The Brewing Organic Beer Market

This post is part of a blogging series by economics students at the Presidio Graduate School’s MBA program. You can follow along here.

By: Michael Schimaneck America’s craft beer market has grown rapidly in recent years, seemingly outpaced only by its niche organic segment, thanks in part to growing consumer fears about genetically modified foods. While a few of the largest regional breweries currently enjoy widespread distribution, craft brewing remains fundamentally an industry devoted to its local followers, and the results are undeniable.

After growing 7.2% in 2009, the craft brewing industry expanded by 11% in 2010, bringing its share of the U.S. beer market to 4.9%. However, given craft brewers’ generally higher price points than those of macro brewers like Anheuser-Busch Inbev and MillerCoors, this accounted for 7.6% of all sales in dollars. This reflects a growth in retail value of $600 million over the previous year, despite a 1% drop in volume of the entire industry. The number of breweries in the U.S. jumped concurrently to 1,759, the highest such total since the late 1800s. Of these, 1,716 were identified as craft brewers by the Brewers Association.

This dramatic increase in craft beer sales during the recession indicates that consumers’ tastes are evolving so much that they have become willing to accept the higher costs of a premium good like craft beer over cheaper, macro-brewed substitutes, even when their wallets are pinched, leading some analysts to project that craft beer’s share of the domestic market could even climb from 5% to 20% over the next ten years.

While organic beer still makes up only a fraction of the craft beer market, it is gaining ground very quickly. Between 2003 and 2009, U.S. organic beer sales spiked from $9 million to $41 million.  However, with the correspondingly low supply of organic ingredients currently available on the market, organic brewers are subject to higher costs for their inputs than ordinary craft brewers. Suppliers are aware that organic brewers are willing to absorb these higher costs in order to make their beer organic, but these costs are subject to a low ceiling because organic brewers generally refuse to offset their variable costs with higher price points. Instead, they sell their products at prices comparable to the craft beer industry average. While these practices serve to minimize organic brewers’ bottom lines, it simultaneously limits suppliers’ ability to further manipulate prices.

In accordance with the industry’s reputation for innovation, many craft brewers have discovered unique ways to overcome these hurdles. For instance, Bison Brewing Company, a contract brewer located in Berkeley, California, sources all of its ingredients from the American northwest. As their business has grown, they have enacted vertical impacts on their supply chain by driving the conversion from conventional to organic farming practices in that region. Additionally, companies like Sierra Nevada have begun brewing small batches of organic beer using ingredients exclusively grown on their properties.

Because organic farmlands require 50% less energy to maintain than conventional farms, it is likely that if demand for organic beers continues to increase at a similar rate, or even one comparable to the craft beer industry as a whole, then organic brewers will soon benefit from increased profit margins as their average variable costs decline.

6 responses

  1. Did anyone else read this article like as if it was talking about green products at large? It sounded to me like many of the same forces that are underlying consumers’ embraces of craft brewing underly adoption of socially and environmentally responsible products. A more discerning consumer wants both delicious beer probably wants products that are better for then environment and safer to keep around the house, and they may be willing to pay a premium for either.

    The real trick for sustainability remains though…green can’t just be taken over by the discerning consumers, it needs to be a part of every purchase decision.

    Bradley Short

  2. Taken as a whole, consumers of the 21st century impact the ecosystem with purchase decisions both large and small. Buying organic products weekly is as important as big purchases like energy efficient appliances, a fuel efficient car, or altering your lifestyle to recycle and conserve energy in your home but. By making these small lifestyle changes you will reduce your carbon footprint therefore helping the planet as a whole. Organic Beer is part of this.

  3. It will be interesting to see the effects of the change in organic beer labeling rules that will require that in 2013 hops no longer be on the list of allowed non-organic ingredients in beer.

    As mentioned, Bison and Sierra Nevada are making changes in their supply chains in different vertically integrating ways. What are other brewing companies doing?

  4. Like all statistics…it is how the data are presented. The the farms “require 50% less energy” it says nothing about the corrosponding reduction in yield. It’s called thermodynamics…energy in and energy out.

    1. James, you’re correct that organic farm yields are often 20% less than conventional ones, but this discrepancy balances out over time. Organic farming methods increase the efficiency of water use, which allows for greater overall consistency and superior yields during times of drought. With equal yields over time, organics become more profitable because they require less inputs to maintain.

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