Given recent inflation and rising input costs across the board—from packaging to fuel to barley malt—you might think it’s a no-brainer that beer prices need to go up, too.
However, that’s not necessarily the message that independent brewers are hearing from experts and industry veterans. In fact, they are pointing to the advantages that could come from holding prices right where they are—to the extent possible, as each brewery faces its own unique situation.
For context, the reasons behind higher costs are many:
- Global, pandemic-fueled, supply-chain problems have had ongoing domino effects, now further exacerbated by Russia’s invasion of Ukraine. A global index of supply-chain pressures compiled by the Federal Reserve Bank of New York found that pressures eased for a few months until March and then worsened in April—likely because of the war and Chinese COVID-19 lockdown measures. The CEO of FreightWaves, which specializes in supply-chain data and analysis, argues that “supply chains are never returning to ‘normal,’” citing higher energy costs and geopolitical risk among the reasons for continued disruption. Ultimately, this means that brewers should not see the costs and availability of raw materials return to what they were before 2020.
- Another effect of the war in Ukraine is its impact on agriculture and the grain market. Russia and Ukraine normally account for more than a quarter of global barley and wheat exports. Besides wartime obstructions to shipping, there are reports that the Russian army has mined millions of acres of Ukrainian farmland, making it difficult to return production to what it was anytime soon. North America’s poor barley harvest in 2021 adds further price pressure on barley as a global commodity, even if growers are cautiously optimistic about supply later this year. However, analysts say that weather concerns in France and North America have interfered with timely planting, and that may lead to supply issues going into next year.
- Inflation is an ongoing problem, and it’s a global one, interconnected with multiple issues. In the United States, inflation eased slightly in April, increasing only 0.3 percent compared to a 1.2 percent jump in prices the previous month. Yet the consumer price index was still at a 40-year high, up 8.3 percent over the previous year, amid fears that it could continue to spiral.
With costs going up across the board, the biggest beer companies haven’t been shy about explaining why they’re raising prices. In February, Heineken said it would raise beer prices by “courageous” amounts because of inflation. The other big beer makers issued similar warnings. Two months later, Heineken, Carlsberg, and AB InBev all reported better-than-expected first quarters, saying that people appear to be accepting the prices even as they drink more beer (and return to bars to drink it on draft). In Japan, Asahi recently said it would raise consumer prices for the first time in 14 years, citing input costs. In May, AB InBev said it planned to raise prices again later this year, bringing the average price of a six-pack of Bud up to about $9.
So, where do all those global machinations leave smaller, independent breweries? The intuitive answer: If input costs are up across the board—and if drinkers are apparently willing to accept higher prices—then craft beer should also get more expensive.
However, some experts and industry veterans have suggested a different approach for smaller breweries.
In their Beer Quarterly, beverage analysts at Rabobank say the industry faces a conundrum: Input costs are rising, but so are the inflationary pressures on beer drinkers—thus, simply raising prices could do more harm to beer sales than usual.
Put another way: If the grocery bill is getting too high, shoppers may be less likely to reach for that extra craft sixer; or, when they see what it costs to fill their gas tanks, they may be less likely to spend money on pints in your taproom.
Complicating the puzzle, the Rabobank analysts say, is their assessment that these higher input costs are not temporary “and will not disappear in the foreseeable future.”
So, what’s their recommendation? To get creative. They suggest exploring a range of options, such as cost-cutting, adjustments to packaging mix, and hedging, as well as possible price adjustments. However, the Rabobank report says, “accepting some level of margin compression may be necessary, or even advisable.”
Others in the industry argue that the pressure to raise prices is exaggerated, based more on “optics” than the real, marginal increase in costs. In an op-ed for Culture Council on the Rolling Stone website, Kevin McGee—president and CEO of Anderson Valley Brewing in Boonville, California—writes that smaller breweries may indeed have to pass on some of their higher costs to drinkers. However, he argues, these costs “are nowhere near the level to warrant the scale of the intended price increases we’re seeing from big beer.”
“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,” he writes. “They’re being surprisingly transparent about this.”
Even beyond Heineken claiming to be “courageous” with its price hikes, McGee cites a recent Constellation Brands earnings call, when the CFO said they are going to “take as much pricing as we think the consumer can absorb.”
Rather than putting pressure on independent breweries, McGee suggests the inflationary environment could create a competitive advantage: “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,” he writes. “The most obvious tactic is to hold prices (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.”
Whether or not smaller breweries choose to raise prices, they are in a better position than many businesses—in their taprooms, via social media, or even to local journalists reporting on higher prices as the story of the day—to explain clearly to customers what they’re doing and why.
For many more factors to consider, see So You’re Thinking About Raising Beer Prices.