Factor Use and Productivity Change in the Alcoholic Beverage Industries

1. IntroductionDemands for wine, beer, and spirits are, in view of their substitutable nature, often studied in conjunction with one another (Heien and Pompelli 1989; Nelson 1999). Yet the alcoholic beverage industries are connected by similarities in their production processes and inputs as well as by the demand substitutability of their products (Lea and Piggott 1995). These industries are therefore usefully examined together when questions about technical change and productivity growth arise. Little recent attention has been given to the nature of technical adjustments in the beer sector, and no such work seems ever to have been published on wine and spirits.1Brewing and distilling, and to a smaller extent winemaking, have become increasingly mechanized during the past half century as they have in most other manufacturing sectors. Packaging rates are higher, shelf lives longer, and storage and transportation technology improved (Tremblay 1987; Elzinga 1990, pp. 216, 219; Iserentant 1995; Piggott and Conner 1995; Gisser 1999). The fixed costs associated with these innovations have, broadly speaking, served as an incentive to build fewer and larger plants.Industry concentration in the beer sector rose dramatically from the mid-1930s through the mid-1980s. Plant numbers then expanded as microbreweries catered to the new demand for product variety and idiosyncrasy, although four-firm concentration continued to rise through the mid-1990s. In the spirits sector, domiciled largely in the South, distillery numbers continue to decline, spurred by declining aggregate demand as well as scale economies. No such broad consolidation is taking place in the wine industry, where several California and New York firms long have occupied a substantial market share. Instead, wineries numbers have grown rapidly and uninterruptedly since 1970, proliferating in regions long thought inhospitable to wine grape production. Growing consumer interest in wine variety and microclimates, a trend similar to that for microbrews, has abetted this diversification (Goodhue et al. 2000).Prices in the alcoholic beverage industries have, in real terms, fallen substantially in the past 40 years. Net prices to brewers have dropped 37%, to wineries 16%, and to distillers 31%. At the same time, real wage rates generally have risen, and, except for brief instability during the 1970s, so have capital rental prices. Real material prices in all three sectors rose from the 1950s through the 1960s, fell through the 1970s, then recovered by the mid-1990s to their early 1970s levels. Relative factor prices in the beer industry, broadly representative of those in the other two sectors, are shown in Figure 1. Wage rates rose relative to both capital and material prices until 1980. Thereafter, wages fell relative to capital but continued to rise relative to material prices (U.S. Bureau of the Census, various years).Expenditure shares, illustrated in Figure 2, suggest that the beer industry is the most capital intensive of the three sectors. By the mid-1990s, capital expenditures represented one-third of beer production costs, compared to only one-fifth of wine and distilling costs. On the other hand, raw materials constituted little more than half of beer expenses but nearly 70% of wine and distilling costs. Labor accounted for only 10-12% of expenditures in any of these industries. Figure 2 seems to suggest that, at least since the mid-1970s or early 1980s, capital has substituted for labor and materials in all three sectors. Yet as Figure 1 reveals, much of these share changes are accounted for by the rising relative price of capital.The substantial narrowing of output-input price margins in the alcoholic beverage sector suggests that the sector has become more cost efficient through either technical change, scale economies, improved utilization rates, or other means. Technical changes themselves can alter potential scale economies and productive capacities and hence prospects for future variations in industry structure. …