As the Price of Beer Rises, is Inflation a Concern?

Includes: BEAM, DEO, SAB
by: TraderMark

From the WSJ Online:

Why Price Increases are Brewing for Craft Beers
  • That six pack of high-brow beer is about to come at a higher price,thanks to the sharpest surge in decades in the cost of the hops and barley that give each brew its distinctive taste.
  • Consumers could pay 50 cents to $1 per six pack more in the coming months for many small-batch "craft beers," as brewers pass on rising hops and barley costs from an unpalatable brew of poor harvests, the weak dollar and farmers' shift to more profitable crops.
  • Other makers of craft beers, the fastest-growing segment of the U.S. brewing industry, say they may eat the higher ingredient costs, which will pare their profits.
  • The company (Boston Beer) has raised its prices just over 3% this year to help offset the hops and barley costs. Mr. Koch says that for next year, the company is "probably looking at the same or maybe more."
  • "The cost increases have been the largest we've ever faced, both in barley and in hops," says Mr. Koch, who founded the company in 1984.
  • The cost pressures could slow the expansion of American craft brewers, which account for about 5% of U.S. beer revenue, and even put some smaller ones out of business. Craft-beer makers also are battling other cost increases, including higher prices for glass, cardboard, gasoline and the stainless steel used to make beer kegs.
  • Big American brewers like Anheuser-Busch (BuD)Cos. and SABMiller (NYSE:SAB) PLC's Miller Brewing Co. also face cost increases, but the impact isn't nearly as great for them. They use much less hops and barley in most of their beers, which is why they are lighter in taste and calories. (thank god for that eh?)
  • Large beer makers are also better able to secure long-term contracts to mitigate the impact of rising ingredient costs. Most spirits makers, such as Diageo (NYSE:DEO)PLC and Fortune Brands Inc.(FO), also face a relatively limited impact from global increases in the cost of grains such as corn.
  • Craft beer makers have faced escalating costs over the past year. Prices for malting barley, which accounts for a beer's color and sweetness, have jumped as farmers increasingly shifted to planting corn, which has been bringing higher prices because of high demand from makers of biofuels, like ethanol. The weak dollar also has made it more expensive for U.S. brewers to buy commodities from Europe.
  • The news worsened for craft brewers significantly in recent weeks. Firms that turn barley into brewing malt informed craft brewers of price increases ranging from 40% to 80%, and hops suppliers announced increases ranging from 20% to 100%, depending on the variety of hops.
  • The price of hops -- which give beers their bitterness and aroma -- has risen because of shortages across the globe, due in part to poor crops in Europe.
  • Mr. Bell says employees who test beers at his company haven't been able to detect a change with the new hops and that he won't make any changes that will compromise quality. Starting next year, he anticipates he will raise the price he charges beer wholesalers by 50 cents to 60 cents per case. Customers may see an even higher price increase because retailers typically mark up beer even further.
  • Rob Tod, president of Allagash, says the company expects to absorb some of the recent cost increases. But it will likely impose some price increases, resulting in a four-pack of its Allagash White costing about $9 at retailers in the Northeast, up about 50 cents. "We're getting hit on all sides," Mr. Tod says.
  • Ken Grossman, the founder of Sierra Nevada Brewing Co. in Chico, Calif., says the brewer plans some price increases, but it's better positioned than others because a price spike for hops in the early 1980s prompted him to sign long-term contracts. "I've gotten calls of panic from other brewers," he says.

Mmmm... no inflation here. Move along. Nothing to see.

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