The post-Prohibition “three-tier system” requires the separation of the production, distribution, and retailing of alcohol in most states. That wasn’t much of an issue for craft brewers during the explosive growth years between 2011 and 2015 when craft beers doubled their percentage of the beer market and could hardly keep up with demand. However, craft beer volume through the three-tier system grew by just 1.6 percent last year, causing craft brewers to turn to direct distribution for growth. Adding direct distribution, mainly through operating taprooms and brewpubs, resulted in 24 percent volume growth.

Taprooms are located in working breweries where consumers can buy beer, and brewpubs are restaurants with a brewery.

Now, such establishments account for almost 10 percent of all U.S. bar traffic and for as much as 35 percent of traffic in Denver and San Diego. Some craft beer bar chains are closing locations in states like Texas because of lost sales following a 2013 law that relaxed the three-tier system and allowed breweries to sell 5,000 barrels a year for on-site consumption. Small craft brewers are excited about this trend—they make higher margins selling direct compared to using an indirect channel of distributors and bars. A brewer’s average cost per keg of craft beer is $60, and a keg sells to distributors for $90. The distributor then resells the keg to a bar for $120. Each keg contains more than 100 14.5-ounce glasses, the amount typically poured into a 16-ounce glass at a bar to accommodate a foam head. A bar’s cost per glass of craft beer poured is $0.88 per glass. The standard in the bar industry is to have 20 percent liquor cost, meaning 20 percent of the price to consumers represents the bar’s cost of goods sold, leaving 80 percent for the bar’s margin.

1.Calculate the price at which a bar will sell one 14.5-ounce glass of craft beer if the desired 80 percent margin is based on selling price. What is the bar’s dollar markup on a glass of craft beer? Refer to Setting Price Based on External Factors in Appendix 3: Marketing by the Numbers to learn how to do this analysis.

2.Determine the brewer’s cost per 14.5-ounce serving

(one glass). What price would a brewer sell that glass of beer for to achieve an 80 percent margin based on its selling price at its own taproom or brewpub? What dollar and percentage margin would a brewer realize if the glass of beer was sold for the same price as it is sold in bars? Is the brewer better off using the direct channel compared to the “three-tiered system” indirect channel?