Price Wars Revisited

November 6, 2017, by Crafty Pint
Price Wars Revisited

Back in May, we ran a two-part Secret Brewer feature on the escalating price war within the Australian craft beer industry. Then, it seemed to be confined mainly to the ultra-competitive Melbourne and Sydney markets but, according to a number of brewers we've spoken to, the situation has been spreading further across the country and is, if anything, intensifying as the marketplace becomes every busier.

Indeed, while we were conducting interviews for this follow up article, one Sydney brewery sent an email to venues offering $120 kegs of two of its beers – around half the price beers of those styles might usually cost – in response to "market forces". 

To put that in context, a current price list for CUB/AB InBev beers seen by The Crafty Pint puts a keg of Fat Yak at $307.49 excluding GST and freight and Melbourne Bitter at $267.01.

So, is this a race to the bottom, one with potentially catastrophic consequences for some small brewers? Or are some brewers merely responding to intense competition by finding sustainable ways of producing beers on a small scale at half the cost of Melbourne Bitter?

Shawn Sherlock, the former Australian Brewer of the Year who is co-owner of Newcastle's FogHorn Brewhouse, believes it's very much the former, raising the issue with The Crafty Pint after seeing Newcastle "flooded with cheap kegs". As a business owner who sells almost 100 percent of his beer through FogHorn's two venues, he's not significantly impacted but says when small brewers seek tap space by offering sharp deals that undercut their peers, "venues aren't losing any of their Lion or CUB taps; it would be FogHorn or Grainfed or another local brewery that will lose out".

"I'm aware it's easy for me to make these statements because my business doesn't rely so much on wholesale," says Shawn. "But what's concerning for me is watching newer entrants into the market think that this – half price deals and buying taps – is the way to do business. 

"It wasn't like this a few years ago. These practices seem to have crept in."

He adds: "If you lose taps because you don't give good service or because the quality of your beer is up and down or you have bad looking decals that's one thing. But if you're losing taps because [an independent] brewer is coming in and carpet-bombing your local market with cheap beer that's another. 

"If one of the bigger brewers was doing it, the whole industry would be jumping up and down and shouting from the rooftops."

Newcastle's FogHorn Brewhouse puts its ethos front and centre for anyone visiting its venues.

Late last month, another award-winning New South Wales brewer announced it was going to be offering beers at just $120 plus GST per keg. Redoak (pictured at top), which operates a venue in Sydney's CBD and brews in the southwestern suburbs, has collected a long line of trophies at major beer competitions worldwide. 

The initial email detailing the "special offer" stated the brewery, run by brother and sister team, David and Janet Hollyoak, was "aiming to get massive penetration into the draught market" and was "targeting permanent taps and volume" as opposed to rotational taps, as reported by Australian Brews News.

Given the email also referenced the recent outcome of the ACCC's investigation into the practices of the country's major brewing companies, and knowing David's history of campaigning on behalf of small, independent Australian breweries, we wondered whether the offer was itself something of a campaigning tool, a means of highlighting the competitive nature of the market, rather than a straightforward offer. However, Janet and David insist it is to be taken at face value.

David told The Crafty Pint: "Yes, our special offer is sustainable because we have set ourselves up in such a way to be able to produce quality premium beer and get it to the market at this price.  

"Like most things in business, it needs to work for everyone, and be easily understood and transparent. This is why we have gone for a very simple pricing structure and one that encourages volume. We are kicking off in our local area with Sydney metro the priority and looking for a massive number of taps.

"I can’t speak on behalf of others, than to say each craft brewery is its own business and needs to find what works for them."

The offer applies to Redoak's Aussie Pale Ale and Lager, just two beers out of a far broader portfolio.

"We have been developing these two beer styles over some time now and we believe they will appeal to the majority of Australian beer drinkers," he adds. "We are offering real craft premium beers at a competitive price point.

"Price will be a defining factor for publicans as they are business owners and focused on the top and bottom line of their business. We believe this addresses both [of] those, while putting a real craft beer on their beer list to give customers more choice. 

"Ultimately, what works for the customer will work for the publican too."

The offer surprised many in the industry, with the brewery's stand a rare occasion on which a business offering beer at such a price point – be that as a standalone price or via deals – has gone public. More commonly, discussions around pricing take place off the record or based on hearsay.

How the move pans out for Redoak remains to be seen. But there are plenty of other brewers who worry where the downward pressure on pricing is leading. 

Phil O'Shea (pictured above) runs Five Barrel Brewing in Wollongong and says it's becoming more of a challenge to secure taps in his local market as brewing companies send their reps to town bearing cheaper beer. He believes some are "in a brand-building exercise", hoping to attract investment or a buyout, and thus are under little pressure to make money off their wholesale business.

"We are seeing some unbelievable deals down here," he says, predicting businesses, particularly those that have over-capitalised, may cease to operate in the next five years. 

"All the main [venues] down here are price sensitive. It's an ongoing pain in the arse.

"There are two plus one deals [buy two kegs and get one free]; some one plus one recently. [Brewing companies] are giving bartenders free kegs to give to punters or giving the barman a tonne of cartons to take home."

Phil says there is a knock-on effect: venues agree a deal with one or two reps then expect the same from everyone else.

"The people making the decisions [on what to pour at venues] have got price pressure put on them by the owners, so when they see $200 kegs come through that's what they go for," he says.

"As a local brewer, it's hard to get a permanent tap in craft beer venues because of the deals that are on. I only hear from people on Friday afternoon when they've finished a keg [of another beer] and need something to put on."

In Victoria's High Country, Bridge Road Brewers has been facing a similar issue, losing many tap points in its hometown of Beechworth. Founder Ben Kraus acknowledges that, in some cases, his brewery and its popular venue is viewed as a competitor rather than an attraction bringing people to the town.

But he says they're also "dealing with price models that we don't believe are sustainable" – beers coming to Beechworth from larger independents that are landing well below Bridge Road's pricing, even though he doesn't have to factor in costs such as shipping or a rep when it comes to selling beer in the town.

"We get challenged as to why we can't match that pricing," he says. "We know how much it costs to produce beer and we want to keep making a high quality product. We're not trying to find an exit strategy as some others have proved to be doing in the past while denying it."

Bridge Road Brewers founder Ben Kraus (right) says it's tough, even for those with growing businesses, strong brands and good beer.

He believes some businesses can offer such prices because they're run by people still working and earning a living in other fields, thus viewing their beer brand as a side interest.

"They're running on margins that wouldn't otherwise be sustainable," he says. "We've seen it in the wine industry. It doesn't last forever because the romance wears off."

In other cases, he says business owners will factor in cheap beer deals as a marketing expense, part of a plan to generate awareness in the hope consumers will continue to demand their beer so they can go back to selling it at full price.

But, he warns: "I haven't seen a model where it works well to build a strong brand."

So what is the solution to the increasingly intense price pressures throughout the industry, particularly for those with no retail space of their own? Indeed, can there be one? 

"Maybe it's a result of competition, but I think we should see ourselves as different to the multinational brewers," says Shawn. "[We] need to value our own products, need to compete harder to be taking mainstream taps, to be pushing out into the suburbs instead of this stupid race to the bottom. Even the bigger independent brewers can never win on price – ABI or Lion's pockets are so much deeper than any of ours."

He adds: "When you are pushing into suburban pubs, there's a bit of evangelism that needs to be undertaken by the craft beer industry. If the first thing we say [to a publican considering putting on a small brewer's beer for the first time] is, 'Here's a two plus one deal' then the publican takes that on board and will struggle [in the future] to pay the price for beer the industry needs to be able to grow."

This "evangelism" – educating publicans, their staff and their customers about craft beer, what it means, why they might like to consider supporting a small, local business, how they might go about becoming part of the movement themselves – is one way in which Bridge Road looks to win customers. 

"We will do events and provide what we can," says Ben. "We build strong relationships and show that we are there for the long run, talk about our values and try to trade on quality and our history and that we really are passionate about craft beer – not business first, but beer first and business a close second.

"There's plenty of good venues out there who aren't driven by discounts but give their customers choice; most of the ones that do that don't need convincing. A good message [for other venue owners] would be for them to understand why small independents can't match the price of some other businesses and [to question] the motivations for that."

The US Brewers Association's mark of independence.

Next year is likely to see the Independent Brewers Association (IBA) launch an Australian version of the independent seals recently introduced in the US and UK. Such a move may provide a rallying point for the industry. Indeed, within the discussion paper sent to members last month, there is mention of the need to encourage craft beer drinkers to "vote with their throats" and patronise venues that support independent brewers. 

We've long believed some form of accreditation for good venues – those that, for example, support independent brewers, provide beer education for their staff, clean their lines regularly and don't look to move from one discounted beer deal to the next – would be a wise move for the industry. If other venues see custom being driven to the best operators, you would hope they might decide to raise the standard of their own offering. It's something Ben would like to see too.

"It would be nice if we could provide recognition for venues," he says. "To generate awareness around freehouses. Once people put that stamp on themselves, they can easily say no to people who are looking to lock out taps."

For the time being, however, he believes the industry will only see "more and more" discounting, deals and cheap beer.

"A keg of craft beer in New Zealand starts at $300," he says. "Here it's $200/$220. [Brewers I spoke to in New Zealand] were gobsmacked and said it doesn't work."

Time will tell if they're right.

You can read our Secret Brewer pieces on Price Wars here and here.

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