Are Specialty Beers Underpriced?

There must be something in the air. A debate raged last week on the Brew Crew listserve about how expensive beer ought to be. (General sense: less.) Earlier, Alan voiced similar concerns on his Good Beer Blog. Now Stan alerts us to a similar debate that broke out on his blog.

I guess it's not surprising--mix a spike in beer prices overall with the worst recession in seven decades, and people are likely to grumble. With regard to regular beer prices--I feel your pain. This is a tough time to have to spend more for a sixer. But when the discussion turns to the price of specialty beers, those limited-edition 22-ounce releases, I have to dissent. Matter of fact, I think there's a lot of evidence that at even $20, these bottles may be underpriced.

I am not an economist, but I think I understand the basics of markets. When supply and demand are in equilibrium, prices stay flat. When supply exceeds demand, prices drop as retailers try to sweeten the deal. This brings equilibrium back to markets, getting surplus product off shelves. When demand exceeds supply, prices rise as a way of moderating demand. This is the healthy function of markets.

Last week, I reviewed Pelican's Perfect Storm, a beer now ranked by BeerAdvocate beer geeks as among the best in the world. It sold for $20 a bottle. Some beer drinkers who wanted a sip of that delicious potion found the price off-putting. By this reckoning, the brewery shouldn't be trying to gouge its customers. The Abyss, ranked even higher than Pelican but nine dollars cheaper, also fanned the flames of discontent. Why look, Pliny is right there in between them, and it's a bargain.

Cost and Retail Margin
Let's unpack this. There are several moving parts: cost, retail margin, and supply/demand. Most beer drinkers consider only the first one. If a beer costs a brewery two bucks to make and it sells for twenty, they're gouging the customer. But even here, you have to consider much more than what the final product cost. There's the development of the beer, test batches, marketing and printing costs. When I spoke to Gary Fish recently, he mentioned that Deschutes spent four years developing Green Lakes, their organic beer. By the time they get a gluten-free beer to market, it will have taken about the same amount of time.

Next, there's the issue of retail margin. Stan captures this nicely:
Distributors will mark up the beer 28 to 32 percent before selling it to retailers, and retailers will mark that up another 30 to 35 percent. Special beers, like Old Rasputin XII tend to get marked up more. Take the middle of both those ranges and you’ll see a bottle of beer delivered to a distributor (which isn’t cheap when the bottle starts in Fort Bragg) for $10 would cost you $17.29 (more likely $16.99 or $17.99). Who’s making the real profit along the way?
Compare beers a brewery produces at $5, $10, and $15. Adding a 30% markup at distributor and retail levels brings that $5 beer to $8.45. At $10 it balloons to $16.90. And at $15, it shoots up to $25.35. If the brewery raises the price per bottle from five to fifteen dollars, it makes ten bucks, but it costs the consumer more than ten more.

Now let's consider the supply and demand issue. A brewery like Pelican simply can't produce very much Perfect Storm. They have limited production and storage capacity. This year they made about eight barrels of it. The demand for this beer was such that fully half was committed by pre-orders and the rest sold in days. Confronted with a situation like this, a brewery should raise its prices. Markets adapt to price points. Looking at the rapid sales, I'd make the argument that the beer was under-priced. Would Pelican have sold the beer at $25? $30? Pelican would know that the price point was right when the beer sold well, neither leaving product on shelves nor causing riots.

There is a virtue to this system beyond just maximizing profits (which is what breweries should be trying to do--they're businesses, not social service agencies). For the customer, pricing beer at the top end means slowing down sales. I suspect there were a lot of people out there who regret not getting a chance to buy a $20 bottle of Perfect Storm. Pricing things at their value means customers have a chance to buy them. It's a bit Darwinian, admittedly, but that's the nature of markets. It's still the best system--by a long shot--humans have devised. When breweries over-price beers, they pay the price, which is how Darwinism runs backward, too. Recently I was in Belmont and noticed that they still had a half-dozen or more BrewDog Atlantic IPAs. Apparently $26 is too expensive for an 11-ounce bottle.

And let's be honest: most people can still afford $20. That's a cheap bottle of pinot. In absolute dollars, it remains affordable--all the more so when you consider that almost no one else on this blue planet had a chance to buy The Perfect Storm at all. If breweries were social service agencies, I would expect them to hold prices down. But then, if we demanded that they just keep prices down, would they really try to shoot the moon and make a beer worth $20 in the marketplace? Making a world-class beer is its own reward, sure, but it also means you get to reap the benefits. Those pretty, green, presidential benefits.

As long as the Perfect Storm and The Abyss continue to sell so well, they will and should stay expensive. And that's a good thing.