Beeronomics hit the shelves in 2017 and offers fifteen chapters of beer stories laced with economic principles that have shaped the world today. This book has loads of interesting history of beer told through the eyes of economists who have delved a little deeper to reveal some of the economic drivers for everything from how hopped-beer came into popularity to the real reasoning behind the German Beer Purity Law. In this blog post I will highlight some of the stories from the book that I found most interesting.

1. Why are hops added to beer?

It’s widely known that hops are used in the brewing process to add bitterness, flavor and aroma, as well as for their preservative quality. It turns out that the latter is the real reason that hops were accepted in commercial brewing.

Before the 13th century, various spices were added during the brewing process and it differed widely, depending on the country/region. A secret concoction of spices known as “gruit” became the standard for brewing in Belgium and other parts of Medieval Europe and the Catholic Church decided to regulate brewing by controlling the gruit supply, requiring its use for all brewers, and of course taxing it to draw a significant income.

Meanwhile, in Germany brewers started brewing with hops due to the preservative quality, which kept the beer unspoiled for long enough to transport it to other regions. Particularly, in northern Germany the brewers brewed hopped beer for export out of the port city of Hamburg. It should be noted that this was never because of the preference of taste of hopped beer – only for the ability to export it to compete with locally-brewed, unhopped beer in other markets, such as Belgium and the Netherlands.

This was a game-changer, since people started to prefer hopped beer over their locally brewed gruit beer (more for stability than taste) and local brewers weren’t allowed to brew with hops to compete with the imports. Since the tax was on gruit, the Church was missing out on some serious revenue from imported beer, so eventually they caved and started allowing brewers to use hops. The tax then shifted to cover all beer, rather than the gruit.

2. How did beer taxes in England fund the 18th Century British Navy?

England was one of the first countries to develop the technology to be able to produce pale malt, which allowed them to produce Pale Ales for the upper class. The working class settled for Porter, made with cheaper, dark malts. A combination of high taxes on imported French wine, the industrialization of breweries (i.e. record-keeping, improved malt production, etc), and the growing popularity of porter amongst the working class led to the success of a handful of porter breweries (i.e. Anchor) in the 18th century.

The British government, not wanting to miss out on an opportunity to take their cut, improved their efficiency in collecting taxes from these breweries and everyone profited. The breweries were happy to cooperate as long as the government kept their taxes high on imported wines, driving consumer preference in their favor. Britain was able to fund their navy largely with these profits to sustain war for over a century, further their colonization efforts and establish overseas trade.

3. How did the Scientific Revolution in the 1800s shift global beer production toward light lagers?

Today the world is dominated by light lager as the undisputed, best-selling beer style in the world. There are a few factors that have contributed to this, but one of the major reasons is the technological leap in the 1800s with the Industrial Revolution. The brewing of top-fermented ales at warmer temperatures characterized the early centuries of beer brewing, until brewers in southern Germany utilized caves during the cold months to produce clean, bottom-fermented, cold-conditioned (lagered) beers – along with their own strains of yeast that had acclimated to the conditions.

While they had the means to produce cleaner, cold-fermented beers, they didn’t have the malting technology to produce pale malts so their brews were on the darker side (i.e. Munich Dunkel). Enter Gabriel Sedlmayr of Germany and Anton Dreher of Austria – two friends who would take a fateful trip to England and be exposed to a life-changing experience with the lighter-colored “pale ales”, made from coke-malted barley (rather than wood). They would return to their home countries and experiment with pale lager brewing in the 1840s. Meanwhile, Joseff Groll, a Bavarian brewer would take yeast and his knowledge of lager brewing to Bohemia (Czech Republic) to the town of Plzen. It is there that he would use their pale malt to produce the “Pilsner Urquell” in 1842. These new styles were quite popular in their respective regions, but it would take advances in technology to allow their production elsewhere.

Prior to this scientific revolution, brewing largely resembled cooking, with families passing down recipes orally, without the means to measure temperatures, densities, or times with much consistency. From the early 1800s science moved towards deductive reasoning and controlled experimentation which was directly applied to brewing and fermentation (only vaguely understood at the time). To summarize, folks like Antoine Laurent Lavoisier, Louis Pasteur, Emil Christian Hansen and Carl von Linde (amongst many others) all contributed to understand the basics of fermentation, to isolate yeast, and to develop quality control measures such as pasteurization and refrigeration. Couple this with James Watt’s steam engine (benefiting manufacturing and transportation), as well as developments in glass bottle and cork production, and you had the beginnings of the scaled, commercial production of beer. Entreprenuers such as Ebenhard Anheuser saw the future as he emigrated to America and set up the Bavarian Brewing Company in St. Louis in 1865 to produce pilsener for the masses in the USA.

So, an interest in understanding fermented beverages helped kick off the scientific revolution, which drove fundamental changes in thinking and experimentation. This led to technological developments that allowed for the mass production and distribution of pale, cold-fermented beer. Couple that with Prohibition and two World Wars and you end up with a vast consolidation of breweries worldwide. For example, from 1900 to 1980 the number of breweries in the USA shrunk from over 1,800 down to about 100, and in the UK from over 6,400 down to around 140 (Table 4.1, p.43). Lastly, the Dust Bowl and Great Depression shifted American breweries to seeking barley-alternatives, or adjuncts, for their lager recipes, with the largest breweries going with rice and corn.

It really is fascinating when you start to think about how light adjunct lager became the most popular beer style in the world. This flavor profile is what most people in the world associate with “beer taste”, and it’s not just due to personal preference – there were many economic factors that have conditioned us to that point.

4. How did Budweiser, the “King of Beer”, get acquired by InBev?

This story was fun, going back to Belgium in the 1970s where the two main players in the domestic lager market were Stella Artois and Jupiler (which I mistook for Jupiter for years). These two brands colluded for years to fix prices while competing over the same consumers. The two brands made it official in 1988 when they merged to form Interbrew.

The newly formed company strategized to market Jupiler as a domestic lager, and Stella as a premium export to compete with Heineken. They also expanded their portfolio by acquiring a few Belgian specialty beer producers, such as Belle-Vue (lambic), Brouwerij de Kluis (witbier, i.e. Hoegaarden), and Abbaye Notre Dame de Leffe (abbey style). Their international acquisitions started in 1991 with the Hungarian Borsodi Sogyor, and they continued the strategy of purchasing other market leaders in their home countries every 4-5 years. Notable acquisitions include: Labatt (Canada – 1995), Bass & Boddingtons (UK – 2000), Becks & Spaten (Germany – 2002), and Lowenbrau (Germany – 2003). All of this occurred before eventually merging with Brazilian “Ambev” to form “InBev” in 2004. This would provide sufficient resources to finally go for the big fish in the massive domestic beer market in the USA.

Meanwhile, in the States Anheuser-Busch had enjoyed decades of leading the market over Coors and Miller. It was widely assumed that the Busch family held controlling shares in the company, but the truth was that around the early 2000s they only held about 7% of the company since many family members had moved more into the distribution side of things. A combination of internal strife and a few years of stagnant growth had shareholders willing to sell. A few of the big shareholders gave in and sold to InBev and others followed suit until InBev ended up with majority ownership in 2008, merging to form AB-InBev in a move that shocked everyone in the US beer market.

Of course this wasn’t the end of the story for AB-InBev, who would go on to further their acquisitions with Grupo Modelo (Mexico – 2012), Oriental Brewery (Korea – 2013), and SAB Miller (USA – 2016). One interesting piece that I’ve left out is that a new CEO was appointed after each major acquisition, with the new CEO charged with trimming the fat and moving on to the next target. And that’s how you become the largest global player in the beer market!

5. What’s up with the Reinheitsgebot (German Beer Purity Law)?

Many are familiar with the 1516 decree by Duke Wilhelm IV of Bavaria that any beverage sold as “beer” should only include barley, water, and hops (*yeast excluded at the time due to the lack of knowledge of its existence). It was basically a food safety regulation to keep brewers from flavoring their beers with just about anything. It’s a traditional standard that is largely followed to this day in Germany. However, there were several additional facts of which I was unaware.

First off, it was originally implemented in 1487 for Munich breweries and later expanded to all of Bavaria in 1516. In addition to limiting ingredients in beer, the law also set price limits for beer sales based on the season, which clearly benefited breweries of scale. This law also served as a licensing control as well, which raised the cost of entry bar, thus protecting existing breweries. As lager brewing was popular in this region, the law limited brewers to producing beer in the cooler months, cutting off production in March for the summer. Brewers would make a stronger, special lager during that last month and condition it for consumption in the Fall – this is the origin of the “marzen” style, which is particularly popular during the Oktoberfest celebration. Lastly, the law served as a trade protection against breweries outside of Bavaria – particularly those of northern Germany who had a tradition of top-fermented brewing.

Bavarians felt so strongly about their Reinheitsgebot that they negotiated as part of joining the German Confederation in 1871, that the purity law would apply to the entire German Empire. However, brewers in the north (Cologne and Dusseldorf in particular) pushed back against the law to allow their top-fermented beers (Altbier and Kolsch) to include malted wheat. Speaking of wheat………what about the weissbier of southern Germany? How is that allowed to be brewed under these restrictions?

Of course there are exceptions to every rule and in this case it’s not different. The original law allowed brewers in a small region of Bavaria (Degenburg) to continue brewing their weissbier, as they had since 1418. Then in the early 1600s the ruler of Bavaria, Maximilian, saw an opportunity to raise funds to support the Counter-Reformation movement – Bavaria has always been largely Catholic. Maximilian began selling the rights to brew weissbier during the summer months, which many were keen to do so that they could maximize their own profits throughout the year.

Most importantly, it was argued by the authors that the Reinheitsgebot ultimately had little to do with food safety, especially as the years went on and the overall level of quality increased across the board; rather, it was enacted to protect local brewers from outside competition. Things got interesting when Germany joined the European Union (EU) and were challenged by member nations that the law resulted in unfair trade practices. In 1987 the European Court of Justice (ECJ) ruled that they could apply the law to domestic breweries, but not against foreign competition. Germany has long been a firm supporter of their local breweries, however, with their total consumption of imported beer rising from 1% of the total market in 1985 up to 4% in 2000 (after the law was enacted), and more recently up to 9% in 2004. This stands out like a sore thumb in comparison to the EU average of 17% imported beer in member nations! It seems the lasting effect of the Reinheitsgebot was to build a strong support for domestic beer alongside a belief in its superior quality.