Sunday, May 31, 2009

Prices and the grocery store debate: Interview with Dave Thibodeau, Part V

This is Part V of Soggy Coaster's interview with Dave Thibodeau, president and co-founder of Ska Brewing Co. Previous installments are posted below. The remainder of the interview will be published in installments over the next few days:

Soggy Coaster: So I wanted to talk about prices a bit. Everyone who buys beer knows that prices have gone up. What’s behind that and what do you see in the next year or so?

Dave Thibodeau: As far as beer prices going up, the thing about it that you always have to keep in mind is that it’s still totally an affordable luxury. It’s still a high-end product – craft beer, anyways. When you compare it to wine, it’s still a value for what you’re getting. Even some of the more expensive beers.

Our costs of our materials, our hops and barley, went up exorbitantly a year ago. We signed some long-term contracts to keep some prices where we could manage them, but the thing was kind of this perfect storm of an adjustment from the ‘90s that farmers were making to the market and then some growth on the craft beer side, some problems with hops in other parts of the world, drought, also, as far as barley goes.

All of the sudden, there were varieties that were no longer available. There were other varieties that were in very short supply and only the bigger guys could afford to do these long-term contracts or even forecast what they were going to do, because that’s a difficult thing.

It takes about three years for the market to adjust, and that’s of course happening. Now, we’re almost two years into it. You can see it leveling out. I don’t think prices are going to drop, but I think we can hope that they’re not going to go up like that again.

One thing that is definitely happening and you’re seeing a bunch of it in Colorado now, and I’m happy to say we’re a part of it, is a real local effort to get ingredients. We had a beer called Hoperation Ivy in the fall – it was a wet-hop beer – where we actually handpicked all the hops in Montrose, and they were Colorado hops. There’s some guys growing barley outside of Alamosa right now and hopefully we’ll have an all-Colorado beer this fall. The same beer, but hopefully with all-Colorado ingredients. It’s nice to have that going on, and I know that’s happening in other states, too, that previously didn’t do that.

The other cool thing is people are using a lot of ingredients to sort of substitute for hops. So you’re seeing a lot more spices and herbs. It’s really just spawned a lot of creativity.

Granted, prices are up on all the good, traditional beers or even the stronger-selling beers. There’s no way anybody could have gotten by, there’s no way anybody even slightly covered their margin selling their beer to a wholesaler. No matter how high their price increase was, they didn’t cover that margin. There’s not a chance. Maybe some of the huge guys, but I don’t know.

Soggy: Got it. So the grocery store sales debate marches on. How would grocery store sales affect Ska?

Thibodeau: What I believe would happen is that we would probably see an initial increase in sales, assuming some grocery stores took some Ska products. The problem with that is a lot of the grocery store chains like Wal-Mart or Safeway or Albertson’s have corporate headquarters in another state, and a beer buyer that doesn’t even live in Colorado that you have to go through. So it’s hard to tell.

They rely on scan data, sales data from other chains to determine what sells well. So a small brewery like us, we don’t sell nationally in all these chains, so there is none of that data on us. So you’re dealing with somebody who doesn’t know you, doesn’t know the area, doesn’t know it’s selling where you live, doesn’t care. They just want to see the scan data, and it makes it incredibly difficult for us to get in a place like that.

On the flipside, there are places like City Market, where they have a beer buyer that buys for the King Sooper’s and City Markets in Denver. He lives in Denver, he used to live in Durango. I think that chain in Colorado might sell some of our beer.

Most of the little independently and locally owned liquor stores that are sitting right next to these large, chain grocery stores, a lot of those guys would go out of business. I think the data says 50 percent of them within five years, and you could see how that would happen. This is what’s unfair about it: they strategically located their stores inn the parking lots of grocery stores. It was their business plan. To go and change the rules now that negates the entire reason they thought they had a good idea, it isn’t fair.

Some of the bigger guys might be able to get by specializing with certain products that the grocery stores aren’t going to stock. But most people are going to take advantage of the convenience and forgo the little bit crazier beer just to grab a six-pack while they’re in the grocery store. And ultimately, when that little guy goes out of business then you’re going to lose that selection. So the consumer is not going to be able to buy the good beers. They’re not going to be able to buy the good beer where they can now. There’s going to be different pricing situations that take place once that happens. They’re going to want to consolidate orders. It’s eventually going to just crush all these little guys.

The percentage of sales probably won’t change all that much. They’ll just shift to these guys that are headquartered out of state. So all the money in Durango that stays local right now, because it’s a locally owned, independent business, those exact sales will shift to another company and 75 percent of that dollar will go out of state all of the sudden when it was all staying here before. It’ll be detrimental to small communities like us.

It’s hard to battle these big guys. They’ve got money, they’ve got lobbyists, they’re going to pay them and go to town. I think initially it might sound like a good thing. It sounds convenient to people. But I think it’s just going to crush things in the long run.

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