Beeronomics: 3.2 Beer and Craft Brewing

[Note: Oregon economy is just too grim, so today let's think about beer!]

Beervana blogger Jeff Alworth sent along this little beeronomics puzzle: in Colorado, craft brewers have taken a stance against repealing the restriction that allows only beer with an alcohol content of 3.2% or less to be sold in grocery stores. See news reports on the story here and here.

What gives? Why are craft brewers afraid of this change? Here is Left-Hand Brewing's Eric Wallage: “It’s terrible, if it passes, it’ll completely junk up the market for craft beers.”

The premise is that the 3.2 law basically shuts out the supermarket market for craft beers. This is not really true, it is easy to make beer for this market. I asked my fellow L&C alum who is the brewmeister for Boulder Brewing how they made their 3.2 beer. "Just add water" he replied with a rueful smile... But it is likely that the distinctive flavors and qualities that are the hallmark of craft brews over macro brews are largely lost when drowned in water. So, essentially, they believe that this is not their market (though Fat Tire seems to sell exceedingly well in supermarkets). Thus, they perceive the liquor store as their 'turf' and they want to protect it.

But there is no economic reason to suggest that liquor stores have different incentives when it comes to selling beer, nor is it clear that the clientele is different than in supermarkets (or would be in equilibrium). My experience in Colorado was that liquor stores did not have beer displays that were substantially bigger than supermarkets (especially since groceries are constrained by the 3.2 law) and that liquor stores seemed to devote plenty of space to macro brews. They are profit maximizing firms after all, just like grocery stores, and in absence of the law, I would expect just about equal space being given to craft brews as macros in the groceries. It is all about the demand. In fact, I had a conversation with my local liquor store owner in Denver and it was clear that he was stocking only what sold well (we were talking about the removal of Full Sail), he did not express any real personal devotion to craft beers.

One would expect that being able to sell their beer to a broader market would be in the craft brewers interest. It certainly has not hurt the craft brewing industry in Oregon. This is particularly true because of the fact that demand for craft brew is a function of experience. Craft brew is an acquired taste and the more craft breweries can get people to try their beers, the more future demand they can expect.

So what gives? I suspect that this is a short-sighted political move by the craft beer industry in Colorado to curry favor with liquor stores in hopes that they will give deference to Colorado beers. This is dumb, because of its short-sightedness and because of the aforementioned fact that liquor stores are profit maximizing firms and will respond to demand. When push comes to shove, you can't take goodwill to the bank.

One thing is certain, the real looser in this fight is the consumer who will face higher prices and less convenience. Craft brewers ought to think about that.