Market Power

Big Beer is Hurting Right Now

Beer sales were flat last year:

Anheuser-Busch InBev SA sold 0.7 percent less beer and soft drinks in 2009 during the economic downturn and says that global beer demand is neither growing nor shrinking.

Craft brewers are doing well, thank you very much.

The Market for Craft Brews in 2009

As I've written before, even though beer sales have been down in the US, the business of craft beers is doing very well.  Here is an article from the Boulder Daily Camera about various aspects of the craft beer market.  The author, Aubrey Laurence, notes that overall beer sales were down in the first 6 months of 2009 and that imported beer sales were down 9.5%.  But the sales of domestic craft brews was up 5% during the same period.

Not only that, but Laurence writes that there are more breweries in the United States than at any time in the last 100 years.  Of course, the US was barreling full tilt towards prohibition 100 years ago.  It took 100 years to get back to that point, even though we are nowhere near the breweries-per-capita levels of 100 years ago.

Since many craft brewers started out as homebrewers, we can also thank Congress and Jimmy Carter for passing a law in 1979 that explicitly allowed the brewing of beer in the home for personal use.  The feds forgot to add language that allowed beer brewing at home when they repealed prohibition.  They allowed for the production of wine, but not beer.  Sometimes I wonder if the brewing industry, in terms of the number of brewers and the variety of beers for sale, would have recovered more quickly had the feds specified that homebrewing was legal.

Here is a link to craftbeer.com, a website devoted to craft brewing that Laurence mentions in her article.

Schlafly's and O'Fallon's Brewing Expansion

Like it's competitor, Boulevard Brewing, 240 miles to the west in Kansas City, St. Louis' Schlafly brewing is expanding its operations to meet the growing demand for craft brews.  The addition of some new 200 barrel tanks to its primary facility has caused Schafly to hit capacity in that building, so they are in talks with other brewers, including Stevens Point Brewing in Wisconsin to have them handle some of their brewing needs.

And it's not just Schlafly's that's teaming up with Stevens Point Brewing.  O'Fallon Brewery, also in the St. Louis Metro area, has teamed up with Stevens Point brewing.

Sam Adams's Jim Koch: "Brewing the American Dream"

Sam Adams Brewing founder Jim Koch is filling a niche in the loan market by making loans (and giving business advice) to low and moderate "microentrepreneurs".  Microentrepreneurs are people who want to open up a small business and the low and moderate income entrepreneurs are those people who would have a difficult time getting a bank loan.

To date, Koch's "Brewing the American Dream" program has created 200 jobs in the food and beverage industry. 

HT Mike Norton

The Canadian Women's Hockey Team Celebration: "One of the Coolest Things Ever"

So the International Olympic Committee is saying it is going to investigate the behavior of the gold medal winning Canadian women's hockey team for returning to the ice after the medal presentation and drinking beer and champagne and smoking stogies.

C'mon!  It's not like they trashed a hotel room, accosted strippers, or bilked taxpayers out of billions of dollars.  What they did was a very typical celebration.  Pro baseball players do the same thing here in North America when they win a divisional, league, or world series title.  Tony Kornheiser had the appropriate take on his radio show at ESPN980 in DC this morning:  "What they did was one of the coolest things ever and one of the most human things ever." 

Video courtesy of this link, which says the video is racy.  It's not racy.  It's a news story.  Now, the girls of curling calendar is racy.

Update:  Three words for the IOC:  Lighten up, Frances.

Real Economic Development - The Iowa Beer Edition

Economic development is the process of using scarce resources better to improve the lives of people.  A flow concept, it's a simple definition, but something extremely hard to create in practice.

Usually when politicians talk about creating economic development, they talk about giving subsidies to this or that company to "bring jobs" etc..  But to subsidize someone, government has to tax someone else.  So while it's supposedly "creating" economic activity in one place, government simultaneously creates an offsetting destruction of economic activity somewhere else.  The destruction may be invisible, but it's there.

The best way, IMHO, to really develop an economy is to give people the freedom to contract with one another.  That is, let individuals decide what to provide and what to buy.  So when I read this piece by Charlotte Eby in the Sioux City Journal, I thought "way to go Iowa politicos."

Proposals to ease restrictions on Iowa's microbreweries and distillers are gaining traction in the Legislature among lawmakers who see Iowa's homegrown beers and liquors as economic development.  

Senate File 2091, which cleared the Senate State Government Committee Tuesday, would allow the manufacture and sale of high-alcohol beer that contains 5 to 12 percent alcohol.  

The bill is intended to allow Iowa micro-breweries to compete.  

“This essentially evens the playing field that we've got with Minnesota, Wisconsin, other surrounding states,” said. Sen. Dennis Black, D-Grinnell.

Eby also writes that distilleries are asking for permission to sell their stuff on-site for consumption off-site.  This too makes sense from an economic development standpoint because it allows buyers and sellers to decide what, with whom, and how much to trade.  Minnesota politicos could take note and allow us 'sotans to buy our beer, wine, and liquor from grocery stores and convenience stores.

Of course, letting the public decide how they want to contract with one another creates winners and losers as well.  But this way the public actually gets what they want.  This is the way to real economic development. 

More Health Benefits from Drinking Beer

Recent online articles discuss research that suggests moderate drinking of beer may help prevent prostate cancer.  The key chemical is called "xanthohumol" which is found in hops.  Xanthohumol has been shown to limit the actions of estrogen and may help prevent breast cancer.  The article says that since estrogen and testosterone work in similar ways, the chemical may help fight against prostrate cancer.

Another recent study says that beer is a good source of dietary silicon, something that helps prevent against weak bones.  Beers made with malted barley rather than with other brewing malts like wheat and corn are more likely to contain this dietary silicon which could help with keeping bones from becoming weak.

Most beer styles that you will find out at your local store are made mainly with a type of malted barley, often 2-row malt (common in many ales and stouts) and pilsen malt (common in pilsner beers, which count beers like Budweiser in their family).

The article also note that beers rich in hops also have high levels of dietary silicon.  So beers like IPA's which are beers historically brewed in Britain and shipped to the queen's soldiers in India.  This was in the days before the Suez canal and refrigerated transport, so vast amounts of hops were used as a preservative on the long trip around the tip of Africa.

John Palmer, writing on the dietary silicon article, rightly notes that the expected effect is small and has a negative second derivative.  In other words, too much drinking is bad for your health.  He also doesn't attach much significance to it.

This may be an insignificant result, but you can say a similar sort of thing about most any study on most any subject.  Each study is a chip off the frontier of knowledge, if you will, and it's tough to make definitive statements about any one study.  But knowledge advances study by study.  We might not want to judge a particular chip off the wall as being important, but let's look at the pile of rubble.

Personally, I have obtained a taste for IPA's, particularly IPA's brewed in cities like Boulder and Longmont, Co., along the Front Range of the Rockies.  My favorites are Avery's IPA, Avery's Maharaja, Boulder's Mojo, and Boulder's Mojo Risin.'  I also like the Single and Doublewide IPA's brewed by the folks at Boulevard Brewing in Kansas City which has a flavor and mouthfeel similar to the Front Rage brews.

In my homebrewing, the last few 5 gallon batches I have made have been hoppy ales and pilsners.  I've brewed a couple of Cascade Pale Ales, a couple of Hop Head IPA's, a couple of pilsners, and a new beer I call Front Range IPA.  The latter beer tastes similar to Avery's IPA and Boulder's Mojo, thus the name.  All my beers are malty (the Hop Head uses 15 pounds of 2-row malt and the Cascade and IPA use 10 pounds each).  Each of those ales contain a lot of hops.

The question I have is this:  do I have a taste for hoppy beers just because I like them, or is my body sending me signals that, all else equal, I have things inside me that could make susceptible to prostate cancer, weak bones, or something else .  In other words, is my taste for malty, hoppy beers one of the ways my body defends itself?

While we wait for an answer to that question, Bottoms up!

Another One on Archaic Liquor Laws

Minnesota liquor laws are pretty archaic.  Grocery stores and convenience stores are limited in what they can sell.  The good beer is mostly found at liquor stores.

But Pennsylvania's liquor laws, which makes it difficult for people to buy beer in 6 packs, make Minnesota's look positively lush.  But just like most licensing restrictions, Pennsylvania's liquor laws end up protecting incumbents, not consumers.

Craft Brewers Grow While Big Boys Shrink

In the American beer market, the Davids did well while the Goliaths struggled.

Craft brewers such as Schlafly's (which makes a nice Pumpkin beer) and Boulevard (love the Doublewide IPA) have seen their growth in the St. Louis market take off.  Kevin Collison of the Kansas City Star writes about Boulevard's recent success in St. Louis.

Todd Frankel of the St. Louis Post-Dispatch writes that it's not just Schlafly's and Boulevard that are doing well.  Other craft brewers, such as O'Fallon Brewery also saw a sales increase last year.  He also writes that Boston Beer and Yuengling have grown so much that they can't officially be called craft brewers anymore.

What's really interesting is that the so-called macrobrewers, Miller Coors and InBev, saw sales decrease.  Their sheer size and their share of the US beer market ensured that beer sales were down for the year, but some of their customers have obviously moved on to the big boys' little brothers.

Two on Beer Companies

Boulevard Brewing in Kansas City is expanding its business.

Boulevard Brewing Co., buoyed by strong sales at retail outlets and a new pilsner brew, is investing $4 million for capital improvements at its Kansas City plant.

The new investment, which includes three fermentation tanks and refrigeration equipment, will allow the regional brewing giant to increase its capacity from the current 150,000 barrels to 190,000 barrels annually.

“Business was healthier this (past) year than it was for a lot of people,” said Bob Sullivan, chief marketing officer. “The last four months of 2009, our sales were up 9 percent.”

Bully for Boulevard!  Here's a picture of one of those bad boys.

On Facebook I jokingly asked whether or not my wife would be upset if I added a couple of 600 barrel fermentation tanks outside our home.  My friends said "why not?"  Well, considering that I brew in 5 gallon batches and a barrel of beer contains a delicious 31 gallons, these tanks hold 18,600 gallons of beer, or 3,720 5-gallons batches.  I like my beer, but I don't drink that much, never mind the cost of ingredients. 

Besides, I don't think my wife would approve.

A second story comes from Colorado where the craft beer market is crowded along the front range of the rockies, driving one new entrant to be rather creative when it comes to setting his brewery apart.

Colin Westcott, who has nine years of brewing experience and served as the head brewer of the Kettlehouse Brewing Co. in Missoula, Mont., is planning to open Equinox Brewing Co. on April 1 adjacent to his current business, Hops and Berries, a home brew and wine making store.

Westcott said they will serve British-style ales on six taps. While the final beer list isn't completed, Equinox will offer a porter, IPA, red ale and golden ale.

The small brewery, which won't offer any food, is installing a brewing system that will brew 8 1/2 barrels at a time, which is about 270 gallons per batch.

The twist: Each beer served will be accompanied by a recipe, ingredients and tasting notes so any home brewer can replicate it.

This initially struck me as rather odd.  Why would he give away his recipes?  Many successful food corporations revolve around the fact that their recipes are super-secret (Coca Cola and KFC, for example).  But as I thought about it some more, it didn't seem so crazy.  The reason why has to do with comparative advantage. 

While the ingredients to brew a beer are not all that significant.  The ingredients I used to make the last few batches I brewed cost me about $25 each.  I normally get about 2 cases of beer from each batch I brew.  In comparison, craft brewed beers at my local liquor stores run around $8 to $10 per 6 pack pre-tax, or about $64 - $80 for two cases before tax. 

But homebrewing involves significant start-up costs, both in terms of time and money, especially if you want to brew something that approaches the quality of professional beers.  You'll need a grain mill to crush the grains right before the mash.  Just like freshly-ground coffee is smoother than pre-ground coffee, beer brewed with freshly-crushed grains is smoother than beer brewed with pre-crushed grains.

In addition to a mill, you'll need a container to soak your crushed grains in for at least an hour.  You'll also need a brew pot big enough to boil an entire batch.  If you are brewing a 5 gallon batch, common to most homebrewers, you'll need a 10 gallon brew pot.  My 10 gallon stainless steel brew pot, complete with spigot and thermometer, alone cost me $400.  Then there's the cost of the mash tun, the fermentation equipment, and the bottling/kegging equipment.

Even as these costs become sunk and ignoring the cost of ingredients, the brew process is very time intensive for even the most seasoned brewer.  It takes me about 6 hours just to brew a batch of all-grain beer and I usually have to wait 4-6 weeks from brew day until the day where the final product is ready to drink. 

Moreover, there are other non-monetary costs associated with brewing.  I like to say that if you love to do dishes, then you'll love homebrewing.  The homebrewer has to pay careful attention to cleanliness because he is dealing with room-temperature sugar water when you start brewing beer.  Bacteria love room temperature sugar water and there's nothing a brewer fears more than an infected beer.  You can still drink infected beer without getting sick, but it tastes like crap.  Thus the attention to cleanliness every time you brew and at each step in the brewing process.

But rather than always brewing his own stuff, the homebrewer can go to his local liquor store or pub and pretty much get what style of beer he wants when he wants to get it.  Even by giving away his recipes, the craft brewer still keeps a significant cost advantage over your regular, run-of-the-mill homebrewer.