Interview with a scholar: Professor Ken Elzinga (part 1)
This is the first (and potentially only) installment in a new series interviewing “scholars” about the beer brewing industry (no Jeff, just because you went to Harvard that doesn’t make you a scholar). Professor Ken Elzinga is a renowned economist at UVA, was my adviser in college, and I realized recently that he’s an expert on the economics of the brewing industry. He kindly granted me a phone interview and some excerpts are below.
From the perspective of an economics professor, what do you find most fascinating about the beer brewing industry in the United States?
I don’t think there is any other American industry that’s had the trend to consolidation that brewing has had and then at the same time have a thousand new entrants come in almost in your lifetime?certainly in mine.
So if you were a boy growing up in Michigan, you not only knew of Miller High Life and the Budweiser brand, but you knew of Goebel and Pfieffer, Stroh’s and Drewry’s.
At the same time, as that steam roller of consolidation moves across the industry, coming up from below, starting with Fritz Maytag out in San Francisco? you could actually pinpoint it historically. One guy, one town, one event when he takes over Anchor Steam Brewery and turns it into a craft brewer and starts to develop a clientele for craft beer and then these two kind of different marketing models of a brewery selling through a small distribution network either on premise or off premise or a brew pub offering food and beer made on premise, this little thing gets started in San Francisco and spreads across the country to now, where there’s over a thousand brewers, and some day they’re going to have a 10 percent share of market.
The cost efficiencies were such that only if you had a plant of 4 million barrels or above, could you be cost efficient, and then these guys come in and offer a craft product at a different price point with product differentiation and they changed it dramatically. So that’s the yin and the yang of the beer industry. That is what makes me? as an economist, why I’m interested in it.
Do you believe there is an opportunity for consolidation of microbrewery brands? While it has certainly occurred on a more minor scale (Independent Brewers United/Magic Hat example), do you anticipate it happening more extensively, or does consolidation undermine the competitive advantage that micros have (local focus, diverse and unique product offerings, etc)?
Yes, that’s starting to happen. Magic Hat would be the best example where you actually have a consolidation of brands that are not geographically contiguous to one another. Now how much money those guys are making, I do not know.
But I find that interesting and I suspect there will be more of that. So far the ties between craft brewers have been just through their trade association. And that’s been terribly important because it’s been a real trade association of networking, of camaraderie.
What is your opinion on the following beers: Amstel (owned by InBev – who you consulted for), Bud Light (AB product, who InBev bought), Coors Light, and Miller High Life, (also a company you consulted for)
Amstel is one that I’m very bullish about. I think it’s a really solid brand. Amstel has the advantage of being a pricey beer, an import price point, but InBev is a really relentless cost cutter and they run a lean operation. Anheuser-Busch will be a much leaner operation under InBev and I suspect it won’t affect the quality of the products. How it’ll do the marketing, I don’t know, but they’ve already gutted the 9th floor of the Anheuser-Busch offices, which [was] this beautiful palatial place where the Busch family could hang out. That’s all gonna be gone.
Bud Light is a remarkable product. Bud Light is a good example of [the second mover advantage] because it comes along after Miller Lite, and Miller stumbled in producing a low-calorie beer. [Bud Light didn't] make the same mistakes and Bud Light is the largest selling brand of beer in the United States now. The light beer phenomenon is something that nobody could have predicted.
Coors is essentially a Coors Light company that makes a lot of money off of Blue Moon as a sideline. Miller has essentially become Miller Light. They’ve just had a terrible time with Miller Genuine Draft and other interesting products that they’d come out with. It seemed to be a hit for a while, but they haven’t been able to sustain it.
Miller High Life, to me that’s sad. That was a great beer when I was a kid. The champagne of bottled beers, a great slogan, but Miller has tried to reposition it. They tried to move it up into the premium level. They tried to bring a low price point. Miller [has] had a hard time finding a marketing focus. My hunch is that Leo Kiely who’s a really good beer marketer will be good for Miller. He’s a Coors guy. He now heads the JV.
In the next installment Professor Elzinga will share his take on the future of craft beer, how the recession will affect the industry, and what beer and lipstick have in common.
Wow! This is cool.
I read all of Elizinga’s relevant work when I was researching my book, so am delighted to hear more from him.
Am looking forward to the next installment.
For those who don’t know Maureen or her book, Ambitious Brew, it’s a MUST read on the brewing industry.
Great stuff. I actually wrote an M.B.A. paper on microbreweries. Thank goodness I can’t find it. :) I enjoy the good content you guys are publishing.
Well you BETTER enjoy it… You’re my dad.
You’re naive if you think the quality of the beer won’t suffer. Changes are already being made which will have a direct effect on the quality of the product, particularly it’s consistency around the US. — ex AB QA