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Why higher beer prices might not last long
Brace yourselves, beer drinkers.
The price of your favorite brew may be heading for an increase this fall as a growing number of companies are signaling they will test the water on price increases.
Constellation Brands (NYSE: STZ) was the first to be reported to be planning a price hike. Riding the hot streak of brands such as its Mexican beers Corona and Modelo Especial, the company plans to raise prices by 3 percent in some states this fall, according to Beer Marketer's Insights. In California and Florida, prices will rise by about 75 cents. California accounts for about 25 percent of Constellation's total sales volume.
The move comes as Constellation is on a roll, delivering results that are among the best in the industry. On the company's conference call, CEO Rob Sands told analysts Constellation has accounted for about two-thirds of the total U.S. beer industry volume growth and pointed to IRI data that showed Constellation leading volume gains among U.S. brewers for eight consecutive quarters.
"Overall, our beer business has been unstoppable" and has "generated results that exceeded our expectations," he said.
Buffalo Wild Wings (NASDAQ: BWLD) also sounded the alarm on higher beer prices this week. The company warned it is seeing higher keg costs, which will be passed along to customers via an increase in draft beer prices.
"We expect keg prices to be going up-and they have-so we will take modest increases on beer," said Mary Twinem, executive vice president, chief financial officer and treasurer at the restaurant chain.
Meanwhile, Boston Beer Co. (NYSE: SAM) is among the group of craft brewers that could facing higher production costs as the result of drought conditions in Washington's Yakima Valley, which accounts for 75 percent of hops grown in the U.S.
The company, whose portfolio includes Samuel Adams beer and the popular Angry Orchard cider brand, said in its earnings release Thursday that it expects national price increases of 1 to 2 percent among its brands.
At a time when beer is losing share to wine and spirits, there may be an additional cause for concern about the industry's ability to withstand widespread price hikes.
According to the Conference Board, consumer confidence is at its lowest level in since September 2014. The Conference Board's Consumer Confidence Index reading fell to 90.9 in July, well short of the 100 economists expected and down from 99.8 in June, the steepest month to month decline since August 2011.
Analysts say evidence that consumers are being more careful with how they spend their discretionary income is already being felt in the bar and restaurant space. According to GuestMetrics, which measures traffic in bars and restaurants, traffic is down 2.2 percent year to date versus down 1.4 percent at the same point last year.
While some of the decline can be attributed to an anticipated drop-off in traffic with no World Cup this year versus last, Bill Pecoriello of GuestMetrics said the on-premise industry had already been showing signs of weakness.
"Even stepping back from the World Cup, traffic continues to be weak overall and that's a sign of consumers still being more cautious with their spending," he said.
While market leader Anheuser-Busch (Euronext Brussels: ABI-BE) has yet to announce its pricing plan, it has a history of announcing price increases in the fall and it would not be a surprise for the brewing giant to once again push pricing in certain markets.
Beer Marketers Insights President Benj Steinman said the company won't be afraid to reverse course if the marketplace appears unwilling to support higher prices.
"More recently there has been kind of a pattern of going up and then having to discount back because the market really won't bear the increase for a variety of reasons depending on local market conditions," he said.
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