How Beer Pricing Actually Works

The return of Donald Trump has meant considering the economics of tariffs and the way they affect the beer industry. Last week, Gigantic’s Van Havig posted comments that deserve a standalone post. It address the relationship between costs and pricing. That is to say, when a brewer’s costs rise—say on an order of aluminum cans—how does this affect the price consumers pay at the store?

Van unpacks the way this unfolds in practice, which because beer is a weird and highly-regulated industry, doesn’t follow the simple rules you might imagine. His comments are especially relevant because he was at one time on the path to becoming an economics professor before becoming a brewer. He understands the differences between models of economic behaviors and, thanks to decades in the beer industry, what actually happens in the market.

The dynamic he describes applies to all hikes in the costs of inputs, and this includes taxes—relevant because once again Oregon is considering raising them, and we’ll hear the same argument they’ve been trundling out for decades: that raising the tax a brewer pays on a barrel of beer is precisely tied to the amount consumers will pay. So if they tax brewers the equivalent of 25 cents per 16 ounces (their most recent proposal), your beer will cost $6.75 instead of $6.50, and how bad is that, really? It is disengenuous to the point of mendacity, and Van’s comments help explain why.

“Another issue for small breweries relative to any cost increase is that we're really not in control of the price that consumers pay for beer.

“First of all, collusion is illegal, so we can't really talk to each other to set prices. Second, because there are so many brands and so much competition, what really happens is you try to figure out what price point you want your beer to be on the shelves, and then you work with your distributor to get to that price. In other words, the distributor kind of tells you what they're going to pay you.

“Third, pricing on the shelf isn't a continuous function: prices don't increase from $8.99 a six pack on the shelf to $9.17 because of a one- or two-cent increase per can from the brewery. They'll end up at $9.49 because that's how pricing works at the grocery store or convenience store. And that ends up being a big difference, which will likely affect the volume of beer a brewery is selling. If a brewery tries such a foolish price increase, the retailer will just take the windfall profits at the $9.49 level.

“So what really happens is that breweries just absorb the cost increases and distributors and retailers make the same amount of money. Any increase in the price of beer that you've seen at the market from 2013 or 2014 up until about 2023 or 2024 resulted in absolutely no additional revenue to breweries. In the last year or two there has been a small increase in revenue per barrel for some package sizes. But [it’s] not nearly enough of an increase to cover the additional expenses breweries have faced due to increasing input costs, particularly for labor, malt and packaging, all of which have gone up drastically in the past 10 years, the last few in particular.

“The economic feasibility of small brewing is becoming more tenuous over time.”