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Yesterday, it was reported that MillerCoors and Anhauser-Busch are raising their beer prices due to rising “commodity” costs. The brewing giants control 80% of the US market share.
In their coverage, the LA Times reported:
“Like other food manufacturers, brewers have been hit by commodity price increases in recent years, but have not been as aggressive about raising prices, analysts said.”
As a category manager, I take issue with general “commodity” prices being blamed for price increases. After all, beer is not made from a combination of pork bellies, copper and cocoa. Its key price drivers, like hops and barley, are actually not experiencing a serious price increase right now. If there was ever a time to blame commodity costs for a necessary price increase, it was last year.
In this case, “commodity” prices seem like a convenient scapegoat for a price increase. Consumers won’t have much ability to push back if the price per six pack goes up and will likely take any modest increase in stride. And to be perfectly frank, beer drinkers have little insight into the cost drivers for their favorite beverage.
However, there is an important lesson in this for procurement professionals, who will likely face many suppliers pushing price increases as the economy rebounds. As the market rebounds and companies look to recover profits lost during the recession, you must know your cost drivers.
If a supplier cites a general increase in “commodity” prices as the reason behind their price inflation, be wary. Armed with information on the true cost drivers of your direct materials - from relevant commodities and currencies to labor and transportation - you can push back against unwarranted proposed price hikes.
As my colleagues have covered recently, there are many potential supply chain pitfalls during the economic recovery. Don’t add overpaying for direct materials due to vague market generalities to the list. Cheers.
Bob Zieger is a Senior Category Manager for Plastics and Raw Materials in Ariba’s Global Sourcing Organization. Bob holds a MBA from Katz Graduate School of Business at the University of Pittsburgh and spent 11 years in the plastics industry in engineering and sourcing management roles. He is also a Certified Purchasing Manager (C.P.M.) as recognized by the Institute for Supply Management.
7 responses so far ↓
1 sugbear // Aug 27, 2009 at 4:59 am
agreed - this is market manipulation and probably illegal. i am switching to vodka personally and boycotting these guys. consumers have equal power if we pull in one direction.
more detail on my logic and movement here:
http://sugbear.blogspot.com/2009/08/so-this-is-permanence-beers-shattered_995.html
2 cbjerrisgaard // Aug 27, 2009 at 6:35 pm
This is great news. It means that the craft brewers who are making real beer have a chance to gain even more market share. Up till now there was a major competitive advantage in terms of price held by the big boys, now that is all but gone and beer has to stand on its own merit and not dollars.
Also Sugbear don’t go with vodka, go with real beer from a local small brewers who cares about what they do and not just how much money they make.
3 Supply Excellence — “What I learned (about spend management) this summer” // Aug 28, 2009 at 2:41 am
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4 TomG // Aug 28, 2009 at 10:44 am
I agree with Chris… the craft brewers don’t enjoy the economies of scale that the big brewers enjoy, and it’s tough to compete.
Besides, when was the last time bud and miller beer went up in price. I remember about 10 years ago, buying beer at about the same price. I bet some research will show that beer has not gone up in many years. It has certainly under increased in relationship to the cost of living.
5 Jay Brooks // Aug 28, 2009 at 11:30 am
No offense, Bob, but it feels a little like Monday morning quarterbacking for you to come in and declare that the reason big brewing companies will raise their prices is commodity fraud. Not only is it not the only reason stated, but it is a valid reason. Hop prices went up two years ago from twice as much to ten times as much and while they’ve leveled off somewhat, they are not at pre-increase levels by a wide margin. As for barley, the farm report you cite concerns primarily exports and American barley. Most brewers use Canadian, European and Australian barley. Only a fraction of the malted barley comes from the U.S. And there have been worldwide shortages over the last couple of years (droughts in Australia, floods in Europe), not to mention with corn being diverted to alternative fuels, feed barley prices have gone up making it more attractive for farmers to not grow malting barley, which is riskier. In addition to those costs, fuel and transportation costs have skyrocketed, a big piece of any brewer’s costs. And the larger point is that A-B in particular has not raised their prices for at least ten years and possibly twenty in any way that kept pace with either inflation or maintained a ratio of costs to pricing structure. Because of competition, they purposely kept their margins slim and slimmer. Now that there’s a new regime at the helm - InBev - and that policy is likely what’s changing. InBev is notorious for not playing that game. MillerCoors is simply doing what it (and they, when they were still separate) always do: follow the leader. My point is, this is a more complicated issue than it may appear at first glance. I’m sure your general knowledge of supply management is top notch, but in covering the beer business for nearly twenty years, I’ve come to know that it rarely functions like other industries and has idiosyncrasies that don’t allow it to behave like other industries. Excise taxes are a good example, as alcohol companies are the only industry (apart from tobacco) who pay an additional tax (at the state and federal level) for every gallon they produce. It’s disappointing that the L.A. Times singled you out as an expert, because it’s clear your expertise does not extend to the peculiarities of the beer business. But now it’s likely that some people will regard the price hikes, as you do, as unwarranted. But for a number of factors, including but not limited to what I cited above, beer margins have been shrinking for decades while the price to the consumer itself has remained largely static. As you might imagine, that’s a situation that can’t last forever. Something eventually had to give, and to me it’s no surprise that A-B IB would be the first to blink (they announced first) because they’re still trying to pay for their purchase of A-B, plus they’re notoriously ruthless (a few months ago they tried to strong arm suppliers into giving them three times as long to pay them for ingredients and packaging).
6 Macro Beer Prices Finally Going Up | Brookston Beer Bulletin // Aug 28, 2009 at 12:12 pm
[...] costs have skyrocketed, too. Naturally, Zieger has a blog — doesn’t everybody? — called Supply Excellence where he expands his criticism. I think it’s unfortunate that the L.A. Times cited him as an [...]
7 Matt // Sep 2, 2009 at 6:15 pm
The Big brewers have a whole lot of Hop Extract made for them that has a two year shelf life and theres also wharehouses of hops in frozen storage they also have to blend hops from different seasons to aviod flavor profile shift .So the inflated hop prices of last year are now starting to effect them as they start to use up that supply .
Also China is a big factor because China is producing more beer and theres a increased demand for hops and grain .
But I don’t mind if the big brewers have to increase their prices because they have artificially kept therm low for many years and now consumers will realize that its better to pay a few dollars more for a microbrewed beer than drinking a beer that is watered down and has no flavor.
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