Dollars & Sense
Why Does the Price of a Craft Beer Vary So Widely?
We break down the cost of a beer to understand why there is no consistency in pricing.
These day ordering a craft beer in a bar, usually comes accompanied by a shot of confusion: How much will this pint cost me?
I may pay $4 for a “pint” of pale ale at my local brewpub, or $7 in a city bar. Pints start at $9 or $10 at beer bars in Las Vegas, and I may be expected to pay up to $15 for a pale ale in Manhattan (seen it happen, friends). I say “pint” in quotes because in most places you’re going to get the standard-looking glass, but what it actually contains usually ranges between a miserly 11 ounces to the full 16 ounces. The amount depends on the owner’s whim (or profit margins), so caveat your emptor on that, too.
So why does the price vary so much? There are a variety of reasons.
First off, this isn’t Uncle Sam’s fault. Unless you live in the handful of states with abnormally high beer taxes (Tennessee, Alaska, Alabama, Georgia and Hawaii), beer taxes in the U.S. are relatively low. Even in Tennessee, it’s only $1.29 per gallon, plus about a dime a gallon in federal tax for most craft beers—that breaks down to about 17 cents a pint. It’s an annoying sin tax, but it’s not gonna break you.
And production costs are fairly standard across the board. So why are there differences in price?
Well, big strong beers cost more, for reasons both obvious and not so obvious. There’s more stuff in big beers, to be sure, but the way they push the envelope also lowers the brewing efficiency; it’s as if you have to add 50-percent more malt to get 20-percent more alcohol. But that’s true for almost everyone, everywhere.
A standard craft-type IPA costs about $80 per 31-gallon barrel to brew, produce and package. That’s includes everything that goes into it: ingredients, energy, all costs of labor, equipment and maintenance. An exceptionally hoppy and hefty IPA will cost more, and a lager’s longer cold aging will raise the price a bit; a session beer, with less malt, may be a bit less. (And special projects that require exotic ingredients will, naturally, increase costs.) But, again, those differences in production costs will be pretty constant for all brewers.
However, there are some exceptions at the extremes. A very successful and large craft brewer, think Dogfish Head or Deschutes, one that’s able to use bigger and more efficient equipment and get significantly better prices on materials, is going to have a notably lower cost than a tiny operation that’s working a lot harder to make a much smaller amount of beer. That’s how that $15 pint in Manhattan happened, for example; it was Maine Beer Company’s Peeper, and they were brewing on a tiny and inefficient system at the time, which produced a very small output. You, of course, have to pay a premium for rarity.
Once the beer’s brewed and packaged—and costs are higher for bottles or cans than for draft kegs; efficiencies again—they have to sell it. Sales staff, marketing, promotion, labels, all that stuff adds up, depending on how much a brewer wants to spend. (All those branded sun umbrellas, glasses and coasters aren’t free to make!) Don’t forget the last thing: profit. If a brewery isn’t making money, it’s going down. Again, the bigger the brewery the lower the profit margins, since they’re selling so much.
Figure all that in, and it’s time to actually come up with the price, and that’s quite complicated. The brewer has to make money, but they also have to work through the steps between their loading dock and that beer sitting on the bar in front of you to figure out what to set their wholesale price. Up until recently, beer prices have been pretty similar across the board no matter which brand you ordered. Maybe a bit more for an import but not much. However, over the last 20 years or so, the number of small craft brewers have exploded across the country and has thrown the standard pricing system out the window. Many consumers equate quality and price and as a result a number of these upstarts are charging a premium to make themselves stand out.
There are also two big steps that add 20 to 30-percent each to that price: the wholesaler, and the retailer. The wholesaler is like a grocery wholesaler, they provide choice and convenience and bulk sales to the retailers. They move the goods from producers to stores and bars. There’s an important difference, though: in beer (and wine and spirits, too), wholesalers are legally required. Except for a few loopholes, producers may not sell beer directly to retailers, they must sell it to the wholesaler, who then sells to the retailer...while, of course, tacking on their mark-up.
The so-called the three-tier system—producer, wholesaler, retailer—was put in place to prevent the big brewers from putting pressure on retailers. That kind of economic pressure, and the graft and corruption it encouraged, was one of the major reasons Prohibition was enacted. When Repeal came along, the three-tier system was put in place to insulate retailers from the producers.
A pint was maybe a bit cheaper in smaller towns and a bit more in bigger cities, like just about everything else. But there has been a lot of wholesaler consolidation in the past 20 years, which has cut down on competition, and allowed wholesalers to put more lobbying pressure on state governments. Less competition at the wholesaler level means that they can effectively set prices across a wide area, sometimes across state boundaries. Once brewery profit, advertising and promotion, shipping, wholesaler markup, and taxes are added in, that $80 keg is closer to $180.
You might want to sit down at this point when you realize how much money that keg of beer brings in for a bar when it’s sold one pint at a time. A keg of IPA is going to realize $840 for a bar when it is sold at $7 a pint. But a bar, of course, has a lot of costs; even more than a liquor store. There’s the staff, the furnishings, rent, entertainment, licenses, a kitchen, maintenance, advertising and much higher insurance, including litigation coverage.
And then there’s the question of how much people think they should pay. A bar that wants to attract an upscale clientele will raise prices. A bar in a college town that’s going for the dependable, high-volume newly legal drinker will lower them and sell pitchers. A restaurant will likely raise prices; a corner taproom not so much.
When you think of all that, you realize that if the prices are too high where you’re drinking, you can almost always find a place where they’re lower. It’s a question of whether you want to drink there. If that’s not working for you, you can always drink at home. The prices are a lot more reasonable there, but it’s always that same old crowd!