The Economics of Beer
Practically all of us know someone that has been severely impacted by the downturn in the world’s economy… layoffs, spending cutbacks, company closures and the like are just all too common. But what about beer (a favorite question of mine)? How has the weakened economy affected the parent industry of my favorite beverage? Let’s take a look…
My apologies right up front to my non-US readers, as statistics and trends seem to be the most readily available for this country. However, one would suspect that the beer industry would have similar economic effects in other countries too. The most recent broad review of the US beer industry was done in 2008, in a study commissioned by the Beer Institute and the National Beer Wholesalers Association (NBWA). According to this study, the beer industry had the following economic impact:
- contributed, in total, approximately $200 billion to the US economy
- supported nearly 1.9 million jobs, made up of…
- more that 1,000,000 people directly employed by the beer industry (breweries, distributors, etc.)
- approximately 888,000 retail positions (bars, stores, outlets, restaurants, etc.)
- about $41 billion paid in business, personal and consumption taxes
- generated $25 billion in economic activity for agriculture and manufacturing sectors
Looking at these figures alone, it is not hard to draw the conclusion that the beer industry contributes mightily to the US economy and its impact grows annually. Annual growth for the big national US brewers has collectively leveled off to about 1 to 2 percent over the last 10 years or so. Craft beer sales, in stark contrast, have shown a relatively steady annual growth rate of about 10-12% over the same period of time.
Once considered nearly “recession proof”, there is little question that the beer industry, as a whole, is being affected by the weakened economy. According to the Brewers Association, US beer sales are off 1.3% for the first 6 months of 2009 and many of the major brewers reported declining sales at the end of 2008 and into 2009. MillerCoors, a joint US venture between SABMiller and Molson-Coors, reported that US sales for 2008 dropped approximately 2.4%, with sales of their flagship brew Miller Lite falling a hefty 7.5%. The US was not alone in declining beer sales in the flagging economy… SABMiller reported a drop in sales of about 1% for its European lagers, a nearly 22% drop in Russia and a 6% drop in Columbia. As sales drop, the reaction of some of these beer businesses has been to begin to pare back on expenses. Carlsberg A/S in Copenhagen, for example, has cut 274 jobs to reduce expenses due to a future “where we face more uncertainties and risks,” according to a company statement. It is not a very far stretch to imagine that other beer industry businesses have already faced or are considering similar cuts or other major cost-saving measures.
For the “half empty” types, the economics surrounding the beer industry is all gloom and doom, with little positive news forthcoming. However, as I saw when poking around on the Internet researching this article, I think for us “half full” types, there is plenty of good news to be had about the beer economy. The Brewers Association reports that as of 7/31/2009, there were 1,525 breweries in the US… the highest that this number has been in 100 years. So if craft beer sales really are slower,… the Brewers Association says craft sales did drop versus the previous year, but that really means that it showed only 5% growth in 2009′s first half… that record number of breweries represents significant “excess production capacity” in the US craft brew marketplace. I see this as a huge opportunity for craft brewers in a beer market that increasingly sees benefit in quality over quantity when it comes to their beer selection. As history demonstrates, the economy will recover. People will go back to buying beer as their personal situation improves and they feel better about the broader economy. From my perspective when buying beer, buying a quality craft beer is BETTER for the recovering economy. Craft beer costs more (and tastes better) than the macro brews, so every craft beer sold puts more money back into the economy than a macro brew sale.
Doing your part to help the economy? No… then have a craft beer (or two)!
7 Comments to “The Economics of Beer”
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I think these are great times for craft beer drinkers. As you said, our options for different craft beer has never been higher. And because of the recession producers/distributors have to figure out how to lower prices to attract consumers (price deflation). This benefits us by saving us money, or increasing our purchasing power.
Unless the crash causes the industry to disappear altogether (which is about as likely as alcohol disappearing during prohibition) we’re in great shape.
I think the ones hurting the most are the big industry brewers who are used to operating on large profit margins.
Microbrewers are used to operating with small staff, keeping distributing costs low, and using free advertising through social media sites, building buzz through reputation, etc.
The simple fact is that the world is moving to an era of personalization. They like picking and choosing their own songs and building their own iPod playlists (a fact that has turned iTunes into the number one music retailer). We like customization, choosing from a variety, having our tastes tailored to by companies… not the other way around.
This is what craft beer is all about.
Although he doesn’t discuss beer specifically, Tyler Cowen, an economist from George Mason University, has a great book out called “Create Your Own Economy” about how the future of economics is all about personalization, ordering of preferences and organization (aided and abetted by the internet). As I’ve mentioned, the craft beer industry is set up to do this.
RB and BA help us order and organize our preferences, twitter helps us communicate directly with brewers. This is exactly what Cowen predicts will be the controlling aspect of the future economy. He also predicts that people who are better at this type of ordering (which, as a side note here, he identifies as a feature of Autism spectral disorder and goes into great detail about) will be the important and successful players in the future economy.
So what we have in the world of craft beer in the perfect combination. Beer producers who are developing in a market where their diverse offerings will be in high demand, can execute small, efficient operations in cost effective ways.
They are servicing a market that’s online, communicating with each other and fitting the prototype of the “next-generation” consumer.
I’m confidant that if it was possible to download beer, only the computer-illiterate would still be buying Bud.
This is why I think the biggest problem the industry faces is the high cost of distribution and legal barriers to shipping across state lines. The best way to buy beer is still at your local bottle shop. Although buying local is great, I believe this is limiting the growth of the craft industry. The big guys do save money when it comes to the “economy of scale” and have their own distribution networks that they can move beer through. (The low quality ingredients isn’t the only reason why macro is so cheap)
This is not an easy problem to solve, but I don’t think it will keep craft beer from growing. If anyone does figure it out, though, I predict that they’ll be very rich.
(wow, I can’t believe I ranted so much on this. Economics and beer are two of my favorite hobbies, so I love when I can combine them. Great Article!)
zdk – You should check out http://www.youtube.com/watch?v=D-orHsPEykw
lmao. I would kill for such a device! thanks for the share.
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