THE GIST
COVID-19 dramatically increased volumes of beer sold to customers through off-premise retailers like grocery and big-box stores in March and April. The pandemic has also affected price points. According to Bureau of Labor Statistics data, off-premise retail beer prices (which includes flavored malt beverages) rose 5.1% in April, more than double the standard growth of 2% in January and February.
“Pricing tends to move up slowly over time, but April was showing a spike. It would be silly to think it’s anything but the coronavirus,” says Michael Uhrich, founder and chief economist at Seventh Point Analytic Consulting, which provides analytic and strategic consulting for alcohol suppliers, distributors, and retailers.
But it’s not because breweries have jacked up wholesale prices or because retailers are trying to price gouge. In fact, many breweries have been tempted to lower prices to compete with fast-selling multipacks of national brands like Sierra Nevada, Samuel Adams, and Modelo.
Instead, Uhrich attributes the pricing spike to reductions in discounting. Retailers are simply putting less beer on sale than they normally would at this time.
Though beer prices are rising along with financial anxiety—69% of Americans currently expect an economic recession as bad or worse than the Great Recession of 2008—economists suggest small breweries shouldn’t automatically lower prices in response. In a Brewers Association-hosted webcast last week, Uhrich cautioned breweries against cutting prices dramatically in a way that would change their brand positioning long-term.
Some breweries are already walking this razor's edge. As a necessary revenue generator, breweries across the country have been selling cases and kegs directly to consumers essentially at-cost. It's not clear whether $32 24-pack cases of Lager, $5 32oz. crowlers, and even $5 64oz growlers will reset price expectations for craft beer lovers long-term.
“Once a brand makes a choice to become more of a value-focused brand, that tends to be really hard to claw back from,” Uhrich said in the webcast. “Be prepared for that to be more of a permanent change.”
WHY IT MATTERS
Given the loss of draft beer sales as bars and restaurants remain closed in many states, breweries are scrambling to make up revenue through packaged sales in grocery stores. Because margins are much better on draft beer sales, even double-digit bumps in off-premise sales likely aren’t enough to offset losses for craft beer overall, which sells 40% of its volume on draft.
Right now, multipacks, flagships, and already-popular brands are what’s moving in grocery. In recent months, drinkers are buying large-format packs over smaller packaging sizes for two key reasons:
More beer means less frequent trips to the store.
Beers within those multipacks are less expensive per can than they would be in a six-pack.
So why aren’t beer prices falling overall? Club stores like Sam’s Club and Costco are likely contributing to this in a big way:
Those stores sell a lot of beer, which is normally a loss-leader for them.
Under regular circumstances, customers come in to buy cheap beer, and end up buying bottled water, snacks, and clothing, too.
But during the pandemic, club stores haven’t needed to lure customers in with cheaper beer; shoppers are already flocking to them for toilet paper, Lysol wipes, and sanitizer.
“Instead of retailers taking a bath on beer and sacrificing that margin as they normally would, maybe they charge more to actually make a tiny bit of money on it,” Uhrich says.
That, combined with fewer grocery store discounts on beer, is enough to create the 5.1% increase beer prices saw in April.
Meanwhile, as small breweries watch big brands like Samuel Adams, Lagunitas, Coors Light, and Bud Light—and, of course, White Claw—flying off shelves, they wonder whether they could cut their own prices to move volume.
“That’s tempting because right now, I basically want to give employees hours and give them work to do,” says Michael Graham, co-founder of Austin Beerworks. “So if we produce 50% more beer and make the same profit, that would be fine, because we’d be keeping people employed.”
But Austin Beerworks has thus far held off on cutting wholesale prices. Graham says he’s taken the lessons of the craft beer bust of the 1990s to heart: struggling breweries steeply reduced prices as they tried to shore up volume, devaluing the entire segment.
Brewers Association chief economist Bart Watson also reminded small breweries in a webcast last week that they’re not well positioned to compete on price the way the larger-scale breweries are. Pricing is a lever small breweries can use, Watson said, but there will always be a larger-scale competitor who can play that game better.
Instead of lowering prices, Austin Beerworks has kept them steady during the COVID-19 pandemic. It nixed a planned wholesale price increase that would have upped the price of a six-pack from $8.99 at major chains to $9.39. That would have translated to an additional $1.50 in revenue to the brewery for every case sold, but Graham says increasing that first digit from $8 to $9 drastically changes shoppers’ calculations, putting Austin Beerworks in “a different category” (read: an occasional splurge rather than a go-to) in their minds.
Delaying the price increase is an effort to compete with lower-priced brands, and to keep prices steady during a time of economic anxiety. It’s a tricky spot for Austin Beerworks and for craft breweries in general, which have historically positioned their beers as higher-quality, more flavorful, local products for which consumers should pay a premium. But as the economy sours and their on-premise revenue dries up, they’re facing pressure to match Anheuser Busch InBev’s, Molson Coors’, and Constellation’s lower price points to drive volume.
For now, Austin Beerworks is leaning on strong growth for 12-packs of its core brands, a package it only introduced six months ago.
Austin Beerworks is also conscious of its position as “a local price leader in craft,” as Graham puts it, meaning that its pricing decisions have implications for other Austin breweries. If Austin Beerworks lowers prices, others would have to do so to compete; if it raises them, it gives other breweries permission to do the same.
This is also a consideration when pricing beers sold to-go from its taproom. The brewery recognizes the pricing of its four-packs of 16oz cans—the darling styling among Austin’s craft beer shoppers—exists in an ecosystem. There’s a going rate for those four-packs locally: about $15 on the low end and $25 on the high end, according to Graham. Austin Beerworks recently released a four-pack of a Hazy IPA for $15, the highest price it had ever charged for that package. The intent was to match the price other local breweries were charging for similar beers.
“Charging too much is a disservice to our customer. But by charging too little, we’re potentially negatively affecting smaller breweries and brewpubs where [to-go sales] are their only source of revenue right now,” Graham says. “They don’t have the profits from the retail sales, so they have to charge that higher price just to survive.”
And drinkers are willing to shell out. Customers buying special releases directly from breweries aren’t price-conscious in the same way grocery shoppers are. They’ve sought out the brewery specifically, and are eager to buy a limited-release product, even if the price is higher—in fact, especially if the price is higher. “It’s like [the four-packs of 16oz IPAs] are Veblen goods: the more you charge, the higher demand is,” Graham says, referring to the phenomenon of demand for a product increasing as its price increases, because the product is seen as a status symbol. “If something is cheap and easy to get, there’s an assumption that it can’t be that special and good.”
Graham says $15 seems to be a good compromise for his brewery’s four-packs: it’s expensive enough not to undercut other breweries, but not so high as to take advantage of the customer. It’s also a cost where shoppers find national craft breweries like Dogfish Head Brewery and Firestone Walker Brewing Company’s Leo v. Ursus series.
“The end, ultimate goal is that you want people who purchase your things to feel they got a good deal, but it’s weird to play a price game to get there,” he says.
If all the competing economic pressures—lower prices to move volume, raise prices to increase margins—are making breweries’ heads spin, they’d likely do best to hold off on any fast decisions. COVID-19 has created unusual conditions that will eventually stabilize, Uhrich says. Breweries should make decisions now that keep them in their normal strategic positions. The worst-case scenario is training consumers to expect such a low price that a brewery can’t raise them again in the future.
“What you don't want to get left with is what you did in a crisis,” Uhrich says. “You don’t want the thing you did in a pinch to be the thing you have to do forever.”
Words by Kate Bernot