Price hikes are on tap in the beer category due to rising costs of agricultural commodities
Higher beer prices are brewing as a hops shortage and other cost pressures begin to take their toll at retail.
Beer prices started climbing about three months ago at Jungle Jim's International Market, Fairfield, Ohio. Microbrews now cost consumers about $1 more per six-pack, while domestics are up about 50 cents, said spirits operations manager Ed Vinson. The prices of European imports are also up.
Vinson has voiced concern about the prices to his beer distributors, who have responded that it's a result of the hops shortage.
“No one wants to raise prices. It's just one of those things,” Vinson said.
Hops, which are plant flowers used to flavor beer, are in low supply due to worldwide crop shortages caused by a number of factors, including bad weather in growing regions outside the U.S., as well as a fire in October 2006 at a hops warehouse in Yakima, Wash., belonging to S.S. Steiner, said to be the largest supplier in the U.S. In addition, some U.S. farmers have reduced acreage, converted hops fields to other crops, or sold their farms to developers.
Prices have tripled and even quadrupled in some cases over the last year. Hopunion, a Yakima hops supplier, charged $12 a pound this past October for “cascade,” one of the most popular hops used in craft brewing, up from $3.40 a pound in May '06, according to sales director Ralph Woodall. Hopunion has since not been able to buy additional cascade hops due to unavailability.
The limited hops supply is not the only problem. Malt costs have also risen, as have prices for aluminum, fuel and other materials needed to produce and distribute beer.
“It's like the perfect storm,” Boston Beer founder and chairman Jim Koch told SN. “Everything has hit at once.” Boston Beer produces the Samuel Adams brand.
Another large craft brewer, Sierra Nevada, was unavailable for comment.
It could take up to three years before the hops market rebounds, said Bump Williams, Information Resources Inc.'s beer, wine and spirits general manager.
“You can't just plant hops and harvest them next year,” Williams told SN. “It takes several years.”
The situation could lead to price increases of 5% to 9%, with some microbrew/craft brands going up 10%, or $1.50 a six-pack, said Williams. The big domestic brewers may have price increases of about 2%.
The cost of raw materials was a big topic of discussion in October at the Brewers Association's Great American Beer Festival, said Julia Herz, spokeswoman for the Boulder, Colo.-based Brewers Association.
Price increases are especially troubling to craft brewers because they use more hops in their recipes, and many of the smaller companies buy on the spot instead of having long-term contracts that lock in fixed prices.
“Craft brewers are the hardest hit by the increase, because they're known for making fuller-flavor beers, which require more malt and hops,” Herz said.
The situation is not unlike what has occurred in other agriculturally based industries, like wine, also affected by the quantity and quality of annual harvests.
“It's not a permanent situation, but how it all shakes out remains to be seen,” she said.
While Boston Beer isn't as affected as much because it has long-term contracts, the weak U.S. dollar is responsible for a 50% rise in the amount the company pays for the Bavarian and English hops it uses. In response, it is rolling out a 5% average increase on all packages.
Even so, Boston Beer's beer prices remain reasonable, Koch said.
“A high-quality beer like Sam Adams is a relatively affordable trade-up,” he said. “It's not like buying a $30 or even $15 bottle of wine.”
But IRI's Williams said that depending on how long the shortage lasts, craft sales could suffer because consumers may start trading down.
“Many consumers who have been migrating up to craft may be forced to supplement high-end beer with lower-priced beer,” he said.
Even worse, Williams estimates that about 10% of the nation's 1,400 craft brewers could go out of business, while others may be more receptive to buyout offers.
“Some smaller craft players are going to be in serious trouble,” he said.
Along with higher retail prices, another consequence may be a change in brewing practices. Some craft brewers, for instance, may stop using certain hop varieties in short supply, Ralph Olson of Hopunion said during a presentation to the Brewers Association in November.
Boston Beer's own recipes remain intact. But due to the lack of certain hop varieties, one winner of the brewer's “LongShot” homebrew contest chose to delay his seven-hop recipe until 2009, rather than release it this year. (Two other “LongShot” winners still have their brews featured in the 2008 Samuel Adams LongShot variety six-pack, now available nationwide.)
While it is experiencing cost increases due to rising prices of brewing ingredients, St. Louis-based Anheuser-Busch has a sufficient supply of hops and barley to meet its brewing needs, according to business operations vice president Michael Owens.
“Our inventory management and strategic acquisition programs have positioned us well,” Owens said. “We also have aggressive cost savings programs in place throughout the company designed to partially offset rising commodity costs without compromising the quality of our beers.”
Miller Brewing Co. was not available for comment.
Microbrews experienced strong growth at Pittsburgh-based Giant Eagle, where top-performing brands include Great Lakes, Samuel Adams, Blue Moon and Sierra Nevada.
Giant Eagle is working to keep percentage increases in the low- to mid-single-digits, said the retailer's beer, wine and liquor director, Olivier Kielwasser. And it has become more demanding when authorizing new brands and stockkeeping units.
“Factors such as point-of-sale material, display enhancers and trade marketing programs are becoming more important now due to the impact of increased prices,” Kielwasser told SN.
Jungle Jim's is keeping prices in check by buying in larger quantities when the brewers offer deals, said Vinson. For instance, when Bud and Miller were offered on sale after the holidays, Vinson bought three tractor-trailer loads, or about 5,000 cases.
“We buy low and sell low,” he said.
The only caveat is ensuring that the stockpiled beer is sold by the sell-by dates. That's usually not a problem, because most beer produced in the U.S. has a 110-day window, and imports have six months, said Vinson.
Prices haven't gone up yet at Dorothy Lane Market in Dayton, Ohio. But the retailer has received word that increases are on the way, said Jerry Post, beer and wine director for the retailer's Washington Square store.
“It hasn't hit us yet, but the distributors are telling us we're going to start to see price hikes of 5% to 8%,” he said.
Even if prices do go up, Post doesn't think it will affect sales. That's because most craft buyers understand they're paying a premium for a unique beverage. Likewise, many beer drinkers like the fact that crafts come from small businesses.
“They see craft as more of an artisanal product, rather than something that's from a corporate giant,” he said.
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|Sales in food, drug and mass for 52 weeks that ended Jan. 27, 2008. |
Source: Information Resources Inc.