Price Increases Are Coming to Beer: Why It Isn’t What It Seems
There’s been a good deal of commentary recently about how the cost of beer is going to go up. Make no mistake, these predictions are all likely correct. There are a lot of moving parts that go into making beer and even more moving parts (like trucks “moving parts”) in getting the beer to retail locations for consumers to purchase. This is the part of the supply chain that is getting more expensive. However, from my perspective, these increased costs are likely not going to justify the level of price increases that consumers are going to see on the shelf.
Here’s what’s happening: We’re seeing supply chain disruption coming from just about everywhere. Hops are in good supply, but the grains used to make beer are having a moment of difficulty in recent harvest quantities, and the cost of delivery is getting more expensive due to fuel prices and availability of trucking.
Packaging is a mess right now with increases in costs of aluminum and even a notable lack of access to cans. Lots of breweries that can’t get cans printed are moving to pressure-sensitive labels (a fancy way of saying “sticker”) on blank cans — this labeling method is typically more expensive than printed cans. The alternative is worse: Glass is more expensive than ever because of demand and supply chain issues, not to mention the energy needed to make it. Glass is also heavy and costly to ship. I could go on but at this point, it’s clear that pretty much all brewery supplies needed to brew beer are costing more right now.
To be clear, some smaller breweries are going to have to pass along some cost increases but largely because they don’t have the purchasing power or scale of the larger breweries. While there are definitely cost increases, they’re not compounding. It’s clear to me these increases are nowhere near the level to warrant the scale of the intended price increases we’re seeing from big beer.
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So where is the sky-is-falling-price-increase conversation coming from if it isn’t coming from math? My answer? Optics.
More impactful than all of the actual cost increases is the ongoing dialog (not data) about inflation. Large and generally publicly traded breweries seem to be using the public perception of inflation to give them the opportunity to grab more margin, and they’re planning to grab it from consumers. They’re being surprisingly transparent about this. In a Q3 2021 earnings call, Constellation Brands’ CFO recently said they’re raising prices due to inflation and are going to “take as much pricing as we think the consumer can absorb” in 2022. Heineken’s CFO told Fortune magazine that because of inflation, they are going to raise prices by “courageous” amounts to offset the supply chain challenges brought on by the pandemic. It’s clear that large organizations are capitalizing on the perception of inflation, but are they basing their price increases on the actual economic impact of inflation?
I have a different understanding of “courage,” although being transparent about your business strategy — albeit one that makes the consumer ultimately question your motive — may qualify. For the smaller craft breweries facing this dynamic, this is an excellent opportunity to differentiate their brands by both managing pricing and clearly conveying priorities to the consumer. The most obvious tactic is to hold price (or implement only slight increases) to create an opportunity to increase market share through a comparable pricing advantage over the larger brewers that are grasping for margin.
Holding price in the face of rising supply costs is also a catalyst to do a deep dive into the brewery’s cost structures and operational practices. Environmental and sustainable practices, in particular, are fertile ground for cost savings as they necessarily focus on the reduction of waste, which in turn almost always results in cost savings. For instance, when my brewery shifted from glass to can packaging, we saw a 60 percent reduction in the shipping needs for our packaging supply and finished goods fulfillment. In addition to taking trucks off the road, we also realize a concurrent reduction in shipping costs. Identifying and implementing these types of programs makes business sense and protects margins while simultaneously reducing the environmental impact of operations.
In the meantime, keep an eye on the big beer on your local shelves, and remember that this is an opportunity for craft beer to stand out.