The cost of a range of inputs has been giving brewers the world over headaches for months. Chief among those concerns has been the cost of packaging and brewers of all sizes are having to assess their product, pricing and procurement strategies.
However, for smaller players, the options can be limited and will only add to the pressure many SMEs are under.
While some eco-alternatives are being trialled, the overwhelming majority of the packaging used for beer is mostly glass bottles or aluminium cans. And both have experienced shortages in recent quarters.
Aluminium prices are currently (24 March) US$2,321 per ton. However, during the winter of 2022, prices jumped to $3,849 a ton. US trade body The Aluminum Association reports North American demand for the metal rose by 4.8% year on year in 2022, to roughly 27.5bn pounds of aluminium.
For US producers, the war in Ukraine has – and will continue to have – an impact on aluminium prices. The US government has just set new tariffs on Russian metals, including a 200% tariff on imported aluminium, which kicked into effect on 10 March.
This follows a rocky period for canners as Trump-era metal tariffs of 25% on foreign imports were only lifted in 2021, which was accompanied by reports Canadian and US smelters were charging beverage companies for non-applicable tariffs.
Most companies of a certain size hedge or forward contract bulk orders of raw materials. This allows them to not only secure the goods but they can negotiate prices that will stay in place for several years. However, widespread aluminium shortages in 2020 and 2021, in part driven by the pandemic and a trade dispute between China and Australia, caused prices to spike. The former is one of the world’s largest buyers of metals and the latter is a major producer of bauxite and alumina.
In 2021, with aluminium prices up by 80% in the US and 70% in Europe, brewers including Molson Coors Beverage Co. reported they were suspending slower-moving SKUs requiring aluminium cans.
As the price of aluminium has been elevated, even heavily-hedged companies are coming to the limit of what they can do as contracts need to be re-negotiated at a higher price point.
Japan’s Kirin Brewery Co. has been raising prices, like everyone else, to mitigate input costs, a spokesperson tells Just Drinks.
“The main reason is the type of contract with our suppliers. Aluminium cans and malt are two big factors of input cost increases for Kirin Brewery. We were able to mitigate the impact in fiscal year 2022 by long-term contracts but [these inputs] will turn out to be a cost increase factor in FY 2023.”
For Kirin Brewery Co.’s full financial year in 2023, it estimates the year-on-year cost increases for malt and aluminium alone will amount to more than JPY10bn (US$73m).
The European market is experiencing the same issues, and brewers like Heineken and Carlsberg are engaged in pricing measures to offset high input costs.
Carlsberg told Just Drinks it is monitoring the situation “but, as of right now, raw and packaging material suppliers are accepting our orders and confirm capacity against our forecasted requirements for 2023”.
German brewers are being hit hard by glass shortages and the related increased costs. A spokesperson for the German Brewers Association says: “For the German market, there are not many alternatives here, as our established reusable systems are mostly open pool systems. By participating in them, there are only common and no individual design options. In addition, about 80% of beer is bottled in glass and here there are few material reduction options due to the safety aspects.
“We are of course clearly noticing the trend away from plastic packaging towards container glass. As a result, capacities are becoming scarcer and prices are higher for our industry.”
The impact of recycling and ESG
Aluminium is easier to recycle than glass, with most aluminium cans containing on average 73% recycled content. Glass beer bottles tend to have a recycled content of between 40% to 60%. Beverage companies are pushing up this average. An extreme example is Japanese brewer and distiller Suntory, which is bringing to market what it claims is a 100% recycled aluminium can.
Peter Licht, director of supplier relations for the US craft beer cooperative Independent Brewers Alliance, says aluminium prices over the last two years have proven a “real rollercoaster ride”, adding that, while prices may have stabilised, demand could soar as beverage producers aim for ESG targets and move away from plastic.
“The beer market is a big market for aluminium cans, but they’re not as big as the soda and non-beer beverage market. So, the Cokes, Pepsis and those types of companies, if they decide they’re going to transition a portion of their sales away from plastic into aluminium that basically can, in a very short order, eat up any extra capacity,” notes Licht.
Boxes, cardboard and paper cut into brewers’ margins
If you were to enter the brewing trade for the first time, the price of putting a label on your product or even just putting it into a box could also be a surprise. Cardboard and paper have not been insulated from the commodity price storm raging in the market over the last few years.
Billy Hutchinson, the MD of Lesters, a UK-based corrugated cardboard and packaging producer, says in the last two years the cost of cardboard has fluctuated “wildly”. From January 2021 to April 2022, prices “accelerated by up to 60%, due to several factors including [the] weight of demand from the online retail boom”.
The UK Office of National Statistics notes the rate of inflation of corrugated paper and paperboard has risen from 2015 by 6% in January 2020, with a notable jump to 42% by January 2023.
Hutchinson says he is seeing the market become more stable in recent months but it is still punctuated by price spikes related to specific reasons, “Kraft paper has been difficult to source due to a recent strike at Finnish ports for example,” he tells Just Drinks.
Once again, larger brewers can weather this storm through long-term contracts and hedging but smaller and independent brewers are being hit from all sides, be it energy costs, malt prices, CO2 shortages or packaging. Labels for each bottle may seem like a small part of production costs, but it all adds up.
UK brewer Northern Monk co-founder Brian Dickson says his packaging, grain and utility costs are starting to pile up and that, in the last year, packaging material costs were up around 20%.
“We spent a lot of time last year focusing on being more efficient and increasing our yields. We managed to recover the majority of our margin doing that last year. But then you’ve got another whole round again this year of things creeping up. So, eventually, it does get to the point where it’s: ‘what can you do?’ There is a limit to what you can do. You can improve your process but we are very reluctant to clear the recipes or reduce hopping,” says Dickson.
Economies of scale
The situation leaves little recourse for SMEs but to hold on the best they can and drive efficiencies across the business. Those gains are, of course, limited by a brewer’s size.
One option is to review the production model. UK non-alcoholic brewery Jump Ship Brewing contracts its brewing and packaging. While ingredient prices have been a pressure on the business, the rising cost of production and packaging has seen an increase of roughly 20% passed on by the brewer’s contract partners. Jump Ship Brewing is moving into its own brewery later this year.
“By bringing our production in-house that gives us significant cost savings as opposed to contract,” MD Sonja Mitchell says. “That’s really how we’re going to increase our margin. Transport costs and fuel costs have gone up. By having everything under one roof where we’re going to not be moving our beer around between the brewery and the packaging line, that saves a lot of costs in transport.”
Unfortunately, brewers’ options on packaging at the moment are limited and even the big players’ attempts to use alternatives are very much in the nascent stage.
“There are some interesting developments coming through,” Lesters’ Hutchinson says. “Mycelium, which is a completely organic, farm-grown material made from the roots of a mushroom, could replace less environmentally friendly options, such as plastic and polystyrene. Then there’s other emerging options that embrace starch-based foams and cellulose shrink-wrapping.”
But these types of solutions are a long way off from being ready for mass-market production and it is still unclear if they would be cheaper alternatives.
Until inflation is curbed and raw material prices stabilise, we can expect more and more SMEs to get into difficulty. Big producers are better equipped to handle the current input cost environment but even they are starting to feel the pinch and are passing on price increases of 15% to 20% to consumers. SMEs may not be able to compete for much longer if input costs continue to eat into margins.
How volatile grain prices have added another straw to the brewers’ backs