Tuesday, January 15, 2008

Exchange rates: closing a door, or opening a window?

"When the Lord closes a door, somewhere he opens a window."

It's a quote from The Sound of Music, where the Mother Superior of Maria's convent is telling her that there are many ways to serve God, so when one path is closed, it doesn't mean you can't continue on your journey. I thought about that on Friday when I was talking to a booze analyst about the imported beer market. It's for a story I'm doing for Cheers, so I won't get into the numbers, but I don't think it's a surprise to anyone that exchange rates are hiking the U.S. price of most imported beers.

Along with the well-publicized rise in the price of hops and malt -- which is pretty much world-wide -- lower values of the dollar vs. the Euro and other currencies mean that beers from Europe, Asia, and yes, Canada, cost more than they did a year ago (wonder if that's affected the price of Blue Moon, which MolsonCoors is currently brewing in Canada?). If you want to buy a fine Belgian ale, a crisp Bavarian lager, or a big bottle of Unibroue, the price curve on your decision will be steeper. From Heineken to Salvator to Rochefort 8, import beers are bound to take a hit in sales, particularly with all the election year scare-talk about a U.S. recession (Congress and Bush are talking about a "stimulus package" before we've even seen any evidence of a recession -- not that either party is pandering or anything).

But if that door to brewed Heaven is closing, surely a window is opening for craft brewers and the Big Three (maybe even Pabst and the remaining regionals). Increased costs in hops and malt may mean price increases -- okay, it does mean price increases, and we're seeing them already -- but the foreign brewers have to add that increase on top of the exchange rate premium. American beer becomes more competitive, more attractive.

We're already seeing that in the majors: mainstream premium beers like Budweiser, Coors Banquet, and Miller High Life are all up, the first major uptick for them in years. People are starting to look at the price of a sixer of import lager, and of a sixer of Bud (and maybe thinking about the latest ads from Miller and A-B, which are hitting themes of solid value, 'regular guy' appeal, and even patriotism), and picking up the American beer.

Don't dismiss that factor in specialty beers. I expect to see more traffic in American-brewed versions of Euro-classics -- assuming American brewers continue to get better at brewing them -- and more experimentation with 'American' styles by both brewers and consumers, maybe backing off the extreme hops or at least moderating them. But I also think we're going to see even more solidification of flagship brands by craft brewers, as people 'hunker down' a bit to ride this out.

Make no mistake: the people who read this blog and the ones over there to the left, the people who read and post on BeerAdvocate, ratebeer, and Real Beer, you there, reading this right now, are probably going to be more likely to keep on spending to get what you want...but not all of you. And remember: craft beer is still under 4% of the total sales, and we the bloggers and readers, the folks who drink 400 different beers in a year, are just a tiny niche in that niche.

Look at the numbers. Most craft brew drinkers are drinking Sam Adams Boston Lager, Sierra Nevada Pale Ale, New Belgium Fat Tire Amber, Harpoon IPA (and Blue Moon Belgian White, if we're going to be honest and look at this in terms of "craft" styles). That's where the sales are that are getting us even close to 4%. I think things are going to shift even more towards those brands, because they'll have the steadiest prices and the most consistent product. Experimentation tends to go down when prices go up. Flagships will do well.

Which is probably a good thing. Those flagship brands will keep breweries alive till the hops and malt thing either sorts out or we get used to it. In the end, I think this is going to be a time of opportunity for American brewers large and small. It's a matter of reading the winds and the currents and deciding how to set your sails to catch the best breeze...while staying off the rocks and shoals.

17 comments:

Travis said...

The recession isn't scare talk. We'll be lucky if we don't have a depression. There are a lot of financial analysts that have been predicting a deep recession for a more than a year now. Daily Reckoning, Mike Shedlock, analysts at Goldman Sachs and many others see a recession as being unavoidable at this point. We are likely already in it. Because of the way the data is collected and tabulated you don't really know that you are in a recession until after you've been in it for six months.

Lew Bryson said...

Okay, let's try to stick to the 98% of the post that was about beer. I don't want another Hugo Chavez wrangle here...

Matt (RutgersBeerGuy) said...

Lew,

I would certainly fall under the description as one of the "Beer Advocate" types, and I certainly find myself reevaluating my purchases based on my wallet. Samuel Adams, Sierra Nevada, Saranac, and Magic Hat all look better day after day. I can get sixers from each of them for <$7.00, while other crafts that used to be in that range now cost me $9.00-10.00 a six.

Thats not to say that I'm not buying them, but there is a healthy dose of Sam and SN mixed in.

Lew Bryson said...

Matt,

Like I said, "...more likely to keep on spending to get what you want...but not all of you." I put that in there because I knew there would be barleywine lawnmowers out there ("Barleywine is my 'lawnmower beer!'"; real quote, from a serious poster) who would let me know that nothing would stop them from buying their beloved (insert probably luscious imported beer of your choice here). Yeah, yeah, whatever. Most of us are going to be sensible, like you. I know I'm buying more Sly Fox cans, and looking forward to the arrival of Flying Fish Farmhouse bottles.

Bill said...

I've had to curtail beer buying -- in order to visit my local brewpub at something close to the same frequency, I've countered by buying less and cheaper beer from stores. It's due to the cost increases of everything, not just beer, but there you go.

Matt (RutgersBeerGuy) said...

Lew,

Yeah...Sly Fox, Flying Fish, River Horse, and Cricket Hill are all reasonably affordable around here. Nice to be able to drink on a budget while drinking locally.

Alan said...

I think it is important to note that we Canadians are very happy with the %50 plus increase in our spending power for US craft beer over the last decade. I do think that the recession, however deep, will be one of the nails in the coffin for art beer even if fine beer can position itself as the affordable luxury in the coming tough times.

Lew Bryson said...

Alan,
What's availability of American craft beer like in Canada/Ontario? I ask because I've heard Canadians bitch about not even being able to find American beers. FWIW, it's hard to find anything other than MolBatt, Moosehead, and Unibroue in the States.

Alan said...

In Ontario, other than the odd special sale which has seen the odd Rogue show up, we have three regularly at the LCBO: Liberty Ale, Sam Adams Boston Lager, Brooklyn Lager. Whoop-ee. There is more support for increased shelf space for Ontario craft beer, which is working, but apparently the LCBO is also going to add more US craft beers later this year. Who knows? Maybe soon there will be six!

Joshua said...

I've hear rumors that if things with hops prices get really bad, that even small breweries with deals through 2008 may lose out as the big three will offer producers so much money, they will reneg on their agreements.

I didn't really phrase that very well, but the concern is that agreements don't mean much until the shipments have been delivered. So small breweries are worried.

Do you think there could be any truth to this?

Lew Bryson said...

Joshua,
I do think that's a possibility, sure. The contracts more than likely all have escape/damage clauses written in them that will allow the hops brokers to get out of the deals by paying damages to the small brewers. All they have to do is get the big brewers to cover those damages, and they're good to go.

That's if things get that bad. I've also talked to some brewers who have locked in more hops than they need: they're planning on releasing them this Spring and making some money on the price differential. Maybe. Dunno. We'll see what happens.

Anonymous said...

The markup in some bars is pretty high for a glass. Paid $7.50 the other day for a glass.
Sticking to buying sixtels to bring costs for me down. By the way it's also greener with no bottles to recycle.
Also growing my hops and homebrew.
I think we're in for rough times financially. Thanks to oil and its vermin. Greenspan's rate cuts now look like a quick fix to the resulting crap we're in. Republicans gotta keep building though. Cut down those trees boys.

Boak said...

Seems to me the importers of American beers into the UK are making some fat profits! Granted, our beer duty adds a fair whack to the price you're paying, but where's our corresponding price drop on US imports?

If we have to have a recession on this side of the pond because of your mortgage lenders getting greedy, at least let us enjoy Sierra Nevada for less than £2.50 a bottle.

Lew Bryson said...

Boak,

Forgive me, but...typical Brit attitude! You admit that it's most likely either your importers that are making fat profits, or your government charging ridiculous duty on beer (which it does...you guys are screwed, and it looks like you're getting set up to get screwed even worse because of some drunk teeners), yet still manage to make it sound like it's the fault of the American company/economy/system. (Yeah, yeah, I know...it's irony.

You've got a valid point, though. That's the way this import/export thing is supposed to work. But when prices go up, they rarely come down, except on commodities like coffee, steel, and oil (er...that's a theory; it's come down in the past).

Boak said...

Sorry, forgot the little smiley thingy.

Anonymous said...

I used to rate hundreds of fine ales on ratebeer. Now I drink 40s. I'm from Michigan. Its all I can afford.

Detroit Troll

roan22 said...

Thank you Lew for posting on this topic because its something I have taken the time to think about lol...

What if the economy gets so bad that we have another depression and we all are out of work? Will it destroy the craft beer industry? I guess if it happens, craft beer shall live on in those smart enough to have learned how to homebrew...but what are the rest of us going to do??? I can't go back to drinking BMC, I never liked it in the first place! lol

Mikkeller beers from Denmark are awesome but the cost is prohibitive and that is a damn shame. $13 per bottle of their Stateside IPA...which you'd love by the way [TND, TJ's and Capone's have it I believe].