Wednesday, September 7, 2011

Beer Arbitrage


I am going to hop on (get it?) an ongoing debate started by Jeff at Beervana (in fact he egged me on to do so) by talking about beer arbitrage.  It all started with a link to this article in the Washington Post. [You should go and read Jeff's post and the very interesting and informed discussion that followed in the comments]

While it focuses mostly on the eBay marketplace for beer (which is both prohibited by eBay and, if sold across state lines, most likely the law), I want to focus on the bigger picture: the secondary beer market itself.

The fact that these market have arisen suggests that there was a missing market problem: buyers and sellers who would like to transact but for whom there is no forum for such transactions.  The most common reason for such transactions is some sort of regulatory constraint.  Black markets in command and control economies like the former Soviet Union are a perfect example: shoes are on sale in Moscow, but there is little demand, so buyers buy them and sell them illegally in Siberia and so forth. 

In this case I suspect the main culprit is interstate restrictions on the sale of alcohol and the fact that a lot of the special beer can only be obtained close to the brewery. So this secondary market is really about circumventing the law - making money by breaking it.  But it is also about beer lovers who are willing to pay a lot to get some special beers that they crave and I agree entirely with Jeff, I fail to see how the resale market in any way exploits brewers.  The very existence of such markets means that additional value from the production and consumption of the beer is being created.  Which is good.

For the sake of argument let's forget about the regulatory constraint and suppose I decide to sell the bottle of Roots Epic that I have in my basement to a local buyer.  I am pretty sure I could get more for it now than when I bought it.  I have a willingness-to-sell price above which the cash is worth more to me than the beer.  I suspect there is someone out there with a willingness-to-pay price above my sell price and below which the beer is worth more than the cash.  If we can agree on a price somewhere in between my price and his/her price we are BOTH better off going through with the transaction.  This is precisely the entire point of markets: they create value by facilitating mutually beneficial exchanges.  Why this should be frowned upon is completely beyond me.

Here is a snippet from the article:

“In another life, I would be a consumer advocate,” Stone’s Koch says, adding that high prices also are problematic because they often accompany second-tier products. Some beers, such as hoppy India pale ales, quickly lose their vibrancy or go rancid when exposed to light and heat. “Frankly, somebody’s naive if they pay big dollars for this stuff on eBay,” Koch says. “They think they get a rare, special beer, but the reality is that they get a rare beer but it’s no longer special.”

Ultimately, though, what seems to upset brewers most is their sense that they are being exploited. “You want to hear about the framboise story?” said Russian River’s Cilurzo. “I am furious about this.”

Last September, Russian River released Framboise for a Cure, a raspberry-flavored beer that it sold for $12 per bottle to raise money for a local breast cancer treatment center. The beer sold out in a day, and soon somebody sold a bottle on eBay for $400. Then someone else put one up for sale. “We contacted that person,” Cilurzo says, “and we said, ‘This is absolutely ridiculous, because we donated 100 percent of this for charity.’”

But this is ridiculous, there is nothing pro-consumer about special releases and events that restrict the beer to a lucky/well-connected/eager set of consumers. What this secondary market is telling you is that you are excluding lots of your consumers and doing so in an inefficient way. And if Russian River wanted to raise money for the Cure, they should have raised the price of the beer, because they probably could have sold it for more. But they got the $12 they wanted for charity, I fail to see how the resale of the bottle has anything to do w.th it, it is not going to affect the amount raised.

Furthermore, the implication that buyers of high priced Vertical Epic bottles are getting a degraded product is totally beside the point. Any buyer paying that much surely knows enough about beer to know the risk he/she is taking. And who are we to judge their preferences. I would not spend the money, but that is me, everyone else can follow their bliss.

So in the end, I do not think secondary markets are evil, just the opposite.  In general I love to find little instances where markets arise spontaneously due to some missing market problem and this is but another case.

9 comments:

Pete Dunlop said...

I agree with you on secondary markets. If a bottle sold for $12 and is worth $400 on the secondary market, it's the brewer's problem if he didn't take advantage of the demand. I think brewers should be tapping these secondary markets to the extent possible. Some brewers are already doing so...or attempting to.

I'm Bill Howell. said...

I would also like to look at this from a property rights view. To whom does the beer belong? I completely agree with you that a gray/black market is created by external/regulatory rules being imposed on an otherwise free market. That being said, I think the fundamental question comes back to Whose Beer Is It?

Once RR or Stone or whoever has collected the price they set and transfer ownership, then it's a done deal. They have surrendered their right to have any say in what happens to said beer, absent something specified in the transfer contract. While they may be concerned that subsequent resale of the beer may hurt their brand (if it's not been handled properly), they either need to address those concerns before sale or just endure their angst.

To say otherwise would imply that they should be able to inspect my home beer frig to ensure I'm keeping their beers at an optimal temperature, lest I serve them to my friends in "bad" condition and thereby hurt their brand's reputation.

As I said, the fundamental question is: Whose beer is it?

Jeff Alworth said...

Nicely done. You've brought a sensible quality of actual knowledge to the discussion.

Bill Night said...

In the abstract, I agree with all of you that people should be free to sell things (for the most part).

However, I do not think people should be dishonest. Ebay has certain conditions for selling things on their site. Don't meet those conditions? Don't use Ebay to sell your beer. Same goes for the U.S. distribution laws. You might disagree with them, but as a good citizen you are bound to comply with them until they can be changed.

Brad said...

Bill N.,

C'mon, there's nothing wrong with a little civil disobedience.

While I somewhat agree that it may not be a good idea to break eBay's rules, the simple fact is that they set the rule they do so they can wash their hands of people flouting the law, not because they actually care about restricting sales of alcohol. Plausible deniability is the whole point.

Being a good citizen rarely does much good changing laws -- just ask Rosa Parks.

Beerologist4BIP said...

I absolutely agreed with Jason Harris' statement on the Beervana post so I thought I'd repost here. While I still can't disagree with Jeff's premise that you have a right to do with the beer what you will after you've purchased it, I find the gray/black market concept highly distasteful. That feeling persists even when broken down so logically by Jeff and by Patrick (your blog is one of my favorite beer blogs and I have my own). The head understands but the heart still doesn't warm to the notion. As for impact I think even suggesting that brewer's raise prices even on specific beers as alluded to with Crooked Line and other brewers raising prices on high end bottles, shows that the end result of this ends up harming your average craft beer consumer. The craft beer market is growing at a strong clip and we can hope for better and more sensible production growth and distribution, which may alleviate this nasty issue...someday.

Jason Harris said...

At the risk of being redundant to my posts at Beervana, I'd like to chime in here as well :)

I agree to a point, it's well within the beer owner's rights to resell a product that they've purchased. I don't feel that right should ever be taken away or limited for them.

However, it is clear that the end buyer is getting a less than ideal product at a large markup. Most account for this, but I can wager a lot of dodgy reviews on BA/RateBeer are from people who got their beer from a trade/eBay sale (which is probably why they added fields to say where you got the beer)

To be honest, if the laws were changed where breweries were allowed to sell their product directly to the public, it would obliterate the eBay market overnight. But until that happens, no amount of pricing adjustments are going to solve this problem.

I'm in MI, I have money to spend on beer, and I want to try Pliny the Elder. Maybe the guy I bought it from spent $5, maybe he spent $25, but either way I'm going to pay what it's worth to me on eBay. Sure, if the seller paid $25 maybe the eBay sales would be $35+....but do you really think that would stop sales? I don't think so. eBay buyers are paying 2-3x the normal price of that beer (plus expensive shipping that adds at least the cost of the original bottle in addition) to get that beer. It's a massive premium. The issue isn't that it was originally $5 for the shipper in CA, it's that the guy in MI has no other choices to buy the beer but to go to that eBay seller.

The day that the guy in MI can go to http://www.russianriverbrewing.com/and order a Pliny for $5+ shipping, the market will evaporate. But today's laws don't allow that, so nothing the brewer does can fix it. Pliny is $5 in CA, and $15 on eBay....if it was $25 in CA, it'd be $35 on eBay. The main difference would be completely alienating their core market who buys the beer on a regular basis.

Daniel said...

Excellent post. One more reason why we need truly free markets and no State manipulation for moral or any other reasons. In a free market, everyone wins. If these beers really are being sold for so much, it won't be long before brewers closer to buyers make similar beers which will more than likely have a quality and cost advantage over a beer shipped 3,000 miles in less than ideal conditions.

Mark H said...

Jason,

The market will not evaporate because Russian River decides to sell their beer online for $5. The market will evaporate when there is enough beer to satisfy the demand for the beer at $5 a pop. The production of Pliny the Younger is not enough to do that, so by selling them on the website; you only change the pool of people who can then sell the beer online. It's not that simple. The rarity of the beer has to be addressed as well.

It's simple: the breweries have decided to create an artificially rare item and sell it at a price based on the cost of production rather than the market clearing price. The two are not compatible if they don't want a secondary market. Either make more, or charge more. The seem to refuse to do either. The former for reasons related to capacity constraints and the latter for fear of a backlash from consumers. I understand why they won't do either, and I don't expect them to (although the issue of capacity is easy to deal with, even if it is not their desire to deal with it). They need to get over the fact that people pay exorbitant prices for these beers. And for the people who do, the old adage applies: buyer beware.