Beer Quarterly Q1 2023: Have the Cost Increases Finally Stopped?

Report summary

While brewers faced dramatic increases in input costs last year, our estimates suggest that contracts and other mechanisms allowed them to avoid the worst of the volatility in spot prices. Looking forward, even though spot prices for some items are declining, key items remain well above 2021 levels, and brewers will face additional cost of goods sold (COGS) increases, as contracts and hedges have rolled off. Furthermore, we believe that wage inflation and rising energy prices in the coming year will create additional headwinds.

For some brewers, the full impact of escalating commodity prices last two year was limited by effective hedging strategies. Hedges helped elude the impact of extreme volatility, and controlled costs in the near term, but as hedges roll off and pricing contracts are renegotiated, the reality of rising costs cannot be postponed indefinitely. However, even though they do not provide indefinite relief, 2021 and 2022 were an important reminder of why hedging is such a critical component of risk management.

Finally, the dramatic rise in input costs had obvious implications for pricing. Rising costs created serious margin compression, but brewers were slow to pass cost increases on to customers. Beer lagged the price increases taken by other beverages in terms of both timing and scope. Brewers will need to walk a fine line of raising prices enough to maintain operating margins while creating the least possible drag on operating efficiencies from volume losses.