By Nestor

We’ve been reading about the need for industry unity.  How close are we?

Let’s see.  The craft brewers are calling for the ability to distribute beer any way they please (kind of like they would be able to do in 99% of US industries).  Oh, and they would like preferential tax treatment because they are, well, craft brewers.  Wholesalers want to preserve (in some states, gain)  distribution monopolies, except maybe for brewers under 100 barrels a year.  Plus stop their suppliers from meddling in their businesses. The big guys would like the industry to revert to 1980 or so; failing this, perhaps… well, I’m not sure.  Maybe fewer tax advantages and other perks for small brewers who are presently cleaning their clocks.

Looks like unity to me.

But let’s step back a bit.  Where are we?  How did we get there?   What should happen next?

Ever explain to a friend how the US beer business works?  That brewers can’t sell to retailers, but must go through these distributor thingies.  That distributors can’t sell across state lines.  That beer can’t, in most states, be sold in certain outlets.  People tend to look at you as if you have two heads (unless you are talking to someone outside the US, in which case they look at you as if you had three or four).

But wait a minute, Nestor, you might say.  These rules are the result of brewers’ and retailers’ naughty actions of a hundred years ago and are necessarily in place to prevent such evils from returning.

Well, yes, to some extent.  But mostly the states were given the right to do pretty much as they please regarding alcohol regulation (this is the American way; try making sense out of the efficacy and sense of 14,000 school districts).  And it is the states that for some reasons (it is rumored that generous contributions were among these reasons) prohibited direct sales and established pro-wholesaler franchise laws.  And we are told that if we did not have such laws that we would become like Britain.  Soccer riots and such, I imagine.

No, we have these state laws because wholesalers successfully lobbied to get them.  And, rightly or wrongly, established a very enviable position for themselves – must use them, can’t fire them, etc.  So one can understand and even empathize with the position of small brewers.  And in a number of states, carve-outs for very small brewers—allowing them to self-distribute or change wholesalers with proper compensation-- are being created. 

And I would say that this is an elegant solution to a legitimate problem.  But not everyone agrees.  Some not so very small brewers believe that these freedoms should be granted to them as well.  Some state wholesaler associations believe that the carve-outs are neither necessary nor acceptable.  And so on.

A reasonable compromise would seem possible.  Very small brewers probably do deserve special treatment.  Larger ones don’t.  Wholesalers are necessary for just about everyone, maybe even A-B. But there is no legitimate argument for allowing them to hold suppliers hostage.

Compromise, however, does not seem to be the solution du jour these days.  The alternative, of course is the courts.  Which raises the possibility of unexpected consequences that could throw the baby out with the old beer.

It has been pointed out by almost everyone (and then ignored by almost everyone), that the beer industry has greater issues.  Such as figuring out why it is being hammered by other forms of beverage alcohol.  Maybe we could put these internecine disputes (and the associated rhetoric) aside.  Not betting on this though.

Especially now that I have just read about the Fat Tire folks’ seemingly successful effort to get wholesalers in an expansion state to pay a non-volume related fee for their brands.  Why did these wholesalers do it?  Well, margins on a new, good smallish brand don’t entail much in additional costs. Wholesalers can pay some fees and still come out ahead.

But that’s not the interesting question.  The interesting question is what are the big guys going to do about this.   I suspect that the answer is that they will want (and likely get) their pound of wholesaler margin, at least in Ohio.  And that could wind up being a big pound.   So we have another wedge between big brewers, small brewers, and wholesalers.  Just what the industry needs.

As craft scene continues to build in Atlanta, startup called Three Taverns has been turning heads with commitment to brewing only takes on Belgian styles – replete with imported Belgian brewer at helm, use of step-mashing process and installation of what may be only

warm room (for in-bottle fermentation) in Southeast quadrant of US. 

Founder/ceo Brian Purcell piloted recipes on small Sabco system and, finding his capital raise oversubscribed, didn’t hesitate to go big, upping plan from anticipated 20-bbl production system to 30-bbl Newlands rig, including three 60-bbl fermentation tanks and two 30-bbl tanks.  He’d gone out seeking $1.35 mil but pulled in $1.9 mil.  Three Taverns, located just east of Atlanta in Decatur, with its strong alternative vibe, brewed its first batch last Jun, launched at Decatur’s influential Brick Store Pub in July, and opened its tap room just this past weekend.  A Comac bottling line is running 4-packs of 12-oz bottles and will move on to 750’s.  An exterior grain silo will go up shortly.  Purcell has assigned brand throughout GA to Savannah Distributing, which has done deft job seeding other Belgian-inspired craft brands like Allagash and The Bruery.

Purcell aims to create distinctive American takes on classic Belgian styles, and he’s not hedging bet that Georgians will respond.  After encounter with Belgian brewer Peter Bouckaert (now at New Belgium), plan was hatched to recruit as Three Taverns’ brewer Bouckaert’s nephew, Joran Van Ginderachter, 27, who’d interned at New Belgium and was intrigued by US scene.  Purcell is processing paperwork for Ginderachter’s permanent relo to US, hopefully within weeks.  He’s also installed 4-vessel brewing system, initially for efficiency reasons, but quickly realized that dedicated mash and lauter tuns would facilitate step-mashing process associated with some Belgian styles. And taking leaf from handful of other US brewers, notably Maine’s Allagash, he’s installed what may be only warm room in Southeast, for bottle fermentation.  He’s starting with his specialty beers, but aspires eventually to be able to accommodate full 60-bbl production run.  To complete theme, tasting room (with window looking into barrel-aging room) incorporates Belgian-style cues, including such oddball touches as brown tap-handle covers resembling drawstring monk’s habit.  When those start going on the taps, patrons are expected to understand that it’s closin’ time, brother.

Flagship beer is dubbed A Night in Brussels, after an evening in 1994 that turned on Purcell to Trappist styles, and it typifies Three Taverns’ approach of using “Belgian inspiration, American creativity,” per its slogan.  It’s a citrusy Belgian-style IPA, at 7.5% ABV, that uses Belgian malts, American hops and Belgian yeast strain – “an American IPA on a Belgian road trip,” he likes to say.  Also in mix are Belgian-style single called Single Intent and imperial stout called Theophan the Recluse.  During visit to Atlanta this week, CBN contributing editor readily encountered Night in Brussels – always served in Three Taverns glassware – at accounts like Decatur’s Brick Store Pub and Java Monkey coffee house and Atlanta’s Publik Draft House.

Purcell’s given fair amount of thought to branding, but that’s no surprise given that he’s former Coca-Cola marketing exec who went on to found Decatur-based incentive marketing co called Carrot & Stick that numbered Coke among clients and was based just steps away from Three Taverns site.  In contrast to his Coke chores, Purcell says he loves fact that he can focus his storytelling on what’s actually in the bottle these days. 

He wanted to name brewery for an actual place, and drew Three Taverns name from Book of Acts, as reference to traveler’s respite on Appian Way near Rome.  It’s intended to subtly invoke a commitment to “nourishment and community,” he said.  He’s betting that there’s edge to be had by focusing exclusively on Belgian styles rather than including sours, tripels and other styles among broader repertoire, as many other craft brewers do.  Might that be a stretch for Atlantans who’ve only lately embraced full range of craft styles?  “I’m pleased to be part of Atlanta’s emergence into craft beer relevance,” was his answer.  

As of this summer “Deschutes beer is now officially available in Thailand, Singapore, Sweden, and later this fall, in Australia and New Zealand,” reported Bend Bulletin.  Deschutes had no real plans to ship overseas until earlier this yr, when they found out “a large supply of Deschutes beer was circulating in Singapore,” by “unauthorized distributors” acquired from “an unknown exporter based in California.”

“We’re currently in not quite half of the United States,” so “the idea of shipping beer overseas seemed a little silly to us, quite frankly,” Deschutes CEO Gary Fish told paper.  But Deschutes decided to take oppy and by June 2013 signed on with Beerstyle Distribution in Singapore, who “contracts with a wine exporter from Napa Valley,” and imports some Rogue and Stone Brewing products as well.  “People were already going gaga over their beer,” when it was on “grey market,” owner of Beerstyle Distribution, Winston Kwang told Bulletin.   “The strategy for us was to have our beer available to people who want to buy it while also eliminating that grey market,” said Michael LaLonde, Deschutes president.

Biggest challenge with shipping overseas is quality/freshness; “the beer travels for a little over a month before it arrives in the country,” and most craft beer best by dates are 4 to 6 mos after initially bottled, leaving a small freshness window, Kwang told Bulletin.  And European beer is typically “more generous” with its expiration dates, so this is a big change up for Kwang and Singaporean consumer.

So far in 2013, Deschutes has shipped about 1000 cases to Thailand with Beervana distributor, (owner Aaron Grieser, happens to be University of Oregon law school graduate), 2000 cases to Sweden, and about 25k cases in Canada, noted paper.  Thus far 29k cases have sold internationally of Deschutes’ 2.8 mil, tho exports have  “grown by over 11,000 cases from 2012.”  Craft beer exports “grew from an estimated 14,000 barrels in 2003, to 189,000 bbls in 2012,” according to Bart Watson, staff economist for Brewer’s Association, added paper.

To understand the mourning going on in Kansas City after the announcement of Boulevard’s sale to Duvel Moortgat last week, remember that Boulevard became Missouri’s largest brewery when another Belgian headquartered company, InBev, bought St. Louis’ pride and joy, Anheuser Busch in 2008.  So comments in response to founder John McDonald’s letter about the deal (posted to Boulevard’s Facebook page) ranged from congratulatory, through skepticism, all the way to “you’re dead to me” (the announcement racked up 582 comments in 24 hours, not counting the 533 times the letter was re-posted by others).  A Kansas City Star editorial, posted alongside the local paper’s write-up of the deal, titled “Boulevard Brewing’s very disappointing decision” likely exacerbated local worry.  Deemed “unfortunate” by the Star, the deal is morphed into another example of big-business takeovers and out-sourcing.  Convinced that “Boulevard will not be the same without its local ownership,” and that the basis of the co’s success was that “it was Kansas City’s own brand,” the editor wondered “will Kansas Citians really care that much about Boulevard when it’s yet another company owned and controlled by someone from out of town?”  

Perhaps in an effort to provide more information to concerned locals, John and Duvel Moortgat ceo Michel Moortgat gave an interview to HuffPost on Friday, in which John assured readers that “no one will leave.  The brewery will run like it is today and the whole management team will stay in place.  A couple of people from Belgium will join us here as well.”  Further, “the more beer you make, the more employees you need,” implying that more KC folks will work for Boulevard, or Duvel Moortgat, in the future.    He also added that Boulevard is up 13% “in the last few months, particularly across the Smokestack Series portfolio,” which the co would like to accelerate along with Unfiltered Wheat and its pale ale.  “We are also going to look to streamline Boulevard, Brewery Ommegang, and Duvel’s US importing company,” he said too.  How the co will “streamline” the biz is still largely conjecture, but “one of the big synergies here will be combining our sales force.”  Michel estimates that “craft beer consumption” reaches a whopping 30% in Belgium and that the co can help grow craft in the US from 7 share to 10, 12 or 15.  And it’s those Smokestack beers that he believe “have the most potential in Europe,” particularly where DM has “a strong presence” - Belgium, France, the Netherlands and the UK.  

A Forbes contributor surveyed various responses that he saw online last week, noting that “if McDonald had real ownership to give up, the Kansas Citians that made his business possible also felt ownership.”  Indeed many commenters on Boulevard’s Facebook page, the more positive of which commented that “at least it’s not InBev,” worried about the community focus of their beloved brands.  DM’s Belgian-ness didn’t help calm folks down.  That 2008 Belgian acquisition certainly colored some local reactions, regardless of dissimilarities in the two deals.  The Star printed its “Boulevard Brewing blues” on Monday, “to wistfully praise what’s being lost in terms of hometown pride.”  The author acknowledged that Boulevard’s success “was capitalism with a heart and playful attitude,” and fondly remembered that after the AB-InBev deal, Boulevard execs “couldn’t resist boasting of their hometown roots at Bud’s expense.  Until now.” 

This contributor, like many other Kansas Citians, seem to be mourning the loss of Boulevard simply due to the foreign origin of its new owners.  The original Star editorial wrote that Boulevard was sold to “not just any outsider, but someone from out of the country.”  Jingoistic undertones aside, that Forbes contributor tried to explain this emotional response by pointing to a Canadian Business article from May.  That writer argued that consumers who buy based on ownership, who care about the provenance of a product are “the kind of fertile ground branded marketing hasn’t seen in a long time.”  Further, winning over consumers by provenance marketing may be “a prize,” but those consumers have entered “an unequal relationship.”  That is, consumers “can leave” companies, “but we can’t hope to change their nature.  Especially when they planned their exit strategy first.”

BREW stock hotting up even more these days, perhaps as more investors embrace concept of craft in stock mkt.  Craft Brew Alliance stock almost doubled in last 3 mos, up to near $17/share.  Jumped over $2 today before pulling back to a 6-7% gain.  Almost tripled in the last yr.  Good chunk of its recent growth spurt came after Forbes piece warned CBA stock too frothy.   Just the other day, financial website Seeking Alpha may have gone over the top the other way; columnist even went as far as to say “we could see a valuation of $1 billion in the future.”  Currently market cap up to near $320 mil.  Not that much new and striking for CBA in last mo or 2, but investors keep bidding the stock up nonetheless. CBA has slowed down a bit in recent scan data, but $$ still up double digits, 12% yr-to-date thru Oct 6.

CBN stumbled into a striking Costco beer set in Ann Arbor, Mich last weekend that a source sez is currently being tested in the state. Under a central sign that sez “Craft Beer,” a tiered display of 25 different big bottles, attractively displayed each in their own boxed areas, priced at anywhere from $5.99 to $15.99.  Included everything from staple big bottle brands like Stone Arrogant Bastard to offerings from the Bruery, Dogfish Head’s Theobroma, New Holland's Dragon Milk plus a lot of Belgian accents.  Indeed, display had Framboise Lambic, Chimay, Saison Dupont, Delirium Tremens and more.  Also the Sierra/Russian River collaboration Brux and Fin Du Monde.   One can wonder how well these collectively and individually will turn, but it was quite an eye-catching evolution at one of most important beer retailers.  But that wasn’t all.

As we came upon the beer area, the first display we saw was a large dual display of Duvel and Ommegang 3-packs of big bottles for $22.99 and $18.99 respectively.  Also offered: Bell’s Two Hearted Ale cases for $32.99, Sierra Torpedo for $23.99, a New Holland fall seasonal also over $30 per case.  Bud Light, Miller Lite and Labatt Blue were in less prominent positions for $14.99. Corona and Heineken 18-packs were 17.99 as was a Molson Canadian 28-pack.  Kirkland (Costco’s private label) craft beers were $18.99 per case.  Tho the set offered many different price points and a fairly wide variety (also included Guinness, Beers of Mexico, Stella and more), the emphasis clearly on trading consumers up and expanding their horizons to the wide world of craft and Belgian-style beers.  Yet another sign of changing times. 

New Belgium continues to make up ground after slow start this yr.  Its $$ sales up 19% in last 4 weeks, 14.5% for 13 weeks, now up 7% yr-to-date in IRI multichannel + c-store thru 10/6.  But its avg prices down 3% for 4 weeks, about 1.5% for 13 weeks. Even Fat Tire now in positive territory yr-to-date; $$ up 14% in last 4 weeks, which puts it up 1.2% for the yr thru 10/6.   Avg prices down 89 cents/case last 4 weeks. Ranger IPA $$ up 27% and NBB seasonals up 14% in last 4 weeks too.  So NBB really turning it around in 2d half of yr so far, before Fla volume really kicks in.  Boston Beer also continues impressive growth in scan data, up over 30% YTD, driven by improved Boston Lager and Variety pack trends, as well as Angry Orchard, natch.

IPAs continue to sell like wildfire.  IPA style up over 40% again in most recent 4 weeks; it grew near 3 share of both $$ and volume in craft segment.  Near 18 share of total craft $$, 16.4 share of volume in same period.  Nine of the top 30 craft brands were IPAs.  They collectively grabbed an additional 0.95 share of craft $$ YTD.  Lagunitas IPA of course leading the charge.  Up 70%, gained 0.44 of craft $$ YTD.  Total Lagunitas biz up 87% for both $$ and volume YTD, and 100%+ in last 13 weeks.  Lagunitas now the 17^th largest vendor in scan data YTD.  Bell’s Two Hearted Ale (+86%), Stone IPA (+58%), and Dogfish Head 60 Minute (+52%) combined make up most of rest of top 10 IPA growth. Redhook Longhammer IPA, Harpoon IPA, New Belgium Ranger IPA, and Deschutes Inversion IPA actually lost share of segment, though all up double digits YTD.  

Big craft flagships are growing but also losing share of segment.  Sierra Pale up 10% YTD, but it lost half a share so far this yr. Boston Lager really picking it up in last few mos, $$ up 19.5% in last 13 weeks, up 10% YTD, but still lost 0.4 share thru 10/6.  Despite Fat Tire’s recent turnaround, it’s lost most share of any craft brand in 2013, -0.6 share of $$ YTD.  Magic Hat #9 up 6%, but lost 0.1 share.  Goose Island 312 is the only non-IPA flagship (of top 30 craft brands) that is gaining share of craft.  It’s flying in recent scan data; $$ up 75% in last 4 weeks, 57% YTD, and grabbed about 0.2 share of craft so far this yr.

All in, only 4 top 30 craft brands trending down YTD: Widmer Hefe (-5.8%), NBB Seasonal (-4.6%), Sam Light (-19%), and Redhook ESB (-5%).   Widmer Hefe down 10%, Redhook ESB down 9% in last 4 wks.  CBA up double digits YTD but slowed a bit to 7.7% in last 4 weeks.  And of top 25 vendors in scan data, 12 are now craft.  Long Trail is the only one of those 12 declining; volume down near 10%, $$ down 7.5% YTD.

Elysian Brewing never got around to brewing a beer with that airborne Seattle yeast we wrote about last issue.  They knew it was “terrible” after just culturing it.

Taking cues and quotes from Stone’s Greg Koch and Brewers Assn, BrewDog founders James Watt and Martin Dickie posted a manifesto of sorts on their blog on why they “categorically believe we need to define craft beer” in UK and Europe.  Why?  The longer version is to: 1) “protect craft brewers and what we are building”; 2) “guide consumers” in this new category; 3) “ensure craft brewers can charge a fair and sustainable price for their masterpieces” and; 4) enable craft beer to grow in UK as it has in US.  Their 3-word, and perhaps more revealing, version: Blue F*%#!@G Moon.  Dickie and Watt, for years among the most vicious and funniest critics of global, mainstream beer, are lighter than usual on the rhetoric, but do point out they don’t want retailers to create craft beer sections that get “carpet bombed by beers that are not craft” and also charge the large global brewers with “bastardizing beer on a colossal scale.” Net-net: without a recognized definition they fear “the large monolithic brewers will simply exploit all that we have worked so hard to build.”  

Although the post starts out to define “craft beer,” Watt and Dickie ultimately follow BA in defining “craft brewer” instead, while going circular in explanation that “the definition of a craft beer is a beer brewed by a craft brewer at a craft brewery.”  Note that the definition moves between defining both a company and the facilities it operates.  Not surprisingly, their proposal, like BA’s definition, doesn’t actually have much to do with those liquid “masterpieces.”  A European craft brewery, in this draft proposal (they’re open to suggestion), is limited to less than 500K hl annually.  That’s about 425,000 bbls, so no single craft brewer could have much more than 0.1 share of 300-mil-bbl Euro beer mkt.  That’s significantly smaller than BA’s definition, which allows a 6 mil-bbl to have nearly 3% of 208-mil-bbl mkt.  The guys also amend BA’s “traditional” with their own “authentic” (brewing all beer at original gravity and not using corn, rice other adjuncts to “lessen flavor and reduce costs”), add “honest” (labeling all ingredients and production location and brewing all of its beer at “craft breweries”) and use tighter definition of “independent,” less than 20% owned by brewing co that operates any brewery that doesn’t qualify as craft. 

Dickie and Watt acknowledge the size limit may be the most “contentious” aspect and suggest it could be dropped entirely, since most brewers over 500K hl would likely fail the “authentic” tests.  Independence level defended since “intent is a massive part of craft brewing” and once craft brewer sells to big brewer, it’s no longer craft, even if beer “might still be ok (for a while).”  Blogpost singles out Goose Island and predicts that in 10 yrs the brewery will no longer exist and “all their beer [will be] made under contract with rice and corn at an InBev plant.” BrewDog founders hope definition will be recognized by Campaign for Real Ale (CAMRA) and Society of Independent Brewers (SIBA) in UK, as well as by The Brewers of Europe Assn.   Read the entire post here. 

Editors’ Note:  For brewers so ostensibly committed to quality products, Watt and Dickie are notably far more focused on their business interests, defending the niche they’ve built and even their pricing, than on the product itself.  While BrewDog and (at least their UK) counterparts are growing fast, gaining share of mind, stomach and attention – just like their US counterparts – there is the same whiff of fear, arrogance and even contempt for their consumers and retailers, who they don’t seem to think can be trusted to make the ‘right’ decisions.  Gotta also note that many US craft brewers wouldn’t pass muster for Watt and Dickie.  Contract brewers working in plants that make non-craft brands or that label where the company is based rather than where the liquid is produced?  No go.  Brewing purely at original gravity could get tricky for some US brewers too.  A final irony: Dickie and Watt, like the BA, would clearly toss craft segment founders Rob and Kurt Widmer, and the rest of CBA, out of the club due to AB’s ownership stake.  That lends a slightly sour taste to the congratulatory video message they recently sent to the Widmers (a very funny bit with Jim Koch, shown at CBA Vegas mtg) on their 30^th anniversary.      

Surly Brewing founder/ceo Omar Ansari switched up more typical craft story by reminding the Minneapolis/St Paul Biz Journal that “brewing is manufacturing.  It’s a beer factory.  It’s cool stuff to make, but it’s still manufacturing.”  While true (and certainly watching machines whir and buzz is a big part of many brewery-visitors’ fascination), this is not the typical craft narrative.  Surly topped 20K bbls last yr and will “squeeze a little more out this year,” Omar told the paper.  The co broke ground on its $20 mil, 48K sq-ft facility earlier this fall, which will “double up our production off the bat.”  He also continued to focus on difficulty of keeping “a manufacturing facility running.”  Pushing out more and more beer is “constantly taxing for the staff,” and tho Surly’s historically built out infrastructure “by the seat of our pants,” the co has hit a point when “it’s hard to keep doing it that way.”  So he’s adding “an HR person and a few more procedures.”  Surly plans to “see how thirsty Minnesotans are and go from there,” once the new brewery opens, tho it pulled out of Chicago and Wisconsin “a few years ago to focus on the Twin Cities market.”  With very little talk of artistry, Omar returns to manufacturing, which he built his career on: “there are days when it’s much more business than beer.  But, because it’s beer, hopefully we can still have a little more fun than if we’re just making widgets.”