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The Not So Magic Art Of Beer Pricing



beer pricing

Would you believe the amount spent on the bottling and packaging exceeds the amount of the brewery's profit per bottle?

Talk of beer pricing a generation ago didn't mean much. All that was available to the masses were macrobrews manufactured by corporations that have since grown larger through mergermania. Circa 1983, a case of Budweiser didn't differ all that much in price from a case of Coors. 

But all that's changed with the introduction of microbrews. A bottle of one microbrew can be triple the cost of another.  Or a helluva lot more.   Germany's Schorschbr√§u's Schorschbock 57 sells a 330 ml bottle for $275. Scotland's Brewdog sells The End Of History, a blond Belgian ale, 55% ABV, for $765. Australia's Nail Brewing's Antarctic Nail Ale, a pale ale of 10% ABV made from melted Antarctic icebergs, fetched $1,850 per 500 ml bottle at an auction.

All right, these are exceptions, limited editions with such limited supply that asking prices can reach the heights of the heavens as long as a rich enough sucker is around to foot the bill. How are the more prosaic brews priced for the marketplace?

All beers, whether macro or micro, have a similar breakdown in costs. There is the cost of ingredients; the packaging; labor; shipping; local taxes; the allotment for loss and breakage; sales tax; and the brewer's, distributor's, and retailer's margins. By no means do these individual categories weigh in at the same cost across all beers, explaining the vast disparities in price. 

Take raw ingredients.  Nearly all beers contain at least water, malt, hops, and yeast.  Breweries utilize the equivalent of 4 to 7 bottles of water to end up with one bottle of beer. Water usually comes cheap, but increasingly among smaller breweries like the Lagunitas Brewing Company in Northern California (now 50% owned by Heineken), the water is drawn from a natural source - here, the Russian River, which has been undergoing a drought since 2011. California alone has over 400 breweries, all competing for the same limited water supply. A drought or an adulteration in the state's water supply translates into higher prices.

Malted grain provides the sugars that convert into alcohol during the fermentation process. A beer higher in alcohol content, like a quadrupel IPA, requires more malt than a 5% Budweiser. Adjunct lagers use corn, rice, and other fillers for "taste" but also because they cost less than malt.   A macrobrewery can get away with using 18 kg of malt per barrel, equating to around 52 grams of malt per bottle. A craft brewer could easily use twice this amount. And because they purchase in lower quantities, the average craft brewery pays twice the amount per kilogram for the same malt and more money again when they add specialty malts. After all is said and done, a craft brewer will spend four times the cost per bottle for malt than a macrobrewer.

Macrobrewers win again on hops, the herbaceous plants that give beers their bitterness and distinctive flavors and act as a natural preservative. Macrobrewers make huge purchases on the hops contract market and aren't much concerned with specific hops varieties.  They're not using expensive varieties or adding much of them to their beers.  A macro might spend $7/kg on cheap hops and use less than a half kilogram for an entire barrel of beer, the equivalent of about 1.3 grams per bottle. Meanwhile, the smaller guys are forced to duke it out in the ever expanding craft brewery industry for limited supplies of in-demand specialty hops varieties like Simcoe and Citra and make up the shortfall on the spot market, where prices can be double if they're available.  A craft brewer can spend at least 11 times more per bottle for hops than a macrobrewer.

A macrobrewer's cost for yeast is essentially zero. They cultivate their own and continue to re-use it. Everyone else buys yeast from companies specializing in the trade which can add 4¢ to 8¢ (USD) to every bottle.   And today's craft brewers find it trendy to add anything from chocolate to chipotle peppers to exotic coffee beans to the mix, things you would never see in a macrobrew. All these add to the final cost, sometimes significantly so.

Macrobreweries also enjoy an advantage on labor costs.  They brew in larger batches and can mechanize much of the work.  Labor is actually only a tiny component in the total cost. Nonetheless, it does add a few cents to the cost of each bottle of craft brew, but perhaps only a penny to a macrobrew.

Packaging doesn't come cheap. Glass bottles with beer labels affixed can cost as much as 20¢ per bottle, which is more than the brewer's per bottle profit.  Macrobrewers can shave more off the cost because, again, they're buying in bulk.

One often ignored cost is advertising, which has to be passed on to the end user. Macrobrews have little to distinguish one beer from the other except for some abstract brand image that they need to outlay advertising dollars for.   The more bottles or cans of beer a brewery produces, the more these advertising costs can be spread out per unit.   To illustrate, the three bestselling brews in the USA - all macrobrews - incur a cost of 1.5¢ to 2.5¢ per unit.  The country's fifth largest brewery, Boston Beer Company, pays over 6¢ a unit.  Much smaller breweries trying to get their name out would have little trouble spending triple per unit what Boston Beer Company does. 

Then, consider the distributor's and retailer's margins. A distributor buys from the brewery and usually marks up the beer by 50% to the retailers who then mark it up again by another 50% for the consumers. 60% of the consumer's cost of a beer is profit for the brewer, distributor, and retailer.  A beer that costs the brewery 50-60¢ to produce will wind up costing $2 minimum by the time it hits retail outlets, barring import duties and excise taxes. If a brewery enjoys such high acclaim and produces limited supply beers, it can add a higher margin before selling stock onto a distributor and be retailed for higher profit margins for its perceived limited availability.

No one ever said being a beer snob came cheap. 

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14 Sept 2015
 
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