Why does Diageo keep raising the price of a pint?

INTERNATIONAL DRINKS GIANT Diageo has once again raised the price of its beer products.

It was confirmed this week that price increases by the London-based multinational company – which produces Guinness, Guinness 0.0, Hop House, Carlsberg, Harp, Rockshore and Smithwicks – will affect all of its on-trade beer products (those sold in pubs and restaurants).

Diageo announced that the change would add the equivalent of 6 cent to a pint and 9 cent a pint in the case of Guinness 0.0. A spokesperson put the increase down to “rising input costs”.

The Vintners Federation of Ireland (VFI), the industry body for publicans, described the increases as “a critical hit to an industry on the brink”.

It is the third time Diageo – which is also the world biggest spirits maker – has raised the cost of its beer products in Ireland in the last 14 months. 

In January 2023, Diageo announced it would be adding 12c to the price of a pint, following a similar announcement by Heineken in November 2022. In July last year, Diageo announced a second 4c increase. But why is it doing this?

TheJournal spoke to publicans, representative groups, and industry experts to find out what’s behind the rising price of a pint (Diageo gave us a statement, but no one was available for interview).

Delivering kegs in Dublin. Alamy Stock Photo Alamy Stock Photo

The ever rising price of a pint

While 22c over 14 months may not seem like a lot, these are increases to wholesale costs for publicans, who then decide whether to absorb the costs or pass them on the consumers.

Usually, wholesale price increases lead to greater increases “at the pump” as pubs say they must maintain the same profit margin. As well as increases in the price of their products, pubs and restaurants say the cost of energy, rent, wages, insurance and more have also risen over the last number of years.

This has led to the price of pints in Ireland shooting up. 

According to Central Statistics Office (CSO) Consumer Price Index, the average cost across Ireland of a pint of stout was €5.64 in February this year, up from €5.40 the same time last year, and €4.90 the year before that. In February 2020, before the Covid-19 crisis, an average pint of stout cost €4.67.

A pint of lager, meanwhile, cost €6 in February, up from €5.88 in 2022 and €5.33 the previous year. Pre-Covid, the average cost was €5.06.

Of course, these are average prices. In some places you might get a pint for cheaper, in many places – like Temple Bar in Dublin – you will pay a lot more.

Temple Bar in Dublin has some of the most expensive pints in the country. Alamy Stock Photo Alamy Stock Photo

Publicans have said that the latest rise of 6c could see further “at the pump” increases of around 20c when they come into force in April.

As things stand, a publican pays €175.95 for a 50l keg of Guinness from Diageo. As of 15 April, this will rise to €181.23. There are about 88 pints in a keg, though some are inevitably lost due to waste and spillage.

Taking the new higher rate, the cost includes €133.87 base price and €47.36 excise duty. The Government charges excise on alcoholic drinks based on unit of alcohol. 

This means that, including taxes, come April a pub will be buying a keg of Guinness at a cost of about €2.06 per pint (up from €2). The pub then adds its mark up and pays a further 23% VAT on pints sold.

So, for example, before the price increases, if a pub in Dublin now sells a pint of Guinness for €6, that means first the VAT is €1.12 (23% of 6 divided by 1.23)

€6 – €1.12 = €4.88

Of the remaining amount, €1.46 goes to Diageo:

€4.88 – €1.46 = €3.42

Then, there is the excise to subtract. According to the Government, the excise duty on a 4.3% ABV beer (like Guinness) is 54 cent. 

€3.42 – €0.54 = €2.88

So the pub is left with €2.88 it earns per pint. However, this is before various overheads are subtracted, including staff costs, rent, insurance energy bills, upkeep, etc.  

With the increased price, if a pub continued to charge €6 a pint, they would lose some of their profit. 

In order to protect their profit margin, many pubs will factor in the additional cost, adding their margin and VAT, to be likely left charging a 15c-20c increase on top of what customers pay already.

The customer shoulders the loss again. But the VFI and many business owners say that margins are too tight already, and the rising cost of food and drink, along with everything else, are making businesses unviable with many having to close as a result (though energy costs and inflation have been dropping over the last year).

“This latest price hike is a blow they cannot afford,” said VFI CEO Pat Crotty.

Alamy Stock Photo Alamy Stock Photo

So why is Diageo raising its prices?

A spokesperson for Diageo this week put the latest hike down to “rising input costs across our Irish business operations”.

“In order to offset this, we have advised our on-trade customers that there will be an increase to the list prices on our full draught product range,” they said.

In July, Diageo said the increase was due to “rising input costs across our business operations”, while in January last year it said “significant inflation in input costs across our operations” left the company with no choice but to raise prices.

“We have absorbed these costs for as long as possible but unfortunately, we can no longer continue to do so,” the company said at the time.

But what are these input costs? And are they really all going up?

Raw materials, staff and energy (how pints are made)

Diageo, like many businesses, has faced increased costs in areas like energy and raw materials, and the company said that it order to maintain a sustainable business it must raise its prices.

Diageo plc was formed in 1997 with the merger of Irish company Guinness and British group Grand Metropolitan. The international conglomerate is present in 180 countries and has offices in about 80 countries worldwide, employing about 30,000 people. While it has an Irish division (Diageo Ireland Unlimited Company), the parent company is headquartered in London.

The company famously brews its Guinness as well as some other beers at St James’ Gate Brewery, Dublin 8, first opened by Arthur Guinness in 1759. 

Alamy Stock Photo Alamy Stock Photo

When it comes to raw materials, beer has only four key ingredients: barley, hops, yeast and water. In tracking rising costs, barley and hops are the main ingredients to follow. Yeast is grown as part of the brewing process, and these days water is a relatively fixed cost.

In Guinness, barley is by far the most significant ingredient. Two types of barley are used in the process: roasted barley and malted barley.

Guinness gets its malted barley from Boormalt, a global malting company headquartered in Belgium (but with an Irish office in Athy).

The vast majority of malted barley used in Guinness is grown in Ireland, but Boormalt has many more international suppliers. Boormalt is owned by Axereal, a huge French agricultural and agri-food cooperative group.

It is believed that the Diageo works out the price it pays for malted barley with long-term contracts, with the prices varying depending on the wholesale price of grains (also known as cereals) in Europe.

The price of grains – which are known as commodities – has indeed risen in recent years as a result of drought and poor farming conditions, as well the ongoing war between Russia and Ukraine, which has severely impacted global supplies. 

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According to Eurostat, in 2022 the price of cereals – including barley – shot up significantly by an average of about 45% across the EU. However, last year prices significantly fell again, dropping by 26%, and continues to fall.

The price of hops – which is used in Guinness in much smaller quantities – has also been rising. Though these increases affect Guinness less than, say, higher end craft beers, as the hops used for Guinness are of a lower quality and not as expensive.

The key ingredient in hops is the alpha acid – the thing that gives beer its bitter taste. Scientists say that hop production in Europe and the levels of alpha acid in hops are both declining as a result of climate change.

In relation to energy – the other big input cost – electricity prices rose hugely in Ireland and across Europe in 2022, but have fallen significantly again in the last year. Staff costs – including the minimum wage – have also risen recently.

Profit…

Input costs have risen, then, but up until this year so had Diageo’s profits.

In September last year, the company posted a 5% increase in its worldwide profits to £4.6 billion (€5.3 billion) for its 2023 financial year (which runs from July to June).

The company said at the time that “strategic price increases and productivity savings more than offset the absolute impact of cost inflation”, meaning that price hikes, among other measures, were greater than the impact of rising costs.

A brew kettle Alamy Stock Photo Alamy Stock Photo

In 2022, the company had an operating profit of £4.4 billion (€4.13 billion), up 18.2% on the previous year, during the height of the Covid pandemic when sales in Ireland and the UK plummeted as a result of lockdowns. The company’s post-pandemic profits have exceeded pre-pandemic numbers.

Diageo had already weathered the storm of rising energy and barley costs in 2022 to post significant profits. The latest price increase in Ireland comes at a time when the price of barley and electricity has fallen significantly relative to 2022. 

So why another increase?

One industry expert, with years of experience in the field (who didn’t want to be named), said that it “input costs” can potentially refer to many things.

“Energy and labour being are at least as significant if not more significant as raw materials,” they said.

But then you can look at investments. How much did they spend on capital expenditure?

In Ireland, Diageo plans to invest €200 million in a new carbon neutral brewery in Kildare. Last year, the company announced €25 million investment to ramp up production Guinness 0.0 at St James’ Gate. 

“Are they input costs? Indirectly, yes they are,” the industry professional said. 

Marketing also plays a significant role in Diageo’s business (all those great Guinness ads). In 2023, the company spent over £3 billion (€3.5 billion) on marketing worldwide, up from £2.72 billion (€3.17 billion) the previous year.

Loss

As well as all this, Guinness and beer drinkers in Ireland (and the UK) could be falling victim to their own love of pints.

Despite having posted good profits for their 2023 financial year, things have since taken a significant turn for Diageo. 

The company’s longtime CEO Sir Ivan Menezes stepped down last year, and died in June after a short illness. The tenure of new CEO Debra Crew got off to a rough start as the company’s half-year result (from July to December) showed that profits had fallen by 11%.

The drop was due to a sharp decline of 23% in its Latin America business and a smaller drop in North America sales. The company is also suffering from suspending sales and winding down its business operations in Russia in 2022 after it invaded Ukraine.

This decline in profits has spooked investors.

However, in contrast, sales in Europe grew in the same period, and sales of Guinness in Britain and Ireland have skyrocketed since the end of the Covid-19 pandemic. 

Alamy Stock Photo Alamy Stock Photo

In the same period as the decline in the Americas, net sales in Ireland shot up by 10% “primarily driven by double-digit growth in Guinness and strong share gains in the on-trade”.

However, this time Diageo said that “strong strategic price increases were more than offset by cost inflation and increased marketing investment”.

In 2022, Guinness net sales grew by 20% in Britain and Ireland, as pubs and restaurants opened back up following pandemic lockdowns.

The customer chooses

“The overall performance of Guinness post-pandemic has been exceptional,” the industry professional said.

Given years of decline, whilst it’s not in some dramatic growth curve, it’s certainly outperforming all expectations.

So, while Diageo is coming under pressure in other international markets, and has faced (now declining) inflationary pressures in terms of barley, hops, and energy, could anything else be at play?

“It’s a lot easier to take a price increase when things are going well than it is when you’re in trouble,” the professional said.

“And if they are under pressure in one market they will look to try to shore up profits in another.”

Despite Guinness being an iconic and longstanding brand that many people feel is synonymous with Ireland, at the end of the day Diageo is a massive multinational company pursuing profits.

Barley, hops, energy, international markets, currency exchange, capital expenditure, marketing costs, investor sentiment, the pursuit of profits and more all feed into the extra 20c you will pay for a pint next month (or the extra €1.20 you will pay for 6 pints).

Diageo and Heineken control much of the pub draft beer trade in Ireland, and Irish drinkers have seen significant price hikes from both in recent years. Publicans are worried that with ever-rising costs, more and more people will just decide to stay at home. 

While this will be bad for them, it could also affect Diageo’s sales. Is the company shooting itself in the foot?

“The whole thing always comes back to consumer choice and the opportunity is there for people to choose other products,” the industry professional said.

Maybe they will. But the reality is that they haven’t in the past. And that’s what Diageo are betting on.