Beer Economics: Factors Affecting Pint Beer

We see beer at sports events, parties, and backyard barbecues, but how many people have thought about what is in a jar or bottle? It’s not the ingredient-the economy. The brewing industry is very complex, and bringing your favorite beer into a local store or bar requires more than just brewing technology.

Beer, like any commodity, follows the rules of supply and demand. If one of the ingredients, such as hops, becomes more expensive, the price of the final product may increase. If grain prices soar due to increased demand for grain ethanol used to fuel cars, beer prices will also rise. What makes beer unique is how it responds to different economic conditions and how your government regulates it.

Key points

  • Beer is unique in its response to different economic conditions and the government’s supervision of it.
  • Although it is logical to assume that the demand for cheap beer increases during a recession, this is not always the case.
  • Even during the recession, sales of high-end craft beer and flavored beer have been on the rise.
  • As the output of traditional breweries as well as craft beer and small breweries has increased, the supply of the beer industry has also changed.

What type of commodity is beer?

The economics of the beer industry can be very complicated. Beer can be regarded as a normal commodity, which means that demand increases as income increases, or it is regarded as a low-end commodity, which means that demand decreases as income declines. In addition, when beer prices increase, some consumers may choose lower-cost alternatives, such as wine or liquor. In some cases, beer can be considered a luxury, which means that demand exceeds revenue growth.

Although some studies tend to support the view that beer is a normal commodity, the beer industry is not homogeneous. In other words, there are a variety of beers at different prices to choose from. Therefore, various parts of the entire beer market may react differently to the economic cycle. Traditionally, the brewing industry is generally considered to be “recession-proof.” For example, during the burst of the Internet bubble in the late 1990s, the stocks of major beer production companies rose.

Beer sales and decline

Although it is logical to assume that the sales of cheap beer will increase during the recession, leading to a decline in demand for high-end beer, the correlation between beer sales and the recession may be complicated.

From spring to early summer of 2020, affected by the new crown pneumonia epidemic, the US economy fell into recession. Compared with the same period last year, in-store sales of sub-premium beer increased by more than 11%. Despite the closure of many restaurants and bars due to the pandemic, sales have increased. At first glance, one might conclude that during a recession, consumers are trying to save money by choosing cheaper alternatives.

However, although the sales of cheap beer have increased, the sales of all types of beer have also increased. According to data from market research company IRI, overall beer sales in 2020 are higher than cheaper beer sales, an increase of 27.5% compared to the same period last year.

In addition, due to consumers being trapped at home during the pandemic, sales of off-site alcoholic beverages have increased by more than 10% in 2020, including premium beer, wine and liquor. Despite the increase in demand for secondary beer, sales have been lagging behind, and market share has been taken away by imported beer (up 15%) and craft beer (up 23%).

Whether the shift in consumer behavior will continue is uncertain. Nonetheless, changes in the market share of beer sales indicate that premium, flavored and craft beer may continue to gain market share.

Beer supply

In recent years, with the increase in output of traditional breweries, the emergence of “craft brewing” breweries (brewery using more traditional brewing materials and methods) and small breweries (small batch producers), the supply of beer has undergone some Variety.

Although the products of these two new breweries tend to be more expensive than traditional beers, this is not necessarily due to high prices. In the beer industry, the economic law of supply and demand is often established, which means that if the demand for a particular beer is greater than the brewery’s output, the price will often be higher.

Larger brewers benefit from economies of scale, which means they can purchase materials in bulk, have easier access to efficient transportation (beer is available in more markets), and can produce large quantities of beer. Therefore, compared with small breweries, large breweries that produce beer on a large scale can provide lower prices.

Due to the combined effect of multiple factors, including changes in regulations, more and more craft beer and micro-brewed beer enter the market-President Jimmy Carter signed a bill in 1979 to legalize home brewing. In addition, the post-Prohibition reconstruction (many of which were declared bankrupt by the US brewers during Prohibition) and changes in consumer tastes have led to an increase in the beer industry’s products.

Although craft beer, micro-brewed beer and traditional beer may target different markets, the overall impact of the increase in the number of brewers is increased supply and increased competition.

Distribution and supervision

Alcohol distribution generally belongs to the three-tier system, which emerged after Prohibition. Interestingly, this system requires all alcohol (with some exceptions) to pass through an intermediary. The main reason for establishing a system in this way is to restrict producers (such as brewers) from possessing the capacity of the two main stages of the industry: production and retail.

The worry is that if large producers control everything (such as standard alcohol), consumers’ choices will be limited, and everyone’s situation will get worse. Although this worked to a certain extent, the rule caused some headaches, even in the Supreme Court case (Granholm v. Heald).

The three layers of the system are as follows.

First line

The first level consists of brewers and manufacturers who produce beer and supply beer to wholesalers.

Second floor

The second layer is distribution. Manufacturers usually provide a company with exclusive rights to distribute their products to different retailers, and the post-Prohibition situation usually makes distributors a powerful entity in each state. This reduces competition and can increase prices, because fewer distributors means less incentive to lower prices.

Some state regulations further define the relationship between brewers and distributors, and even legally restrict the relationship between brewers and distributors. This may cause headaches for consumers, because disputes between brewers and distributors may cause certain beers to be unavailable in a certain area.

the third floor

The third tier is the retail sector, where ordinary consumers can buy products, whether it is a grocery store, a bar or a state-regulated supplier. As with many things, there is one exception: brewpubs-restaurants or bars that produce beer on site for sale on site.

Unique drink

Unlike other beverages such as carbonated drinks and fruit juices, beer sales are regulated. The supply and sale of beer is closely monitored by local, state, and federal governments because it is considered a “bad habit”.

Municipalities regulate alcohol sales through state-sponsored stores, taxes, or other restrictions to raise funds or control residents’ access to alcohol. Regardless of political reasons, this will greatly affect the supply of beer and increase its price. Limiting the number of suppliers, such as grocery stores or convenience stores, effectively reduces competition, leading to higher prices.

Bottom line

Whether relaxing at home or going out with friends, the beer in your hand is more than just a liquid refreshment. The beer industry is complex and is affected by supply and demand, production and distribution, and regulations.

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