THE GIST
Limping off a difficult summer for craft beer sales in retail chains like grocery and liquor stores, breweries now face a new, threatening reality: Shoppers are beginning to spend cautiously just as rising input costs push up beer prices.
Analysis by Michael Uhrich, founder and chief economist of Seventh Point Analytic, shows that higher on-the-shelf prices for beer began in early 2022 and continued to rise nearly in lockstep with increased prices for beer ingredients and packaging throughout this year. That change builds on pandemic-influenced price increases in 2020 and 2021, which were largely driven by shortages of packaging materials like aluminum cans and certain beers, notably those from Constellation Brands, being out-of-stock.
Now, beer prices are continuing to rise, along with shoppers’ anxiety. With inflation and credit card debt spiking, consumer research shows that shoppers are becoming more careful in their spending habits. People searching for deals and discounts are also buying less of the products that they don’t consider essential. While alcohol overall has proven resilient to economic downturns, craft beer may not be. Drinkers with above-average incomes (craft beer’s typical customer) are paradoxically more price-sensitive, Uhrich says. In response to rising prices, they’re more likely to scale back their buying than to trade down to cheaper alcohol.
Breweries whose profit margins are strained by high ingredient costs can’t afford to lose volume sales as customers tighten their belts. With little budgetary wiggle room and higher interest rates on borrowed cash, such considerations become existential. But ingredient and material price hikes aren’t affecting large and small breweries the same way—small breweries are more vulnerable to these dynamics for key reasons:
There’s more opportunity for customers to switch brands within craft beer while still buying a relatively similar product, like Double IPA.
But at some point, that brand-switching reaches a potential end point: A customer could go from a local $22 four-pack to a $13 six-pack of a national brand, but prices may eventually still be too high, causing a need to switch styles or categories altogether to save money.
As the cost of items continues to rise, small breweries are in turn being hit by higher prices for malt, aluminum, and cardboard than large breweries, and at a faster rate. (Large breweries typically have long-term contracts with suppliers for these products and are able to use scale to negotiate better rates.)
Because of this disparity, if beer prices continue to follow the rising costs of materials, the pattern would lead to a widening gap between macro beer and craft beer prices in the long run.
For example, market research firm IRI shows the average chain retail price for a package of Big Grove Brewery’s Easy Eddy Fresh & Juicy Hazy IPA is already about $5 more than the average for Bud Light. For that Iowa craft brewery and many others, that gap could become even bigger as costs mount.
“That increasingly puts small brewers at a pricing disadvantage, and this is an especially bad time to be at a pricing disadvantage,” Uhrich says. “People’s household incomes are stretched pretty thin right now.”
WHY IT MATTERS
In October 2022, breweries’ producer price index—what companies on aggregate pay for things like malt, freight, carbon dioxide, and cardboard, as measured by the U.S. Bureau of Labor Statistics—rose to its highest level in at least three decades. The pace of increases really heated up beginning in January 2022, leveled off a bit over the spring and summer, and began rising again more rapidly in the fall.
These are not small upticks. Peter Licht, director of supplier relations for the Independent Brewers Alliance (IBA)—a co-op purchasing group that helps breweries get better prices—says many member breweries have reported their bulk malt costs doubling since 2020. Malted barley forms beer’s core; there’s really no way to brew without it. Ditto carbon dioxide, which Massachusetts Brewers Guild executive director Katie Stinchon said in August had increased by 1,000% for some member breweries, from 11 cents per pound to $1.20.
Craft beer was already struggling in chain retail, and continued pricing ripple effects from rising input costs are likely to accelerate declines. Brewers Association (BA)-defined craft beer retail sales volume hasn’t grown over the past three years, and in the second half of 2022 has been declining at a rate steeper than what BA chief economist Bart Watson had projected earlier this year. He now estimates that BA-defined “small and independent” craft beer will end the year up somewhere between 0-5% across chain retail, draft, and at-the-brewery sales.
“Craft’s not doing well, but craft wasn’t doing well previously,” is how Watson put it to the audience at Brewbound Live in late November.
Things aren’t looking any better for chain retail sales of any kind of craft. According to craft sales figures from IRI—which include brands the BA doesn’t count, like Blue Moon, Lagunitas, and more—sales volume at the end of 2022 will be closer to what was sold in 2016, despite thousands of new brands entering those stores.
Within the larger beer market, some subsections and brands are bucking overall downward trends. Imports—almost entirely Mexican Lagers—are up strongly in chain retail as well as in bars and restaurants. Ditto for some lifestyle brands, including Michelob Ultra and non-alcoholic beers from Athletic Brewing Company.
Those kinds of brands are more immune to pricing pressure than most craft brands are: There’s only one Modelo Especial, but there are dozens of IPAs that consumers can trade between when they’re feeling price-sensitive. This puts brand loyalty for a company at more of a premium, and as craft breweries are learning, that counts for a particular flavor experience, too. Among IRI-tracked craft, brands that are growing by double digits year-over-year for the 12-week period ending in late November are mostly capitalizing on popular styles like IPA, Imperial IPA, and fruit beer—styles where there is plenty of competition across price points.
Overall, craft continues to struggle mightily in chain retail, declining -8.4% in volume sales for that same 12-week period versus the year prior—making it one of the worst-performing major alcohol categories alongside hard seltzer. Beer (excluding seltzers and flavored malt beverages) was down -3.5% during that time.
Hard seltzer, which headlines have described as having “ended,” “los[t] [its] fizz,” and “stunningly collapse[d],” is declining less in the U.S.’s largest beer market, California, than craft beer is—and in a state that’s long been a stronghold for craft breweries.
Combined on- and off-premise data from market research company CGA by NielsenIQshowed craft beer lost -1.9% market share in the Golden State for the 52-week period ending in early October, whereas hard seltzer lost -1.1%.
Even in favorable geographies, things are worse for craft beer than expected, and the potential for help is mixed.
Breweries are increasingly turning to arrangements like collectives and consortiums that may help them increase their purchasing power. This year, the IBA has added about 100 breweries, increasing its membership to about 320, with a collective production volume a little bigger than Sierra Nevada Brewing Company. Licht says the beer made by IBA members doubled in 2022 to about 1.5 million barrels. An average IBA member brewery can save $20,000 to $40,000 per year through negotiated discounts or rebates on cans, freight and logistics services, cardboard, and more.
One major beer ingredient that IBA hasn’t yet cracked, though, is malt. With malted barley being the primary ingredient in beer—and with members reporting bulk malt costs doubling since 2020—Licht is eager to renew efforts to start a malt discount or rebate program in early 2023. He says a poor North American barley harvest in 2020 means malt suppliers have barely had enough inventory to cover existing customer needs; they’re not willing to work with IBA to take on new customers. Breweries have already wrung as many savings as they can out of their businesses, he says, in response to those rising costs.
“You’ve seen prices go up on store shelves and for kegs, but I think a lot of input costs have so far just been absorbed by the breweries,” Licht says. “I expect consumers to see increased prices, because brewers have already shrunk their margins.”
All tiers of the industry appear concerned. A Beer Business Daily (BBD) survey of beer distributors, results of which were published Dec. 8, found that the most pressing industry issue respondents cited was cost and pricing pressures, including “rising costs, pricing (either too low or too high), and general concerns about inflation.”
“Consumers [are] switching to the less expensive and lower quality craft beer with higher ABV,” one distributor told BBD.
“You can definitely see some beers on the higher end of price slowing,” said another.
Ongoing cost pressures for breweries don’t just eat away at their margins, but contribute to price upticks that could lead to further craft beer volume declines. Some of this is due to basic economic principles: Typically, when prices rise, shoppers buy less. But in the beer aisle, these decisions are complicated.
“There’s a narrower price range in craft,” Uhrich says. “Whereas Pale Lager, if you were buying Corona, you can ratchet down to Budweiser, you can ratchet down to Natty Light. You can ratchet down kind of indefinitely.”
Results of a survey by global alcohol research firm IWSR from the final quarter of 2022 found that drinkers across major world markets are using three main strategies to cope with economic uncertainty: moderation, “selective uptrading,” and value-seeking. All of these potentially affect how shoppers look at the beer aisle:
Moderation is a volume-related decision to buy less alcohol.
Selective uptrading describes a mindset in which consumers are more picky about what types of alcohol they splurge on.
Value-seeking is a catchall for savvier shopping habits, like waiting for favorite brands to go on sale or comparing prices across multiple retailers.
One thing is certain: When economic times are tough, shoppers take cost into consideration. Whether they choose to splurge on luxury alcohol or buy less of their favorite craft beer, price-sensitive consumers aren’t likely to reverse craft beer’s trends in 2023.
Words by Kate Bernot