to resell online. For very good business reasons, they choose not to. For one, they keep their customers happy and engaged. For two, they continue to be among the very few breweries in the world that can command those prices on a bottle of beer--a pretty great marketing trick.


Update: Patrick picked up the baton and expanded on this in a more professional manner. It's a fine and careful consideration, and you should read it all, but of course, I'll poach a choice cut for my own purposes.
The fact that these market have arisen suggests that there was a missing market problem: buyers and sellers who would like to transact but for whom there is no forum for such transactions. The most common reason for such transactions is some sort of regulatory constraint. Black markets in command and control economies like the former Soviet Union are a perfect example: shoes are on sale in Moscow, but there is little demand, so buyers buy them and sell them illegally in Siberia and so forth.
You'll have to follow the link to see where he takes it.

34 comments:

Bill Night said...

What? Have you become a worshipper of the magical infinitely intelligent market, which instantly and infallibly calculates the true value of everything? I feel like I don't know you anymore.

Breweries charging more for their limited beers will not solve the problem, which has to do with distribution, not price. The brewery cannot incur the overhead to give everyone on planet Earth the opportunity to buy a bottle of their beer, let alone administer a system that finds the theoretical equilibrium price point at any given moment. So they sell the beer at a fair markup to those in their distribution area. There is a small but intense demand outside that area, which will be present no matter what price they set on the beer (unless they set it so high that no one at all cares to drink the beer!).

Jeff Alworth said...

The beeronomist has been working me over for years--blame him. (But yes, in terms of managing the supply and demand of a single product, I think it does a marvelous job. Providing health care to seniors? That's an entirely different kettle of fish.)

In any case, I guess my point is this: I fail to see any problem in the system. It seems like a win win win. Who's losing?

I'm Bill Howell. said...

Well said, Jeff. No one is losing, with the possible exception of the brewers whose egos demands that they somehow exercise control over something that they no longer own.

The monks at Westvleteren are another example of this -- for want of a better word--hubris on the part of some brewers. As a brewer, you get to ask whatever price you choose for your beer. If I as a customer pay it, then it's my beer and I should be free to do with it as I wish: drink it, re-sell it, or pour it out on the sidewalk.

I don't try to tell the brewer how he can or cannot spend the money I paid him for that beer. Where does he get off trying to tell me what I can or cannot do with it?

Nothing but hubris...

Patrick Emerson said...

Wow, I didn't realize my brainwashing has been so effective...

I agree, Stone is selling a product for a chosen price, if that price is below the market value, who are they to say you can't resell?

The key word here is 'selling' - they are transferring the ownership of a private good. Once I buy it, the beer is no longer theirs.

Bill Night said...

I think you guys may be missing at least part of the point of the brewers' angst.

Ebay prohibits sales of beer. Thus, if the brewery wanted to seek higher prices via Ebay, they are not allowed.

However, unscrupulous people who don't see honesty as an important part of business transactions get around this restriction by saying that they're selling a collectible bottle and that the incidental contents are not intended for consumption. That language is at least part of the breweries' complaint. It was the basis for Tomme Arthur's "Fuck Ebay" editorial in Beer Advocate a few years ago.

By the way, if you are opposed to Ebay beer sales, you can report any beer auction to Ebay and they will close it. I have done this occasionally to point out the patent dishonesty in the disclaimers.

Mario (Brewed for Thought) said...

Who loses? The brewery and the end customer.

I was on hand at Russian River for Pliny the Younger 2 years ago and saw people taking cases of growlers out to their cars and coming back to drink beer. The beer in those growlers then warmed up to above room temperature as the winter sun baked the parked car (It's California, we always have sun).

I assume these profiteers would immediately go home and post these growlers to ebay where the would continue to sit at room temperature, fluctuate with the ambient temperature and essentially be treated about as well as any warehouse treats Budweiser. Once sold, the beer would be packaged and shipped (my guess by ground) wherever it was purchased.

The result, a 10-14 day old growler of beer that's been mistreated from the second it was poured. The consumer then drinks and judges this brewery based on the tortured brew and exclaims, "I paid $100 for this?!"

The consumer loses as there is no quality control. There is no guarantee that the beer was treated properly. There's also no guarantee that the beer is in fact what you purchased. Growlers seal with a flick of a thumb. Crowns from breweries are easy to come by. Can you say this beer you've never tried and have only one chance to try is definitely what you paid for?

The breweries lose because they are being misrepresented. Wishing to provide a beverage at a fair and attainable price, the beer is now expensive and poorly treated. Consumers from afar now build their judgement of the brewery based on a falsely produces price and a product of questionable quality.

If you want to pay $100 for a beer, that's your own business, but to pretend that no one is hurt by this practice is being naive.

Jeff Alworth said...

Bill, the breweries don't have to sell it on eBay, they can sell it for whatever price they want at the brewery. If Vinnie Cilurzo decided that glasses of Pliny the Younger could be sold only in single glasses, one to a customer, for $25 a pop, he could. The eBay thing is a secondary matter, and the breweries aren't mad about the legal issue, they're mad because they think they're being cheated. The answer is to raise their prices.

Jeff Alworth said...

Mario, you raise separate issues that serve to refute each other. Unscrupulous people will sell products online that are other than advertised.

There's no brand confusion here when invco2011 from Tampa, FL sells a bottle of Vertical Epic. Everyone knows invco2011 is a private dealer--just like they know that Bluetoothchip from Janesville, WI is not Apple Computer when he sells an iPod. There's no issue of misrepresentation going on here.

Kris said...

Limited edition beers or tickets to limited attendance events (ie. GABF, Great Taste) if you are lucky enough, through whatever means, to get them may you suffer the wrath of The Beer Gods, karma if you prefer, for charging excessive amounts. That is regardless of whether or not you find a buyer. Wrong is wrong, plain and simple.

Joe said...

i was at the cascade barrel house earlier this spring. was chatting with the bartender and another fella in there. some tourist type. was telling us that he just paid $300 for a bottle of dark lord. this was back when both the vlad and bourbonic plague were both on sale for $22 at the pub. we were like, dude!!!!!!!

Jason Harris said...

I agree with Mario 100%. Typically the people who are paying a lot to get these beers are getting only one impression of that beer. When they get something sold by Joe Shmoe that was stored in dubious conditions and isn't up the par with what the brewery intended, they get a bad taste in their mouth from the brewery.

At the end of the day, until all of the craft breweries are in all 50 states and any other country that wants beer, that's always an aftermarket demand. But because some guy in Australia or Maine wants to overpay to try out the fancy new Stone bottle, they should jack up the price on all of their regular, local customers?

If the bottle is $50 for every local customer, is that really going to stop the guy on eBay who can't get it for that price from paying $100? Now you just screwed every local customer and didn't solve your resale problem.

J Peters said...

I find this blog rather short sighted, in the fact that it just assumes the value of the beer to be set at what it may go for on eBay, and consequently the brewery is at fault for not setting the price point more accurately. That, my friend, is hogwash.

As Bill has already noted, what this really boils down to is distribution, and the problems involving the three-tier system of beer distribution (brewerey-distributor-retailer). The only reason any of these beers go for such outlandish prices is because of the lack of distribution. For anyone in your immediate distribution area, as a brewery, you would alienate by setting the price point significantly higher simply due to a shitty interstate 'trade' system, done illegally, on eBay. So the brewer is supposed to irritate and alienate 99% of their buyers because there is a 0.5% population of mouth breathing morons that exploit the system for profit, from the other 0.5% population of morons stupid enough to buy this beer at a inflated cost? That's called terrible, terrible beeronomics.

Jeff Alworth said...

Jason and J Peters, if a brewery wanted to make sure local customers had a shot at the beer first, there are a lot of options. Sell it at local pubs on tap. Sell it from the brewery in a dock sale on a given day with strict limits about bottle limits, and then raise the price thereafter. Etc and so on. This is absolutely not an issue of distribution; the beers ARE getting to market. If you sold half your stock locally for $15 a bottle and the remainder for $30 a bottle, how much would appear on the after-market? It would almost certainly end the practice, for two reasons: 1) because the $30 price will dramatically slow sales, meaning that anyone willing to pay $30 can get a bottle, and 2) because the risk in arbitrage once you've sunk $30 into a bottle is far higher.

So then the question arises: why don't breweries adopt this practice? My guess, looking at the likes of Russian River and Lost Abbey--obviously exceptional businesspeople--is because they see a much bigger advantage in selling beers at a lower rate and creating the buzz that underpriced beer brings. You can't very well create a scrum for your underpriced beer and later complain that you're losing money. Well, you can, but I think it begs credulity.

Jason Harris said...

Or perhaps the dramatic PR hit the brewery would take for having a "locals price" and a "non locals" price.

How does any of that solve the problem that most of the people overpaying for the beer are outside of the brewer's distribution area?

Three Floyd's doesn't have the capacity to distribute to all 50 states, so when Dark Lord comes out, it won't make it to CA. They are not able to sell direct to the consumer, so there is no legal way for me to get it. As a result, many CA beer geeks will go buy a bottle on eBay because of the beer's lofty reputation. So by your logic, Three Floyds should just be charging $300/bottle to every customer who comes in, that way they'll stop half a dozen people from making that much selling to people on eBay? What do you think the reaction would be from the other 99% of people who just want to go get their favorite beer from their favorite brewery?

The basic jist of your strategy is "Piss your customers off so much that they will no longer want your beer, problem solved!"

Patrick Emerson said...

Look, limited time sales available at a few locations is just another cost you are imposing on consumers. The increased prices from the secondary market is a reflection of the price people are willing to pay to avoid those costs.

The only people for whom the brewery is doing a favor by prohibiting resale is those who happen to be close enough, have flexible enough schedules, etc. and can get to the beer to buy it at list price.

This system is inefficient in the sense that there are a lot of consumers who would love to try the beer that can't, and the secondary market is simply a reflection of that fact. Such markets arise due to some kind of failure of the primary market.

In this case I agree with Bill that the main market failure is probably a regulatory one. Prohibitions on interstate sales create an arbitrage opportunity for those willing to violate the law. This is where the anger should be directed in my opinion - the regulatory regime is too restrictive.

But don't sneer at those willing to pay $300 for beer - these are the uber beer geeks, your very audience! If they get that much enjoyment out of a bottle of beer, good for them! Unlike wine, beer is not a long term investment, so it is not likely they are paying this amount for anything other than their own enjoyment.

J Peters said...

Jeff A, we'll just have to disagree, because distribution is a far bigger beast than simply offering the beer to those in your surrounding area at a 'discounted' rate. Where does the 'discount' end, at the state border, county border? The people paying this inflated price over the internet are people that have no means to get it otherwise. What's 'stock locally' in your argument? To the distributors you are selling directly to and the areas they sell to the retailers? Then those beers are then grabbed and sold on eBay for a profit since they were bought at a 'reduced' price and the problem persists. If anything that will maximize the profits made by exploiting 'locals' since they are buying cheaper.

I'm not arguing about making sure the locals get first crack, and at a perceived discounted rate. There would still persist and exist exploiters that buy the $15 bottle, and use eBay illegally to make the trade for profit.

And you don't have a problem with the guy that bought a for-charity beer at $14 a pop, and sold it for $100 a pop, when the brewery was giving all that money to charity? That's disgusting.

J Peters said...

Definitely agree with Patrick on where the creation of arbitrage opportunities arise. In fact, I emailed Bell's directly about their thoughts on Hopslam being sold on eBay for profit, and the response I got was basically them throwing their hands up because every state has different regulations and they'd have to staff an entire legal department to unknot the mess.

Jeff Alworth said...

Well, I don't want to throw the baby out with the bathwater--there's obviously nuance here. Distribution is a related issue and I have my own complex and contradictory thoughts about that. (Though when I've aired them in the past, they receive a resounding snore.)

But I still fail to see how the breweries are getting exploited when they sell all their beer at the price they themselves set. Which was my point.

J Peters said...
This comment has been removed by the author.
Pete Dunlop said...

I think there is a growing market for boutique beers. Some of the Russian River beers certainly quality, but it extends to Dogfish Head, Hair of the Dog and others. I believe the local guys engaged in blending and barrel aging (Cascade Brewing, Upright and, of course, Hair of the Dog) are actively courting the high end market. They know they can get more for their product and are doing so.

I am forced to agree with your point on pricing. Some of these beers are simply worth more than the breweries are charging. That sets up instant black market potential. However, the law and eBay's own rules are quite clear on the legality of selling "collectible" beer on eBay: it's illegal.

A while ago I was talking to Art Larrance about his sour beers. He was telling me about their efforts to sell those beers for premium money in New York and other places outside Portland. I believe Alan Sprints has a similar marketing plan. If a brewery has a product that is in demand, it seems to me they should do what they can to tap that market as best they can. They would then be in a position to control the quality of the product and boost their bottom line.

Jason Harris said...

I honestly think the vast majority of eBay beer sales go to people who are not within the market reach of the brewery to sell to directly. The guy buying a $300 bottle on eBay can't get it from the brewery at any price, so the brewery's original price is irrelevant.

As an example, I can regularly come across Pliny the Elder for $5 or less a bottle. A quick glance on eBay shows it's selling for 2-3x that amount. Now, I can still go to the store and get it for $5. If the brewery raised their price, all that would do is make it more inconvenient for me to buy. The person buying it on eBay is buying it there because that's the only place they can possibly get it, short of travelling to the area where the beer is sold.

I think you'll see very, very few people within the distribution area of any given beer paying big money to get it on eBay. The problem comes because people will look at say, RateBeer's top 50, and decide they need to try Westy 12, or Speedway Stout, or Pliny The Elder, or Bell's Hopslam....and those beers are available in maybe 1/3 of the US and nowhere outside of it (or only from a tiny little monastery in Europe....)

I don't think the argument is that the brewery is harmed financially....Stone has said repeatedly that they don't like their beer being sold gray market because it's almost always dubious quality. A badly kept version of the beer going to the customer is bad for the customer and bad for the brewer's reputation, which is why they'd prefer people not resell. It's not them upset that they lost that $10 for the sale, it's that they have a customer who now thinks "Stone is overrated" because the beer he over payed for on eBay wasn't up to snuff. Russian River won't even sell Elder to retailers who don't keep it refrigerated, and it's almost never old on the shelf....so if it sits in a box while UPS leaves it in the hot sun on someone's porch (or in the back of a truck), is that person getting a good representation of the beer? Or are they getting a less than stellar version at 4x the price?

BTW, RR in particular has made efforts to combat this. When Pliny the Younger came out this past year, it was a draft only beer with absolutely no growler fills. You can only get it in glasses direct from the brewery and their favorite bar sellers. But that's not an ideal solution for every brewer (or every beer) and I don't think saying "either stop bottling beer, or gouge everyone so they won't resell it" is the answer either.

Besides, if the beer cost $50 to buy, that just means the guy on eBay will bump his price up accordingly. Sam Adams Utopias is $150-200 a bottle normally, and go ahead and check what it's selling for on eBay. The high price doesn't discourage resale at all.

Jeff Alworth said...

Jason, your case becomes increasingly strong. I guess that's one reason to have a blog--to use conversation to edify. If indeed eBay is being used as a back-door national distribution network, that raises some interesting questions.

Though in those cases, it's really the beer geeks who are suffering-as you note. (RR probably isn't selling nationally because they can't make enough beer to support a national audience--and anyway, the bulk of their business is not done via Pliny sales.)

Finally, on the Utopias point, I think that is more a reflection on the balance point of supply and demand. Since the supply is so constrained, it drives prices way up. The eBay sales are more eye-popping, but the principle is the same.

Soggy Coaster said...

I'm with Jeff here — I don't think reselling hurts anyone.

A few years ago, I paid $30 for a bottle of The Abyss on eBay (this was the 2008 edition, which was impossible to come by in Colorado).
It arrived in good condition, I drank and enjoyed it and blogged about it.

I got to enjoy a great beer, the seller earned a few bucks and Deschutes got their original sale price plus a little bit of publicity.

Who's hurt in that scenario?

Short of a better distribution system, the market will do what it will.

Now that The Abyss is more readily available, I can get it for $11 at the liquor store. But I don't regret my earlier purchase, and fail to see the problem with resales.

Chase said...

Raising prices for these beers won't sap demand for eBay sellers and beer trading auctioneers. The arbitrage opportunities available on eBay and BeerAdvocate/RateBeer are caused by market inefficiencies resulting from the antiquated beer distribution system in this country.

People who buy beer on eBay or trade for it on the rating forums know that they aren't going through the proper channels. They don't care.

Greg Koch loves to talk about how super fresh his beer is because of how carefully Stone monitors its distribution chain. Stone Ruination sits out on the non-refrigerated shelves at both John's Marketplace and Belmont Station. That's no better than most grey market "distributors" handle his beer.

Nobody is being hurt by these arbitrage artists.

joe said...

The marginal price and the market clearing price are two different things. Just because one person is willing to pay 300 bucks for a beer doesn't mean the brewery should charge 300 bucks a bottle.

Price discrimination is a very difficult thing to pull off. It's not as simple as "just charge more."

Beerologist4BIP said...

I absolutely agree with Jason Harris' statement. While I still can't disagree with Jeff's premise that you have a right to do with the beer what you will after you've purchased it, I find the gray/black market concept highly distasteful. That feeling persists even when broken down so logically by Jeff and by Patrick Emerson from Beeronomics (Emerson's blog is one of my favorite beer blogs and I have my own). The head understands but the heart still hurts at the thought of it. As for impact I think even suggesting that brewer's raise prices even on specific beers as alluded to with Crooked Line, shows that the end result of this ends up harming your average craft beer consumer. The craft beer market is growing at a strong clip and we can hope for better and more sensible production growth and distribution, which may alleviate this nasty issue.

Brad said...

I don't think anyone is suggesting that Russian River sell their beer for outlandish sums like $400.

But what about this: these beers are naturally rare. These beers are excellent and are things that we'd like to be considerably less rare. In order to make them less rare, breweries have to up their production: therefore for their rarest beers, they should raise prices [reasonably] to build their capital to expand and *increase* production.

Then more people can drink this excellent brew!

Mario (Brewed for Thought) said...

Jeff, comparing an iPod to a beer isn't a fair analogy for ebay purchases. I can take a Vertical Epic, drink it, then fill it with a bottle of something similar, maybe even a homebrew, use a crown picked up at the brewery as a souvenir and resell it for a high price. I can't do anything similar with an iPod or most other consumer electronics.

While this is an extreme case, it does happen. What happens more often is the mistreatment of the beer and poor quality of the beer. Living in Santa Rosa I know what fresh Younger tastes like. I also know what Younger in a growler kept cold tastes like 3 days later. It's still good, but nowhere near the beer it was fresh. I could only imagine what 3 week old Younger tastes likes after being kept at fluctuating temps.

When it comes down to it, people who are looking to make excessive profits on these things online do things that maximize their profit. Think of the steps you would have to take to ensure the best quality beer from brewery to buyer. Maybe a cooler in your car packed with ice packs, a fridge at home to store the beer, packing the beer with ice packs in a Styrofoam cooler and shipping expedited shipping to ensure it remains cold. All these steps cost money and are not on the list of priorities for someone looking to make big money.

If a beer was an ipod, that would be one thing, but these people are selling stepped on ipods with damaged screens and loose connectors. If that were ebay for anything else, ebay would have disappeared long ago.

Anonymous said...

Just curious: how do you feel about concert ticket scalping? It's sort of a similar situation, no?

Bill Schneller said...

Breweries can't have it both ways. You can't hype the rarity of certain beers and then bitch when someone else taps that idea of rarity and resells it for more. If you push your beers as exclusive and collectible, then you have to realize that this is what happens in a collectibles market.

Charlie Hutchins said...

Schneller, you're the most level-headed beer geek I know.

Anonymous said...

I have to say I find the notion that breweries ought to raise their prices to discourage arbitrage both laughable and arrogant. Does anyone really imagine that they haven't given _considerable_ thought to their pricing? The fact that some beer afficionado with a lot of disposable income will pay $100+ for a bottle of some rarity on the gray market doesn't mean that the it would be to the brewery's advantage to sell it at that price.

Mark said...

As I made my way through the comments, I was waiting for someone to bring up the difference between the marginal price and market clearing price. Thank you Joe for finally doing so. There is an important distinction there that people are missing. The brewery is not attempting to price the beer based on supply and demand. They are doing so based on the cost of production. These rare 22 oz. (in most cases) bottles are being sold for a price that is the cost plus a reasonable (debatable) markup. (I say that the markup being reasonable is debatable because the cost of production on a 22 oz. bottle is not much more, if at all, than the beers bottled in 12 oz. and 6 packs. This is an argument for a different day though, and we'll assume the markup is reasonable for this discussion).

Brad, I must disagree with you. These beers are not naturally rare. They are artificially rare. The things that stop Russian River from brewing more Pliny the Younger is their own doing, not an act of nature. Beer is not like wine. The production of wine is restricted by amount of (quality - adding a stronger restriction as the grapes used in excellent wines cannot just be grown anywhere) grapes grown. Beer may have a similar restriction with hops and barely, but the current production of beer has not come close to that ceiling.

Dave said...

I agree the brewer is not directly hurt fiscally from the secondary market by someone who re-sells at a mark up.

However, if we assume the seller has not taken proper care of the beer then the brewer's brand may be hurt by a poor perception of their product due to things out of their control. So the indirectly there is a legitimate loss for the brewer as brands have value.

it makes me wonder if there is a model where the brewer could get a distributor that is outside of their "normal" area to take the product at a much higher price and allow them to sell the beer at a higher price.

My assumption is that a distributor would nor typically handle a small amount of product at the normal per bottle price but might at a range of 5X or so. No idea if this is true or feasible. Of course the brewer may have to increase production and who knows if they have that capacity.

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