Tuesday, February 12, 2008

Beeronomics: Specialization and Product Variety

Last Friday I had the distinct pleasure of having lunch with John Harris, brewmaster at Full Sail and the man responsible for, among many other amazing beers, slipknot Imperial IPA (shown here - go get some, it is fantastic). I learned many interesting things from John about the beer business including learning about an outfit called 'Microbeer Source.' A number of very small bottling breweries use Microbeer Source to bottle their beer, including Full Sail for the 'Brewmaster Reserve' line that is brewed at the Pilsner Room in Portland. Microbeer source is, you see, a mobile bottling line which brings the line to local breweries and bottles their beer for them. Upon researching this, I discovered that this is very common in the wine industry, which makes sense, the wine industry is mostly made up of many very small producers whose product is needs to be bottled in order to send to market. Bottling lines are pretty expensive, take a lot of space, and without this kind of specialization, it would be hard for small producers to survive. Economists often talk about such industries in the context of "natural monopolies," industries where there are such high fixed costs to begin production, that the market can only support one producer (which means having large economies of scale, but in a particular way).

In this context, if all small wineries had to have their own bottling lines, many would not be able to cover the cost of the line from the sales of their wine and would, therefore, not exist. There would not be monopoly, but the number of wineries would be drastically reduced. This is the same, albeit on a smaller scale, in the microbrewing industry. It is unlikely that breweries like Roots, a small Portland outfit (whose "Woody IPA" is fantastic and available in bottles down here in the sticks thanks to Microbeer Source) would be able to sell in bottles without such a bottling service available to them. So, through specialization of tasks, we can not only improve efficiency (as in Adam Smith's archetypical pin maker story), but in these cases, we can improve product variety as well. For what this means for consumers of beer and wine is not just lower prices for the increased efficiency that specialization brings, but many more choices available to them when they wander into their local supermarket or beer and wine store. Ah the wonders of economic organization...

P.S. John raised an interesting question, to which I have a number of plausible answers, but I will ask it as an open question first: why are just about all of the major bottling breweries in Oregon today the very same ones that were here 15 years ago? In other words, why have there been no new entrants into the industry in the last 15 years (with the exception of Terminal Gravity)? Ideas?

3 comments:

Jeff Alworth said...

One factor is distribution. It's far more difficult to place beer in major grocery stores--for a variety of reasons--than it is to get tap handles. The mobile brewing facility has been around at least ten years, so I assume cost to enter the market is not one of the major factors (though bottling lines are big bucks).

Colin NĂ©ber Wilson said...

Knowing nothing of demand trends in the area, I posit that one possibility is saturation of the market. Perhaps we hit a more or less optimum capacity 15 years ago. A current shortage of hops is not helping to invite any new market entrants, and what true-minded soul would exit the Oregon microbrew market if they had a secure niche in it!?

tkn said...

I was thinking market saturation also. Bars don't need 30 different taps all the time. Consumers don't need 30 different breweries to choose from.
However, here in Corvallis, we are anticipating the opening of another brew pub, Block 15.