Transactional costs & the hop market

Hop growers and merchants are having trouble keeping up with the craft industry because it’s growing so fast, but not for the reason you may think. The American hop industry is big. Americans like things big, so this should come as no surprise. The farms are big. The picking machines are big. Growers like to sell in big quantities when they sell their hops. Merchants like this too. Bigger is not always better. Most hop merchants try to optimize their business focusing on transactional costs … which is the fancy way to say that they prefer to work with big customers because it costs less to work with them. The result is that some merchants screen out brewers that need less than a certain volume of hops. Those brewers are not worth their time.

It’s true that it can take as much time, effort and paperwork to sell 44 pounds of hops as it does to sell 44,000. In fact, it can be more difficult to sell 44 pounds. The company buying 44,000 pounds probably has somebody dedicated to the job of buying raw materials. The brewer who needs 44 pounds of hops is also probably the accountant, the janitor, and the bartender. For that reason, it is easier for merchants to focus on big customers … transactional costs. That’s the way the hop industry has worked traditionally. The infrastructure to handle smaller and medium sized orders doesn’t exist among the largest companies. It’s a different business model. That has fit well with the way big breweries bought hops in the past. It has worked well for the craft industry so far. Third party retailers, traditionally buy hops from bigger merchants and service smaller brewers. There’s nothing wrong with that business model. The problem is while they demand a higher price, not all of them provide a high level of service. All that will change in the coming years with the rise of the long tail.

If you didn’t read our previous blog, you can read it now demackinnon.com/revolution so you know what we’re talking about when we talk about the long tail. Growers and merchants will find new ways of dealing with smaller brewers around the world because they want to continue growing their market share. The same old ways of doing things won’t be good enough in a world with 10,000+ craft breweries. We’re likely to see more hop merchants and growers satisfying the demand of smaller brewery customers. We may also see the pooling of orders from the brewer side. If they can organize, brewers can act collectively to get the size necessary to fit the current system. We have already seen both of those things happening. Meanwhile, the merchant companies that once enjoyed a strangle hold on the hop industry are losing their power and influence. Some have yet to realize that there’s a hop revolution happening too.

The old guard will fight to maintain the status quo like empires always do. That’s as true in the hop industry as it is in the beer industry. The hop empires of the past still possess a lot of power and money, but they lack entrepreneurial spirit. How will the market change in a world where smaller breweries become the norm? The focus on quality hops is no less important than it ever was. In the long run, the fight is not just about quality hops. Quality of service and the quality of the experience will be vital to success. Smaller brewers will not accept being treated like second-class citizens once they realize they comprise the majority of the industry. The next several years will be a particularly chaotic time as both the hop and craft beer industries struggle to come to grips with their new future.