Craft distillers are sounding more and more like craft brewers. Last week we felt some distant tremors of craft vs crafty in the new "craft distiller/blender" certification/definition. This week, Ohio distillers seek respite from "decades-old regulations" they claim are "in their way," according to the Plain Dealer. Since the craft distilling "industry has potential for growth similar to the wine and microbrewing industries that could be worth millions to the state's economy," distillers are asking for legislative changes to allow more on-site sales and to alleviate distribution costs.  

While some cities have been veritably begging brewers to build in town, LA's been a little more aloof, according to a recent Press Telegram article. Instead, small-scale breweries are "booming in Los Angeles County suburbia" rather than within city-limits. That's at least "in part to avoid the red tape that has bedeviled entrepreneurs in Los Angeles," the paper reports. The author comments that "craft beer, at its heart, is about good conversation and community, yet fragmented Southern California has always been short on those, goes one supposition." This echoes David Walker's comments about the city in the long interview we cited last week when Firestone Walker announced its coming Venice taproom and offices. David argued that figuring out that fragmentation was the key to understanding the city. Many smaller brewers seem to be investing in smaller and smaller fragments of the suburban market, but they've already come together to form a "nascent" LA county brewers guild (at least the 4th more-local-than-state guild in Calif). Of all the LA suburbs, perhaps most-notable is Torrance, an "unlikely beer destination" (see CBN from May 17 for an in-depth report) with 4 new breweries in as many years. One current Torrance brewer reported trying to work with the city for 3 years, dealing with different regulators every time; in the suburb she found regulators she "could create a relationship with." Now two separate bus tour companies bring interested consumers to South Bay breweries, of which 6 more are in-planning. Long Beach saw its first this summer and the San Gabriel Valley's got 3 already. But don't forget the biggest US craft brewer is operating in town too. Alchemy and Science front-man (and therefore Angel City star too) Alan Newman expects an "explosion of craft breweries of all sizes" in LA soon and for craft share to "grow from a 4 to a 10 in the next 18 to 24 months."  

Franchise law reform floated by Pennsy small brewers in Jun (see Jun 20 CBN) now intro'd as bills in state House and Senate. Lotsa interest in this effort as other states grappling with same issues. Hearing held last week included testimony from Victory's Bill Covaleski who has been lead voice on reform as prexy of Brewers of Pennsylvania. Yuengling exec and atty at hearing. Brewers Assn and AB weighed in with written comments. NBWA's general counsel also attended. Two distribs and general counsel for distrib assn testified against the key measures. There will be likely more hearings, we understand, even while small brewers want to move bill quickly. (Some of the following appeared in our sister publication Insights Express earlier this week.)

Shields and Swords; Why Reform Needed; Proposed Changes Bill Covaleski summed up points he's been making all along for reform measures. Among his grievances are that current franchise law "creates a state-mandated middleman monopoly" that gives distribs "exclusive rights in perpetuity." Good cause terminations end up in "expensive litigation," (like recent spat between Yuengling and one of its distribs). Distribs sometimes sit on brands simply to keep rights away from others. Some distribs "unilaterally" sell rights "without manufacturers consent." Meanwhile, distrib consolidation has "reversed the bargaining power" between distribs and small brewers and "nearly all the wholesalers in Pennsylvania are larger than" Pennsy breweries they represent. When enacted in 1980, franchise law was "shield" vs natl brewers. But now it is a "sword utilized by wholesalers to maintain the brand portfolio without regard to their performance." If distribs don't perform, "only the breweries business is at stake." While brewers seek reforms, they're supported by report from state committee that recommended changes, other states that have looked at issue and Pennsy's Granholm conflict because it allows in-state brewers to self-distribute, but bars practice by out-of-state brewers.

Proposed bills contains most of key reforms laid out in Jun: 1) all brewers, including mega-brewers, can self-distribute up to 75K bbls; 2) brewers can terminate distribs without cause if brewer represents less than 20% of distrib's volume, but distrib must get fair mkt value, settled by arbitration if they can't agree on a number; 3) distrib contracts have to be re-negotiated every 5 yrs. New bills exclude language that brewers have to approve any transfer of brands if acquiring distrib meets "material qualifications" of brewer's other distribs. But "in consideration of consenting to such a transaction," Bill said, "the brewers propose that they would receive 10% of the brand rights' value exchanged between the wholesalers." (This 10% language not in bills but brewers expect to add it, CBN understands.)

BA Weighs In BA provided written comments that did not address any of these specifics, but rather argued that current conditions in US beer biz support "the logic of increasing flexibility in existing franchise laws." So concluded BA's new economist, Dr. Bart Watson. Bart's key point: combo of distrib consolidation and explosion of brewers in recent years has "dramatically changed the economic power relationship" between distribs and brewers. For 1st time since late 19th century, US has more brewers than wholesalers, and gap is "only widening." Tho distribs have "relatively weak market position" vis a vis mega-brewers, they have a "relatively strong position relative to the average small brewer." So while distribs may still need protection vs megas, "may make sense to re-evaluate" laws on their "interactions" with small players. Bart pointed to efforts in other states to allow self-distribution and termination without cause (with cap). "States could also allow small brewers and wholesalers to work out their own solutions to termination," Bart suggested, noting distribs have access to "sophisticated contract attorneys and can negotiate reasonable terms to end a relationship."

Distribs, AB Criticize Key Reforms Predictably, distribs rejected each of the key reforms being proposed. Fran O'Brien of distrib assn said brewers provided "no rationale" for allowing all brewers to self-distribute up to 75K bbls. Allowing "true small brewers" self-distribution rights might be acceptable, he suggested, but "correct cut-off point" is 2K bbls of production. Fran also questioned 10% "tax" on distrib deals, as he called it. By same logic, distribs would deserve 10% of purchase price when brewers sell brands, he said. Distrib assn also has "very strong objection" to any termination without cause, tho there "may be a need for some changes" to the process.

Distrib John Beljan (Stockertown Bev, import/craft distrib) said distribs and especially smaller suppliers work, grow and succeed together. Proposed changes would "destroy the symbiotic relationship." Self-distribution on scale proposed would be a "dismantling and potential eradication of the 3-tier system." Few of his suppliers approach that 75K-bbl cap and John asked how state would enforce it. Allowing termination without cause with the 20% threshold could lead to arbitrary "tactical termination" by suppliers and/or encourage them to ensure their brands never get to that point in any given house. Distribs in turn might attempt to "protect themselves from 'brand bleed' by culling" their own portfolios to ensure remaining brands stay above threshold. Smaller brands could then lose access. John believes that re-negotiation of contracts every 5 yrs "would inhibit and obstruct growth and productivity."

AB doesn't like these reforms either, tho it acknowledges need to fix Granholm problem. In letter to committee, AB cited "particular concern" with requirement to re-negotiate contracts every 5 yrs, which would "create uncertainty" for both distribs and brewers and "disrupt our business." AB also objects to how new changes limit one definition of good cause and drop need for supplier to approve ownership transfers. Other aspects of proposed reform are "inconsistent" with current AB agreement and "drastically change some well-accepted legal standards." AB will detail those aspects at a later date.  

Ain't just Southern Wine & Spirits upping its ante in Las Vegas craft biz (see Aug 8 CBN). City is poised for big-time craft growth, and Nevada Beverage is ready for it. The 10 mil-case indie AB wholesaler covering the 4 counties in southern Nevada with 75% of the state's population has been investing in its craft division for about 4 yrs now, the distrib's craft brand mgr Mark Lawson shared with CBN. And while total biz for the co was up about 2% yr-to-date thru mid-August, craft share in the area has been "moving quick." Craft is 6-7% of NevBev, "growing at a pretty rapid pace." Latest IRI data showed craft at about 8 share in Las Vegas for last 4 weeks, said Mark, compared to just over 6% for 52-weeks. He expects it to hit 10% "within the next 2 yrs." Sure, the city could be "10-15 years behind," but since his biz is "70-80% chain-driven" - "all of the off-premise and a lot of the on-premise" - a lot can change quickly. So "once those guys start embracing craft, then it's in every single town" and "goes from nothing-nothing-nothing to a substantial number quickly." In fact, at some point "craft could be 20%" of both NevBev and its market, Mark suggested.

Tho the strip is what most outsiders think of when Las Vegas is mentioned, it's only 19% of NevBev's biz. That "81% is the market we're trying to grow," said Mark. Part of the reason, dedicated craft specialist Bill Leaver explained, is that singles are king on the strip. Convenience and drug stores there go thru "thousands of singles a week," many of which are consumed immediately. So "22oz bottles of craft don't pull thru like a Bud, Bud Light Platinum aluminum." And the heat "doesn't help," Mark added. Casinos are just starting to get it, an oppy to be sure, but it's slow-going.

Instead, Mark, Bill and newest NevBev craft specialist Melissa Long Higgs report that chains like Whole Foods and Total Wine "drive a lot of craft beer sales," sez Mark, and "do a bulk of your 6-pack" biz. The "craft market in Vegas really didn't start changing until Total Wine and Yard House," he said. Melissa came over to NevBev from her beer-buying post at Total Wine, a chain she says is a big reason many craft brands have entered Nevada in the first place. As elsewhere, food chains have done well, but convenience has been a harder sell. Two yrs ago Mark pitched two separate local c-store chains on "craft in convenience." One told him "I just don't see it," while the other bit and "really started the craft revolution in c-store." That revolution is driven by over-sized singles. In fact, 22oz bottles are 60-70% of Mark's off-premise craft biz. Now some local c-stores are even doing "hyper-local" sets. "The consumer hasn't really embraced craft cans yet," in Nevada, but Uinta and Anderson Valley's new aluminum have gotten good starts.

Uinta, from nearby Utah, was NevBev's first craft brand and "our craft learning curve," Mark said. As we reported recently, even "with their expansion, they're still scrambling." Mark added that Uinta's brands are up 37% thru mid-Aug for NevBev, reporting that the rebrand has "done extremely well." But Mark and team haven't settled there. Since the end of 2012, the distrib's added 7 craft beer and cider brands: Alaskan, Epic, Coronado, Hangar 24, Anderson Valley, Mission and Julian Cider. Alaskan moved over to NevBev in Dec from an "underperforming" distrib and has already grown to "probably 40%" of craft at the house. It's "more than tripled" already, Mark said, and he expects it to be 4x it's 2012 size by the end of the yr. Utah's Epic Brewing is "fairly new to us" and "killin' it," while Hangar 24 chose NevBev as its first distrib outside of Calif back in Nov, off to a "flying start."

Mark and team handle a spectrum of brand sizes. It's biggest local brand is Tenaya Creek, only available in 22s and on draft with a "big local following." It's also got Joseph James Brewing, a "very very small brand" from nearby Henderson, "literally only 1200 cases." Learning with Joseph James has gone both ways: NevBev has "learned what it takes to support a guy like that" (such as not over-placing the brands and being patient with getting quality product) and the brewing co has learned "how to present to a wholesaler our size." And Bill argued that there's real value in tiny brands, including specialty offerings from larger brewers, as a limited number of kegs "creates a demand" and "helps me sell more beer." The good news is that "a lot of retailers are starting to get that" and beginning to vie for small brands that NevBev will only get 10 kegs of. Besides, it "makes it more fun," Bill added.

Of course, as an AB distrib, NevBev carries Shock Top, Goose Island and all the Craft Brew Alliance brands. The "Classic" Goose brands only got to Nevada last yr, but wheat beer, IPA and classic bitter "translate very well to the general populous," Mark said. NevBev's CBA trends match national ones: "Kona's driving the ship," while "Hefe's a little in decline" and Redhook's seen a bit of a "resurgence" after "repositioning the price" and brand in general as a "laid back, easy to drink, every day, every person kind of brand." Meanwhile, cider has been a "very nice category for us," including newly added "very craft-cider" Julian brand, plus longer-running Woodchuck. As in other markets, competing (for NevBev) Angry Orchard is "kinda driving the bus here," particularly in the area's chain-heavy biz. But due to Nevada's "weather and the lifestyle," he sees continued growth for the segment.

On its relationship with NevBev's largest supplier, Mark notes that "like the rest of the US, AB does not necessarily support their wholesalers selling craft," and "they're not very understanding." But "in reality," distribs like NevBev "can't keep all your eggs in one basket" and "if you don't have a diverse portfolio you're probably not gonna last." And NevBev "ownership" has "embraced it." In addition to Bill and Melissa, Mark also supervises a rep who only services hi-end and craft-focused on-premise accounts. He's also got a full-time sampler on staff. The "small, organic, close-knit group" without "a huge budget" leverages "our relationships and our understanding" to attract like-minded craft brands.

In August presentation to investors, Craft Brew Alliance highlighted how much it has improved since 2010 with faster STR growth, increased innovation, international expansion, better gross margins and increased spending on SG&A. While 2010 sales-to-retailers grew 1%, CBA expects STRs up 7-11% in 2013. In 2010, CBA had no real innovation, now it's got gluten-free Omission and Square Mile Cider. CBA used to only export to Japan, now it's available in 14 countries. In US, CBA has become less dependent on the West Coast as it's performed better in the East, +20% in 2013. That's a big swing from -6% in 2010. CBA has worked its way back from 85% total volume in the West as of 2010 to 75%, as it developed further in the East.

All of these factors set stage for expected "robust profit growth," in next 3-5 years. Yet CBA EBITDA dropped from $13.85 mil in 2011 to $13.1 mil in 2012. EBITDA margin in 2009 was 9.3%, but dropped to 7.7% in 2012. Still, debt levels much reduced, down to just 1x EBITDA at end of 2012, which provides more oppys for "aggressive growth." Keep in mind, only "acquisitions of brewers over $30 million" require AB's consent. CBA noted that its gross margins grew from 17.7% in 2008 to 28.5-30.5% in 2013. Stayed right around 30% since 2011. Stock very near its 52-week high of $12.50, but has more than doubled in the last 10 mos, as mentioned earlier this week in INSIGHTS Express. That boosted stock market cap to $234 mil. Investor presentation also detailed ownership structure: 32% AB (currently worth $75 mil), 14% Widmer Bros ($33 mil), 11% Kona founders ($25.8 mil), 3% mgt and board ($7 mil), the rest investors. Kurt Widmer sold 182,000 shares of CBA stock since July, but still has 1.4 mil.  

Two NY distribs that didn't get Bell's reached out to us to let us know that while Bell's letter may have contained nice words, the process wasn't nearly as thorough as suggested or even well-handled in their view. One distrib said that letter "well written" but "beyond the kind words, however is a completely different story." Distrib even called aspects of Bell's treatment "disingenuous and disrespectful" and felt his distrib got "short shrift," i.e. "not a formal and thorough process." He concluded: "This is not sour grapes. We can accept their decision as best for them," while not agreeing with it, but he felt "compelled to tell you what I think of the letter we received."

The American Distilling Institute wants to help wholesalers, retailers, and most importantly consumers, be able to easily distinguish between products made by its members and competing "pseudo-craft" brands created by "large liquor conglomerates." To that end, ADI has applied to the US Patent and Trademark Office for two separate "certification marks," one for "Craft Distilled Spirits" and one for "Craft Blended Spirits," according to statements on ADI's website. Only full ADI members are eligible to use the mark on "labels, POS materials, fliers, advertisements," etc and will be included on the ADI's "searchable online database" of products. Citing a growth story that "so closely echoes the growth of family wineries post-Prohibition and craft beer following the legalization of home brewing that the parallels are hard to miss," the ADI is "taking a stand" since "the big boys have caught on to our rapid growth and would like to do anything they can to take advantage of it." Similar to the Brewers Association's definition of a "craft brewer," the ADI requires distillers and blenders to be independently owned (less than 25% by an alc bev industry member that isn't a craft distiller) and work on a small-scale (sales of 100K proof gallons/yr or less). The ADI also requires "hands-on production" of its members, a slightly more amorphous requirement based on distilling, blending and aging processes. The assn has already started promoting the certification, and pre-certified "hundreds of craft spirits" that already fit requirements. And here we thought the relationship between large and small spirits producers was much different than that of large and small brewers.

The visual media like tv and movies are increasingly smitten with craft beer too. A new movie with craft brewer focus, "Drinking Buddies" has hit theatres, and another new tv show "Adventure in Brew" is in works too. These follow recent announcements of BrewDog's tv show and upcoming tv show based on the life and times of Dogfish Head's Sam and Mariah Calagione. "Drinking Buddies," a romantic comedy stars Olivia Wilde and Jake Johnson as brewery workers in Chicago. Indie filmmaker, Joe Swanberg (a homebrewer himself) told Time that the movie is "a celebration of the passion of the craft beer world," which should resonate with craft drinkers. "I do suspect that the craft beer crowd is also a crowd that appreciates independent films," he observed.

Drinking Buddies, which was filmed in part at Revolution Brewery in Chicago, could become known as "the Sideways of the Chicago craft beer scene," noted mag. "We were there in the craft beer timeline at the moment when the industry is going through this really exciting thing, and Drinking Buddies can be a little snapshot of the Midwestern chapter of it," said Joe. The movie provides a look at Revolution's "gleaming new brewery" that it completed in 2012. While they were paid $4,000 for 3-day shoot, "it was a pain in the ass," recalled owner Josh Deth. "It was an independent movie, but they still brought a crew of 30, 40 people and lunch trucks outside," he added. But it may prove well worth it in the end with free product placements for his beer. "I think the thing is like a commercial for Revolution," said Josh. Other craft getting free cameos include Half Acre, Three Floyd's, Founder's and Bell's.

The Arizona craft beer scene (and other mkts) will be getting attention from yet another new reality show concept "Adventures in Brew," hosted by beer columnist (and former SanTan Brewing worker) James Swann, reported Phoenix Business Journal. Though no broadcast deal has been inked yet, "We've already begun to garner interest from cable networks and had requests from across the country to go film there," said partner Scott Kelly of Black Dog Promotions. Show will feature "brewery tours, interviews and other educational aspects," as well as wacky contests, a staple of reality TV, such as a keg roll while holding a pint above their heads in first episode.  

The cult of the brewer as artist just got dialed up several notches in long, fascinating profile of Hill Farmstead's Shaun Hill on website Narratively, replete with pictures too. Narratively practices "slow journalism" (i.e fewer, longer thoughtful, in-depth pieces). Recall that Hill Farmstead named by RateBeer.com as the best brewery in the world for 2013 and already subject of intricate and intriguing interview in Vanity Fair earlier this year. The article begins by describing the "packed dirt and gravel road," the "one store town" of Greensboro, VT that is "home to Shaun Hill, the master brewer and philosopher behind the Hill Farmstead Brewery, where he produces some of the world's most sought after beers on family land that has been passed down through the centuries."

From a business perspective, Hill Farmstead is not terribly significant. But as an emerging icon of the craft movement, Shaun Hill is mighty significant. Hill Farmstead can currently only brew about 2000 bbls. Hill expects to max out at around 5,000 bbls. He has 7 employees, including friends and family. Lately, he is pulling back distribution and "customers looking to taste his latest brews have only one option: driving to the farm to buy growlers and 750 ml bottles of freshly poured beer…. The line forms at 11:30 every Wednesday morning, a half hour before the retail store opens." He can't meet demand of his customers "and frankly he's not all that interested in trying to meet them."

Hill Farmstead is "a place driven more by idealism than profits," notes Narratively. The brewery is located on the family farm. Shaun has some interesting comments about his famously prickly personality, noting of his ancestors: "We're all misanthropes and stoics in the hills, so we're not really people-people," yet "the greatest misconception people have is that I'm some sort of arrogant asshole, where it's the opposite of that. I just take what I do extremely serious." Shaun also refers to his "neurotic psychotic issues" and the "need for perfection, low self-esteem, overcompensating." Narratively adds: "He has no time for people… because he is constantly busy working. He has no patience for chitchat, ignoring the customers in line to buy his beer as he brusquely moves from one task to the next." Shaun also talks about his meticulous brewing process and 13 hour days, but then adds "all I'm doing is making a bunch of fucking soup every day." This is not the traditional beer business model, that's for sure. More like a reclusive artist. And the beers garner similar reverence.