Tuesday, October 14, 2008

Beeronomics: Is Beer a Recession Proof Industry?

I blogged a lot about hops shortages and barley prices creating a perfect storm for craft brewers and now the economy has turned south at precisely the time that craft brewers are forced to raise prices. Big trouble right? Apparently not. And from here I outsource and refer you to a great article from the Wall Street Journal on the eve of the Great American Brewer's Festival which is held annually in Denver.

Here are the meat and potatoes:

Despite rising prices and a shortage in hops, craft beer -- beer made by small, independent and traditional breweries -- has grown 6.5% in volume and 11% in sales in the first half of 2008, roughly the same amount as the same period last year, Mr. Gatza says. According to the Brewers Association, in 2006 and 2007, 47 of the top 50 craft brewing companies grew in production to keep up with demand. So far this year about 42 of the top 50 are growing to keep up with demand, Mr. Gatza said.

One of the reasons for this continued growth despite the economic downturn is that craft beer is still one of cheaper luxury items people can buy, with most six packs cost less than $10, says Mr. Norgrove of Bear Republic Brewery. Bear Republic has seen business grow by more than 50% in 2006 and 2007, and is seeing healthy profits gain this year, he says. "We are in one of those industries that is really doing well. I don't want to say it's recession proof, but we are seeing steady growth."

Wow, sales are up 11%! One could possibly infer from this that craft beer, like macrobrews, are an inferior good (in the economics sense, not in the real sense). This means that as incomes fall, you actually consume more. The classic example of this are the potatoes in the aforementioned meat and potatoes meal. As incomes get tight the plate becomes more potatoes and less meat (and vice versa when people are flush). Perhaps craft brew becomes a substitute for fine wine, scotch and the like. Of course it is more likely that demand just continues to rise as more and more people wake up to the fact that beer doesn't have to taste like crap (pardon me - that is an economic term of art for "Bud"). Oh and what about those macros? Sales are flat, just like the keg the day after the frat party.* Anyway, read the WSJ article, as it addresses how brewers are coping with hops shortages and increasing input prices. Beeronomics indeed...

Oh and one more note about the GABF: Kudos to my old buddy and Ithaca Beer founder Dan Mitchell for coming home with two silver medals. Truth be told, the beer wasn't that great at the beginning, but it is good stuff now.

*I know that at Oregon State Frats the kegs are more likely to be Rogue. ;-)

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