Beer industry needs to be ready to ride out further upcoming costs
An increase in inflation-driven production costs, to a degree that has not been seen in decades, is set to create further issues for brewers.
In a recent report from Rabobank the challenges of taking additional pricing to cover costs is addressed, with advice being given for how the industry needs to respond.
In the Beer Quarterly Q1 2023 report, Rabobank’s senior analyst – beverages, Francois Sonneville, said: “While brewers faced dramatic increases in input costs last year, our estimates suggest that contracts and other mechanisms allowed them to avoid the worst of the volatility in spot prices.”
Sonneville added: “Looking forward, even though spot prices for some items are declining, key items remain well above 2021 levels, and brewers will face additional cost of goods sold (COGS) increases, as contracts and hedges have rolled off. Furthermore, we believe that wage inflation and rising energy prices in the coming year will create additional headwinds.”
Rabobank described how, for some brewers, the full impact of escalating commodity prices in the last two years was limited by effective hedging strategies, but warned that although hedges helped elude the impact of extreme volatility and controlled costs in the near term, as some hedges roll off and pricing contracts are renegotiated, the reality of rising costs cannot be postponed indefinitely.
The report outlines how the dramatic rise in costs for the brewing industry has had obvious implications for pricing within the industry and it highlighted how rising costs have created what it calls “serious margin compression” since brewers were slow to pass cost increases on to customers in fear of losing business.
In a deep-dive into the category, the findings identify how, for the foreseeable, brewers will need to walk a fine line between raising prices enough to maintain operating margins while creating the least possible drag on operating efficiencies from volume losses.
It also indicated that, “from the cost perspective, brewers likely need to raise prices more and for longer than they are currently talking about publicly”. It suggested that this might be easier “if we have a shallower recession and/or a financially healthier-than-expected consumer, or if wine and spirits companies also begin to raise prices further”. Otherwise, the analysts advice is that “brewers will need to rethink medium-term margin expectations and look for better performance from premium innovations”.