The Big Squeeze (Part 5/6)

Hopefully 2023 is better for the supply chain. These supply chains took a beating in 2021 and 2022, with 2022 fairing worse due to the war in Ukraine and lingering effects of a continued increase in demand for materials.

I am combining the posts for supply chain and pricing pressures since they are intrinsically intertwined.

1. Mergers & Acquisitions
2. Craft is dead, long live craft
3. Wholesaler consolidations and pressures
4. Three tier, what is it good for?
5. Supplies, supplies, and supplies
6. Pricing Pressures
7. Musical Chairs

Supplies, supplies and supplies

Every industry was impacted by COVID. The subsequent war in Ukraine, Tariffs and geopolitical decisions didn’t help matters either.

This article is about the beer industry but I didn’t want to proceed without acknowledging that there are much more serious issues in the world impacted by supply chain disruption than beer. In particular those impacting human life and means. But, this article is about the beer industry so I will stick to that.

2021 exacerbated the tail end of COVID challenges; especially in the supply chain and labor market. The Craft Beer market saw its first 9% volume decline ever. The number is significant as craft had continuously grown in volume. Consumer purchase habits during COVID changed as well. Consumers purchased lower cost packages in bigger format (12 and 24 packs). Since larger suppliers were able to fulfill this demand readily, craft lost share in grocery and convenience segment.

Raw material prices increased in every area of production and reduced profitability across all product types. In addition, cash flow was impacted as well. Just take a glance at some of the top issues that were faced by our brewery.

• Grains costs increased over 50% and can prices increased over 22%. There was a grain shortage due to a poor crop yield which was then exacerbated by the war in Ukraine. Ukraine supplied 30% of world’s food grade grain supply. Reduction in that supply put pressures on other sources of grain.
• Major can suppliers implemented MOQ’s (Minimum Order Quantities) that were five fold over prior quantities. A brewery that was buying truckload of cans at a time was now required to buy a minimum of (5) truckloads per SKU. While large breweries didn’t even blink, it caused a debilitating issue with craft brewers.
• Delivery lead times increased in some cases from 2 weeks to over 90 days. Cardboard, yes cardboard, was unavailable and had to be pre-purchased to ensure supply.
• Fuel prices were a constant nightmare. There was nobody who wasn’t impacted by the challenges in fuel.
• In one scenario when our truck had to be repaired, it took over (4) months to get the part. We considered buying a new/used truck but there was a nationwide truck shortage. So we had to pay 1,100$ per week to rent a truck while the truck was in shop.
• CO2 production was impacted and there was an increase in price of food grade CO2 that was being purchased.

Just the above supply chain issues caused a drastic increase in COGS for a craft brewer. There are more but the above were the primary increase factors. Which leads us to the next discussion regarding pricing.

Pricing Pressures

While craft brewers were combating the cost of goods and cash flow challenges they also had to combat pricing pressures and inflation.

Regardless of what we would like to think, beer consumers are sensitive to pricing changes. Add to that an inflationary economy and the purchasing power of customers decline.

A $9.99 six pack was in reality no longer possible for craft brewers. Even a $10.99 four pack in 16oz. format is a tough pricing number. But would the customer in your community who already has so many other challenges want to pay an increase in prices?

We saw the answer during COVID. Consumers migrated towards 12 packs and 24 packs at reduced prices of Natty Light, Busch Light, etc. while the craft brewers couldn’t really compete with those formats. As a result large wholesalers and brewers saw an immense increase in grocery store sales. While craft brewers had to contend with average increases amongst the perfect storm of other issues.

The reality is that 2022 was tough, very tough, for craft brewers. Increase in costs, decrease in cash flow and not a lot of room to grow with prices. The taprooms are also numerous in numbers so overall taproom sales are seeing a decline as well.

So, is it all doom and gloom? Not at all. Craft brewers are a resilient bunch, they have to be. New products, entry into distillation and smarter wholesale / package moves are in the works. We will work hard to get through to the other side but it will take at least another year to steady these ships. Another favorable year for big beer and another fighting year for craft beer.

Let’s go!