The Economics of the Craft Beer Revolution

Beer is a staple part of many households’ weekly budgets. It’s found in your typical home cupboard, served in your typical restaurant, and consumed at your typical work function (often rather excessively). But for suppliers of this staple beverage, whether they are breweries, retailers or wholesalers, the last thing they can do is treat beer as “typical”. Frequently changing market conditions mean that members of the beer industry must always be on their toes, lest they be faced with problems with supply chain and inventory management that can translate into large financial losses, or losses of customers.


Beer Market

The market for beer is complex as beer is not a homogenous product. Beer differs widely in taste, alcohol content, and price, and this segments the market such that certain events affect the supply and demand for certain beers and not others. Broadly speaking, beer can be considered a “normal good”, in the sense that when incomes rise, demand for beer will rise also. Beyond this, retailers and wholesalers will need to be aware of the nature of supply and demand for the particular beers that they sell.


There are many factors affecting the demand for beer. Seasonality is one main factor. Demand for beer tends to peak during summer months, when there are holidays and more favourable weather. Incomes also influence demand, although studies have shown that rather changing their total consumption of beer when incomes rise or fall, consumers tend to buy different types of beer. They will typically switch from more expensive to cheaper varieties when incomes fall, and vice versa. Changing consumer tastes will also affect demand. For example, a recent trend is that craft beers have become much more popular over the past few years, taking the demand away from more standard, less “exotic” types of beer. Such changes in taste are difficult to predict, but sellers who can keep up to date with the current trends can adjust their orders or production mix accordingly.


As two of the primary ingredients for beer are a starch source like malted barley, and flavouring (usually hops), both being crops, environmental factors such as weather and insect infestations have large impacts on the supply of beer. Retailers and manufacturers can mitigate risks associated with these by contracting years into the future, although it may be difficult or impractical for smaller, specialist breweries to do this. Another factor that is influencing the supply of beer is the aforementioned shift in tastes towards craft beers. These beers typically require more hops to produce, and this increased demand for hops is limiting the hop supply. Shortages like this will balance out once growers make the necessary adjustments to their hop production, but in the meantime it will mean rising prices for this key ingredient, which will be felt directly by brewers and passed down the supply chain for other sellers.


For consumers, beer is a common beverage, enjoyed by many as a routine part of their lives. For those who want to produce and sell beer, the market for this beverage is a complex one, as it is a segmented market, and because of the various factors that can affect supply and demand. The above discussion has canvassed some of the main factors that producers and suppliers of beer should be aware of when making investment decisions around inventory and sales. The next step for any member of the beer industry is to find the particular supply and demand conditions for the beer that they sell.


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