Pay to Play

Since the repeal of Prohibition, federal and state guidelines governing the alcohol industry have been very strict. The most stringent surround ‘Tied-House’ laws. In a nutshell before Prohibition breweries in all states would offer up fully functioning taverns/bars/etc. to willing tavern keepers. The catch was that once they received the fully functional bar but all they were allowed to sell was the beer from the brewery that owned it. That was anti-competitive, particularly when you add in the aggressive price fixing, and additional inducements to lure patrons away from other bars (and hence other brewery’s offerings). The general consensus was that this needed to be banned once Prohibition was lifted in the spirit of fair competition and limiting the corruption involved in the alcohol industry. It clearly gave undue advantage to the big breweries with the exceedingly deep pockets like Budweiser, et al to literally control the beer market.

Ownership in bars and taverns is not the only game in town however when it comes to inducements to leverage the market in favor of a particular brewery as there are myriad methods. In Massachusetts AB-InBev was investigated for giving away over $1 million in enticements to retail establishments in the form of coolers and draught lines for prime shelf placement and committed draft lines. Although the MA Alcohol Control Board determined there was insufficient evidence to charge them, which was not the outcome in California where they did face consequences for their actions. AB-InBev was forced to pay a $400,000 fine for violation of pay-to-play laws when their reps furnished refrigeration systems, televisions, and draught lines for 34 retailers. AB stated that they were just ‘leasing’ the equipment and it wasn’t an inducement to prioritize sales of their beers. They promised re-training of all sales representatives to avoid such confusion in the future. Hmm….confusion is it?

AB-InBev also got into trouble in Washington State in 2016 when they engaged in Tied-House violations when they paid for concert venues in which AB products were exclusively sold. It does not stop there however, in 2016 AB-InBev agreed to pay $6 million to the US Securities and Exchange Commission for anti-trust violations involving- you guessed it, pay-to-play practices, this time in India. The issue here is that a $400,000 or $1.6 million fine is a drop in the bucket for the mega-monopoly that is AB-InBev and it is not a deterrent against these pervasive pay-to-play practices.

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Other high profile breweries engaged in these illicit practices and were also fined. This month (May, 2018) Warsteiner Importers Agency, Inc. agreed to pay $900,000 for Tied-House, Commercial Bribery and Exclusive Outlet violations that placed, or potentially placed the retailer’s independence at risk. Warsteiner paid for draught lines, and sponsored events where Warsteiner beers were exclusively carried.2

This is not however strictly a macro-brewery violation. Recently Craft Beer Guild LLC, a wholesaler who distributes more than 200 craft brands throughout Massachusetts and the Northeast paid bars $120,000 over a two year period (2013-2014) for tap handle placement. The Guild admitted to paying kickbacks up to $2000 per tap handle and up to $20,000 for committed lines. They were already forced to pay the TTB (Alcohol Tobacco Tax and Trade Bureau) $750,000 in fines for another, separate violation.

Southern Glazer’s, a Miami based wine and spirits distributor demonstrated that pay-to-play was not in any way restricted to the brewing industry. They were fined $3.5 million by the New York State Liquor Authority last year for schemes involving cash, gifts, and credit card swipes (large expenses paid through Southern Glazer’s expense account), among a host of other preferential placement schemes.

This problem is also not limited to manufacturers and wholesalers. There are many stories of bar owners with their hands out for that flat screen television, or a new draught system and they are more than happy to prioritize tap lines in kind. For others it isn’t the flat screen or direct cash, but instead they receive a reduction in the total beer bill in exchange for tap placement- and in many states this is legal. It is something called an accumulation credit. The translation is: if a bar buys a certain number of kegs of a certain brand, they distributor will credit them back the cost of a fair percentage of those kegs.1

What is perhaps more shocking is that not everyone sees this as a problem. A recent article in FoodDrink International argued in favor of the erosion of Tied-House statutes enabling for example manufacturers of alcoholic beverages in some states to hold ownership of retail licenses to operate retail outlets on production premises. I would argue this is more of a carve-out specifically for taprooms which serves as a brand building necessity for small breweries to gain an audience. A more intriguing analysis of the ‘evils’ of the Tied-House laws comes from the Midwest- Wisconsin to be precise. The Tied-House law is so restrictive that a restaurateur Justin Aprahamian had to open his craft brewery in Illinois because the laws in Wisconsin prevented him from holding any ownership in both a retail establishment and a production facility. Logic dictates that a brewer would like to sell his hand crafted beer in his own restaurant but Wisconsin law firmly stands against such an act as an unacceptable integration of the three-tier-system.

There is yet one more aspect to delve into and perhaps it is more significant in many ways when applied to craft alcoholic beverage producers- advertising. There are numerous federal and state restrictions linked to alcohol advertising. Beers cannot be advertised in a way that confuses brands, promises health benefits, disparages another brand, targets children, or makes promises it cannot deliver. These seem like pretty common sense rules. Many states go a step further- like Missouri where alcoholic beverages cannot be advertised for a discounted price outside of the retail premises, cannot be advertised below the retailer’s actual cost, and requires manufacturers to exclude retail pricing in all advertisements while including multiple unrelated retailers in the ad. Most states are like California and prohibit manufacturers from giving rebates or kickbacks to retailers, or paying a retailer for advertising. Again this all seems to be under the guise of common sense.

Old-German-premium-Lager-Cone-Top-Queen

As a comparative tool let us briefly delve into Maryland history and take a gander at Queen City Brewing Company. Post-Prohibition, Queen City and Cumberland were THE major breweries and employers in Cumberland. Their brews were a staple of bars and package stores across western Maryland, into southwestern Pennsylvania, and West Virginia. The brewery salespeople and the retail establishments knew each other well. By the 1950s every package store in the region was suddenly flush with massive advertising displays of Budweiser. To top it off the displays were prominently placed where Queen City and Cumberland products once sat. There were plenty of giveaways along with the six packs of Budweiser that were far cheaper. As a regional brewery with limited tchotchkes, and a far smaller advertising budget- there was no wat to compete. It didn’t matter that the six packs of bud were in 10 ounce or 12 ounce cans instead of pints, consumers were enjoying the bells and whistles- as were the bars that began to carry more macro brewed beer than regional beer. When was the last time you drank an Old German or an Old Export? Chances are you either weren’t alive when it was still on the market, or you were too young to drink it. Although the Queen City and Cumberland merged, they still could not survive the macro brewery advertising and closed down in the 1970’s. This is a reminder that many of the laws that are so bothersome today were put in place to protect regional breweries and level the playing field- advertising was just one facet of that.

There is no question that advertising has changed over the past few decades particularly with the advent of social media. Should we adapt to this- yes. Does that mean we throw out the rule book completely and start over? Not necessarily. There is absolutely no doubt that pay-to-play is happening in almost every state of the union whether it is dedicated tap lines, prime retail shelf space, sponsorship of certain events, or outright bribery as already outlined. Granted it is also not something happening only at the macro level. Must craft breweries- or their distributors pay-to-play to garner shelf space and sales? Ideally no- particularly when we think about the role of social media when it comes to advertising craft beer.

Ponder this for a moment, the whittling away of the Tied-House and pay-to play prohibitions may serve smaller craft alcohol manufacturers in the interim, but it is setting up a terrible precedent for the future that monopolistic breweries and wholesalers will take advantage of, and I wager that they already are. I will quote Craft Beer Professor Daniel Croxall,

Without these laws, the market would turn into a free-for-all for those with the deepest pockets. Of course international monoliths would take every advantage to squeeze out pesky independent brewers who keep taking market share—dare I say even pay bribes to retailers? And as I have pointed out before, many state three-tier systems and accompanying Tied-House regulations are under attack through sophisticated lobbying efforts, legal challenges, and even through circumventing the laws in questionable/illegal ways. Are there problems with the three-tier system? You bet. Do the benefits outweigh the problems? That depends on if you favor consumer choice, an even playing field, and good old independently brewed beer in all its glorious iterations.”

So where do we go from here? Each state is witnessing a battle brewing against restrictive Prohibition-era legislation that inherently favors monopolistic breweries over local craft. Some laws -like the franchise law imposed upon small breweries deserve to be challenged and overturned. This will help with the levelling of the playing field and engender a greater ability for craft breweries to compete in the market. State by state many of these statutes and regulations can be revised, removed, or renegotiated to give craft brewers a fighting chance, while leaving certain protections in place for all three tiers. Other laws however, deserve a much greater level of scrutiny and attention to the long term implications and should be examined without opening a Pandora ’s Box that would certainly incite a bloodbath with the removal of Tied-House laws en masse thus spelling an end to our independent craft brewers.
Beer for Thought
Cheers!

TTB Craft beer advertising guidelines: https://www.ecfr.gov/cgi-bin/text-idx?SID=29140e6cab911aaf20a26fd46e304766&mc=true&node=pt27.1.7&rgn=div5#sp27.1.7.f

Autumnal Splendor and Things that Inspire

As the weather turns cooler, and the leaves crunch beneath your feet thoughts often stray to hearty stews, cozy fires, and good company sharing a delightful libation. Fall often evinces thoughts like this, inspired no doubt by the splendor of the season, and the crisp breeze carrying the scent of autumn through the air. I find that I become more selective with regard to the beverages chosen to mark the season, and those moments that take on a greater significance. Many people intentionally pair their beer with the evening’s planned victuals, and often do so with painstaking precision. I am perhaps not that particular, but I do enjoy the process of merging flavors in a way that elicits the best qualities of both the food and accompanying brew. What I have more recently taken note of is the story behind both, and how much that factors into my decision.

Cooking heals, and the process has an almost meditative power. Selecting a recipe is more than meeting a list of dietary restrictions, and flavor preferences; it also involves the history of the dish. How, why, and for whom was it created? Granted there are not always answers to these questions, but it certainly is intriguing to embark on the voyage to uncover them. The national dish of Cuba, Ropa Vieja is a perfect example of this. Legend has it that a peasant had no meat to feed his family, so he decided to take his old clothes and put them in the stew pot. While it cooked, he thought about how much he loved his family. When he uncovered the stew, the threadbare garments magically transformed into the delicious shredded beef stew (resembling tattered clothing.) Miracles, inspired by love, created this dish. Fanciful? Perhaps. Delicious? Definitely!

This wee tale leads me back to the accompanying beverage. What inspired a brewer to make a particular beer? Was it love? Was it history? Was it something more? Not all brewers share the muse behind the conception of a brew, but when they do I find myself intrigued and more inclined to give it a go. Make no mistake, a well told story behind a creation will not make up for lack of quality, or cleanliness in the process. Will consumers select beers with no significant story? Absolutely- if they are well crafted. Often however, one can tell when a brew was uninspired, as it shows on the palate. Similarly, a thirsty connoisseur of malted beverages can taste the inspiration behind it. Brewer’s Alley Wedding Alt is an example of an extremely well-crafted alt beer with an equally inspired story. Brewer Tom Flores created this very personal beer to mark the most auspicious occasion of his very own wedding. It was brilliant, and so well received that it became an (annual) seasonal offering, much in demand.

Other breweries in Maryland have also created beers motivated by personal stories, or historical events; just take a gander at Union Craft Brewing’s Duckpin Pale Ale. Duckpin bowling was invented in Baltimore, and neared the point of extinction (if you can use that terminology for a dying sport) when Union Craft released their homage to the Baltimore institution. The sport was invented around 1900 by a couple of Baltimore Orioles Hall of Famers while drinking beer in a billiards hall (although the specifics of this are open to historical debate.) Union wanted to get in touch with what made Baltimore great, and its rich history of craft brewing was a perfect analogy to the once thriving sport of Duckpin bowling. The sport and the beer have both surged in the past five years, and it would be impossible to separate the revival of one from the success of the other!

To have a muse behind the crafting of a fantastic beer may not be a significant factor to some consumers, but for many it will most assuridly lure them to open their wallets and give it a try!

Beer for thought!

The fine art of Coopers

For over 2,000 years barrels have been crafted to hold liquid gold of varying types. The science behind the construction is fascinating, but the craftsmanship is exceptional and has evolved since Rome ruled the western world. The Romans adopted the method of storing and transporting beer in wooden containers instead of amphorae from the Celts. The process has changed little over the course of two millennia, but the nuances have become more refined, adjusted not only for technological advancements but the expertise and preference of the master coopers constructing them.

Coopers are artists, and each one operates on known, standard practices, but that is where the similarities end. Some coopers prefer uniform size staves for example, while others prefer alternating widths. Like many of the arts, it comes down to the preferences of the master craftsmen, and their own specialized techniques. The starting point is always same- the selection of the wood, traditionally oak. The wood will be weathered (aged) in preparation, and then both steamed to enable bending of the staves for construction (mise en rose), and fired (toasted) to specifications determined by the brewery, winery, or distillery. The characteristics of the wood comes through the process and into the brew, making it the most crucial decision before the first cut is ever made, or the first stave planed. It ultimately constructs the flavor profile of the liquid in the barrel to varying degrees based upon toasting, and length of ageing in the barrel. Master coopers always choose wisely, as that is part of their craft.

An intriguing aspect is the natural water tight seal achieved in the process, without seals, adhesives or other artificial methods. Dowels are used, notably for the head, along with metal hoops to secure the staves, but really nothing else. It all boils down to the craft. This harkens back to the ancient technology of boat building. Ancient shipbuilders also followed a similar process in achieving near water tight construction, but unlike coopers they chose to slather bitumen (pitch, or what is commonly known as tar today) on the finished vessel to procure (and perhaps guarantee) a completely water tight seal. Even when the Romans instituted the Celtic invention of barrel making to store beer and wine, they did not adapt this new ‘bitumen less’ technology toward their seafaring vessels.

Many of the Maryland breweries prior to Prohibition had coopers on site crafting barrels for their touted brews from John Frederick Wiessner to National Brewing. 10,000,000 barrels were in service in United States breweries prior to Prohibition. The invention of steel kegs coincided with Repeal, and threatened coopers traditional role in American breweries. Fortunately it would be another few decades before metal would completely supplant wood. When breweries did decide to turn away from wooden barrels, coopers remained the premier option of wineries and distilleries. All was not lost for coopers and breweries however, as they have seen a much welcomed resurgence in recent decades, not as the primary container for transport, but instead as the vessel to age and enhance golden, malted libations. Although it seems unlikely that barrels would unseat modern metal kegs as the choice for delivery, they have been lauded for their craft, their history, and their contribution to the renaissance of cask ales in America.

All hail the return of coopers to the brewing industry, like Free State Cooperage of Maryland, demonstrating a tradition thousands of years strong, and only getting better and more in demand.
Sláinte!

 

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!