Does Choice Dampen Demand?

FILED FEBRUARY 7, 2011

Dear Client:

A few months ago in Florida I was listening to a speech by Boston Beer's Jim Koch (who looks pretty cold in our BrewPic today), where he was speaking about the great proliferation of choices in the beer aisle today, giving Americans the most choices and a wider variety of beer in any time in history. But he also warned that there is a law of diminishing returns, as too many choices can actually paralyze the consumer into buying less, or even buying none, because no matter what he/she chooses, the consumer is left with an unsatisfied feeling that they may have not chosen the best beer. It was an interesting notion that I made a note to follow up on.

Swarthmore College psych professor Barry Schwartz actually wrote a book about this phenomenon called The Paradox of Choice. In that book, Prof. Schwartz makes the case that in the old days, consumers faced the reality that many choices were shoddy or faulty. But today, that's not much of an issue anymore, as most products meet minimum standards. A case in point : Consumer Reports tested and ranked 53 kitchen ranges, ranging in price from $400 to $5,200. Of the lot, it found that 4 were "excellent, and 47 were "very good," and two were "good." None were "fair" or "poor." That's good news, but it also slims down the margin between the quality of products, and can make it difficult for consumers to differentiate between products.

"All of this choice has two negative effects on people," Prof Barry Schwartz told an audience at the Ted Conference. One, it actually does produce paralysis. In one study of voluntary retirement funds, for every ten mutual funds the employer offered, the rate of participation goes down two percent. If you offer fifty funds, ten percent fewer people participate than if you offered five funds. The second effect, is that "even if you manage to overcome the paralysis and make a choice, "we end up less satisfied when making the choice than we would if we had fewer options to choose from," says Barry. Why? Because with so many choices, if you make a choice that isn't perfect, it's easy to imagine that you could've made a better decision. This imagined alternative makes you regret the choice you made, and that regret "subtracts from your satisfaction of your decision, even if it was a good decision." The more options there are, the easier it is to regret the decision you made. "The secret to happiness," says Barry, "is having low expectations....and as options go up, the expectations go up.....marketers don't know this."

So how does this apply to the beer business? Certainly, we've all hung out near supermarket coolers and watched as consumers stood there for five minutes staring blankly at the rainbow of beer labels and then picked seemingly at random and walked away, or not choosing at all. On the other hand, I've also seen people starting to go for a cheap brand, and then grabbing a sixer or bomber of an expensive craft to try it, which could move them up to a twelve pack next time. And from a sales and marketing perspective, it makes sense to offer several choices, not only to create a "billboard effect" on the shelf and take up space, but to keep increasingly promiscuous consumers loyal to your brands. Also, beer is different from ranges: variety is pretty wide.

So I think this is an issue for the Truth Squad. What do you think? Ping me at hs@beernet.com or anon at http://www.beernet.com/hotline.php

GROKKING MODELO'S NEXT MOVE

"An ABI that becomes increasingly preoccupied with SABMiller would likely put an acquisition of Modelo on the back burner. We do not think that this is good for Modelo," writes Credit Suisse's Tony Bucalo and Carlos Laboy in a research note this week that has been much remarked upon in the press. Credit Suisse has a neutral rating on Grupo Modelo (predicated mostly on easy comps and lower costs).

Why is it bad to hold on, according to CS? "In the context of ABI running out of synergies and cost cutting opportunities in the US, we fear that the upside that Modelo brings to the table is increasingly irrelevant for ABI, which might in turn be unwilling to pay a steep premium for the remaining 50% stake in Modelo it does not already own."

Is the clock really ticking? Credit Suisse thinks so. CS points to Mexico's "sluggish recovery in consumer spending" and the drug cartel violence that is gripping the country. "Our CS Economics team believes security issues are definitely weighing on the economy (negatively affecting growth opportunities and investment decisions), though it is impossible to say by how much," although much of the violence is in the northern region and Modelo's largest share is in the central region.

Also, there's the issue of what to do with Crown Imports. Modelo's stake in Crown would presumably be at risk were ABI to buy out Modelo for antitrust reasons, nor could Modelo operate as a "sole venture" in the US.

In conclusion, CS believes that "Modelo's chance to maximize value via M&A might as well be already behind us, and ABI's incentives to push Modelo towards a sale are increasingly small."

Modelo probably has a different view. Regardless, Grupo Modelo's leadership has reiterated several times that it wishes to continue as an independent brewer. It will be interesting to see what happens, if anything.


ILLINOIS CRAFT BREWERS MOVING ON LEGISLATION TO PROTECT SELF-DISTRIBUTION

As state lawmakers' return to Springfield next week, small brewers in the state are pushing legislation to preserve their self-distribution rights in the wake of the lawsuit by A-B against the Illinois Liquor Commission, which provoked a judge to level down. Under the new bill, small brewers would be licensed to distribute as long as they make no more than 60,000 barrels of beer annually. Pubs that brew their own beer would also get the right to self-distribution. The House bill (HB0205) has bipartisan sponsorship from Rep. Greg Harris, D-Chicago and Rep. Mike Bost, R-Murphysboro. Sen. Donne Trotter, D-Chicago, is backing the Senate version (SB0088).


FRESH & EASY EXPANDS WITH LESS SHELF SPACE

UK-based Tesco supermarket group is planting more Fresh & Easy grocers in Northern California, according to Financial Times. But it's also pursuing a strategy to squeeze more c-store sized stores into crowded spaces like urban LA. The move signals an overall trend toward abridged shelf space in tight markets.

Fresh & Easy's regular stores are 15,000 sq. ft. but the smaller footprints are about three times smaller than regular grocers at 4,000 sq. ft. Spokespeople told the Times the company would "remain flexible in our footprint" while it accelerates store openings in "different types of neighbourhoods."

Wal-Mart and other grocers have mimicked the trend. The grocer giant is doing smaller "bodegas" in dense urban areas, and has planned a new "Walmart Market" format of 25,000 sq. ft. for sites in California.

STELLA'S NEW CIDER IN THE UK

Stella Artois will have cider line extension in its home market by spring called Stella Cidre. The announcement follows Heineken's recently vetted plan to take Strongbow global. It's not planned for it to hit the states any time soon. (Interestingly, at-home consumption is the best occasion for hard cider according to Mintel 2010 consumption trends.)

BEER BRIEFS:


FRITZ MAYTAG IS MAKING A COMEBACK AT CBC. The former Anchor Brewing owner and unofficial patriarch of craft beer will deliver the CBC's opening keynote, along with Ken Grossman of Sierra Nevada. Fritz and Grossman will look back on more than 40 years of craft brewing in their speech, according to the Brewers Association.

This will not be the first collaboration between Ken and Fritz, who sold his iconic brewery to The Griffin Group last year. Fritz directly influenced Ken's brewery, now a bastion of craft beer quality and shelf life stability.
150 YEAR-OLD AUGUST SCHELL BREWING HAD AN "ABSOLUTE BANNER YEAR" in 2010, having grown volume by 24%, "in spite of being out of beer through much of the summer," according to Ted Marti. No word by press time how much its craft lineup contributed to the growth.

BOULEVARD TECH CHIEF TONY LUX revealed to Bnet.com how the brewery is now virtually run through a "zero client" Pano Logic device. Confused? "It simply connects touch-screen monitors and other input-output devices to a virtualized operating system that runs on several servers in our private enterprise cloud," Tony said. Brewing from the cloud, I like it. He can troubleshoot problems from his iPhone.

DESCHUTES ANNOUNCED SOME NEW BOTTLE RELEASES for its 16-state distribution network, including its "Cascadian Dark Ale" Hop in the Dark (May - Sept.), Twilight Summer Ale summer seasonal and a top-secret brew called "The Stoic" to be revealed at the Craft Brewers Conference during a TBD "Base Camp Week."

BREWPIC OF THE DAY: Groundhog Day: Boston Beer's Jim Koch -- looking miserably cold -- joined Punxsutawney Phil in Gobbler's Knob yesterday. Just as everyone was hoping, for the first time in years, Phil did not see his shadow, signaling an end to this winter's bitter chill. Jim and the Inner Circle toasted Phil's prediction with a bottle of Noble Pils, Groundhog Day's official beer this year. Jim said that Noble Pils', would be known as "Noble Phils" in Punxsutawney.




Until tomorrow, Harry

"History is indeed little more than the register of the crimes, follies and misfortunes of mankind."
-Edward Gibbon


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