Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping the Craft Beer Industry
Transcript
- Lucas: So the July jobs report came in softer than expected, which fits a slow-growth story. But the other half of stagflation, the inflation side, is still lurking. Core CPI is down a bit, but the ten-year breakeven inflation rate ticked up to 2.26 percent. And that's the backdrop for something I've been watching: the craft beer industry. Luna: Craft beer? I mean, I love a good IPA, but is it really a macro story? Lucas: It is, and the numbers are stark. Craft beer volumes fell about three percent last year, while the big macro brewers actually gained share. And the reason isn't just taste or trends; it's stagflation. Input costs are soaring: barley prices are up twelve percent year-over-year, and aluminum cans are up about eight percent. Small breweries don't have the hedging power or scale to absorb that. Luna: So they're passing those costs on to us, right? I've noticed a six-pack is like twelve bucks now. Lucas: Exactly. And that's the squeeze. When inflation runs hot and wage growth is tepid, consumers trade down. A four-pack of hazy IPA at eighteen dollars loses out to a twelve-pack of macro lager on sale. The craft segment is getting squeezed from both sides: higher costs and softer demand. Luna: But is this just a cyclical thing? I mean, craft beer has had ups and downs before. Lucas: That's the question. Some of it is cyclical, but there's a structural shift too. Look at what breweries are doing to adapt. Some are shrinking can sizes from twelve ounces to eleven point five, which is a classic trick to keep prices stable without admitting a price increase. Others are pivoting to more value-oriented styles like lagers and pilsners, which are cheaper to make. And there's a wave of consolidation happening, with smaller breweries getting acquired by larger craft groups or even macro players. Luna: Consolidation makes sense. If you can't beat the cost curve, join it. But what does that mean for the variety we love? Lucas: That's the trade-off. The craft beer boom was built on diversity and experimentation. But in a stagflationary environment, the market rewards efficiency and scale. So we're seeing a shakeout where the middle tier gets squeezed, and only the truly niche or the truly big survive. It's a bit like the 1970s, when economic pressures reshaped consumer habits permanently. Luna: It's funny you mention the seventies. My dad always talks about how his beer choices changed back then. But let's not forget the current numbers: real GDP growth is only one point five percent annualized, and unemployment is at four point one. That's not a recession, but it's not exactly vibrant either. Lucas: Right, and that's the stagflationary sweet spot. Growth is sluggish, but prices are still rising. The brewers I've talked to say they're planning for a couple more years of this. They're not expecting a quick rebound. Luna: So what's a small brewery to do? Is there any good news? Lucas: There is, actually. Some are finding success by focusing on hyper-local distribution and direct to consumer sales, like taprooms and bottle shops, where they can capture more margin. And the ones that are innovating on the non-alcoholic or low-alcohol segment are seeing growth. It's a niche, but it's growing fast. Luna: That's smart. Adapt or die, right? Lucas: Pretty much. And that's actually something I've been thinking about more broadly. The way we cover economics here, on this show, it's a lot like a small brewery. We're not a giant network, we're independent and listener-supported. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these shows. No ads, no corporate overlords, just people who value the kind of deep dives we do. Luna: Yeah, and I think that's why we can go into this level of detail. It's like the taproom model. We're not trying to appeal to everyone, but the people who come here get something they can use. Lucas: Exactly. And we're grateful for that. But back to the beer. The can-size trick is interesting, but there's a limit to how much you can shrink before consumers notice. Some brewers are actually going the opposite direction, releasing bigger cans at a slight premium, like the tallboys at a lower price per ounce. It's a way to offer value without feeling cheap. Luna: So it's like a psychological pricing game. What about the supply side? Are barley shortages a real thing? Lucas: It's not a shortage per se, but it's a cost issue. Droughts in key growing regions have cut yields, and that's pushed prices up. Plus, energy costs affect everything from malting to refrigeration. So even the raw materials that aren't directly tied to grain are more expensive. Luna: That reminds me of that headline about Europe blowing up riverbeds due to drought. It's all interconnected. Lucas: Exactly. And when you look at the global picture, it's not just barley. Hops are also affected, and they're a key input for craft styles like IPAs. So the very styles that defined the craft boom are now the most expensive to produce. Luna: So are we going to see a wave of breweries shutting down? Like the ones that can't adapt? Lucas: We're already seeing it. The number of active craft breweries has actually declined for the first time in decades. It's not a crash, but it's a correction. And I think that's healthy in a way. The ones that survive will be stronger and more resilient. Luna: That's a bit of a 'survival of the fittest' narrative. But what about the consumers? Are we going to lose variety? Lucas: In the short term, yes, I think we will. But the flip side is that the breweries that do survive will likely focus on what they do best. So you might see fewer options, but the ones that remain will be higher quality or more distinctive. It's a different kind of variety. Luna: Yeah, I can see that. Like, I'd rather have a killer lager from a local brewery than a mediocre IPA from a big craft conglomerate. Lucas: And that's the thing. The craft beer industry has always been about authenticity and local connection. Stagflation is forcing it to get back to those roots. It's not the end of craft beer, it's a reinvention. Luna: So, looking ahead, what should we be watching for in the next year or so? Lucas: I'd watch the pricing strategies. If can sizes keep shrinking, that's a sign that cost pressures are persistent. Also, watch the M&A activity. If we see big players snapping up struggling craft brands, that's a consolidation signal. And keep an eye on the non-alcoholic segment, because that's where growth is happening. Luna: And maybe I should start investing in hop futures? Ha. Lucas: I wouldn't bet on it, but I'd definitely keep enjoying your local brewery's taproom. Because in a stagflationary world, that might be the best way to support the industry and get a great beer at the same time.