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Mmmmm.....beer

Reading the articles about beer and alcohol sales in The Consumerist and on fivethirtyeight.com really piqued my interest in this subject, and it left me with a couple bones to pick with Mr. Nate Silver. Mr. Silver offers no real explanation as to why sales of alcohol are decreasing; times are rough, so it is very counter-intuitive to think that sales of something that makes people forget their economic woes would be on the decline. But he does throw out a few ideas that he thinks “perhaps” could be the reason behind this phenomenon, which then makes it the readers obligation to go out and research this topic in order to gain actual insight into it; any 4th-grader that is failing in math can read a downward-sloping graph of money and tell you that this is a bad thing, but it takes some digging to come up with a plausible reason why.

His first “reason”: alcohol sales were on a “hot streak” prior to the 4th quarter, and slumping sales were just a “reversion to the mean.” A reversion to the mean? By going down by almost three times the previous record drop? This would be like Kobe Bryant putting up 50 points a night for an entire week and then reverting to the mean by driving the team bus off a cliff. His second golden nugget of explanation is as follows: “Perhaps people are substituting Michelob and Coors for more expensive microbrews like Alpha King and Dogfish Head.” In order for me to understand why this was possible, I thought back to the first course on basic economics that I ever took, ECON 1001: Principles of Microeconomics. Basically, as my professor explained it, when consumers have less money the demand for inferior goods, like cheaper macrobrews (Michelob and Coors), goes up while the demand for normal goods, like more expensive microbrews (Alpha King and Dogfish Head), goes down. But I always had a hunch that my University of Minnesota professor was just a crackpot old fool who rambled about nothing and sputtered out sentence fragments, so I guess Mr. Silver just proved me right in that respect. Reason number 3: “Perhaps retailers are discounting their prices.” This to me seemed plausible, but just for the sake of confirmation-bias I figured I should check it out. Retailer discounts should result from supplier discounts, right? Since beer is the main culprit, and the main focus of the article, I did some research and found a quote that came straight from the Clydesdale’s mouth, Anheuser-Busch.com: “As planned, implementation of the company’s 2009 price increase plan was initiated in the latter half of September.” Wait a minute now, Anheuser-Busch increased prices? And sales plummeted? Mr. Silver is really batting 1.000 here. He then brings up a shortage of hops (one of the main ingredients in beer) in 2007 and 2008 as a potential reason. Again, some economics: scarcity of input resources make prices go up, not down.

So now that we have made clear Nate Silver’s economic prowess, what, then, could truly be the problem? That, my friends, is easy. So easy, in fact, that I could describe it in a mere 501-word essay located beneath a red and blue economic graph. The answer to this is twofold. First, more people are gravitating toward bars’ Happy Hours, where they can get twice as drunk for their money as they can during regular hours. A Los Angeles Times article written on January 10, 2009 reports that bars’ Happy Hours are starting earlier and lasting longer in order to draw in more customers. Here’s a quote from the article, talking about customer Luis Romero’s new spending habits:

“‘You start watching your pennies a bit more,’ said Romero as he sipped a $3.75 pint of Honey Blond Ale one recent afternoon in the Yard House restaurant at Shoreline Village in Long Beach. Just a few hours later, the same beer would sell for $6.”

In tough economic times, everyone starts pinching pennies. In the case of the bar-goers, this means getting more for your money during the aptly-named “Happy Hour.” This penny-pinching brings me to my other reason for the slump in alcohol sales. In hard times as these, consumers may not have much money, but they never lose sight of what’s really important: getting drunk to forget about their empty bank accounts; taste is merely an afterthought. As a result, people are trading down from their Belvedere and Grey Goose to cheaper brands that still do the trick like Absolut or Smirnoff. This same principle can be applied to any type of alcohol, be it Captain Morgan to Admiral Nelson or Crown Royal Extra Rare to Rebel Yell.

So all in all, consumers really just want to get the same amount of drunk for a smaller amount of money. If anyone really wanted the slump in sales to end, they would push for legislation to lower the drinking age so more college students could fritter away what little money they have at the bars. Damn, that just makes sense.


Comments

I see you have done some research and used prior knowledge to argue your points and destroy Mr. Silver's "reasons". I have not taken economics here at the U of M but I do know a little bit about economics from high school and the arguments you use to argue against Mr. Silver's that involve economics are all very true. Mr. Silver's almost seems like he wrote this article for the New York Times using very little resources. Making this article a non scholarly article and poorly written. If I was reading the article in a news paper and had no knowledge of economics and did not have time to research it further I would have probably believed what Mr. Silver's had said. Most Americans would too. Your reasons for the slumping in the alcohol sales are more practical and you obviously have done the research needed to back it up and prove it to be more plausible. Therefore after reading the article and your response to the article I would have to agree with you in all your points and the plausible reason to the decline in alcohol sales. When times get hard people do try to save money and pinch their pennies. The public realizes that they cannot spend money on all the extra wants and desires. So another possibility is that for the people that drink as a celebration or social activity may think twice before going to the bar or liquor store because they have bills to pay and groceries to buy. So it could be partly because less alcohol is actually being purchased. Then again there are the people that are alcoholics or drink either way that, yes, would go to Happy Hour to get more for their money and get drunker for their money.

Normally I’m one disinclined to agree with the whatever argument made, but it’s hard to disagree with the statement “So all in all, consumers really just want to get the same amount of drunk for a smaller amount of money”. Why wouldn’t consumers want the “best bundle available”? (also Into Micro Econ). So I’ll bite. People are turning to everything from cheap beer to church to ease their pain. Benj Steinman, editor of trade publication “Beer Marketer’s Insights” claims that Beer sales usually hold up during tough economic times, I assume for the reasons you mention. Yet recently the undeniable decline in beer sales have correlated with the global economic downturn across the globe.

“In Europe, where consumers are also hurting, lager volume fell 1%, including a 22% drop in Russia. But MillerCoors volume grew 2% in Poland, where the company gained market share. In Romania, the volume growth rate slowed to 11%, while the Czech Republic's domestic volumes dropped 1%... Third-quarter shipments rose 2% in Latin America, stymied by a 6% decline in Colombia, the company's biggest market in the region. In Africa and Asia, organic lager volumes increased 2%, with growth in China flat.”

Growths rates are dismal or at least stymied even in countries with no drinking age.
The anti-prohibition sentiment you mentioned earlier seemed to “just make sense”, but only if your argueing for the sake of responsible and safe drinking.*1. The beer market mirrors the global financial crisis, and an extended happy hour alone is unlikely to explain either. People are certaintly out for a good deal, but if their budget line is lowered, (Intro Econ), then the demand is going to fall. “Wait a minute now, Anheuser-Busch increased prices? And sales plummeted?”) The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. So yea, that makes sense. Yet Anheuser Busch is only the second largest beer producer in the U.S., so I’m willing to bet there are other factors affecting the global markets.

So lets all grab a beer and hope that the “markets” magically figure it out again.

*1 : John McCardell argues that the drinking age should be lowered back to 18 in order to bring underage drinking out from behind closed doors into a less dangerous public place. Makes sense, not only is the glamour taken off of drinking, but also gives people access to the police, medical help with out worrying that they will be in trouble for needing their services. However, I’m not too sure McCardell would agree with depending on drunk college students to stimulate the 6-pack economy. That would be like depending on the AIG employees to fix the entire market crisis
http://www.usatoday.com/money/industries/food/2009-01-15-beer-sales-flat_N.htm
http://www.colbertnation.com/the-colbert-report-videos/222216/march-19-2009/john-mccardell

Just to clarify, Cat, in regards to your comment about the law of demand: I wasn't saying that I was surprised that sales fell as a result of higher prices, I was fasetiously stating that Silver's notion that sales fell due to lower prices was wrong.

Great post. Is was very interesting to read