Why Price Increases Are
Brewing for Craft Beers
By DAVID KESMODEL and JANET ADAMY
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 hops are to Samuel Adams what grapes are to wine," says Jim Koch, founder of Boston Beer
Co., maker of Samuel Adams Boston Lager, one of America's
fastest-growing beers. The company 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
|Jim Koch, right, with Bavarian hops farmer Stephan Stanglmair.|
"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 company only buys hops that are grown on several
thousand acres in Bavaria, and the crop has been smaller in the past
two years, making them more expensive, Mr. Koch says.
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. "People are very concerned," says Kim Jordan, co-founder of
Colorado's New Belgium Brewing Co., which makes Fat Tire Amber Ale, a
top-selling craft beer. "It significantly affects profitability."
Big American brewers like Anheuser-Busch Cos. and SABMiller
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. A
barrel of craft brew Sierra Nevada Pale Ale, for example, has about
twice the malt and as many as five times the hops of a mass-market
brew, like Budweiser or Miller High Life.
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 PLC and Fortune Brands Inc., also face a relatively limited impact from global increases in the cost of grains such as corn.
The craft-beer segment has been among the few bright
spots in the slow-growing U.S. beer industry. The number of barrels of
craft beers sold rose 11% in the first half of this year against
year-earlier levels, according to the Brewers Association, a craft-beer
trade group in Boulder, Colo. Meanwhile, the Beer Institute, a
Washington-based industry group, projects total U.S. beer sales, by
barrel, will rise 1.5% this year. The boom in craft beers reflects
heightened awareness of their brands and a willingness by American beer
drinkers to pay an extra $2 or $3 per six pack to get a premium product.
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
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. Some European brewers are competing with
American brewers for hops grown in the Pacific Northwest.
For years, hops were cheap due to a glut. That
prompted growers over the past decade to replace hops with other crops,
such as apples. Now, the amount of hops acres world-wide is about half
the total of 12 years ago, says Ralph Olson, a hops dealer with
Hopunion CBS LLC in Yakima, Wash. That's caused some hops varieties to
quadruple in price over the past year, he says.
To cope with higher malt and hops prices, smaller
brewers are trying to secure longer-term contracts for the ingredients.
And, in some cases, they're tweaking their recipes.
At Bell's Brewery Inc. in Comstock, Mich., founder
Larry Bell says he is substituting other varieties of hops into the
brewer's Bell's Oberon Ale and Bell's Lager because he could only
secure 60% of a Czech Saaz hops that he normally uses in the beer.
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
"I am concerned that there could be some small players
out there that will fail because of this," says Mr. Bell, whose brewery
sold its first beer in 1985.
Boston Beer has inked long-term contracts for some of
its ingredient needs. But many smaller brewers, such as Allagash
Brewing Co. in Portland, Maine, buy hops and malt on the open market,
exposing them to huge price swings. 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
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.
Dogfish Head Craft Brewery Inc. in Milton, Del., is
coping by trying to make its operations more efficient, locking in
commodity contracts as early as possible and weighing a price increase,
says brewmaster Andy Tveekrem, whose company is known for "hoppy" beers
like 60 Minute IPA, or India pale ale.
"I think there's going to be some brewers out there,"
Mr. Tveekrem says, "if they haven't looked that far ahead, that
actually might run out of malt or hops, which would be a catastrophe."
Write to David Kesmodel at firstname.lastname@example.org and Janet Adamy at email@example.com
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