How climate change could make your favorite beer less refreshing
Water accounts for about 95% of the composition of beer, and it is also a crucial agricultural input for barley and hops. Given this significance, water supply risk mitigation should be a major focus for the Brewers Association and their membership of over 4,100 small independent craft brewers.
Climate change impacts the global water cycle in a number of interdependent ways, including geographic variability in rainfall patterns, in
creased water needs due to increased global temperatures, and the contamination of fresh water supply due to pollution and the rise in sea levels. [1] Corporations across multiple sectors are paying close attention to the potential risk this may have to their business models; in fact, the 2017 CDP Global Water Report found that thousands of companies are collectively committing $23.4 billion into projects that reduce their water risk. [2] Among the over 2,000 respondents to CDP’s outreach for water data disclosure, many shared operating costs and supply chain disruption amongst their chief concerns, as shown in the chart. [3]
The Smallest Brewers are in the Hottest Water
Small and independent craft brewers should be especially concerned about their water supply risk exposure. The relative scale and production cost advantage held by the world’s multinational macrobrewers as compared to these smaller, often local operations is a competitive divide that could continue to widen due to water risk mitigation techniques.
Currently, the industry average ratio of water usage by volume to beer produced is about 7 to 1. [4] However, global brewers Anheuser Busch InBev and Molson Coors have production ratios of less than half that footprint, with continuing plans for further reduction. [5,6] By contrast, the smaller in barrels per year (bbl/year) a brewer is, the worse their ratio. Brewers Association’s recently-published 2016 Sustainability Benchmarking Update shows that while their best-performing large members producing >10,000 bbl/year can get close to the macrobrewers’ stats, at a ratio of 3.3 to 1, the water usage ratios vary considerably by size cohort and by individual brewery performance, such that the lowest-performing quartile of brewers in the smallest cohort (<1,000 bbl/year) uses 82 barrels of water to produce just 1 barrel of beer! [7]
Beer-making is Fun but Knowledge is Power
The Brewers Association (“BA”) is a 501(c)(6) not-for-profit trade association, organized to “promote and protect American craft brewers, their beers, and the community of brewing enthusiasts”. [8] The BA provides an array of support functions; the impact they have on water supply risk, at present, is the information they compile and make available to their members. Aspiring brewmasters have many aspects of the art and business of brewing on their mind, and often their primary consideration for water sourcing may typically be the underlying chemistry and its impact to the flavor profile and consistency of their creations. The benchmarking statistics that BA provides for their members allow them to also consider their operational efficiency against their peer group and incorporate BA’s best practice recommendations to improve and realize short term cost efficiencies.
However, while these resources are necessary and helpful, they are not sufficient to successfully position small independent craft brewers for long-term viability and competitive success. The risk of water supply shortages needs to be a much more prevalent topic of active consideration by smaller brewers as they evaluate plans to scale their operations. Specifically, I recommend that BA:
- Broadly communicate a tangible outlook of the future of water availability, and the cost of such availability, for their member brewers. The related increasing costs of doing business may otherwise be underestimated for relatively new brewers who are very likely thinking of many other aspects of growing their business in the short to medium term.
- Provide an even greater degree of advisory support to build action plans to meet water efficiency targets for their member brewers. For example, guidance on development of sustainable production practices and increased partnership with water-conscious agricultural suppliers will help accelerate the reduction of water usage towards the competitve range seen by high-performing, larger brewers.
Don’t Let Independent Craft Dry Up
MIT Sloan Management Review recently argued, rather persuasively, that water prices (in general, for all buyers) may need to rise significantly to better align intensity of water use with actual availability. [9] If this happens, and small independent craft brewers are not adequately prepared, I have to wonder about a few sobering possibilities:
How will the cost of efforts to responsibly manage water usage impact the prices of all the kinds of beer that consumers currently enjoy?
How might rising prices shift consumer demand for different types of beer? Will craft buyers get priced out and switch to national brands? Or will they just buy less craft?
Will independent craft brewers survive the competitive challenges resulting from price pressures?
(792 words)
Sources:
[1] “Water and Climate Change”. Union of Concerned Scientists. http://www.ucsusa.org/global_warming/science_and_impacts/impacts/water-and-climate-change.html#.Wgtg-GhSwuU
[2] CDP Global Water Report 2017. https://www.cdp.net/en/water
[3] Ibid.
[4] “Water and Wastewater: Treatment/Volume Reduction Manual” Brewers Association. https://www.brewersassociation.org/educational-publications/water-wastewater-sustainability-manual/
[5] 2016 Better World Report. Anheuser Busch InBev.
http://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/BetterWorld2/reporting/better_world_report/ABInBev_2016BWR.pdf
[6] Increasing Efficiencies in Our Breweries. Molson Coors.
http://www.molsoncoors.com/en/sustainability/sustainably-brewing/water
[7] Brewers Association 2016 Sustainability Benchmarking Update. https://www.brewersassociation.org/industry-updates/sustainability-benchmarking-update-helps-brewers-gauge-utility-usage/
[8] Brewers Association Purpose Statement. https://www.brewersassociation.org/brewers-association/purpose/
[9] “Does Your Supply Chain Risk Management Strategy Hold Water?” MIT Sloan Management Review. December 22, 2016. http://sloanreview.mit.edu/article/does-your-supply-chain-risk-management-strategy-hold-water/
I honestly think that as water pressures continue to rise that small independent breweries are going to struggle to keep up. I think it’s likely that we see further segmentation within the beer category, with microbrews or local breweries having to charge higher prices and promote quality to justify their pricing if water prices become too high and there isn’t technology/technique developed to improve water ratios needed to make beer. Luckily (or unluckily), it may be many years before water prices see upticks since governments will likely have to tackle the issue first.
The water shortage is probably one of the most scary environmental trends we face, and one I feel doesn’t get as much attention.
The one thing that’s not clear to me is if the price of water is such a large component of the price of beer (e.g., what percentage of cogs is water related costs?). If it’s small, even if water costs double, the end impact on price may be small. Assuming it’s a large effect, I think you rightly point out that the BA is in a great position to spread best practices. Do you think, however, they’re going to be able to execute that? Seems like a lot of work to provide those advisory services and there may be volume advantages that are unavailable to small players even with best practices. It therefore seems that the lack of water (and proper, effective water management) may become a powerful moat for big players (e.g., Anheuser) to undercut smaller competitors. It seems quite possible that we may see a long term decline in # of small brewers. If this happens, the consequences for the beer market are sobering…
I agree with Fede that water prices would have to go up substantially to meaningfully affect the price of beer directly through water COGS, but I think that when you consider the other effects of lower water availability / higher prices, even moderate increases in water prices (corresponding to lower availability) could be quite problematic for craft beers. This is because higher water prices would also flow through to COGS related to agricultural inputs, which are substantial for beer-making. The combined effect of higher water prices on water COGS and agricultural input COGS could significantly increase the cost of craft beers, even if prices went up moderately. As others have pointed out, large beer companies would be better able to handle the double effect of higher water prices, which would increase their competitive advantage.
Similar to Fede’s response, my thoughts on the most likely outcome of the situation you describe is that it will lead to further and more rapid consolidation in the beer industry. It seems that the efficiency of water usage will become such a competitive advantage that the major players will be able to scoop up microbreweries who cannot achieve the same type of scale without being under the umbrella of a larger brewer.
I am not convinced that consumers would be willing to pay a higher enough price for craft brews compared to national brands to offset the widening cost base, particularly because of their lack of knowledge of the issue. I wonder if the BA could play a role in educating beer drinkers on the impact of water sourcing on the prices of their beers. At least if a consumer can rationally understand why their Spotted Cow costs more than a Bud Light, they may be more willing to accept the price disparity.
I agree with Fede that the water shortage is one of the most frightening consequences of climate change. I am reminded of the epilogue of The Big Short, the movie about the economic crisis of 2008, in which we learn that the investor who first predicted the global crash is now focusing all his trades on water!
I am curious about why smaller brewers use water so much less efficiently than the larger brewers. Do they have more inefficient supply chains? Are they less sophisticated in their production processes? As Fede points out, this seems like a huge opportunity for the BA to provide education and support. I would also suggest that small brewers look into joint ventures for water sourcing in preparation for rising water costs. They will need much larger scale to compete with the large brewers, and banding together could be one way to ensure survival.
I personally am of the opinion that the craft revolution is here to stay, and that rising water prices could be translated successfully to consumers. To a certain degree, I think demand for differentiated beer has become inelastic in response to consumer education and changing preferences, and successful mid-scale craft breweries (e.g., Southern Tier, the pride of the mid-Atlantic Dogfish Head, etc.) can raise prices to more accurately reflect the prices of their inputs. I do however acknowledge the point that these costs will become a barrier to entry, and you may see novelty beer recipes that in the 2000’s would result in a brewery launch be “acquired” by a mid-scale competitor. However, I am most curious about how these increasing input costs will impact the largest growing beer segment, Mexican cervesas, and if rising beer prices will also fuel the growing US liquor demand.
Thank you for the interesting and well written article. I also see this as a potential issue for microbreweries in the future, and appreciate that the BA is being at least somewhat proactive in bringing this to their attention. One question that I had was regarding geographical decisions for microbreweries as a result of water prices. Right now some of the largest beer-producing regions in the US are also its driest, including places like Southern California which only recently exited the longest drought in its recorded history. Since particular regions are likely to be more or less vulnerable to these issues, might we see a shift in this geographic distribution, or potentially greater discussion around where to locate production facilities as concerns around water scarcity continue to rise?
I agree with Oswald that consumer preferences for local, artisanal beer is here to stay. I wonder though, if instead of leading to higher prices, the water shortage will lead to innovate beer brewing techniques that require less water. I’m not familiar with the brewing process, but it sounds like there might be opportunities to refine the process so that less water is used in the sourcing or production process. Thus, I believe this encourages breweries to innovate on their processes, and that breweries who are able to do so most effectively will be most successful. This also points to an opportunity for another company to create this new technology / process and sell to breweries.
Lauren, this was a very interesting and insightful read! Thank you. Many comments already touched on multiple ideas, so I try to keep it short. If water shortages affect hops and barley production, it should also affect the supply chains of all other agricultural products, most notably meat. In the not too distant future, we should see all prices of agricultural products rising (if we don’t want to buy GMO products which might need less resources to grow). In such an inflationary environment, aren’t consumer not just likely to accept higher prices for beer? One could argue that large multinational breweries might possess a cost advantage because they need fewer water in their growth process. But to my mind, that is also visible in the quality of their products. In conclusion, the smaller micro-breweries don’t compete for the same customer segment right now and won’t compete for this kind of price-sensitive low-end customer segment in the future.
Very interesting read Lauren, thank you! I agree with your suggestions to BA and also think that BA can assist independent brewers to try innovative methods that can potentially reduce their water usage. That being said, however I believe only large companies like AB inBev are well positioned to shift towards more sustainable practices and innovation as they simply have the financial sources and the massive scale advantage. Therefore unfortunately, I think small independent beer producers will increasingly have to price their products higher resulting in a much larger premium beer segment or to exit the market altogether.
Water is an important ingredient in beer, and it’s in the Brewers Association’s best interest (and the world’s best interest!) to consider the impacts of a diminishing clean water supply. In addition to improving the ratio of water usage to beer produced, I wonder if breweries could consider how to alternatively source their water, as the cost of fresh water will likely rise if climate impacts continue unabated.
Would it be feasible for brewers to invest in technology that could increase the availability and access to water? For example, a San Diego brewery has leveraged technological advancements to produce a beer that uses treated sewage water as a main ingredient [1]. Drinking former sewage water sounds like a crazy idea, and it may be too unappealing for the majority of consumers, but an investment in technology of this nature could potentially pay off for brewers in the long-term.
[1] David Moye, “San Diego Brewery Makes Beer From Treated Sewage Water,” The Huffington Post, March 20, 2017, https://www.huffingtonpost.com/entry/stone-brewing-toilet-to-tap_us_58cc60c7e4b0be71dcf4fc2f, accessed December 2017.
Very interesting read. With the recent acquisition spree by the major beer names, case in point- ABInBev, it seems likely that there will be further consolidation in the market and the local breweries will get bought out. The smaller brewers do have the advantage of being small and nimble and can use that to their advantage to invest in radical methods to set themselves apart. Im not sure if Andrea’s idea mentioned above would be enough but its a step in the right direction where crazy may actually be what can help them. There also seems to be a change in consumer taste preference with a high demand for premium beer [1]. So a combination of these ideas can help the brewers compete.
https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/a-perfect-storm-brewing-in-the-global-beer-business