Brewery Industry Roundup for August

A brief examination of several industry topics from TTB violations, aluminum shortages, industry stats and new breweries in Maryland .

Welcome friends, it has been a while and there is much to catch up on.

Ab-Inbev- at it again

Starting with the elephant that is always in the room, Ab-InBev (AB) has committed yet another TTB violation of tied-house regulations. The breakdown of offenses establishes a pretty clear pattern. In exchange for the regular purchase of a determined quantity of Ab-InBev products by a sports venue, to the exclusion of competitor’s products, lucrative sponsorship agreements would remain in place for the participating venue. In case you wondered- yes this is illegal.

Additionally, they violated tied-house regulations when AB employees enforced a verbal agreement for Concessionaires to grant favorable placement to AB products, to the exclusion of competitor’s products in exchange for fixtures, equipment, service, etc. Yet again this is illegal.

They were in violation for paying retailers for samplings that never took place- yes this was in effect a bribe for favorable product placement. You guessed it- this is illegal. This list does go on, but for the sake of brevity that is probably enough to understand the process.

Conveniently these things were not written down, but these verbal agreements were clearly understood and provided TTB with enough evidence to force their hand.

Marc Sorini of the Brewer’s Association of America offered a nice write up of the resulting Offer in Compromise (OIC) and its potential impact. The $5 million settlement is small potatoes for AB, but historic for the TTB.  This did not come as a shock to most craft brewers however, as they knew this game was afoot for quite some time, the trouble was proving it. The OIC did not require AB to admit fault, just pay the fine.

There is still possible redress for states and craft breweries impacted by the alleged violations. We will have to wait and see what, if anything transpires from this. AB did promise to work diligently on training employees not to engage in these sorts of practices in the future… Echoes of past promises continue to hang in the air.

The Can Can

There is another front that leaves American craft breweries in a bit of a pickle in 2020- aluminum. Most may remember the debate in the not-too-distant past as to whether bottles or cans were better. Well if you didn’t know- cans won! No surprise, but alas it has created another issue- demand. According to S&P Global Platt, aluminum demand was on the decline before COVID. Since the pandemic, we have seen a marked increase in aluminum demand specifically for beverages. Craft beer can demand has risen 6.7 % this year, most likely a result of required off-premise consumption. Coupled with a lack of recycling due to COVID concerns, the problem has been compounded as 74% of aluminum cans are made from recycled aluminum cans.[i]   Fortunately, we are witnessing a return to recycling, but perhaps not quickly enough.

Earlier this month, Kate Bernot wrote an article in Good Beer Hunting noting the rise in canned wines, and the much maligned and ubiquitous “seltzers” were major contributory factors in the can shortage for breweries.[ii] Whether recycling or seltzer, the issue remains the same- there is a shortage. The law of supply and demand has been pretty clear on this, a shortage equates to a rise in the price of the material. This places breweries squarely between Scylla and Charybdis while in the midst of a pandemic.

One response is it to absorb the increased cost of aluminum in the short term, as production has increased with the easing of COVID restrictions. This is not entirely viable given the difficult financial circumstances most breweries face during this tenuous economic time. Another solution is to pass along the increased cost to the consumer. This is equally troublesome as it may become a test of loyalty for some consumers while pricing out others, resulting in a loss of business. Blaming AB for flooding the market with seltzer still remains an option however, but offers no true plan for overcoming this challenge.  For some breweries it is no longer a matter of passing on cost, but a question of actually receiving cans in the first place- regardless of cost. Time will provide greater insight into this most vexing debacle.

Collaborations

Collaborations are king (or Queen depending on your preference) and 2020 has been a banner year for them despite social distancing. The annual Pink Boots collaboration in March fell on International Women’s Day. Myriad breweries with either female owners or employees hosted the collaborations. This year’s theme was an homage to the suffragettes that valiantly and successfully championed women’s right to vote. The 100th anniversary of the passage of the 19th amendment requires a centennial celebration of great magnitude, and the end result of this year’s Pink Boots collaboration (with a proprietary Pink Boots bend of hops) was definitely worthy of the occasion.

Brew for BAM was the most recent Maryland wide collaboration. Proceeds from the malty creations will help fund the Association that supports the legislative priorities and hosts events for the breweries. Due to the pandemic they have lost a primary source of revenue generated through the (several) annual events BAM hosts. Each brewery that participated let inspiration take flight, resulting in a wide and wonderful variety of brews, with a few true surprises!

Another nationwide collaboration began at Weathered Souls Brewing in San Antonio, the Black is Beautiful stout. 17 Maryland breweries partook of this unifying collaboration, each adding their own signature flair to the stout. If you haven’t had a chance to yet sample one of these delights- make it a priority!

Look for more historical collaborations coming from yours truly and Judy Neff at Checkerspot Brewing. Next up- an appropriately historic porter!

Judy Neff and Maureen O’Prey

New Breweries

Maryland breweries are growing and navigating their own course in these uncharted waters. This summer we welcomed the opening of a few new Maryland breweries.

Hopkins Farm Brewery in Harford County opened in July. If you are not familiar, Aaron Hopkins is also the genius behind (the on-site) Chesapeake Malting at Hopkins Farm. They are one of three local malting operations in the Free State and responsible for contributing to many fantastic local brews. A self sufficient farm brew with some quite tasty offerings and plenty of outdoor seating to safely enjoy your brew.

Additionally, the much heralded Ten Eyck Brewery in Queenstown has finally opened its doors! Ten Eyck continued to build its brand while building its brewery through beautifully crafted collaborations with a handful of breweries in the state, including a lovely rye with Checkerspot Brewing. I personally cannot wait to walk through those doors for a Taildragger IPA.

The ladies of Ten Eyck breaking ground

Gateway Brewing in Salisbury, another Eastern Shore creation, is a nanobrewery that opened for tastings last month. Licensing for pint service is pending and anticipated soon.

Last but not least, Richard Carter has made progress on a zoning amendment to Build Rock Hall’s first microbrewery, Delmarva Craft. Updates will be forthcoming.

Statistics and more statistics

Growth is great and the market will shake out those that cannot create products of consistent quality. As I have always said there literally is a beer for every palate and Maryland breweries certainly meet the threshold for diversity of styles, flavors, and preferences.  So what is all the hullabaloo about the latest Brewer’s Association of America stats?

The 2019 figures came out by state and Maryland was in the middle- sort of:

33rd for number of breweries per capita (2.5 per 100,000 drinking age adults)

22nd for number of breweries

25nd for economic impact

49th for economic impact per capita

22nd for barrels produced per year

So, how do we unpack this? Well the number of breweries is pretty straight forward- we are a state with 112 breweries. Hard stop.

The number of breweries per capita means that 32 other states have more breweries per 100,000 legal drinking age adults than we do. Can we do better? Absolutely, but let’s keep in mind a little thing called size. Maryland is petite compared to the land mass of some of other our great United States. There are areas of the Free State that are extremely dense in population and some quite sparse. I am not adverse to a brewery on every corner, but is it feasible that a business model like this can survive? Probably not, just as having too many breweries in very rural areas would need to rely mainly upon distribution and tourist traffic to survive, which is difficult during COVID.

This brings us to the number of barrels produced per year- coming in solidly at 22nd. Factor this in with the last number and perhaps it will make a little more sense. Our breweries in Maryland are cranking! We may not have the per capita breweries, but the 112 breweries we do have are really out-producing many other states. Obviously this is fabulously encouraging.

Moving along to the sticky widget that is economic impact. We are smack dab in the middle of the country for economic impact at 25th. What does this mean? In a nutshell our breweries have a nearly $1 billion economic impact (954 million to be precise) on Maryland’s economy. The figure is derived from the total impact of beer brewed by craft brewers as it moves through the three-tier system.[iii] This includes jobs in breweries, jobs created at affiliated industries because of the breweries (distributors, bottle makers, can manufacturers, retail sales people, etc.), and sales of beer, food and merchandise sold in breweries and taprooms.  This number is quite impressive and a definitive and substantial increase from just a few years prior.

So how does this jibe with the economic impact per capita? Simple. This correlates directly to our placement in breweries per capita. We are almost dead last in this category. How can that be when our economic impact is clearly more substantial? If we have more breweries per capita, most likely we will have a greater economic impact per capita. For the number of drinking age adults, we could probably do better, but we already out-produce many states with the breweries that we do have.

Another correlation I think is relevant is the change to Maryland’s antiquated franchise and craft brewing laws that only went into effect last July, 2019. Give this number a chance to come up. It probably will based on increased taprooms sales and opportunities for our craft breweries one the pandemic is in our rearview mirror.

Do not forget where we are as far as economic impact on our state- we are faring much better than many of the states that lead us in per capita economic impact. This is not doom and gloom by any means, but a light shining brightly, strengthening in illumination with each passing year.

Here is a quick takeaway direct from the BA statisticians on how US craft breweries are situated:

Overall U.S. beer volume sales were down 2% in 2019, whereas craft brewer sales continued to grow at a rate of 4% by volume, reaching 13.6% of the U.S. beer market by volume. Craft production grew the most for taprooms. Retail dollar sales of craft increased 6%, up to $29.3 billion, and now account for more than 25% of the $116.0 billion U.S. beer market. The industry also provided more than 580,000 total jobs, with more than 160,000 jobs directly at breweries and brewpubs, including serving staff at brewpubs.[iv]

The bottom line is our craft breweries are consistently eating away at big beer’s market share (translation- AB-InBev). Perhaps that is what keeps AB execs up at night, and why they continue to see so many tied-house violations.

Just a thought!

Sláinte!


[i] Sara Baltic, “Of cars and cans: US aluminum and the pandemic” S&P Global Platt Insights (July 2, 2020) https://blogs.platts.com/2020/07/02/us-aluminum-demand-coronavirus-pandemic/

[ii] Kate Bernot, “Summer Crush — Aluminum Can Shortage Costs Stack Up as Breweries Likely to Suffer for Months” Good Beer Hunting Sightings, (Aug 4 2020)  https://www.goodbeerhunting.com/sightlines/8/4/aluminum-can-shortage-costs-stack-up-as-breweries-likely-to-suffer-for-months?fbclid=IwAR0QvABaNyxb349Ud3CkjuxO5x7rVz1q-6MN79J9tQaJ7_IM3GdNpwlXE28

[iii] Bart Watson, “National Economic Impact and Data” Brewers Association of America (2019) https://www.brewersassociation.org/statistics-and-data/economic-impact-data/

[iv]Bart Watson, “National Beer Sales & Production Data” Brewers Association of America, (2019) https://www.brewersassociation.org/statistics-and-data/national-beer-stats/

Flying Dog and the 1st Amendment

Flying Dog recently made public their decision to no longer retain membership in the Brewer’s Association of America as of June 1, 2017. What was behind this decision? The 1st Amendment of the Constitution of the United States of America states,

“Congress shall make no law… abridging the freedom of speech…”

Terrific! I love America and the right to free speech, even when I don’t particularly care for the words that are sometimes spoken! That is how the 1st Amendment works. As citizens, we are all entitled to freedom of speech, agree or disagree. What does that have to do with craft beer? In a nutshell-marketing and labels. The Brewer’s Association of America in April, 2017 informed craft brewery members they were instituting a new Marketing and Advertising Code. On the surface, the code appears merely as a reminder that breweries need to advertise responsibly and follow the traditional path of making sure they DO NOT PROMOTE in their advertising:

• excess drinking
• underage drinking
• drinking and driving
• illegal activity and drinking
• bad or irresponsible behavior and drinking
• claims that beer can solve all of your problems (social, mental, professional, or otherwise)

If we stopped here, this code seems innocuous enough mostly backing up federal law, and something all craft breweries would like to get on board with- acting responsibly towards the consumers that support them. The code does not stop there however and goes on to prevent breweries from advertising which:

• contains sexually explicit, lewd, or demeaning brand names, language, text, graphics, photos, video, or other images that reasonable adult consumers would find inappropriate for consumer products offered to the public;
• contains derogatory or demeaning text or images.

This is where it starts to get a little murky when taking the 1st Amendment into consideration. There is an assumption here regarding reasonable adult individuals finding advertising appropriate or not. Don’t get me wrong- I understand that there is a section of every magazine rack that is required to shield young eyes from the cover and contents because they are not legally old enough to view those rags; much like the rating system for movies- like NC 17. This is fine as the law has been established to guide us (where children are concerned) as to what is appropriate. This doesn’t hold water when it comes to craft beer, an adult product.

It is easy to gather a group of ‘reasonable’ adult consumers together to determine what they find appropriate (or not) with regard to beer advertising/labels. Statistically they would probably be divided on many of the labels level of ‘appropriate’. That is because ‘reasonable’ and ‘appropriate’ can be extremely subjective in advertising. We have all heard the marketing mantra sex sells. Well according to the BA, sex, among other things would not be allowed as a sales tool any longer, if reasonable adults found it inappropriate.

This is where Caruso doesn’t budge, and views the new code as a form of as censorship, and critically a Constitutional violation. It has the potential to limit speech, freedom of expression, and advertising based on ideas and requirements that are entirely subjective. The supposed creation of objectivity in this code appears in the Advertising Complaint Review Panel. This three member panel would interject themselves if the brewery did not respond in a ‘satisfactory’ way to an advertising complaint. I am not completely clear on this eradicating subjectivity. How are they defining satisfactory?

A free market economy allows consumers to decide what they will and will not purchase/consume. The quality of the beer should be the determining factor. To get consumers in the door to sample quality beer, breweries advertise. In a crowded craft beer market, a unique or even controversial marketing campaign may set a brewery apart, luring or deterring potential customers. If a consumer doesn’t care for a marketing campaign, like the Swedish Bikini Team for example, they can choose to go elsewhere to spend hard earned dollars. Shouldn’t that be the determining factor? Caruso thinks so, and the 1st Amendment backs him up.

The counterpoint to this is that the Brewer’s Association is trying to hold their members to a higher standard than the ‘Swedish Bikini Team’, or mudslinging among competing breweries (another part of the ‘code’ prohibits defamation toward competing breweries). For that they should be lauded. These standards however (some of them) might be better off self-imposed as opposed to dictated when they violate the foundational documents of our nation. Why? Once you begin to make exceptions to the 1st Amendment, it will become easier to chip away at those core rights granted to us by our founding fathers; rights many died for, and continue to sacrifice for today.

In the end it may be much ado about nothing, and perhaps an overreaction. All breweries may in fact continue to operate as they have, with no actual infringement upon their rights to advertise as they see fit. Time will tell. Jim Caruso and Flying Dog won’t take that chance.
Cin Cin!

Independent Craft Breweries vs Macro: It has all been done before…

Today it’s time to take up the macro vs independent craft brewery conversation. Much has been made for quite some time about AB InBev buying up many of the craft breweries and now buying Miller Coors (without a peep from the government despite its likely violation of the anti-trust laws). For years I have heard from the old Anhauser Busch, Miller, Coors, and Heineken salesmen that the macro breweries will always reign supreme and the craft beer market will not see much in the way of growth (I also heard from those same men there was no place for women in the beer industry- but that is a tale for another day.) Let’s begin by noting how much market share craft beer (despite the most recent slip in numbers) has gained, while macro breweries like AB InBev have started to lose. As of March, 2017 there are 5,301 independent craft breweries in America that have seized 12.3% of the volume share (up from a mere 5.7% in 2011.) That is a major gain, while the macro breweries may look at 7 % and thinking that isn’t much, but it is certainly not what they anticipated and cuts into their profits. Craft retail dollar share is up to almost 22 % – a 10% increase in only a year and that is noticeable. Big beer is fighting back.

Now many people will look at the numbers and ask why bother caring because the macro breweries don’t care about what craft beer is doing since the percentages are so small. I will argue they do. If AB InBev didn’t care about the growth of craft breweries cutting into the market why try so vigorously to purchase the successful craft breweries? Why spend millions of advertising dollars on campaigns proclaiming AB InBev to be one and the same as craft? Why purchase a stake in Ratebeer where many go to seek reliable ratings on craft beers? And most recently why bother to spend time and money downplaying the Brewer’s Association of America’s latest move to signify ‘certified independent’ craft breweries with a special label? What does the label mean? More than 25% of a certified independent craft brewery cannot be owned by any other entity, and it must produce less than 6,000,000 (million) barrels per annum.

Much has been made lately of the new label and how “divisive” it is. Really? Technically that is the appropriate term as it divides the beer into separate classification from macro to independent craft. I however prefer to think of it as a line of demarcation for those of us that care whether or not or beer is locally produced, sourced, employed, and crafted. Some beer drinkers (yes even craft beer drinkers) will not care. I do, as do many that prefer to know where their (nourishment) beer is coming from. It foments economic growth within communities at every end of the spectrum from agriculture to community gardens, to increased retail and food sales in neighborhoods where breweries are located. Is the ‘certified independent’ label really that different from a terroir designation on a bottle of Pinot Noir? Or an ‘organic’ label on your produce? Well many have taken pen to paper (or keyboard to internet) to argue the needless futility of the designation, and just as many have hit back challenging that those that prefer to do away with the ‘divisive’ label are predominantly macro brewery stakeholders. Jacqeuline Dheere was just one in a long line of beer writers to point this out. The battle lingers on with no signs of abating.

Curiously, all of this has happened once before, a little over a century ago. Just before the turn of the 20th century a war raged between macro breweries and independent local craft brewers. It started with a British brewing consortium buying up the top breweries in each city as an attempt to recoup financial losses from the former colonies and their now thriving breweries. Next it was a local trust- the Maryland Brewing Company that purchased the top breweries in the beer capital of Maryland- Baltimore in 1899. That failed and was replaced by yet another monopoly (with better management) G.B.S. Locals were deeply concerned by this and lacked any understanding of why their favorite breweries would sell out. Well the answer then as today was a great payoff for all their hard work! That is the American dream isn’t it? The rise of the monopolies also created at times, a vitriolic and divisive atmosphere for both the consumers and the breweries. Many breweries added ‘independent’ to their names just to make it easier to identify that they were not sell outs, and could be relied upon to continue producing that same favorite regional beer. Among brewing families, a sort of dystopian nightmare ensued where family members that wanted to remain independent disowned those that sold out, some even engaged in legal battles over the sales and the family fortunes.

So how did it all shake out? Prohibition shut them all down in 1920. Today I have no inkling that America would ever attempt to recreate that failed experiment, although I have been wrong before. I honestly don’t know what will happen. What I do know is that people will act based upon what is important to them. Perhaps they will look beyond the tasty malted beverages on their lips, and see talented local craftspeople investing their own neighborhoods, bringing jobs, building trust and fomenting communities. Beer for thought.
Cheers!