Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Brewing Industry
Transcript
- Lucas: If you've bought a six-pack of craft beer lately, you've probably noticed the price creeping up — but what's interesting is that the breweries themselves are getting squeezed even harder than the consumer. Luna: I've definitely seen it. My local spot in Portland used to have four-dollar pints; now it's five-fifty. And the cans at the grocery store are pushing eleven bucks a pack. Lucas: Right. And that's exactly the dynamic we're digging into today. The brewing industry — especially small and mid-sized craft operations — is caught between two hard trends: input costs that refuse to come down, and consumers who are starting to trade down or drink less. Luna: So it's a classic stagflation pinch — costs up, demand softening. Lucas: Exactly. Let's start with the numbers. Barley prices — the core grain — are up about 18 percent year-over-year. Aluminum for cans has risen about 14 percent over the same period. And that's before you factor in freight costs and energy for refrigeration. Luna: And those are the two biggest line items for most breweries — grain and packaging. Lucas: Right. So a typical regional brewery, say one doing twenty thousand barrels a year, is seeing its cost of goods sold rise by roughly 12 to 15 percent. But they can't pass all of that on to the taproom because they'd lose customers. So they're absorbing some of it, which crushes margins. Luna: What are they actually doing about it? Are they shrinking their distribution footprint? Lucas: Yes — that's one of the biggest moves. I talked to a brewery in Bend, Oregon that just pulled out of four states. They used to distribute as far east as Colorado. Now they're sticking to Oregon and Washington. They cut their distribution by about 30 percent. Luna: That's a big bet. They're basically saying we'd rather be strong in two states than mediocre in six. Lucas: Exactly. And it's not just about saving on freight. It's about focusing marketing dollars and sales rep time on accounts that actually move volume. The CEO told me that their delivery cost per case was up 22 percent last year. By pulling back, they've dropped that to a 6 percent increase. Luna: So the math works. But what about breweries that are too small to distribute widely in the first place? The nanobreweries and taproom-only spots. Lucas: They're pivoting in a different direction. A lot of them are moving toward contract brewing for larger brands. If you've got spare tank capacity — and many do, because taproom traffic is off 8 to 10 percent from last year — you can brew someone else's recipe and earn a fee. Luna: That's fascinating. So they become a white-label manufacturer essentially. Lucas: Exactly. It's low-margin but it keeps the lights on. And it's growing — contract brewing volume was up about 6 percent in the first half of this year, according to industry data. Luna: Meanwhile, the big macro brewers — the Anheuser-Buschs and Molson Coors of the world — they have more room to hedge. They lock in grain and aluminum contracts two years out. Lucas: That's the advantage of scale. They've also got pricing power because their products are cheaper to begin with. A twelve-pack of Bud Light is still under 14 bucks. That's a much easier swallow than a twelve-pack of IPA at 18 or 19. Luna: So we're seeing the consumer trade down. And I think that's a really important trend for this episode. The June CPI data showed overall prices dipped 0.4 percent, but that was mostly driven by gasoline. Food and beverage at home is still stubbornly high. Lucas: Right. The core CPI — excluding food and energy — barely moved, down just 0.02 points. So the relief isn't hitting the grocery aisle yet. And that means consumers are making choices. They might swap a 10-dollar six-pack for an 8-dollar one. Or they buy a 12-pack of something cheaper and drink less. Luna: I see that in my own shopping. I used to pick up whatever seasonal IPA caught my eye. Now I'm checking the price per ounce. Lucas: And the data backs that up. Nielsen numbers from the second quarter show that dollar sales of craft beer were flat, but volume was down about 3 percent. So people are paying more but buying less. That's not sustainable for breweries that rely on volume. Luna: What about the taproom experience? That's where margins used to be fat — a pint costs the brewery maybe 80 cents to produce, and they sell it for 6 or 7 dollars. Lucas: Margins are still good, but traffic is down. The Federal Reserve's Beige Book from last week noted that bars and restaurants got a temporary boost from the World Cup, but overall consumer spending on dining and drinking is softening. The taproom is a discretionary outing, and when people feel pinched, it's one of the first things they cut. Luna: So it's a double hit — higher costs on the production side, lower traffic on the sales side. Lucas: Exactly. And that's the stagflation pattern. You've got persistent inflation in inputs, and you've got slow growth in demand. The unemployment rate is still low at 4.2 percent, and job openings ticked up a bit, so the labor market isn't collapsing. But real wage growth is barely keeping up with inflation. The average hourly earnings figure — 37.60 an hour — is up 2.8 percent year-over-year, but that's basically matching CPI. Luna: So consumers aren't getting ahead. They're treading water. And that means they're cautious with spending. Lucas: Right. So what's the path forward for a small brewery? One thing I'm seeing is a shift toward more non-alcoholic options. NA beer is growing at about 12 percent annually, and it's cheaper to produce because you skip the fermentation step and the tax rates are lower. Some breweries are using that to diversify revenue. Luna: That's clever. It also taps into a different consumer trend — the wellness angle. People might skip the IPA but still want something that tastes like beer. Lucas: Exactly. And it gives them a product that can be sold in more places — grocery stores, even some convenience stores that have limited beer licenses. The margins aren't as good as taproom pints, but the volume potential is much larger. Luna: So the breweries that adapt — by cutting distribution, taking on contract work, launching NA lines — they'll probably survive. The ones that try to keep doing what they did in 2021 might not. Lucas: That's the sad reality. I've already seen several well-regarded breweries close their doors this year. The Brewers Association reported that the number of operating breweries in the U.S. declined for the first time in over a decade in 2025. I suspect 2026 will show another drop. Luna: It's a shakeout. But maybe that's healthy in the long run — the ones that survive will be leaner and more focused. Lucas: Exactly. And look, speaking of being lean and focused — this is a good moment to mention that we keep Stagflation Conversations completely ad-free. No sponsors, no commercials. It's funded entirely by listeners who chip in a few bucks a month over at buy me a coffee dot com slash fexingo. That support is what lets us keep digging into niche industries like this without worrying about ad revenue. Luna: Yeah, and it's really appreciated. We hear from listeners who say they learn something new every episode — and that's exactly what we're going for. So if you've been getting value from the show, think about joining that group. Lucas: Alright. Back to the beer. One more interesting data point: wholesale prices actually declined 0.3 percent in June, largely because of a drop in gasoline. If that trend continues, it could eventually feed into lower freight costs for breweries. But it's too early to call that a turn. Luna: So there's a potential ray of light, but it's not here yet. Lucas: Right. In the meantime, the strategic playbook for craft breweries is pretty clear: shrink geography, diversify revenue, and keep an eye on consumer price sensitivity. The ones that do that will be around to pour a pint when conditions improve. Luna: I'll drink to that. Maybe an NA IPA.