Even as the number of US breweries marches steadily toward 5,000, the demand for “limited” beer continues to outpace supply. Craft beer enthusiasts continue to reach for the newest beer instead of the proven or even more affordable options. Some newer breweries are actually building their entire model around one-off releases, at least in their early years. Pipeworks Brewing in Chicago was one of the first to adopt the concept of throwing beers against the wall (not literally) and seeing what sticks. For years, they would release new beers, practically on a weekly basis, then remake or tweak the recipes which showed the most potential. As Pipeworks scaled, that model was adapted to accommodate regular, rotating 16oz 4-packs, but still maintains its reputation of offering frequent limited releases.
A newer example of this model, which requires a strong trust between consumer and brewer in order to be successful, is Mikerphone Brewing. Mike Pallen (Owner/Brewer) explained some of the specifics behind his production and distribution, “In my situation, I produce seven barrel batches. Those batches usually yield 65 to 75 cases (12 750 ml bottles). These cases are then self-distributed to roughly 30 stores all over the Chicago and Chicagoland area. I have tried my best to give consumers a fair chance at getting Mikerphone beer, all while considering there are only so many hours in the day and traffic in Chicago is terrible. Spreading out 75 cases to 30 stores means most stores only get 2 cases per batch.”
The retail store owners who sell these limited releases are faced with a pricing dilemma. Oftentimes, stores are only allocated a single case or two of 12 bottles, when demand could be 5-10x that. Page one of your microeconomics textbook tells you that it’s inefficient to charge anything less than the equilibrium price. In other words, the highest price possible that would result in all 12 or 24 bottles being sold. That equilibrium price often results in a significantly higher margin to the retailer than intended. On Tuesday, Pallen received an e-mail from a fan accusing a retailer of significantly inflated retail prices on his Monday release, Imperial Smells Like Bean Spirit. Mikerphone's subsequent response on Facebook put a big smile on my face:
So why do store’s gouge on prices for these limited beers? Greed tends to be the initial reaction, but I believe it goes beyond that so I continued the conversation with Pallen and also reached out to Chris Quinn, owner of The Beer Temple in Chicago. “Stores realize that they only have 2 cases,” Pallen began, “but are getting calls everyday asking for these beers. Multiple stores have told me their phone rings off the hook asking about Mikerphone. This is crazy to me. I pinch myself everyday to make sure this isn't a dream. One store even said they want me to pay their phone bill since all the calls are in regards to Mikerphone. Ha! So when they know several people want a beer even before it gets to the store, they know there is a demand. Demand is high, supply is low...greed sets in and boom, prices get marked up.”
Quinn added, “In their minds, if people are willing to pay it, why shouldn't they be allowed to charge it?” Some find these tactics to be shortsighted, but the practice makes more sense as awareness spreads about the secondary market for beer. “Owners may realize that even if they do charge the suggested MSRP, all that's going to happen is people will flip these beers online for a greatly increased price,” Quinn elaborated, “At least it's legal for the store owner, as a licensed retailer of alcohol, to make the money instead of some guy on Craigslist.”
“I even saw it on my post yesterday”, Pallen pointed out, “People said they would have paid whatever just to get a bottle. These are not your typical craft consumer, but they do exist and can do very well for themselves.” I agree with Pallen that these opportunistic hucksters are not the typical consumers, but when you’re only producing 65-75 cases per batch, it doesn’t take too many of them to cause a ripple.
Despite not participating in these pricing behaviors, Quinn shared additional perspective of why retailers gouge, “There are certain stores that only see a certain set of customers when the rare beers come in. These people know all the spots that get a specific beer, and could easily just go from store to store to collect a stash of them. These customers only buy these beers, and rarely if ever buy anything in addition, such as their weekday six pack. In this sense, the store is being cherry-picked of its most limited items by people who otherwise do nothing to support the store. Meanwhile, the regular customers who actually help keep the lights on rarely get an opportunity to purchase these items, if they even would want to in the first place. In this way, the gouging is basically just a ‘jerk customer tax’"
The Fallout - End Consumers
The end consumers are the most directly impacted. I chose the term “end consumer” very carefully as I am referring to the individual who actually drinks the beer. It’s important to make that distinction today, when it’s not uncommon for beers to change hands multiple times before finally being consumed. I joke that beers can be like bitcoins, where others refer to them as baseball cards, pogs, or Pokemon.
Pallen expands on the impact to the end consumer, “The reason I wrote the message on my Facebook was not about stores making extra money off of me, it was directed at the fact that consumers are being taken advantage of. Consumers realize that there is a limited supply of Mikerphone beer right now, and know that if a store gets a 'higher demand' Mikerphone beer, chances are it will sell out quickly. So if they see it at a store for $17.99, they buy it because they do not have time to visit other stores to see if that is a fair price. Right there, they are being taken advantage of. And then when a consumer finds out that they over paid, they are going to be upset. Upset at the store, and possibly at the brand, in this case Mikerphone. “
The Fallout - Breweries
The effects of these pricing decisions are felt by the breweries as well. Pallen and I have a similar approach as consumers, where $10 for a single bottle represents a key threshold where our expectations rise exponentially. In other words, we choose our +$10 single bottle purchases a lot more carefully than our $8.99 4/6-packs. When a beer is sold at a significantly higher price than the brewery intended, it raises the expectations of the consumer to an inflated level that is unfair to the brewer. In addition, it hurts the brewery’s chance of building their fan-base by scaring off the more rational consumers who would have paid MSRP, but not the gouged price. This may not seem like a big deal now as Mikerphone can’t meet current demand for certain styles, but after a few rounds of expansion, those missed opportunities could have an impact.
Pallen adds, “It is important to note that when price gouging happens, stores make way more money on the beer than a brewery ever will. When a beer is marked up higher than normal, it sends the wrong message to the consumers. Consumers may not understand how pricing works, that was partly why I made that post. I cannot control what a store charges for my beer. I can guide them and hope they follow that, but at the end of the day, they are legally able to sell the beer for whatever they want.”
The Fallout - Retailers
I go back and forth on the impact of this negative publicity on the retail store itself, given the type of stores who usually participate. On one-hand, these stores have a built-in audience based on the convenience of their location and the majority of their customers aren’t after these high-priced limited beers. On the other hand, as Pallen points out, “I think in the day and age we live in, where people use social media every minute to rate beer, food, stores, etc, retailers are foolish to even ever think to gouge. When consumers see price variations, they begin to talk...privately in craft beer groups, and then publically.” Pallen took the high road, not calling out the specific retail store where his incident took place, however his fans took care of that for him and thousands of people have now seen.
It’s not the the fear of negative publicity that encourages Quinn to charge fair prices at The Beer Temple, “I don't think that I have any right to set the price above what is considered to be the commodity price for a particular beer, which is my cost plus a set margin. It's the brewer who thought of and created this beer, so why do I have the right to make an exorbitant amount on it? What people do with the beer after me is beyond my control, but as long as it's in my stewardship, I want act respectfully towards my customers, my suppliers (the brewers), the beer itself, and me.”
Unfortunately, the shenanigans don’t stop with simply overcharging for limited releases. In NYC, store owners have been caught attending brewery-only releases, then selling those beers at 100% margins on their store shelves or online site. Other Half, one of Brooklyn’s most popular new breweries, took a stand against one of these stores last year:
Why are consumers paying?
These are my two favorite theories:
So will this situation get better? Will it get worse? In my opinion, we're about half way through the bad part. It's going to get worse and there will be a lot more incidents like Mikerphone's, but eventually things will level off either because the secondary market bubble will burst, or because supply begins to catch up to demand. I would love to hear your thoughts and opinions.