The cost to make beer is soaring. The price to buy it is catching up.
Up until this point, brewers have largely absorbed the ballooning expenses for their ingredients, including barley, aluminum cans, paperboard and trucking.
But as high costs persist longer than many had hoped, brewers are forced to make the inevitable decision: raising prices on their beer.
“Something has to give,” said Bart Watson, chief economist at the national Brewers Association.
As bars closed and consumers took more beverages home during the pandemic, liquor store sales grew 25% from 2019 to 2021, according to federal data. Breweries, distilleries and wineries started churning out more retail products to meet the demand for at-home drinking.
Here’s the problem: There weren’t enough aluminum cans and glass bottles to package this extra beverage volume, so packaging prices soared. Aluminum can suppliers started favoring their biggest customers, who could afford to place larger, more expensive orders.
“It has been a stress on our business to have so much of our business in cans, and that’s led to a lot of these issues in the supply chain,” said Tom Whisenand, chief executive of Indeed Brewing in Minneapolis. “We recently did price increases to help cope with this, but the increases are not nearly enough to cover the cost increases we’re seeing.”
The prices for many of the essential elements of beer making and selling have surged in the past two years as a global supply chain struggles to untangle itself from the late-pandemic buying frenzy. Many brewers cite trucking and labor costs — and the increased time it takes to get supplies and ingredients — as their biggest increases.
Even the world’s largest beer manufacturers are passing on their higher costs to consumers. AB InBev (Budweiser), Molson Coors, and Constellation Brands (Corona) have told investors they have been raising prices and will continue to do so.
Heineken told investors this month that the price increases it must push through are high enough that consumers might buy less of its beer.
“As we continue to take these quite assertive price increases … the big question is indeed whether disposable incomes will be hit to the point that it will dampen overall consumer spend and beer spend as well,” Heineken chief executive Dolf Van Den Brink said.
The price increases on beer, wine and liquor have only just begun, said Scott Scanlon, a beverage expert and vice president at Chicago-based market research firm IRI.
“We’re going to see a lot of manufacturers take price (increases),” Scanlon said. “That is only going to increase, probably higher than it has.”
So far, he said, consumers have taken it in stride. Just as higher grocery bills are offset by dining out less, a bigger tab at liquor stores is being absorbed by a lack of travel and entertainment expenses.
Even as some of those expenses return and other bills grow, Scanlon expects alcohol sales to be resilient.
“It’s that affordable indulgence,” he said. “This is the product that people are not going to want to give up.”
The aluminum shortage and last year’s drought-stricken barley crop — when the U.S. recorded one of its lowest barley harvests in more than a century — have given brewers some of the biggest supply chain squeezes. But all alcohol categories are facing cost pressures.
“I don’t think you’ll talk to anybody in liquor who is not disappointed with their glass supply,” said Andy England, chief executive of Minnesota’s largest distillery, Phillips. “And there is always a random ingredient, when everything else is figured out, that keeps us from growing more.”
The widespread reliance on “just-in-time” manufacturing collapsed under the weight of huge consumer demand triggered by the surge of consumer spending following the pandemic’s initial lockdowns and layoffs in 2020. This just-in-time system was designed to keep costs down for everyone by having ingredients and packaging supplies delivered only as they were needed.
“COVID just destroyed the models people built,” England said. “Manufacturers say I need to order more of everything because I’m worried about scarcity, and all of a sudden suppliers can’t supply enough.”
Last fall, the Brewers Association wrote to the Federal Trade Commission about the aluminum can shortage, which is expected to last until 2024 when new production capacity can finally catch up.
“Craft brewers have and will continue to find it harder to compete with larger brewers not facing similar shortages and price increases in aluminum cans,” Bob Pease, the association’s president, wrote. “Where product becomes unavailable, the impact can last long after supply becomes available again,” as retailers and restaurants fill shelves and taps with other products.
Many craft brewers, especially those without long-term contracts that provide a level of cost stability, are expected to follow the lead of big brewers in raising prices — if they haven’t already.
The alternative would be to shrink profit margins, to which many craft brewers would reply: What profit margin?
“There isn’t really a profit margin to speak of,” said Dave Hoops, owner of Hoops Brewing in Duluth. “I think it’s about staying afloat, keeping level, fighting off a million things… and keeping beer relevant.”
Accepting higher prices
The psychology of inflation may help to ease the pain of price increases, Scanlon said. Higher prices for pints at restaurants and a faster increase in the price of other groceries may make that extra dollar or two for a six-pack or bottle of vodka less shocking.
“Consumers may go in thinking, ‘The price of that product I really enjoy is not going up as much,’ ” he said.
The Brewers Association is preparing for another year of elevated costs in barley, aluminum cans and freight.
Meanwhile, Whisenand at Indeed Brewing said there is only so much room to control other costs, which led to the recent price increase.
“We need to increase our costs to compete to be a quality employer and have quality beer,” he said, but at the same time: “Breweries believe very strongly that beer should be, in a sense, affordable — one of the greatest affordable luxuries in the world.”
Post time: Mar-03-2022