Saturday, 25 November 2017

Does dearer mean better?

“Craft beer costs more because it uses better ingredients to produce a higher quality beer.” It’s almost become received wisdom nowadays. But I was interested to read an article recently suggesting that this may well not be the case.

“A big misconception is that craft brewers use better grains or hops, or that they use superior products to create their beers than the larger-scale producers,” Fritts said. The craft brewers themselves have encouraged that misconception, but Fritts said it’s not so.

“Busch, for example, isn’t using worse grain or products, they’re probably using better or at least as good,” he said. “They’re just making a product that they know their audience wants.”

Part of the argument is about strength. The situation in the US is different from here, as beer in general is taxed at a flat rate rather than proportionate to strength, so any additional expenditure on materials will not be multiplied by additional duty. Clearly a stronger beer will need more materials per gallon, but it’s important not to confuse strength with quality. This happened in the article by Pete Brown I dicussed here, where he was arguing that a £9 pint showed how people should be prepared to pay more for top-quality beer, but omitted to mention that the main reason for it being so dear was that it was 10.5% ABV.

I have no professional involvement in the brewing industry, and so can’t speak from the horse’s mouth in terms of a cost breakdown. But I think it’s fair to say that the impact of direct costs on the price paid over the bar is considerably less than often supposed. I do, though, have information as to the prices actually paid for beers at our local beer festival.

For example, we bought some beer from a well-regarded local micro that successfully straddles the border between cask and craft. For a 3.9% beer, the price was £67 for a firkin, or £80.40 plus VAT. That is £1.12 per pint, for a beer than would usually retail at three times as much. Let us assume that direct brewing costs, excluding labour, overheads, distribution etc, account for half of that. That is 56p a pint, or a sixth of the retail price. I assume this brewery are already using pretty high-quality raw materials, but if they decided to splash out and increase that by 50%, it would still only be one-twelfth of the price the customer pays.

Of course the way the industry tends to work is that pubs apply fixed mark-up percentages, so any additional wholesale cost filters straight through to the price paid across the bar. But it does not need to be so, and in general the biggest factor affecting the retail price is not the purchase cost but the level of mark-up involved. Within a couple of miles of my house, I can easily pay 33% more for the same, or similar beers, in pubs that aren’t noticeably smarter than the cheaper ones. That has nothing to do with beer quality, and everything to do with pub operators’ financial models.

One obvious difference is that some craft breweries use a lot more hops, or exotic varieties of hops. But what proportion of the overall cost do hops represent? At a guess, no more than 10% of direct costs, and that’s probably an overestimate. Or 6p a pint. Even if you double it through buying special hops grown on the south-western slope of Mount Rainier and watered with otters’ tears, it’s hardly going to make much difference to the end price.

In fact, rather than ingredients, it’s likely to be in overheads that craft beer costs more to make per pint. Small breweries will be more labour-intensive than big ones, and also less energy-efficient. Their costs may genuinely be higher, but that doesn’t necessarily equate to a better end-product. I’m not really that interested in whether my pint is a labour of love resulting from backbreaking toil.

Returning to the original article, I’d be very sceptical that craft brewers actually are using significantly better raw materials than their bigger brethren. My guess would be that the likes of Robinsons and Fullers aren’t using any worse ingredients than the typical microbrewery, but they’re certainly paying less for them because of economies of scale and the skills of professional buyers.

I’m not saying there’s nothing in it, but in practice, once you strip out any effect of strength differentials, the impact of better ingredients and production processes is pretty trivial as a part of the over-the-bar price.

And, as I said in the blogpost I linked to above, in the early days of CAMRA there was often, broadly speaking, an inverse relationship between retail price and quality.

If anyone has any actual cost breakdowns of brewery costs, then I would be very interested to see them.

19 comments:

  1. Undoubtedly the smaller brewers must have less buying power,whether craft keg or not. But they also can be more fleet of foot savings wise,and I know a medium brewer and chain who claim they have higher costs off the record to feed their management structures some by necessity of size and employees. Undoubtedly also some smaller brewers do have to reserve and shell out a fortune for a particular hop etc.You are right I feel to question though. I become highly suspicious when the occasional in trend brewer starts mentioning their very high prices as being due to their high moral and ethical stance in looking after their staff or investing. Many at the other end of the price spectrum,also do that,also produce excellent and innovative quality and brews,and look after investment and staff without going on about it.

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  2. Interesting to read this alongside your previous post. I often hear and read that those best sellers (and Plum Porter and Sam Smith's OBB) are much cheaper to produce than "craft" beers, which is why the latter are much more interesting. So what do those handful of hops add to the price of a 4.0% pint of (say) Mallinsons or Oakham compared to a pint of OBB then ? And it's not just Sams. Plenty of smaller breweries in greater Manchester (Prospect, Allgates) knock out beer well closer to £2.50. Yu can't explain all of that differential by property costs or lack of hops.

    Martin

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  3. Cloudwater have some figures for the ingredient cost of a "standard" beer vs their DIPA stuff here...

    http://cloudwaterbrew.co/blog/on-the-values-of-beer

    Basically, the cost difference, once the disparity in ABV and packaging is taken into account, comes down to the massive amount of cold-side hops (25g/L, or ~50p per pint, they claim). That's an astronomical amount of hops, and can't be representative of all craft beer...

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  4. There's a comprehensive breakdown of costs from Beer Nouveau here http://beernouveau.co.uk/costs-quality-again-and-that-elusive-profit/

    Looking at some of the costs I can't help but think they're exaggerating a great deal to justify their high prices but the proportions seem right. By contrast, I believe the net profit of a pint of Sam's OBB is around 20p. Brewing beer is very profitable if you have economy of scale.

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    1. So according to those figures, for a 760-litre batch (1338 pints) his total direct brewing costs come to £406.75 inclusive of VAT, or 30p per pint. Which is even less than I'd assumed in my post. And I doubt whether for most beers the cost of hops is more than the cost of malt. Plus that's a 5.6% beer, for which the material costs will obviously be greater than for a 4% one.

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  5. Disparaging big operators is all part of the game. Whether suggesting Carling use poorer quality ingredients or Wetherspoons sell short dated stock. It’s about justifying your own higher price by claiming it better.

    It’s never held water. You can’t produce beer on the scale of Carling or sell it on the scale of Wetherspoons by bottom scraping a market. You need an established supply chain of agreed standards and prices.

    Very little noise is made about process. The ingredients of my lovely cooking lager may be no worse than a Budvar but the brewing process & lagering times differ making for a different product and accounting for the higher prices and value of the latter.

    The value in Craft is not in the ingredients but in the process. Just as a suit is just wool, a bespoke one has higher value than an off the peg one. The value is in the fit of the suit & that is achieved through a more expensive labour intensive process. If craft beer can get that message across it has a more meaningful narrative about its product.

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    1. The fallacy that cost of ingredients sets the cost of sale is seen at its extreme with whisky. A 25year old whiskey will cost ten times as much as a ten year old one despite using exactly the same ingredients (probably bought more cheaply0 and paying the same tax.

      The correct price of an item, as an arch-capitalist like our host must agree, is exactly what the punter will pay. And if beer snobs will pay £9 for a pint of Piddling Dog, flavoured with pony droppings then good luck to the brewer. I'll stick to my £2.40 Abbot at 'spoons.

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    2. Absolutely. Nothing has any intrinsic value beyond what people are prepared to pay for it. The crafties moaning that the beer market doesn't properly recognise the value of their efforts are railing against reality.

      There is, however, a cost both in terms of financing and warehousing in keeping maturing whisky stocks for longer, so the cost of a 25-yo isn't identical to that of a 10-yo.

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    3. Is there really much more to the "craft" process in terms of quality? I've drank Farmer's Glory from Wadworth's and that's great tasting beer, produced on a large scale. I've had beers from small breweries that was no better. I think that what small breweries do well isn't so much about quality as filling niches, whether that's spiced beers, fruit beers, high hops or high malt beers.

      There's a lot of misplaced thinking out there about "small" and "handmade", that they're somehow better. Companies advertise that food stuffs are hand made, as if that's better than a machine. For personalised goods (like a tailored suit), it's true. But for things produced in almost any scale, machines are not only cheaper, but more reliable and less error-prone.

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    4. Of course. But the point I was making is that the cost is not just set by the cost of materials. And one ten year old malt can be substantially more expensive than another simply because it is perceived to be better.

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  6. A lot of unmalted barley is used in Carling, which is cheaper than buying malt. And big industrial beers are brewed to high gravity and diluted prior to packaging which is cheaper than brewing to sales strength. I suspect the biggest saving comes from the lack of labour required though. A giant beer factory needs very few staff to make a very large amount of beer, whereas a small manual brewery needs lots of people to make a small amount of beer.

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    1. Well yes, small breweries are less economically efficient than big ones. And if you are paying extra, a lot of it goes on low-productivity labour rather than better materials.

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  7. This may not be pertinent to the topic at hand but in North America many of the larger brewers make adjunct lagers:

    https://www.beeradvocate.com/beer/style/38/

    The focus is less on flavour and more on mass production and consumption.

    On a hot day I can sort of see the point, but not on a regular basis.

    Cheers

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    1. Pretty much all of the UK mass produced lagers use adjuncts, often rice flour but potato starch and corn syrup make appearances. Apparently rice flour makes a clean, light taste. Flavourless insipid p**s to the rest of us.

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    2. "Flavourless insipid p**s to the rest of us."

      Heh.

      Over here we call it "making love in a canoe"... because it's effing close to water. :)

      Cheers

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  8. Have you ever wondered why CAMRA have never campaigned on ingredients listings?

    It is basically because most real ales contain additional sugars that you would classify as adjuncts.

    Some lagers do certain rice, maize but many are all barley as per the information on the can.

    They like the myth that real ale is pure and natural & canned beer is chemical and artificial and have been smart enough to not push for something that would expose that myth for the bollocks it is.

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    1. I may be wrong, but I'm sure I've read that Carling is an all-malt beer. Not that that particularly matters, of course - it depends what the other fermentable materials are. Many of the highly-regarded Belgian Trappist beers include some candy sugar in the mash.

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    2. There is already a market where customers see value in purity of ingredients & know what is in beer and avoid adjuncts. It's Germany.

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    3. It's sometimes argued that the Reinheitsgebot tends to limit innovation in German beer and make the beers, while often excellent, taste a bit samey.

      Some years ago, CAMRA proposed introducing a "Pure Real Ale" accreditation for beers that were felt to stand out from the crowd in terms of quality. One of the criteria was a minimum 90% malt content in the fermentable material. However, an AGM motion changed this to 100%, which left it effectively dead in the water. I've not been on a brewery tour for a while, but you always used to see sacks of invert sugar lying around.

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