Tuesday, October 28, 2008

Beeronomics: Complements or Substitutes?

Over at Beervana, Jeff poses a question about the effect on craft brew sales if Budweiser's American Ale (which he proclaims is not half-bad) is a hit. Could it, he wonders, actually help sales of craft beers by bringing in new customers that would previously not look past macro-brews? Does this theory make sense economically? Well, yes.

Maureen Ogle points out that this idea is not new to the business of, shall we say, 'sophisticated foods.' That Starbucks appears to help nearby coffee shops instead of hurt them.

First the economics. It is pretty obvious to everyone that there are two competing forces at work here - the expansion of overall demand and the capturing of that demand by particular brands. In cases where the niche demand is a small part of the overall demand for the basic category (beer or coffee in our two examples) one might expect that the increase in overall demand to outpace the capturing of the market, especially at first. In economics terms, is American Ale a complement to craft brews or a substitute? Here are some thoughts:

One wonders is what the end game is. Budweiser has huge advantages in scale, supply chain, distribution and marketing: once the demand for taste in beer hits its zenith, what next, do brewers start competing heavily on cost. If so, this is where Bud wins. However, if the entire demand expansion is based on the idea that beers are distinctive and diverse, it will be hard to dominate with a single beer.

I think that while Bud AA might lead to a vast increase in overall demand for craft brewed ales, it will probably have a bigger impact on beers that have gone for the mainstream, like Fat Tire, with which AA compares favorably, according to Jeff. It is their part of the demand curve that is most contestable by a large brewer.

If American Ale is not an immediate hit for Bud, and I am guessing it will not be, will the marketing types and bean counters at AB have patience and allow it to gain traction, or will the profit motive be so strong that they will abandon it quickly? I give it 50-50 odds.

In the current economic climate, it is a hard time to turn Bud drinkers on to a more expensive beer, will Bud keep prices low to allow it to sell?

Finally, a large part of the craft brew demand is from folks who relish being 'in the know' and cherishing the latest iconoclastic small brewer, will this scuttle Buds attempt to crash the party?

Time will tell...

Apropos of nothing: I picked up a bottle of Elysian's Immortal IPA the other day and noticed, when I cracked it that it was contract brewed by New Belgium. Thus it has the curious distinction of being both the best beer New Belgium brews, and a terrible purchase for a Northwesterner concerned with the carbon footprint of his purchases.


Jeff Alworth said...

On Bud: interesting comments. Why do you think the AA won't sell well? I have no idea, and could see arguments going either way. Perhaps you have some kind of special economist's insight. (It is worth noting that while Bud has dipped its toe into the craft mash tun before, they've never done it under the "Bud" label. I suspect this means a greater commitment to making it work.)

On Elysian/NB. One cool thing is that there's no merger--the two remain independent, but are doing a brew-share deal with each other's breweries.

On the issue of carbon footprint, I'll throw you a question. My recollection is that Elysian has no bottling line. I think they do the mobile bottling deal. Would using a brewery with a bottling line actually create some efficiencies that would reduce its carbon footprint. Moreover, wouldn't this system dramatically reduce the carbon footprint of the breweries who now no longer have to ship their beers hundreds of miles into each others' markets?

I think the answer to the last quetion is likely "yes," making the first one moot. You may therefore enjoy your bottle of Immortal IPA. Though, as a beery point, you'd enjoy it more if it were a bottle of the Wise ESB.

Patrick Emerson said...

I think AA may flounder because in a big corporation like AB it is hard to sustain investment in something that takes a while to establish. The bean counters will say BUd Light outsells AA 100 to 1, why are we investing so heavily in marketing AA? Then they pull back on marketing loose interest, etc. It was Jack Joyce actually who told me this about their impatience. He realized however, they if they cold learn patience, they could do very well. Perhaps this is the time.

I don't think I could generalize about bottling lines v. mobile bottlers, it depends on the scale probably. I think the mobile bottlers are a pretty efficient (energy-wise) way to do things when most of the bottles get sold locally.

The Immortal was good, but I also picked up a bottle of Pelican's IPA and it was better. I have heard so much about Pelican so I was excited to finally try the beer and it did not disappoint. Got to get myself out there sometime in the near future.