A recent Huffington Post article attempted to explain why a six-pack of craft beer costs $12. If you have not read the article, you can read it here. There are many basic economic and accounting flaws in the news story that should be addressed. Let’s try to tackle a few of them:
Twelve dollar six packs? That equals $48 per case, almost 1.5 times more than the average case price as measured by retail market data. In fact, the average price of craft beer around the country is $8 per six pack, not $12. A quick look at the top 30 bestselling craft bands in the U.S. reveals only six brands actually retail for more than $10 per six pack.
Ingredients at 6 percent of the cost of beer? Ingredients for making beer go way beyond malt, hops and yeast.
- A short tour of any size brewery reveals a wide variety of ingredients and supplies that actually go into the brewing process.
- Moreover, just like medium and large brewers, brewers of all sizes must plan their brewing far in advance and most buy forward contracts for as much as their ingredients and packaging needs as possible.
- Costing hops at spot market prices at $35 per barrel would be a last-minute purchase and very unlikely for any business interested in staying in business in the long run. Moreover, that level of hopping is about five times the craft industry usage per barrel.
Brewer margins at 8 percent and distributors and retailers take 52 percent?
- Just like brewers, distributor investments in trucks, salaries, refrigeration, warehouse, workman’s compensation and other costs of moving a heavy, perishable product are not insignificant.
- Both retailers and distributors carry a wide variety of products, across many states and in a variety of retail channels. Simply ignoring the complex nature and cost structure associated with both these lines of business and accounting for 50 percent of the retail price is far from how the market really works.
- The IRS Statistics of Income Database reveals just how profitable brewing can be relative other industries. According to the IRS, using data from 370 corporate tax returns, brewers had an average gross margin of 60 percent, while alcohol beverage wholesalers worked with margins at 25 percent and alcohol beverage retailers at 22 percent.
Federal and state excise taxes make up 23 cents per six pack?
- The federal excise tax alone on craft beer starts at 29 cents on average. This is an easy calculation to make by taking the total excise tax bill of the craft industry and dividing that total by the volume. Data from the top 100 craft brewers can be used to calculate each brewer’s excise tax bill for a total of $232 million. The combined volume for these same brewers is 15.6 million barrels.
- State excise taxes. There are roughly 10 states that offer some kind of state excise tax relief for small brewers. However, they are all very different and hard to quantify. At best, the combined impacts of state excise tax breaks will effect total rates in a marginal way. Similar to the federal excise tax estimate, we can calculate the total state excise taxes collected and then divide by total state volumes. This calculation yields a state tax of about 19 cents per six pack.
- Combined federal and state excise taxes are 48 cents per six pack. That’s 6 percent of the $8 average six pack cost. A long way from the 2 percent reported.
Taxes are indeed a huge share of the cost of all beer and ultimately paid for by consumers. The list of taxes paid is a long one, starting with permits, brand registrations, licenses, water taxes, sewer taxes, property taxes, payroll taxes, income taxes, corporate taxes, excise taxes, sales taxes… and the list goes on. In fact, various studies have shown around 40 percent of the retail price of a typical beer goes to pay some kind of tax at the federal, state or local level.
In summary, brewing, distributing and retailing beer in today’s marketplace is complex. The beer industry offer thousands of styles and brands to meet all consumer tastes, preferences and budgets. Not only are these beers brewed by great brewers large and small, they are distributed and retailed in more than 500,000 licensed retail accounts across urban and rural markets alike. Cheers to an independent, three-tier alcohol beverage system that helps make it all possible for all types of beer.
To receive additional information, please contact NBWA Chief Economist Lester Jones at email@example.com.