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.