Stretching Your Dollar: Is Elasticity Craft Beer’s Biggest Threat?

Every story started deserves an ending.

Remember my last post and the inner struggle between a local beer and national one? The difference of a couple bucks was enough. In lieu of a beer brewed within a short driving distance, I bought the new Sierra Nevada Harvest Ale, made with Neomexicanus hops. The price certainly helped, but the promised experience of enjoying a beer created with what is essentially “experimental” (read: new) hops pushed me over the edge.

Also, I’m still not buying the $11 bottle of “imperial amber ale” brewed several miles from where I type this.

At the core of my decision was the reason I’ve become so adamant for craft beer in the first place – quality and variety. As Greg Engert recently pointed out, we shouldn’t let the sole idea of “drinking local” cloud that search:

We began by decrying the lack of variety, the lack of quality, and the lack of full-flavored drinking experiences offered by the industrial lager. Now, the desire to drink local brews has reached a fever pitch, often blinding publicans and craft beer drinkers alike from what should ultimately guide our choices: Is the beer of the highest quality? Is it bereft of off-flavors? Is it delicious? In short, is it superlative and memorable?

This is especially important when considering today’s beer consumer is focused on aspects of variety and new experiences. So what does this have to do with how we spend our money, anyway?

Beer is inelastic…

To put it plainly, the price of beer doesn’t really impact its sales – people are going to buy beer no matter what.

However, this is particularly true for craft beer, with a great example coming from the Great Recession. While overall beer sales declined, craft beer continued to grow.

The demand for craft beer turned out to be especially inelastic. That is, people will continue to buy craft beer no matter the price because it’s good. Macro beer, on the other hand, was found to be closer to static in regard to price and interest.

We may not like rate increases in a general sense, but the 1 to 2 percent jump in beer prices we see each year or two doesn’t seem to matter.

… but are beer’s demographics?

Here’s where my curiosity really starts to dig in.

The outcome of inelasticity is that no matter the price, people will continue to purchase a good. That’s true in the sense of beer as a product, but can the same be said of beer as individual brands?

For example, we know that youngest drinkers are laser-focused on price, so brand or style is secondary. More so, once this same demographic grows up, the idea of brand loyalty continues to be some vague ideal in lieu of seeking out variety.

Via blogs.ubc.ca

To put this in even broader context, consumers are comfortable switching between beer, wine and cocktails based on lower price. One study even suggested that drinkers are more likely to drink beer over wine or cocktails. On a whole, the youngest drinkers are content with being frugal, but also want to seek out new experiences.

There might also be an assumption that only half of that equation – frugality – holds strongly with older drinkers who might have less disposable income, causing a stronger reaction to fluctuating prices. Mortgages, parenthood and car payments are necessities to beer’s luxury, especially when Generation X and older are considered to be more knowledgable, savvy shoppers.

To point, consider the tight grip to “legend” beers in Zymurgy’s annual “best beer” rankings opposed to including new, highly regarded beers entering the market. As voted on by members of the American Homebrewers Association (average age of 40), beers like Sierra Nevada Torpedo, Dogfish 60 Minute and Stone Arrogant Bastard have been around for years, even if their rankings are slowly slipping. These beers are probably more static in price compared to other options these drinkers are encountering.

What about intercraft elasticity?

I may be off my rocker here, but it feels like the rapidly-growing industry should create stronger responses from consumers. Demand and quantity are up, but have we reached a point where quality isn’t as much of a consideration as rarity or hype? More specifically, as the number of choices exponentially grows, how will that impact willingness to spend?

Lots of options…

As recently noted by Bart Watson, chief economist for the Brewers Association, people aren’t necessarily choosing craft beer in lieu of Big Beer like Bud Light or Coors – it’s an industry with its own dynamic. Which, to me, means intercraft purchase decisions are coming.

Drinkers want to experiment with the flavors and styles they consume, so whether they’re searching for more variety for greater bang for their buck, that doesn’t necessarily mean spending should stay all over the map as well.

Price pressure has potential to squeeze the little guys, especially as the fight for market share becomes more intercraft. The number of substitutes available to us is overwhelming, creating a shift in point of sale where price matters more as the number of options increases as well.

So what’s next?

I am not an economist and this is all more of an exercise of thought process than anything, but at some point, it seems the price we pay will become a broader issue. In addition to always pushing for better beer, we should also want to make sure it’s financially viable for anyone that is interested.

Craft breweries face a unique challenge in running their businesses, and their budgets and prices reflect that. There are many variables to consider when talking about national or regional companies going up against smaller, localized businesses, but eventually, we all put our money where our mouth is when it comes to beer.

Literally.

Related: Local Brews and the Beer Economy

+Bryan Roth
“Don’t drink to get drunk. Drink to enjoy life.” — Jack Kerouac

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