Thursday, 12 January 2017

The cask premium

Following the announcement that Cloudwater were quitting cask production, there’s been a lot of talk in the blogosphere about how brewers of cask beer aren’t getting a fair return on their money, and that cask beer needs to be more expensive in pubs to remedy this situation. Now I can’t say I have much sympathy for this viewpoint, as I explained here, and if you attempted to argue to a typical group of drinkers that beer in pubs was too cheap you would be laughed out of court if you were lucky. And the market fundamentals aren’t going to change, so brewers have to live with the world as it is, not how they’d like it to be.

However, buried in all the noise, there is an important point in there. Some cask beer is much better than others, but within the market it’s very difficult to command a price premium for higher quality. As I argued here, there are price premiums for some categories of beer over others, and for some pubs and pub chains over others, but not between products in the same general category.

One obvious difficulty is that in many pubs, Spoons as well as independents, guest beers tend to by priced in strength bands, or even all at a single price. Yes, there will be some variation in what they pay for beers, but they’ll obviously be reluctant to pay well over the odds and cut their own margin to the bone. The same is true of Premium Bottled Ales where, in the big retailers, pretty much everything is lumped together in “4 for £6” multibuy offers.

Things aren’t helped either by the prevailing culture of ever-rotating guest beers. The varying beers are just seen as a homogenous, dispensable product. Even if your beer isn’t up to much, the pub probably won’t be having it on again, so it will be quickly forgotten. All cask beer certainly isn’t of broadly uniform quality, but when customers are confronted with an array of beers, and possibly breweries, that they have never heard of before, it’s well-nigh impossible for them to decide that one is worth more than another.

Part of the answer must therefore lie with pubs being prepared to charge a premium for beers that have a reputation for standing out from the rest of the herd. Of course this involves sticking your neck out a bit, but I think customers would genuinely be prepared to pay a bit over the odds for beers from breweries like Thornbridge and, yes, Cloudwater.

And the other half of the answer must be for brewers to develop their reputation, so that pubs are going to make repeat orders, and that customers perceive their beers – whether individual brands or the overall output of the brewery – as something they actively want to drink. There’s no magic bullet for achieving this, but has to be the aim. Consistency, and having a product that stands out, not necessarily by being extremely distinctive, but by being of obvious quality, are vital factors. They need to aim to get their beers in pubs as a permanent fixture, or have a permanent tap devoted to the one brewery. Easier said than done, maybe, but getting more control of your own distribution chain is a sensible long-term objective.

It’s not going to happen overnight, but it’s something that the more discerning pubs and quality-minded breweries need to keep plugging away at.

35 comments:

  1. Perhaps the proper reading of the Cloudwater story is not that they couldn't get a premium price for their cask beer (moral: cask drinkers are skinflints and Tim Martin should stop encouraging them) - but that they couldn't get a premium price established across the board and (most importantly) in the time that they had to do it. And the moral of that is that breaking into a market and establishing a new business model is difficult and takes time; skilled people, good ideas, a good reputation and a ton of startup capital are all good things, but none of them's a magic wand.

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  2. The problem isn't the guest beers which provide welcome variety, the problem is when 3 out of 4 pumps are low quality bitters that never change from year to year, so punters never get a chance to vote with their wallets.

    One of our local pubs recently took the plunge and switched from Doom bar for St Austell Tribute after much moaning from regulars (inc me). AMAZINGLY, their takings went up 25%. They regularly ran out of Tribute in a single evening, and sales of GKIPA (on the other pump) collapsed.

    Who would have thought that if you put beers on that people actually want to drink, they are more likely to stop at your pub rather than the pub down the road.

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    1. An interesting question - if you run a free house, or a pubco tenancy, how do you actually work out which are the regular beers people most want to drink. And it's not as simple as "just ask them", because what people say and what people do aren't necessarily the same thing.

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    2. Or indeed, a publican can't just assume that because a beer is selling ok, it means it is actively popular and that another beer wouldn't sell better. It could be that people like the pub for other reasons, and are willing to put up with a poor beer selection.

      Asking only the regulars also suffers from selection bias. The people you want to be asking are the people who don't regularly come to your pub - easier said than done.

      I guess the answer is to give beers an extended run, but change out the weakest selling of your three beers every few months or so.

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    3. A good point. I don't use one of my locals much because the two cask ales are GKIPA and Golden Hen (which I'm not awfully keen on anyway), and quality is a bit iffy when it doesn't sell, whereas the other 2 have beers I want to drink, and it's very rare to get a duff pint, because it sells. Mind you, the pub with the GK stuff also regularly keeps the lounge locked, and the bar noisy, so all in all it's not terribly tempting.

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    4. The fact that you're talking in terms of permanent national beers as opposed to guest beers implies this is a pub with some kind of tie, which means that the publican is probably highly constrained as to what he can choose to sell.

      Even if it's a freehouse, there's all sorts of ways for breweries to entangle a publican. For instance, Coors are trying to "own" football at the moment, so that Doom Bar may be on the bar as part of a package with Carling etc in return for which Coors chip in £3k/year to the pub's Sky bill. So even a big increase in sales from stocking Tribute may not be able to contribute sufficient net profit to match the package they were getting with Doom Bar.

      Even in a freehouse where they try to ignore the siren voices of the big boys and their deals, it'll be a mixture of sales analysis, a publican's pet favourites, general awareness of what's "hot" (eg awards, the buzz that develops around certain beers and eg the wider trend towards golden and hoppier beers), price promotions from microbreweries, customer feedback, asking around other beer sellers and sometimes just "what the heck, let's just give this a go and see what happens".

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  3. "cask drinkers are skinflints" - really? Millions of people dismissed in just four words. I can't think of any other area of retail where some customers complain they're not being charged enough. Such an attitude is - frankly - bizarre.

    I'm a Leftie (don't faint, CM - I've been intending to reveal all for some time), and yet it seems to me that I understand the free market rather better than those who want a variant of minimum pricing for real ale.

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    1. To be fair, that was Phil giving an offhand summary of a position that he didn't agree with, not something that anyone (that I'm aware of) actually said in those terms.

      I think it's also worth pointing out that the original Cloudwater blog post was very matter of fact and wasn't about blame or finger pointing or telling anyone else what they should or should not be doing, just stating the fact that they didn't think it was sustainable for them to stay in the cask market. It's commentators after the event (including me) who've been chucking stuff around about whether it's a problem with the cask market that brewers whose cask ales we liked are abandoning it, and if so, whether anyone can do anything about it.

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    2. Fair enough, Dave, I stand corrected, but what I said does apply to those drinkers who argue for dearer real ale.

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    3. "I can't think of any other area of retail where some customers complain they're not being charged enough."

      Actually there's been quite a lot of analysis around the power of the supermarkets which has concluded that the short-term benefits of supermarket discounting aren't worth the long-term effects of reduced choice and ultimately higher prices to the consumer. See eg the Competition Commission 2008 report into supermarkets. You've seen specific examples in eg dairy with things like the Morrisons milk that is more expensive to support farmers. Even the supermarkets are starting to recognise that they've pushed things too far and are starting to endanger their own supply chains with eg the Tesco Sustainable Dairy Group guaranteeing minimum pricing in order to support their supppliers.

      There's lots of markets that aren't true free markets - the Reinheitsgebot is an example in the beer world where certain "cheap and nasty" products are kept off the market in the name of quality (and a whole heap of other reasons, with a whole heap of other effects), but you could equally look at markets from brain surgery to bungee jumping where it's probably best if the super-discount options are kept off the market.

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  4. I think strict adherence to GP percentage can be part of the problem. To get a GP of 60% you treble the cost price. If more people worked on a absolute profit per pint instead (or somewhere in between) then going for the better quality beer isn't such a shocking difference on the bar. (And as per anonymous above, you could well sell a lot more of it).

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    1. You would think pubs would look around and try to undercut their competitors by a small amount, but it doesn't seem to work like that. Wetherspoons seem the only pub who think like this - have you all seen those tables in wetherspoons pubs that show a price comparison of popular drinks against 3 local pubs?

      I think one of the reasons pubs don't advertise their prices on billboards outside very often is that they don't want to start a price war with their neighbouring pubs.

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    2. Pubs' offer is about far more than price alone, though.

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    3. Small operators or individual licensees have no chance at all of surviving a price war with Spoons ( or Amber Taverns, or Stonegate/Yates ). I have personal experience of this . If you go remotely head to head on price, they will chase the overall price level down and, given their buying power, there is only one winner.
      Re cash vs percentage margin, Rob in my opinion is absolutely right. I am often surprised to find people still clinging to the percentage model ( except, often, on Guinness, where the old theory that the Guinness drinker decides where the group drinks lives on despite all the evidence).

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    4. @Rob trebling the cost price would give you a GP of 66.7%. Yr multiplier is 2.5 to get 60% - I think?

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    5. Hi stringers, I was assuming cost price without VAT, selling price with.

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    6. No worries. Just doing a bit of numbers as an example:
      - £65 cask with 60% GP, works out at £2.87 /pint and a profit per cask of £97.50.
      - £85 cask with 60% GP, £3.75 per pint and £127.50 profit.
      - To get £97.50 profit on your £85 cask you end up with a GP of only 53% but the pint costs £3.22.

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    7. Of course, assuming you are doing full absorption costing, you have to factor in your fixed costs, which accrue by the hour rather than by the cask. A cheaper beer might sell quicker, and thus absorb less costs, to the extent that you might find that you actually make more money per hour by charging less.

      Publicans who just blindly add a fixed GP to their products are probably doing themselves out of business. Psychologically, the difference between £3.95 and £4.05 or between £4.95 and £5.05 is quite significant, to the extent which people are likely to switch to cheaper beers altogether.

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    8. Example: If you get through your £3.22 beer in ten hours on the bar, your profit on that beer is £9.75 per hour, but if it takes 20 hours on the bar to at £3.75 a pint, then your profit is only £6.35 per hour.

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    9. Yes, but there isn't (typically) just the one pump. And compared to the overall costs, adding another one isn't a big deal (until you run out of space). And costs accrue (in the cellar) even before the beer's on sale. It's not clear (to me at least) that SPQR (which is what this is, essentially) is always a great strategy, you're liable to be sucked into a race to the bottom. And wetherspoons own that. But I'm not much of a business head.

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    10. ... but you're right of course, and I'm sure many wise publicans don't apply a fixed GP across their range. I suspect the price range is generally narrower than that. (Sometimes even flat across the bar, or at two or three price points only)

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    11. I think you'll find most publicans are a bit more sophisticated than has been made out above, and are well aware of the power of ducking below eg a round-pound level. Conversely they won't be afraid to bump things up a few pence to fit in with an "expected" price - and then perhaps publicise a discount or combo deal to get people in on a quiet night.

      Also the idea of mixing profit models so that the cheaper stuff is on a %GP and the more expensive stuff is on a cash margin of £x per drink is not unfamiliar. And given the expectations of cask drinkers, you may well find the exotic stuff on cask being subsidised by the cheaper pints on cask.

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    12. Yes qq, plenty are well aware and think through their pricing carefully. And I'm sure some pubs do work on a profit/pint model (e.g Grove in Huddersfield I'm pretty sure must do). But I wasn't really thinking about the many-cask venues, more those with 2 or 3, and they have cheap rubbish on.

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  5. I wonder if a price premium to consumers at the point of sale would necessarily find its way to the hard-pressed brewers of high-quality cask ale? If pubs operators really believed that their customers had a propensity to pay more for high quality real ale, then they would surely already price it accordingly, and pocket the surplus as additional margin. This premium would be unlikely to find its way back to the brewers at a time of market saturation and fierce competition for cellar space. Brewer margins will remain squeezed until such time as supply shrinks to a sustainable level, or they find ways to reduce production costs (maybe through more efficient asset utilisation).

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    1. It kinda works the other way - the "premium" brewers generally already charge that premium on the casks, it's then up to the publican to discover if his clientele can support that premium on the taps, or subsidise it with other stuff just because s/he wants the halo effect of having that product on the bar.

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  6. A number of beers do seem to hold a price point above other beers. As if punters see them as being worth more. On cask, Timothy Taylor Landlord is always a pricey pint.

    Other none cask examples are Carling & Guinness which have a loyal set of punters that ask for it by brand and do not consider cheaper options, much to the bemusement of the beer commentariat.

    How you set up a brewery among 2000 others and go about establishing a brand that punters recognise and see as a mark of quality is another matter. Passive aggressive blogging, tweeting and moaning that pubs won't pay a premium for your casks and cheaper breweries exist producing less distinctive beers appears to be in vogue.

    Brewdog seem to have cracked it. Lots of imitators less so.

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    1. I'd say Thornbridge have cracked it to some extent too.

      Re Landlord, the problem is that it sells at a premium in pubs that can't look after it properly.

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    2. In any given pub, there is rarely more than 10p difference between Carling and other standard lagers, like Fosters and Carlsberg, or the resident cooking bitter. Guinness is often priced in the same bracket as a premium lager, like Kronenbourg. Punk, where it is available, tends to command a small price premium again, although I've been in (normal, not craft) bars where Dead Pony Club was available for less than the premium lagers.

      Its hard to report accurately on the range of prices for cask ales, because they're rarely displayed, and if I'm honest, I don't always pay a huge amount of attention as to how much change I receive - I rarely go to the pub by myself, so never buy single pints.

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    3. Brand reputation/value is not fixed. It's tested with every experience.

      Control over the supply chain appears a method of quality assurance. Making sure a quality product reaches the end consumer. If you don't keg it, don't sell it to those that don't do it right or sell it through your own outlets. Far easier said than done when you're building a business and need sales and cash flow.

      Over the years I've found it interesting what Robinsons have attempted to do, moving from generic regional/local bitter to a respected established and known premium brand. In some parts successful, especially in off sales, but often let down by being able to do nothing about tenants in some of there own pubs trashing the brand with ropey beer.

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    4. Fosters or Carlsberg is often the cheap lager offer in Greene King, Spoons and many food chains. Carling never so. Guinness is usually at the top end of whatever prices are charged.

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    5. @Cooking Lager
      There's huge regional variations in these things - oop north you might see Carling outsell Fosters 9:1 if they're on at the same price, but the reverse if it was down south. And it might take a 30p price differential to make it 1:1.

      Coors seem to accept Carling as the old man's lager, but use it to get Coors on the bar for the yoof market.

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  7. The problem with trying to price cask beers by quality is that the variation in intrinsic quality is overwhelmed by the variation in final quality introduced by the way it is kept and served. On the day The Boring Brown Bitter at the Dog and Duck might be the best drink in town whilst the Super Bearded Docks Bollocks at the Crafty Whistler might be undrinkable vinegar.

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    1. Well done David, spot on. Quality in the pub will almost always count for more than in the brewery.

      On Cloudwater, I distinctly recall the Cloudwater Bitter being priced at a premium compared to similar beers in the York Tap, where it was my beer of last year. I'd certainly pay a 50p premium over say, Guzzler,in the Tap, but I wouldn't if I saw it in a Greene King pub with 10 pumps.

      Martin (who's not anonymous)

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  8. One thing is for sure is that this topics has generated a *lot* of comment. I've got so confused with the debate, that I need an executive summary!

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