Energy
Friday, August 5th, 2022 4:26 am EDT
LONDON — The average cost of a pint of beer in the U.K. has soared by 70% since 2008 — well ahead of inflation — and some Londoners are parting with as much as £8 ($9.70) for 568ml of the amber nectar.
According to figures from consultancy firm CGA, the average cost of a pint has risen from £2.30 in 2008 to £3.95 in 2022, though prices vary drastically across locations. Average prices rose by 15 pence between 2021 and 2022, up almost 4%, one of the largest year-on-year increases since 2008.
The average price of a pint at one unnamed pub in London hit an eye-watering £8.06 this year, the highest CGA has ever recorded, while the lowest nationally was a £1.79 average at a pub in Lancashire, in the northwest of England.
U.K. inflation hit a 40-year high of 9.4% in June and is expected to rise beyond 13% in October, compounding the country’s historic cost-of-living crisis and prompting the Bank of England to implement its largest interest rate hike since 1995 on Thursday.
Many pubs and hospitality venues are concerned that consumers will increasingly stay at home.
Paul Bolton, client director for GB drinks at CGA, told CNBC that a combination of supply chain issues, staffing shortages, soaring energy costs, lingering pandemic-era debts and generally high inflation are increasing suppliers’ cost pressures, which then have to be passed onto the consumer.
Raw materials and energy
Francois Sonneville, senior beverage analyst at Rabobank, told CNBC that prices are increasing throughout the value chain, starting with barley.
“The barley price has gone up, and has doubled since 2021. There’s two reasons for that: one is that the harvest in North America was really poor, driven by a poor climate, so there was not much inventory to start with – and then, of course, we had the Black Sea region conflict,” he told CNBC’s Arabile Gumede.
Historically, when grain prices increased, farmers would compensate by planting more the following year, but broader agricultural inflation is also putting a squeeze on farms, outpacing even the 40-year high of 9.4% headline inflation in the U.K.
“Where our normal inflation is running at 8, 9%, (agricultural) inflation for our businesses is running somewhere over 22, 23%,” explained Richard Hirst, owner of Hirst Farms in Suffolk.
“That’s a function of obviously oil prices, fuel – our tractor diesel has gone up more than three times in price, which is a lot more, relatively, than road fuel has gone up.”
Hirst said the farm is also facing substantial labor cost increases, with shortages affecting the farming industry nationwide, along with fertilizer costs.
“Fertilizer costs will have tripled for next year – we’re buying fertilizer now three times what it was last year. Our chemical inputs are going up and just the cost of running machinery, whether it’s spare parts or actually just the cost of buying machinery itself. All that has gone up an awful lot more than the 9 or 10% of normal inflation.”
However, barley is not the main cost incurred during the brewing process – in fact, it only contributes around 5% of the price of beer at the tap. The biggest costs, analysts and business leaders told CNBC, come from labor, packaging and energy.
“I think that if you look at the brewing process itself, it uses a lot of energy – and the energy price has gone up, as we all know, when we stop at the pump – but the most important one is probably packaging,” Sonneville said.
“Packaging makes up about 25 to 30% of the cost price of beer, and glass packaging, glass bottles, use about 25% of their cost in energy, so with gas prices going 10 times higher now than they were two years ago, that has a massive impact on the cost of a brewer.”
Labor of love
His comments were echoed by Andy Wood, CEO of Suffolk-based brewery and hospitality business Adnams, who told CNBC that the energy price increases the company is seeing are “absolutely eye-watering.”
“Brewing beer or distilling spirits involves a lot of boiling water, so that involves lots of energy to get to that state, although we’ve put quite a number of innovations in over the years to limit the impact of that,” he explained.
Wood said in the aftermath of Brexit and the pandemic, a tightening of the U.K. labor market is also exerting upward wage pressure, which will likely be exacerbated by the country’s escalating cost-of-living crisis.
“The biggest cost that we have is our payroll because the hospitality part of that business is a people-driven business,” he added.
What’s more, the geopolitical headwinds facing businesses throughout the supply chain are unlikely to abate any time soon.
“So we’ve got Russia’s invasion of Ukraine, we’ve got the energy crisis that that’s brought on, we’ve got the food supply crisis, grain, cooking oils, these types of things, and then … we hear in the media that China may be looking longingly at Taiwan, so I think the geopolitical situation is getting no easier, so I think these things are here to stay,” he said.
The question for businesses, according to both Wood and Sonneville, is how many of these costs they can absorb, how much should be passed onto consumers, and in the midst of a cost of living crisis, how to sustain margins without forcing the consumer to stay at home and jeopardizing volumes.
Brewers tend to have long-term contracts and hedges in place to ensure contingency plans for future price rises, meaning not all of their costs are fully reflected at present, and therefore not immediately passed onto consumers.
“I think if you look at the price of beer that you and I pay, there is a risk that that will go higher, because there is a lagging effect of costs at the brewery because of those long-term contracts,” Sonneville said on Monday.
“The hope that I think is there at brewers is that prices will come down. We have not seen that in gas — we’ve seen more sanctions there and gas prices have actually risen in the last three days — but we have seen that grain prices have come off a little bit, and the hope is that that will continue.”
Shifting trends
Wood noted that consumer sentiment and behavior had already begun to shift in the face of higher prices at the bar.
“We’re certainly seeing people come out earlier in the evening, having their drinks, having their dinner, and then they’re going back home,” he said.
“We’re seeing people perhaps having two courses rather than three courses, and perhaps having a glass of wine rather than a bottle of wine, so we are seeing some changes in consumer behavior, there is no doubt about that.”
This was reflected in CGA’s latest consumer analysis, which found that premium products and venues offering particularly unique experiences were increasing their share of the on-trade.
CGA’s Bolton told CNBC that venues offering darts, ax-throwing or cricket were thriving, while brands seen to be offering premium drinks were faring better in the aftermath of the pandemic, as spending became less about volume and more about the experience.
“It’s really about making sure that the consumer understands that they’re going to get a real experience when they do go out, and therefore they are happier to pay that when they do go out, because we do know that consumers have told us that they’re going to prioritize eating and drinking out in terms of disposable income over things like holidays, over things like clothing,” Bolton said.
“So we know there is that real appetite to get back out there and spend.”
This post has been syndicated from a third-party source. View the original article here.
