Higher Prices, Brighter Futures? The Changing Landscape of Beer Retail

Feature by | Oct 2016 | Issue #117
Illustration by David McMillan

When baseball executive Billy Beane gave his keynote address to this year’s Craft Brewers Conference in Philadelphia, he talked about his achievements as the general manager of the Oakland Athletics and how that story became the movie Moneyball. His success with a small market team versus the “macros,” the well-financed teams in major markets like Los Angeles or San Francisco, was at the heart of the presentation.

It was a weird way to launch a meeting of professional brewers. But the idea was to exhort craft brewers to be creative in the business sense when attacking a marketplace that’s still dominated by Big Beer. Beane’s message, to borrow a baseball bromide: “Hit ’em where they ain’t.”

Now that macro brewers have acquired breweries that once belonged to the independent ranks, where “ain’t” the big guys?

They certainly aren’t abundant at the top end of the market where beer prices get, well, pricier. And that’s one place where craft breweries remain strong. After years of struggling to gain acceptance, beers that have more ingredients, better ingredients, longer aging periods, and a surplus of creativity are beginning to impact the marketplace. According to data from Chicago-based market research firm IRI and analysis by Bump Williams Consulting (BWC), revenue from higher-priced beers is increasing faster than any other segment.

This is good news for consumers when it comes to being able to buy a wide variety of exceptional beers—if they’re willing to pay up. But what about the rest of the story? Does this upward trend also mean that the $8 and $9 six-pack of craft in the longstanding affordable middle segment is becoming a thing of the past?

Bump Williams, a consumer packaged goods consultant and the founder of BWC, follows beer retail pricing with the same expertise and enthusiasm that Beane brings to the statistical analysis of baseball talent. A data guru, Williams and his company help identify beer pricing trends for clients and also offers other CPG analysis. He sees a purchasing trend where craft beer consumers are increasingly breaking into the higher-priced categories he designates as Super Premium ($12.50 to $15 per six-pack) and Apex ($15 and up).

“As beer drinkers move up to more expensive beer—they very rarely turn back down,” says Williams. “As they migrate up they tend to stay in Super Premium and Apex-type craft beers. But it doesn’t mean they walk away from the basic introductory brands. They don’t.”

According to BWC’s price chart, which is derived from IRI scan data (point of sale information), this jump by consumers is happening more often. One of the best examples is the demand for Ballast Point’s Sculpin line of IPAs, which fall into the $12.50 to $15 category. The pricing of Sculpin six-packs, usually around $14, has been a major talking point in internet forums over the past two years, and it ultimately became a successful selling point during a rapid expansion in distribution. Soon thereafter, the margins produced at this higher price point attracted Constellation Brands, which snapped up the San Diego brewery for $1 billion not long after the founders first announced an Initial Public Offering.

The pricing opportunity for beers perceived as higher quality isn’t lost on independent brewers who continue to compete with macros like Constellation. According to Bart Watson, economist for the Brewers Association, a non-profit trade group, the “hit ’em where they ain’t” approach comes in at the next tier.

“At the upper pricing levels we’re seeing that craft brewers who differentiate do well,” says Watson, who uses a different pricing tier than Williams. “We’re seeing a split in sales from $0 to $7, from $7 to $14, and $14 plus [for a six-pack]. Craft has been that $7 to $14 category, but nobody has really created that $14 plus space—rather it’s undeveloped. I think that’s the next frontier for craft brewers.”

Some members of the Brewers Association have already ventured into that frontier. Allagash Brewing Company founder Rob Tod has long been committed to cork and cage bottles and the more complex (and expensive) beers typically packaged this way. At his Portland, Maine, brewery, he utilizes everything from a coolship and wild yeast to traditional Belgian yeast strains and funky Brettanomyces to create his distinctive beers. The highly rated Coolship Cerise, for example, is an American Wild Ale aged in oak barrels with 100 pounds of Maine-grown Montmorency and Balaton cherries per barrel. It’s now in it’s fifth year as a limited release. Average retail price for a 375-milliliter bottle? $15.

Tod sees the move to higher-priced beers continuing because beer is just beginning to flex its strength when it comes to quality, particularly with regard to more complex sours, whose acidic content is not unlike wine.

“Beer has always been affordable,” says Tod. “Even the most expensive beer is affordable. If you want to go out and buy the best wine in the world or if you want to buy the best whiskey in the world, you pay a fortune compared to what you would pay for the most expensive beers. You can go out and buy a beer to pair with a great meal that’s $25 for a 750-milliliter bottle. That’s the most expensive bottle you can buy. And you get a world-class beer and it’s affordable.”

At $25, a 750-milliliter bottle would equate to a $72 six-pack, decidedly in the realm of Williams’ Apex segment. Another brewer leading the way in this category is Chad Yakobson, founder and head brewer at the Crooked Stave Artisan Beer Project. Yakobson’s Master’s thesis on Brettanomyces has made him a popular speaker in North America and Europe. But he’s more than just talk. At his small brewery in Denver’s Sunnyside neighborhood, he is making complex mixed fermentation sours that often include exposing the same batch to different wood and conditioning on huge amounts of fresh fruit.

The Colorado native turned to beer after first studying viticulture because he was turned off by the snobbishness of wine drinkers, an attitude he believes begins with pricing. Beer, he concluded, is a new frontier where ingredients and process are key pricing factors. In brewing, prices can be kept in check relative to the top end of the wine market.

His varied portfolio includes 375-milliliter bottled beers sold individually that are the equivalent of an $84 six-pack. But he’s also careful to maintain more entry level pricing. “We’ve attacked it from all ends,” he says. “Different beers we’ve priced to be introductory. They compete with any beers made with Brettanomyces or Saisons. On one end we’re bringing these beers that are highly complex, just like Saisons, and we’re making them affordable. We’ve got a couple middle ground ones that don’t use as much fruit. They’re designed for people who say, ‘What’s a sour?’ and really want to get into it.”

Yakobson is trying to create a path to his complex beers that require additional steps in the fermentation and aging process. These steps are part of what drives his prices, but his customer conversion technique seems to be working. Crooked Stave expects to double production this year to 5,000 barrels, even though one of its most popular beers, a sour made with Colorado-grown Palisade peaches called Persica, remains a relatively small part of the portfolio.

Despite being a growing category, the beers dubbed Apex are aspirational, not routine purchases for most people. It’s actually the Super Premium ($12.50 to $15) pricing in Williams’ chart that’s driving higher prices, a trend backed up by IRI scan data. In the 52-week period ending in August, BWC’s $10 to $12.50 Premium category is the primary source of increased revenue growth, confirming mainstream prices are beginning to hit $10. That’s a significant change even from April, when the $7.50 to $9.75 mainstream Craft category was strongest.

“As consumers go up that price pyramid, as they migrate up in craft, it gives the basic craft brands all the opportunity in the world to take that price up,” explains Williams.

Henry Monsees, president of Savannah Distributing in Georgia, thinks the pricing creep began with the arrival of beers from companies like Ballast Point and Dogfish Head. “Over time, the Dogfish 90 Minute IPA and Ballast Point Sculpin, they kind of busted that $9.99 pricing and then the retailers are trying to do those [higher-priced], pick sixes, all the time,” he says. “Everything moved off the $8.99 price point and went up. […] The distributor margin to my knowledge is not driving the $9.99 prices. The distributor has not increased his markup. It’s just life in general, the cost of glass, box cost, insurance, hops.”

Under the three-tier system, it’s illegal for brewers to discuss pricing with retailers. The process starts with a wholesale price brewers offer distributors, who generally mark up those prices as much as 25 to 30 percent. Retailers have different markups and gross profit goals that they use to arrive at their own price points. Finally, sales tax differs from state to state, and some states are simply more competitive when it comes to beer pricing.

Shmaltz Brewing Company founder Jeremy Cowan, a former contract brewer who established a brick-and-mortar operation in upstate New York in 2013, would like higher prices. But in the short term, he isn’t always seeing the opportunity, a complaint he sometimes discusses with his distributors.

“There’s an enormous amount of headwind when it comes to more mainstream beers,” he says. “In California nothing is over $9.99. I don’t know how they expect us to grow our businesses and ship beer around and have health insurance for our employees with pricing at these very, very low levels in these competitive local markets like California, Colorado, and Texas. The Midwest has been more helpful because the margins they take are not quite as aggressive. The East Coast has been a little bit better [on pricing] just because Dogfish Head did a very good job of making expensive beer that was wonderful and everybody loved.”

In overall beer sales, the macro prices of select Budweiser, Coors, Miller, and Pabst brands have shadowed craft beer, edging up over the past decade as consumers accepted craft’s higher prices. Now that Big Beer has acquired craft breweries, will the macro brewers choose “shadow” prices to help boost sales volumes for the acquired brands?

“The big brewers are doing the same thing other brewers are doing,” explains Watson. “They’re looking to maximize profits and they’re doing it with a variety of tools, including pricing. I’m sure they’re looking for different things out of their craft brands than they are out of their volume brands. […] Knowing those companies are very analytically driven, I wouldn’t be surprised to see them pursue different strategies to see how those brands respond in the marketplace.”

Goose Island, now owned by Anheuser-Busch InBev, has in some cases followed a pricing strategy one would expect from a company with a volume sales philosophy driven by efficiencies of scale. Goose Island IPA, often priced in the $8 range, occupies the low end of the IPA spectrum. But for AB-InBev, the payoff for low pricing has been rapidly growing volume.

Price-sensitive consumers do have alternatives. Larger independent craft brewers are pursuing volume sales with some success through 12-packs that bring prices back down to the $8 and $9 six-pack range, and variety 12-packs, another version of “hit ’em where they ain’t.” “I think we’re seeing growth where craft hasn’t been before in multi-packs, which is not something that craft brewers have traditionally done,” says Watson. “That’s a green field or a blue ocean.”

Meanwhile, the acquisition of independent brewers by private equity may keep pricing from rising too rapidly. Private equity acquisitions are heavily financed, and that puts pressure on the “top end,” i.e. sales volume, to keep lenders satisfied. The traditional way to sustain or drive up volume is to hold down pricing. One strategy often employed by brewers is to “pulse” lower prices to distributors that encourage retailers to temporarily reduce their prices.

Interestingly, according to data from August, sales revenues are slowing among longtime favorites in in the mainstream Craft pricing category. “Sierra Nevada Pale Ale has dipped into the red,” says David Williams, an executive at BWC. “Declines among top-ranked brands from Sam Adams and Leinenkugel, among others, have accelerated,” he adds.

These recent declines experienced by long-established flagships, including New Belgium’s Fat Tire as well as Boston Beer’s Sam Adams Boston Lager, are a reminder that pricing needs to remain elastic for brewers. But when revenues fall, it doesn’t mean brewers automatically lower prices. Sometimes they increase them and come out ahead despite losing some buyers. Interestingly, one area of higher pricing isn’t working. Numerous sources report that $10 four-packs, an indirect way of pricing a six-pack at $15, are not moving well.

The shifting price patterns are taking place within a system where distribution ownership is consolidating or changing and where the battle continues for shelf space. For now, it appears the consumer is in a relative sweet spot when it comes to packaged beer: accessible pricing for local craft, 12-packs and volume-priced nationally distributed brands, plus a growing number of choices in more expensive, higher quality beers. But $9.99 is becoming the norm for six-packs.

If anything is likely to change dramatically, it will be more choices among the higher quality beers. “Ten years ago, if [asked if] we could sell a bottle of beer for $20,” says Allagash’s Tod, “I would have said, ‘No way.’ But here we all are, there’s hundreds of us craft brewers selling beers for that amount. And they are still amazing values. So have we hit the top or not? Who knows?”