Behind the cost of a six pack of beer

Behind The Cost of Beer
by Samuel S. McClure

There's never been a better time to be a beer drinker in America but quality doesn't come
cheap. Prices for good craft beer are far higher than for mainstream macrobrews from
conglomerates such as MillerCoors and Anheuser-Busch. A six-pack of beer from breweries
like Dogfish Head, Ballast Point or Cigar City almost always costs more than $10 -- and
sometimes exceeds the $15 mark, and that might be for a four pack!
You could easily get a 12-pack of Bud Light for that much.

Most beers contain four basic raw ingredients: water, malt, hops and yeast so why the big price
for craft? Let's take a look. Beer brewing uses a great deal of water. About five gallons are
required to produce one gallon of beer, however water remains so cheap that it's not a serious
concern for most breweries when it comes to pricing.

When it comes to malted grain -- the source of the sugars that become the alcohol that makes
beer what it is -- macrobreweries have three key advantages over craft breweries. Their huge
size lets them demand lower prices from malt suppliers. They mix corn or rice -- far cheaper
than the traditional barley -- into their beer. A medium-sized craft brewer can expect to pay 40
cents to 50 cents per pound for malt, while a macrobrewer will pay closer to 22 cents a pound.
And while a macrobrewer uses about 40 pounds of malt to make a barrel of low-alcohol beer, a
craft brewer might use 70 pounds to 100 pounds of malt to make a barrel of IPA or stout.
That means that a six-pack of craft beer contains about 65 cents of malt, while a six-pack
of macrobrew contains about 16 cents of malt.

Certain hop varieties have become extremely sought after by craft brewers in recent years,
driving prices to record levels. Though most hops cost $4 to $6 a pound, some specialty types
cost as much as $20 a pound. Macrobrews contain almost no hops; they might add a pound of
cheap -- $3 a pound -- hops to a barrel of beer. Meanwhile, a craft brewer could easily put four
pounds of $7-a-pound hops into a barrel of hoppy IPA. All told, a typical six-pack of craft beer
contains about 53 cents worth of hops, while a six-pack of macrobrew contains maybe 5 cents.
A super-hoppy double IPA with ultra-premium hops could include more than $1 worth of hops.
So, all told, a typical six-pack of craft beer contains about 53 cents worth of hops (a double IPA
might go as high as $1worth of hops), while a six-pack of macrobrew contains maybe 5 cents.

Yeast: Another category that ranges wildly in price. Very large brewers -- and some craft
brewers -- cultivate their own yeast, and rarely spend significant money on it. So forget it.
But most others regularly buy fresh batches of yeast from the two companies that produce it for
the beer market: San Diego's White Labs and Oregon's Wyeast. Overnighting a batch of yeast
large enough to brew a 30-barrel batch of beer is expensive -- around $800. Most brewers try
to reuse the yeast as many times as possible, often around four times, which would imply a
per-six-pack cost for yeast of 13 cents. It's less than malt or hops, but still significant.

A rule of thumb for labor costs that says it takes about 20 hours of work to make a batch of
beer, regardless of the size. The going rate for a ground-level brewer at a non-union brewery
is about $12 an hour, meaning it costs $200 in labor to make a batch. Assuming the 30-barrel
batches that are standard at relatively small breweries, that means 15 cents of labor goes into
a typical six-pack of craft beer.

Packaging -- whether in cans or bottles is expensive. Even buying in bulk, a glass bottle
with a beer label affixed to it can cost as much as 20 cents, and the cardboard container
that holds a six-pack costs a few more cents. So packaging can add as much as
$1.50 to the cost of a six-pack

Finally, buying equipment and renting space for a commercial-scale brewery costs big
money often as much as several hundred thousand dollars or more. And there are ongoing
costs -- promotional events, advertising, R&D. The owner of the brewery eventually has to
recoup that investment, not to mention make a living. To do that, breweries typically add a
healthy markup to costs before selling the beer to a distributor -- around 50 percent of gross
costs, leading to a margin of 33 percent. Assuming raw ingredient costs of $1.31, labor costs of
15 cents and packaging costs of $1.50, the brewer's margin ends up adding
about 91 cents to the final cost of the six-pack.

Shipping: A truck generally carries 18 pallets of goods, and you could fit around
80 cases of beer onto one pallet. That translates into shipping costs of 67 cents for
each six-pack trucked across the country.

The federal government and each state government levy excise taxes on all alcoholic products,
and beer is no exception. Federal excise tax is the rare cost that's actually lower for small
breweries than large ones. Washington charges breweries $7 per barrel for the first 60,000
barrels a brewery sells. After that -- and for all breweries that sell more than 2 million barrels a
year -- the federal tax is $18 a barrel. States vary wildly in the amount they levy, from 62 cents
a barrel in Wyoming to $33 in Alaska. The median, though, is $6.20, which is what we'll use
for the purpose of our analysis.   So, in general we can say that Federal and state
excise taxes add about 23 cents to the price of a six-pack.

Thanks to a sea of laws created in the wake of Prohibition, almost all beer sold in America must
pass through a distributor before it reaches a consumer. For their services they add a big
chuck to your cost. Thanks to their legally-mandated monopoly, they generally mark beer up
around 50 percent! So a distributor might buy a six-pack from a brewer for $4.75. The
distributor's markup, plus the cost of the lost product, adds $2.73 to its price.

Finally we get to the retailer. A typical one would buy a six-pack of craft beer, based on the
above calculations, for about $7.48 from a distributor. But from there each distributor has
broad discretion on how much they will charge the consumer. A run-of-the-mill bottle shop is
likely to mark up beer by around the same amount as the brewery and the distributor -- that is,
50 percent, or $3.75 on a $7.48 six-pack. Once you add the 7 percent sales tax,
approximately the national median, you get almost exactly $12 a six-pack.   Ouch.

beernexus.com - SPECIAL REPORT

Why is craft beer so expensive?