The Novelty Premium
Although casual observers might imagine the Beervana podcast is quietly fading away, I am pleased to hint—official announcement plus fanfare to come—that it is not so. In fact, just yesterday we inaugurated a secret new phase of the pod that ... wait!, I’ve said too much. Let’s leave all hints and teases right there. What I can say is that Patrick Emerson, the pod’s resident professor of economics, created a new concept midway through this too-secretive-to-discuss new pod that I believe will fundamentally change the way economists think about craft beer—nay, any artisanal product.*
He called it the “novelty premium.” Here’s how he defines it:
“The novelty premium is the additional price you can charge due to the novelty of the beer/brand. In other words, a beer that might go for $5 per can will sell for $6 because of the novelty, so the premium would be that extra dollar.”
It emerged from our discussion about the challenges facing larger breweries saddled with flagships seen as aging by a novelty-obsessed market. In recent days three breweries in this situation announced course corrections to address matters. Oregon’s Ninkasi has announced plans to sell to a newly-created entity that will purchase other larger craft breweries, similar to CANarchy and Artisanal Ventures. Colorado’s Avery sold another 40% chunk of its brewery to San Miguel (70% total). And of course Stone is selling its new Berlin brewery to BrewDog.
Meanwhile, Brewers Association economist Bart Watson revealed some of the trends in the past year at the Craft Brewers Conference. Of the many interesting details, two stood out. Of the million barrels of craft growth in 2018: 1) 872,000 came from breweries 0-3 years old, while 2) just 105,000 barrels of growth came from the breweries older than that. People love them some new breweries!
Because these newer breweries act as the belle of a city’s craft beer ball, they’re able to reside at the top of the pricing scale, charging a premium for their coveted products. As they age, breweries have to compete more and more on price. That’s why we’re seeing price wars among bigger regional breweries that are trying to attract customers with bulk packages and low prices.
How long is the half life of the novelty premium? Maybe 18 months to two years? (That is, after two years, that premium is halved, and after another two halved again.) No doubt some brands retain their cachet well past five years, but most don’t. And even breweries that were once highly prized (Russian River, say) eventually come down to earth. More study needs to be done, and perhaps we can arrange for Bart and Patrick to conduct it. Surely a federal grant awaits.
In any case, remember the novelty premium, and use it in casual conversation. “No, I don’t go to Brewery X very often—their prices are inflated by the novelty premium. I’ll wait a couple years and start going more often.” We’ll get Patrick his Nobel one way or another.
* Do economists actually think about artisanal products? Do I really believe this is revolutionary? Maybe so! You better share the post just to be safe.