For second year in a row, a state legislature reformed its beer franchise laws, creating a carve out for small producers. At the end of March, Maryland legislators unanimously approved a small brewer carve out for state franchise law. The measure, which allows brewers under 20K bbls to move for fair market value with 45 days’ notice, is now waiting for Gov. Hogan’s signature. Recall, last year, Vermont approved a small brewer franchise carve out, and these measures are being considered in growing number of states (see above). The speed with which Maryland moved on this could suggest greater support among legislators or perhaps increased willingness to compromise by wholesaler advocates, who have generally pushed back hard against these proposals.

Then, at end of last week, state legislators in MD also passed so-called Brewery Modernization Act, which now also waits on gov’s desk. Recall, that bill eliminates controversial buy-back provision for larger production breweries selling between 2K and 3K bbls in on-site taprooms, while lifting that total cap to 5K bbls, among other changes (see March 19 issue for more details). This was crucial bill for Diageo, as it expects to easily pass 3K-bbl cap at its new Guinness brewery this year.

Also at end of last week, bill dropped in Georgia to revise that state’s franchise law. It includes trio of provisions, most notably allowing brewers that are less than 15% of a wholesaler’s biz to provide 30 days’ notice and move to new distrib. Bill would also allow self-distribution of up to 25K bbls by any beer producer. That paves way for brewers to be successor-distrib if leaving current franchise agreement and switch to self-distribution. Finally, and perhaps most controversially, bill would also “prohibit brewers from extending credit to wholesalers,” according to brief bill summary. Wholesalers required to be paid cash on delivery by retailers in GA. This bill would make same requirement of brewer sales to wholesalers. Proposal hit House hopper on last day of session, but active thru next yr’s legislative session as well, CBN understands, providing small brewers time to advocate and publicize efforts and perhaps figure out some form of compromise.

Busy-busy times in the legal and regulatory landscape as it pertains to craft ain’t slowin’ down in early 2019. There’s coming Supreme Court ruling on Tennessee retailer residency requirement and big push to get CBMTRA excise tax reductions extended or made permanent. Total tab paid to TTB by alc bev cos nabbed for trade practice offenses keeps growing just as the same agency takes comments on first substantial re-write of its labeling and advertising regs. Oh, and by the way, here comes cannabis. All these topics and more covered by atty Marc Sorini of McDermott Will & Emery, longtime counsel of Brewers Assn and many other alc bev clients, during annual presentation at Craft Brewers Conference in Denver yesterday.

Franchise Reform “Finally Starting to Roll,” Fact that Some Form Considered in 6 States is “Huge” Long a supporter of small brewer carve outs to state franchise reforms, Marc clearly encouraged that “the ball is finally starting to roll on this.” He shared updates from 6 separate states considering or “reaffirming” some form of franchise law carve out during this year’s legislative session. But at least 2 others noted during Q&A, plus others that had been put on the table but are no longer (see legislative notes below). That’s “all very, very positive news,” in his view, and a “huge” change.

First and foremost, Maryland legislators already reformed franchise laws this yr and bill with 20K-bbl carve out waiting on Governor’s desk. Speaking of forward movement, a bill with a 10% carve out passed the Florida House, Marc shared. “The fact that this is getting as far as passing one chamber of the legislature” there, is also a big change, even if it doesn’t end up being successful in 2019. At same time, compromise bill to change self-distribution laws in North Carolina also “reaffirms” state’s 25K-bbl franchise carve out. He’s also heard of a “consensus agreement with the wholesalers” in Maine, setting a cap at either 20K or 30K bbls. It “looks like some real movement to get something done” in Massachusetts is finally happening with “very ambitious franchise bill” with 3-mil bbl carve out, after many years of push and pull on topic. Then too, “I hear Georgia just dropped a bill,” he said (see below for details). And one questioner pointed out that in Oklahoma, recently revised alc bev laws also took the NY franchise carve out as a model.

TTB Thinking on Trade Practice Enforcement “Troubling” Add Marc to list of industry atty’s calling into question tactics taken by TTB on stepped-up trade practice enforcement (as detailed extensively in sibling pub INSIGHTS Express). Beyond tough investigatory tactics and harshly worded letters, TTB’s broader theories behind recently announced offers-in-compromise are “a little troubling,” in Marc’s view. Agency taking broad views of what constitutes a “slotting fee” in pay-to-play and commercial bribery cases as well as what is a “willful act,” he thinks. While the former lowers the threshold on what TTB can act against, the latter paves the way for permit revocations. He’s already heard from plenty of small companies hit with scary letters or taking big fines that they “couldn’t afford a lawyer” and “couldn’t really fight this.” That’s troubling to Marc to in a “two-strike system,” where on second strike, TTB can revoke permit. It all underscores that no industry member should think that “I’m too small or too cute to get stung on these.” Indeed, list of targets of investigations so far full of lots of small companies. So “take compliance very, very seriously,” he argued.

TTB “Punting” on Reg Revisions, “Disappointing” Lack of Acknowledgement of Key Issues Marc also fairly critical of TTB on recently proposed revisions of its labeling and ad regulations. He sees a “desperate need” for these revisions. And “from a purely technical standpoint, this does some very positive things,” not least of all that they tend to be “more easy to understand.” However, “from my perspective, this is a very timid modernization act,” Marc said. “There are some very big issues that have now been pending before the agency” for some time, which TTB “punts” on. That includes labeling regs about “light beer” and strength-claims. “The list of class types for beer are laughable” and unchanged. There’s no updated guidance on GMO or organic labeling, “all natural” claims and more. Plus, it’s “disappointing” in his view that TTB didn’t incorporate more of “constructive suggestions” provided by BA and other industry trade groups and cos.

That said, most concerning of all for Marc is new proposed reg that explicitly states that a label approval from TTB does not prohibit the agency from going after an industry member for a “false and misleading” claim on that same label. While he understands that TTB can’t catch all potential issues during label approval process, such a “blanket get-out-of-jail free card” for the agency calls into question entire label approval process in the first place. The “industry has to – has to – push back” on this, in his view.

Implications of Supreme Ct Decision “Huge,” But Decision Likely Tailored Cuz It’s “A BFD” Marc’s comments on pending Supreme Court decision about Tennessee retailer residency requirement track other recent alc bev atty thoughts and expectations. Because case deals with crucial interactions between 21st Amendment and Commerce Clause, with potential to create an oppy for “interstate three-tier system,” there are obviously “some huge implications to distribution” of alc bevs, Marc said. However, based on oral arguments, he (and other attys) expect to see a “narrow holding.” The justices “don’t want to decide the big picture,” he thinks, because they clearly “recognize this is a BFD” (big effing deal) “for the industry.”

Building on brewery opening rates shared by Bart during State of the Industry talk at CBC this morning (see above), BA sr veep of professional brewing division Paul Gatza shared this staggering take: “the median age of a brewery in this country is now less than 4 years.” Again, most breweries in the country haven’t even been open for 5 yrs. So Paul noted some key reasons for concern and reasons for optimism as well as sharing “some words of wisdom” for what a bit paradoxically remains a very young industry.

Taproom Growth to Be Targeted, So “Make Friends” Paul riffed on “some thoughts from craft pioneer Fritz Maytag,” shared back at the 2011 CBC in San Francisco. “It is an honor to be the brewery in your town,” Fritz recalled being told. “Those words have stuck with me,” Paul said, offering that “we should remember to be humble” and that small brewers are “serving the community first.”

As such, it’s crucial to “have supportive relationships instead of opposing ones.” The strong growth of very small, taproom-focused breweries “gets the attention of new” entrants and on-premise competitors alike, who all “want a piece of it one way or another.” It’s understandable to both Paul and Bart that retailers are “going to be pointing fingers” and looking for “scapegoats” of their own declines. While those folks may point to differences in “permit fees” when they advocate for restrictions on at-the-brewery sales, “they don’t talk about the investments into tanks” and the manufacturing processes and ingredients that brewers must make. That said, he encouraged brewers to “make friends and manage those relationships” with retailers and others in the community. If more brewers recognize and respect their roles in those communities, then “perhaps we won’t see as many challenges in the state houses,” Paul supposed.

Know Your Regs and Prepare for Audits; Three Kinds of Safety It’s “important to invest in quality and safety,” Paul guided early in his remarks. Many brewers may be “broke” when they open, but if they don’t make considerations for these important tenets, “you’ll be broke and out of business.” He urged young brewers in the audience to “please understand the regulations” and to “prepare for an FDA or OSHA audit.” BA and state guilds all working hard to provide resources to members so they can successfully navigate these issues, natch.

Paul later dug in on safety, specifically spelling out 3 different areas of focus: traditional workplace safety concerns, what he termed “emotional safety,” and “beer drinker safety.” On that first front, Paul warned that “if your company is growing, safety protocols need to go hand in hand with that growth.” BA working with other orgs on “piloting an OSHA alliance,” for example, while org’s safety ambassador tours the country to help small breweries be safer places to work. But Paul also insisted that breweries be “emotionally safe workplaces,” too. A handful of recent brewery closures were “tied directly to poor behavior.” These days, “workplace harassment and bias” are “less likely to be ignored” and breweries need to ensure employees of all kinds can work in spaces free of discrimination, harassment and worse, he explained. That said, the brewing industry is increasingly more diverse, a key reason for optimism, in Paul’s view.

“A third kind of safety is beer drinker safety,” he concluded. That includes ensuring proper packaging and handling of that packaging. But he also pointed to current challenges to the safety and even healthfulness of moderate alcohol consumption. These attacks on moderate consumption now regularly include proposed legislation to lower the legal BAC for driving to 0.05. That recently popped in Calif, Oreg and NY, 3 big beer-drinking states, among others, Paul explained. “High BAC” and “repeat offenders” still represent an outsized portion of drunk driving incidents, he reminded, while “distracted driving” continues to be a growing concern.

Half Empty, Half Full on Line-Blurring and Mainstream Interactions “The long term impact of the blurring of the lines” between beer and other malt bevs, spirits and so forth is definitely a concern, in Paul’s view. Then too, “this blurring of category lines is creating some new drink opportunities,” Paul said, as well as the oppy “to address some capacity issues.” At same time that “large brewer brand decline is creating opportunities for the craft brewer,” small brewers are “getting really good at making lighter lager” and other light styles, he pointed out. They’re also participating in the movement toward beer with “low and no-alcohol” and “low calories,” a clear reason for optimism. But often, larger brewers are leading in that department. So Paul’s also concerned that “large brewers are starting to unlock what will keep [them] relevant to generation Z,” thru innovations in and around the beer space. Still, Paul’s “last reason for optimism” highlighted “two excellent attributes” that brewers need to continue to hold dear: “beer is delicious. And beer is fun,” he concluded.

Now a few years into this “new normal” of more moderate craft growth, continued explosive number of new breweries opening and pressing list of challenges lie ahead in craftland. That’s even as craft continues to gain ground in total beer biz, BA Chief Economist Bart Watson and Senior VP of Professional Brewing Division Paul Gatza both acknowledged during their annual State of the Craft Beer Industry report at CBC in Denver. And perhaps chief among ’em: craft needs “to bring more drinkers” into the segment and “widen our view” to “the other 87%” of market share in beer, said Bart. Otherwise the growth will continue to slow, he predicted. In fact, 2018 was “lowest per brewer growth rate since the late 90s and early 2000s.” Recall, BA craft estimated up 4%, +1 mil bbls to 25.9 mil bbls last year (see Apr 2 issue), now split amongst 7,300 plus brewers.

And newer brewers are disproportionately snagging bulk of craft’s growth. For second straight year, vast majority of that collective growth (872K bbls) came from breweries that opened in the last 3 yrs, while “established” brewers (4 yrs and older) collectively grew just 100K bbls, Bart shared. Regional brewers (15K bbls and above) were flat for second yr as well, at 18.1 mil bbls collectively. That’s “where the pain point really is.” More brewers are coming, Bart promised, adding that TTB counts more than 10K active TTB permits, suggesting at least 2500 breweries are currently in planning. This trend “isn’t going away” as more folks “excited” to join this industry. So this is “a reality everyone should be prepared for.”

With Taproom Growth Comes “Scrutiny”; Determining “Balance” and Size are Key Another challenge: there will be “scrutiny” from retailers and others “looking to capture that magic” of taproom growth, sez Bart. Recall, total taproom volume grew to 3.1 mil bbls. If you assume 90% of those sales were draft, that’d mean 15% of all draft in US is now being sold in breweries and brewpubs, Bart noted. Then too, one thousand of the 3K plus brewers surveyed by BA identify as “taproom” brewers, with 25% or more of total sales derived from their taproom. They collectively grew 40% to 809K bbls, representing nearly ¼ of total craft growth, Bart showed. These brewers are tiny on avg. And that number would be higher if more brewers reported. So net-net, “expect retailers to cry foul.” Microbreweries remain the fastest growing category in craft, up 16% to 5.835 mil bbls including over 1K new breweries opening last yr. Their biggest challenges going forward will be finding “balance” between distribution growth and taproom growth, and determining “how big do you want to be.”

Capacity Utilization Still an Issue; ~45 Mil Bbls of Craft Capacity vs 25.9 Mil Produced Excess craft capacity remains an outsized issue that exacerbated over the last several yrs. Total BA craft capacity grew to more than 45 mil bbls, vs just 25.9 mil bbls of production, Bart estimates. So capacity utilization rate is just 57% across the industry. That’s down from closer to 65% utilization rate in 2013. Brewers of all sizes are looking to reduce excess capacity in variety of ways, such as acquisition (e.g. Sierra, Oskar Blues), contract brewing (New Belgium, Abita), innovation in ancillary products (Oskar, Hardywood), or selling off capacity (Green Flash, Stone). But more and more established brewers are running into this issue.

Craft Pricing Had Slowest Gain in “A Long Time”; Tuff Choices Ahead, “Central Dilemma” Craft pricing decisions will be “tough choice[s]” for brewers going forward, as competition ramps up, and likely “central dilemma” over “next couple years,” sez Bart. Indeed, craft pricing “didn’t grow that much” last year, as 2018 “was one of the slowest pricing gains in a long time,” Bart shared. BA craft prices grew 1.6%, 61 cents to $38.88 per case in IRI data. And BA craft prices rose 1.4% in Nielsen CGA tracked on-premise.

IPA Jumped from 8 Share in 2008 to 40 Share Now (in Scans); Yet Consumer Preference Across Spectrum “Choosing your products” is “increasingly” difficult in this “challenging market,” yet there are still opportunities and interest from drinkers across the spectrum of beer styles, Bart showcased. But no style is more explosive than IPA, natch. BA craft IPAs were just 8 share of IRI $$ in 2008, the 5th largest style in craft behind Seasonal (19%), Pale Ale (15%), Amber Ale (10%) and Amber Lager (9%). How quickly things change, as IPA now ~40 share of IRI craft dollars and the largest growth style in craft by far. Yet when consumers asked what flavors are driving most interest, descriptors such as “crisp,” and “dark” are as large or larger than “juicy/hazy,” “hoppy” and “fruity,” per survey results. So “consciously be thinking about what the beer lover wants,” sez Bart. Then too, more and more craft brewers are getting “really good” at producing lager styles, and others are experimenting in hard seltzers, FMBs, kombuchas, spirits and more to fill capacity and differentiate, Paul noted (see below). Plus, BA continues to push its independent brewer seal as an oppy to not only inform drinkers, but draw them toward craft.

Net-net, while Bart laid out laundry list of challenges, both his and Paul’s tone were optimistic. BA craft represents more than 1 in 8 beers produced, and nearly ¼ of total $$ spent on beer in the US. Much of the pockets of growth in total beer are occurring “in this room,” as microbreweries and brewpubs each still growing double-digits. And craft overall “continues to outperform.”

Cannabiniers/Two Roots Brewing added yet another (alc) bev vet to its team, appointing ex-Constellation/Ballast Point exec Marty Birkel as “the company’s newest board member,” co announced. Marty worked for Constellation for 20 plus yrs,including eventually as Chief Global Sales Officer on wine side (and before that as exec veep sales for Barton Beers), before moving to prexy of Ballast Point in Jul 2016 and head of (short-lived) High End Specialty and Craft unit. Marty had front row seat to Ballast Point’s tuff transition within Constellation org and “elected to leave the organization” effective Feb 2019. But his long experience, including at Ballast Point with VA brewery project, various Ballast brewpubs and acquisition of Funky Buddha could prove helpful for Cannabiniers, especially as it plans to acquire several more breweries across the country and figure ways to integrate them into its Two Roots platform.

Consumers are willing to spend nearly $1 more per 16oz glass of craft beer than they currently spend on average in tracked on-prem channels, according to Nielsen CGA data and survey results shared by Matthew Crompton and Bianca Piluso at CBC Seminar earlier this wk. Consumers say they’re willing to spend $6.29 per 16oz craft glass vs actual avg price of $5.39 per glass. Similarly, consumers are willing to spend $5.67 per 12oz bottle of craft vs actual avg price of $4.70 per bottle in Nielsen data. This “could be a huge opportunity,” sez Matthew. Could equate to $2.888-bil oppy if craft were to collectively raise prices by 18% on-prem, he added. Currently, there’s a near $2 gap in what consumers are willing to pay for craft vs domestic on avg.

Beer biz vet and owner of No-Li Brewhouse, John Bryant, can leave his brewery in Spokane, WA and drive “six hours to the farthest point you can get No-Li draft,” he told an audience at Craft Brewers Conference in Denver this week. The co now sells 90% of its beer within a 4-hr drive, John shared. No-Li hit 14,200 bbls in 2018, he told CBN, all within WA and neighboring ID. The co refocused sales on these 2 states, reining in distribution from what was 10 states just a few years ago. “The consolidating of markets created increased sales, increased market share, increased account relationships, more focus, increased profitability and a craft beverage company with more bandwidth for innovation,” John followed-up with CBN, reiterating key points from seminar titled “Permission to Dig Deep.” John expects No-Li to grow by near 20% this yr to about 17K bbls, bullish on the co’s ability to expand biz in tighter footprint and on new Day Fade hard seltzer brands.

After finishing last year slightly down in volume, Dogfish Head had a strong start to 2019, with shipments up 11% to over 66K bbls thru Q1, founder and CEO Sam Calagione shared with CBN. SeaQuench is keepin’ up high double-digit growth rate in its 3d year, with volume up 79% in IRI MULC thru Feb 24, he noted. Plus, 90 Minute IPA volume grew 20% in IRI with shift to $15 6pks, after several tuffer yrs for brand. Namaste grew 12.5%, Seasonals eked out 1% gain, and Grateful Dead themed brand, American Beauty, became its 6th best selling brand at retail ahead of Namaste. All while maintaining #1 price position among top craft brewers at $50.16 per case YTD thru Mar 24, even with avg prices down $2/case as mix shifts. Gotta note, shipments trend is ahead of total IRI trend, as Dogfish volume up 7%, $$ up 3% YTD thru Mar 24. Yet part of the reason is due to disproportionate level of sales and growth in Mid-Atlantic region where Dogfish continues to grow double-digits, Sam explained.

Notable craft brand move went down earlier this week in OH, as Founders dist rights statewide were sold to Superior Bev from craft/indie distrib Premium Bev Supply, multiple sources told CBN. Superior will sell off parts to Bonbright, Stagnaro and NWO, we hear.