Beeronomics: Factors Affecting Your Pint

We see beer at sporting events, parties, and backyard barbecues, but how many of us have ever thought about what goes into that can or bottle? Not the ingredients—the economics. The brewing industry is quite complex, and it takes more than just a brewing technique to get your favorite beer into your local store or bar.

Beer, like any good, follows the rules of supply and demand. If one of its ingredients, such as hops, gets more expensive, the end product's price can go up. If grain prices skyrocket due to increased demand for grain-based ethanol to fuel vehicles, beer prices can also rise. What makes beer unique is its reaction to different economic conditions and how your government regulates it.

What Type of Good Is Beer?

The economics of the beer industry can be quite complex. Beer could be considered a normal good, meaning demand increases as incomes rise, or an inferior good, meaning demand decreases as incomes decline. Also, when beer prices rise, some consumers might opt for lower-cost alternatives such as wine or liquor. In some cases, beer can be considered a luxury good, meaning demand outstrips increases in income.

Although some research tends to support the idea that beer is a normal good, the beer industry is not homogeneous. In other words, there is a wide array of beer types available at different price points. As a result, each segment of the overall beer market may react differently to economic cycles. Traditionally, the industry of brewing has often been considered "recession-proof." For example, the stock of major beer-producing companies rose during the dot-com bust of the late 1990s.

Beer Sales and Recessions

Although it's logical to assume that the sale of cheap beers increases during recessions, leading to a decline in demand for high-end beers, the correlation between the sale of beer and economic downturns can be complicated.

During the spring to early summer of 2020, the U.S. economy entered into a recession due to the coronavirus pandemic. In-store sales of subpremium beer rose by more than 11% versus the same period a year earlier. The increase in sales was despite many restaurants and bars being shut down for the pandemic lockdown. At first glance, one might conclude that consumers were attempting to save money by opting for cheaper alternatives amid the recession.

However, although sales of cheap beers rose, so too did the sales of all types of beers. According to the market research company IRI, overall beer sales were higher than cheaper beer sales—up by 27.5% in 2020 versus the same period in the previous year.

Also, off-premise alcohol beverage sales increased in 2020 by more than 10%, including premium beer, wine, and liquor, due to consumers being stuck at home during the pandemic. Despite the increase in demand for subpremium beer, sales have been lagging and losing market share to imported beers, which were up by 15%, and craft beers—up by 23%.

Post-COVID, the beer industry has started to evolve. The e-commerce industry for alcohol is playing a key part in industry growth, with e-commerce sales more than doubling year-over-year for certain manufacturers. The same report found positive import growth for the United States, and overall sales of COVID are expected to fully recover across the industry by 2025.

Beer Supply

The supply of beer has seen several changes in recent years, with increased production from traditional breweries, the emergence of "craft" breweries (those that use more traditional brewing ingredients and methods), and microbreweries (lower-volume producers).

While the offerings of these two new types of breweries tend to be more expensive than traditional beers, it's not necessarily due to prestige pricing. In the beer industry, the economic law of supply and demand tends to hold up, meaning if demand for a particular beer is greater than the amount the brewer can pump out, prices tend to be higher.

Larger brewers benefit from economies of scale, meaning they can procure materials in bulk, have easier access to efficient transportation (beer available in more markets), and can produce a large volume of beer. As a result, large brewers of mass-produced beer can offer lower prices compared to smaller breweries.

More craft and microbrew beers have come into the market due to a combination of factors, including regulation changes—President Jimmy Carter signed a bill making home brewing legal in 1979. Also, post-Prohibition rebuilding, in which many brewers declared bankruptcy during the American Prohibition and shifting consumer tastes, have led to an increase in offerings in the beer industry.

Although craft, microbrew, and traditional beers may target different markets, the overall effect of a rise in the number of brewers is an increase in supply and an increase in competition.

Distribution and Regulation

The distribution of alcohol generally falls into a three-tiered system, which came about post-Prohibition. Interestingly, this system requires all alcohol (there are a few exceptions) to pass through a middleman. The main reason for establishing the system in this way was to limit the producers' ability, such as brewers, to own the two primary phases of the industry: production and retail.

The fear was that if big producers controlled everything (like a Standard Oil of alcohol), consumer choice would be limited, and everyone would be worse off. While this has worked to some extent, the regulation has created several headaches, and even a Supreme Court case (Granholm v. Heald).

The three tiers of the system are below.

First Tier

The first tier is comprised of the brewers and manufacturers that produce the beer and supply the wholesalers.

Second Tier

The second tier is distribution. Producers will often provide exclusive rights to a certain company to distribute its product to different retailers, and the post-Prohibition landscape usually makes distributors powerful entities within each state. This reduces competition and can raise prices since fewer distributors mean less incentive to lower prices.

Some states have regulations further defining the relationship between the brewer and a distributor, even legally binding a brewer to a distributor. This can create a headache for consumers since disputes between brewers and distributors can result in certain beers becoming unavailable in an area.

Third Tier

The third tier is the retail sector in which the general consumer can purchase the product, whether that be a grocery store, bar, or state-regulated vendor. As with many things, there is an exception: brewpubs—restaurants or pubs that produce beer on-site for sale on site.

A Unique Beverage

Beer sales are regulated, unlike other drinks such as carbonated beverages and fruit juices. The supply and sales of beer are closely monitored by local, state, and federal governments since it is considered a "vice."

Municipalities regulate the sale of alcohol, either through state-sponsored stores, taxation, or other limitations, to raise funds or control residents' access to alcohol. Political reasons aside, this can dramatically affect the supply of beer, which can increase its prices. Limiting the number of suppliers, such as grocery or convenience stores, effectively reduces competition, which can lead to higher prices.

The Bottom Line

Whether relaxing at home or out with friends, the beer in your hand is more than mere liquid refreshment. The beer industry is complex, shaped by supply and demand, production and distribution, and regulations.