This column marks the return of our elusive columnist Diogenes, who takes his name from the ancient Greek philosopher who famously walked the streets with a lantern in search of an honest man.  This is a craft curmudgeon’s take on today’s hot topic: seltzer. 

By Diogenes

A recent headline jolted me: “Four Loko Launches 14% Seltzer.”  (Turned out to be 12%, but point still holds.) Four Loko, a company producing sweet high alcohol beverages in 24-ounce packages entering the same segment as many American craft brewers.  It seems that no one can resist the success of White Claw and Truly.  Alcoholic seltzer is ravaging the beer industry.  There is nothing socially or culturally redeeming about alcoholic seltzer, beyond the beneficial effects of moderate alcohol consumption.  It does not evolve from some great European brewing tradition.   It will not inspire new food pairings for America’s creative chefs.  

It belongs with beverages like Olde English 800, Colt 45, Steel Reserve, King Cobra and others, tho lower in ABV.  I am not saying that people drinking craft beer do not want a buzz, but they also clearly want something more than a buzz. 

Some craft brewers console themselves with the argument that anything coming from a brewery is beer. But I have to say I am more than a little depressed by the fact that craft brewers are going head-to-head with 4 Loko.  Was the “craft” designation just a fig leaf meant to distinguish craft brewers from other alcohol producers?  Whatever happened to craft brewers’ commitment to elevate beer, “Respect Beer,” “Defend Beer?” 

Michael Jackson must be spinning in his grave.

I am not unsympathetic to the plight of the larger craft brewers.  They have built big breweries and they have to keep those breweries pumping out—something.  But it is nonetheless depressing to see the craft beer revolution take this turn.

Are we all, finally, just pushers of alcohol?  Is this the fate of the proud custodians of 5,000 years of brewing history?

Maybe so.

The simple fact underlying all this is that craft beer is now between 30 and 40 years old.  A new generation of drinkers is in place.  They grew up with craft beer.  Their fathers and mothers drank craft beer.  Craft beer is…just beer.  Like my generation, they want something new, something different than the beer their parents drank.  They don’t remember the days when 98% of American beer was light lager beer.  They don’t remember when you could not tell the difference between the three main beer brands in the United States.  They don’t appreciate the struggle that craft brewers endured to revolutionize the US beer industry.  They don’t care about the subtle differences between Simcoe and Amarillo, Hallertau and Cascade.  They don’t cup their hands around their glass and stick their nose in to smell the aroma of their nightly IPA.

They just want to have fun!  Beer is not the point of their Friday night out.  The point is to have fun.  Don’t bore me with craft beer or wine talk.  Just drink it!  Cocktails are fun.  Bring on the pink umbrellas!

Craft beer is here to stay, but with the rise of seltzer, I wonder how much it can grow.  Tasting rooms are the last bastion of the hop sniffers, but tasting rooms are fundamentally bars and bars are always evolving.  I wonder how long craft beer tasting rooms will remain in vogue.

Health is a priority for this new generation.  They seem to think that seltzers are somehow healthier than beer.  For the most part, the new generation accepts that drinking and driving is taboo.  Many craft brewers are producing alcohol-free beers to address this challenge.  There is no complicated story behind alcohol-free beer. It just needs to taste good.  At least it tastes like beer.

The rise of seltzer has created a challenge for the Brewers Association with its independent craft brewer seal.  When the BA dropped “traditional” from its craft brewer definition, it opened the door to craft brewers to make seltzers and flavored malt beverages.  The BA is insisting that the independent craft brewer seal cannot be used on these beverages.  It will be interesting to see if that rule holds.

Welcome to a new generation of craft brewers.  We have more in common with the megabrewers and the 4 Lokos of the world than we thought.  For years, many craft brewers reveled in the news that mainstream beer was failing.  Now we see that craft beer can lose its cachet as well. 

To quote Pogo: “We have met the enemy and he is us.”

On top of the many bold claims made about hard seltzers so far, here comes another from Evercore ISI analyst Robert Ottenstein.  “We believe that the addition of hard seltzers to potential drinking occasions is not a zero-sum game, and that it is additive, both in terms of population penetration and per capita consumption.”  Why is this such a bold claim?  No other alc bev innovation has managed to appreciably increase either the percentage of Americans who say they drink (approx two thirds in Gallup Poll for 60 years) or per capita absolute alcohol consumption (fluctuating, but lower in 2018 than 1990, virtually the same in 2018 and 2008, despite a significant shift to higher-ABV spirits).   What’s so magical about hard seltzers?  Importantly, Robert notes 4 times in 4 pages that hard data/research is either “limited” or non-existent.  But, based on input from industry players, and some data bits, seltzer’s combo of sessionability, cross-gender appeal, lack of off-putting taste, refreshment and better-for-you qualities “may increase the absolute amount of alcohol consumed,” he concludes.  Among Robert’s observations, based on supplier conversations/presentations:

·      50-55% of seltzer volume is sourced from beer, 20-30% from spirits and 20-30% from wine; drinker penetration is 50-50 male-female, but volume penetration skewed 55-60% male and “we believe the vast majority of the volume sourced from men comes from beer, probably over 60%.”

·      While approx 2/3 of American adults consistently say they drink, Robert picks up on Jim Koch’s point that “beer, spirits and wine all have strong and distinct tastes that do not appeal to a large percent of the population.”  But “hard seltzers have virtually no taste at all.”  So, “it’s not crazy to think that the introduction of an alcoholic drink that does not taste like alcohol, is fun to drink, socially acceptable and widely available could draw drinkers away from CSDs or water.”

·      Constellation has found seltzers are approx 23% “more sessionable than beer.”  If true, the math translates to a beer session of 2.6 beers turning into a seltzer session of 3.2 drinks.  No data on seltzer sessionability vs other alc bevs, Robert acknowledges, but “we would guess that they are generally similar to white wine/wine spritzers/cocktails and more sessionable than red wine and straight spirits.” 

·      Report included screen shots from industry presentations by Nielsen and Mike’s that showed: “beyond beer” brands do attract new alc bev buyers; White Claw sourcing about 50% of volume from non-beer brands; huge oppy to take from vodka-soda (300 mil cases); seltzer’s still-small household penetration despite its success.

In addition to citing widespread expectation that hard seltzers could “at least double” in 2020, Robert sees lots more retail shelf space opening up in spring 2020 resets, taking from current FMB space and mainstream beer, additional front-end displays and “new ‘better for you’ display space near wine.”  The latter two would be “incremental” space.   From investment perspective, Robert believes ABI, Constellation, Molson Coors and Diageo have oppy to “offset share losses from one side of the house with gains in another, if they have reasonable success in the hard seltzer category.  Accordingly, the outlook for legacy players may not be as dire as bears argue.”

The Ballast Point deal “stunned” the industry, wrote Chi Trib. That’s spot-on assessment of reaction.  Beer folks “stunned” that in 4 short yrs, Constellation went from paying $1 bil for Ballast Point to selling it for mere cents on the $$ (tho purchase price not revealed) to a company most folks had never even heard of. Kings & Convicts expects to sell a whopping 660 bbls in 2019, it told Trib. Yep, you read that right.  660.   

Kings & Convicts ceo Brendan Watters gave revealing interview to Trib.  He told Trib that he said to Ballast Point workers not to worry that they haven’t heard of Kings & Convicts. “I said most people in Chicago don’t know us, either.  I think that’s what makes it quite interesting…. This has been about the conglomerates buying up the independent breweries, but we’re doing the opposite,” Brendan continued. “Let’s bring it back to independence and innovation and see what happens…. It’s really about focus,” he added. “I think it just needs some love and focus and it’ll be fine.”  Well, it may take more than love and focus.  Ballast Point peaked at 375K bbls in 2016, INSIGHTS estimates, but expects to sell 200K bbls this year.   So volume virtually cut in half in 3 yrs.  It went from making about $25 mil to losing money, INSIGHTS understands.

Yet Kings & Convicts aims to reverse those trends.  CEO Brendan “is a former hotel executive who sold his chain of Boomerang Hotels in 2015,” wrote the Trib.  Not much info readily available on sale.  He’s Australian and one of his partners is Christopher Bradley, who is British. Hence Kings & Convicts. Here’s video in which they describe themselves.  Investor group is now 6 people, according to Trib but rest unidentified.  

Analysts mostly lauded the deal. “It’s a pretty clean sweep of approvals,” wrote Seeking Alpha, mentioning several that liked “decision to unload” BP to focus “on higher margin opportunities.” In a way that’s a surprise, because the deal was a flop.  But Cowen’s Vivien Azer notes “divestiture should result in slightly improved depletion and margin trends” for beer biz (as mgt noted), adding “that in measured channels, Ballast currently represents less than 1% of company sales and has been a ~50 basis-point drag on overall sales growth YTD.”  And Credit Suisse’s Kaumil Gajrawala said: “We are positive on Constellation’s strategy to focus the business on its core, the Mexican imports portfolio.” While “the loss is substantial…we think exiting a fragmented, structurally declining industry with high capital costs is better sooner rather than later.”  Consumer Edge’s Brett Cooper did note this is “negative headline as it relates to market reception of capital deployment.  In the end, Ballast Point seemed to have little hope of getting turned around,” but “loss on sale of this business is already embedded in Constellation’s stock.”  Stock down 1.5% today.    

Distrib reactions poured in too. “Wow. That was one expensive haircut,” quipped one.  Multiple distribs expressed dissatisfaction with Constellation expecting and pushing distribs to pay up to buy Ballast Point, only to abandon ship shortly thereafter.  “This is so disappointing,” wrote one.  “Constellation asked us to align the brand so the portfolios would be seamless.  We negotiated with our competitor for over a year” and then paid 7.5x “with big hopes that Constellation would take Ballast Point to the next level as promised.  They had no clue what to do with a quality craft. From our view they paid so much for the brand that they had no money to spend on marketing.”

Veteran alc bev atty Marc Sorini also heads up his firm’s cannabis division.  Marc agreed to a “lightning round” of quick cannabis questions at Beer Insights Seminar last mo.  His answers included some notable opinions/insights.  Asked whether legalization of recreational cannabis was inevitable, if a 3-tier system was advisable and whether cannabis should be regulated like alcohol, Marc’s brief answers were “yes,” “no” and “in certain aspects yes, but not all.”  Should beer wholesalers seek to obtain cannabis licenses and put cannabis with THC on their trucks?  “No, especially if you’re not in a recreational state.”  Even if you are, “you still have a significant federal risk and it gets very complicated.  No, I wouldn’t do it.”  How about CBD-infused bevs?  “CBD is a much lower-risk proposition.  If it’s the right CBD product not making stupid claims, yes, why not?” While distrib advocate Mike Madigan suggested distribs may put their licenses at risk if they pursue CBD bevs before FDA clarifies rules, Marc sez FAA Act, “allows TTB to revoke a permit only for violations of alcohol laws or tax laws, not an FDA law.”  Is cannabis a minimal, modest or major threat to beer/alc bev sales?  “At best a small threat.”  Why?  “Especially for beer, I don’t think there’s ever been the following statement made: ‘Dude, I’m so wasted, don’t give me a beer.’” 

Since many view cannabis as “safer” than alcohol, could there be a turn towards stricter alc bev regulation?  “I don’t think there will be a huge push for that.  Although, I can see people getting more tax money [from cannabis] and going ‘Why don’t we jack it up for alcohol as well?’”  Which industry is more likely to create the largest footprint in cannabis: Big Farm, Big Pharma, Big Alcohol or Big Tobacco?  “Why not Big Retail?  What if all these products end up being private label?  That’s one thing I think people have to think about.  The other is what if it ends up looking like the wine market and it’s highly fragmented.  I think those are possibilities.”  Then too, if cannabis “becomes a commoditized, cheap product, that’s going to favor large no-name producers creating private label products.  You can’t predict where it will go.”  An extensive report on Marc’s review of recent legal/legislative developments in alc bevs will appear in the next issue of beer marketer’s INSIGHTS.  

San Diego has often been described as a “mecca” for craft beer and Stone founder Greg Koch is called “Beer Jesus” in new movie with same name. But there’s trouble in paradise, especially for biggest players in segment.   Ballast Point just sold and Stone for sale INSIGHTS hears.  Stone tried for a long time to sell pieces of itself, managing only to sell off its Berlin brewery.  But now it’s exploring selling in its entirety, driven by its private equity partner VMG.  Recently, its trends too took turn for worse.  Down double digits for last 12 weeks in IRI.  But Stone is “not for sale,” said ceo Dominic Engels.  “Being among the largest independent craft breweries, we’re often a target of speculation but rest assured of our commitment to independence. We recognize that craft is experiencing a challenging time, but we have done a lot this year to solidify our place as a leader to weather the storm in craft. We’re growing as a company in many ways, have a lot to be proud of, and many reasons not to sell,” Dominic continued.

San Diego craft scene overall still has bright spots, with over 150 players in area, but some craft vets have shifted in new directions.  “A better craft? Spirits, seltzer, cider and kombucha and others take aim at craft beer,” was headline of long article over weekend in San Diego Union Tribune. It detailed how former brewers at Ballast Point and Lost Abbey are now at spirits co Cutwater (purchased by AB) and hard kombucha co Juneshine.  Another craft brewer, Kilowatt, “pivoted” to hard seltzers and cocktails this yr.  And founder of Julian hard cider and 8-ball chocolate whiskey said craft brewers “created their own monster” where “there is no loyalty.” As an entrepreneur, he looked and said: “there’s enough IPAs in the market” and “enough vodka. I had to come in with something new.”  Of course, as Mike’s founder Anthony von Mandl, among many others noted, rapid shifts and absence of brand loyalty happening across many products, as new generation comes of age.  Another hot-hot flavored alc bev comin’ outta San Diego: Skrewball, a peanut butter whiskey.

Mike’s Hard prexy Phil Rosse wrote note to “partners” this afternoon entitled: “White Claw Performance & Trademark Dispute Update.”  So take it away, Phil.  White Claw is “at the core of our accelerating performance with national depletions, +287% YTD,” he writes, leading to total Mike’s growth of 85%.  And even tho Mike’s “began allocating…supply” in Sep 2018 to “minimize both product loading and on shelf out-of-stocks” and estimated 50 new seltzer brands intro’d during that period, “remarkably, our performance together has accelerated, and our market share has grown 19 points!”   In latest period, sez Phil, White Claw has 64% share of hard seltzer segment.  Editor’s note: White Claw franchise up 340% for 4 weeks thru Nov 23 in Nielsen all outlet, accelerating compared to 296% growth yr-to-date. That’s even tho total beer dropped 3.7% in same period, because of mismatch of Thanksgiving holiday, a week earlier (on Nov 22) last yr.  White Claw franchise grabbed 3 share of $$ in period, up 2.3 share.  

Update on White Claw Surge and “Dispute” With Coca Cola  Phil also gave “clarification” and “update” on trademark dispute with Coca Cola that surfaced in Law 360 last week (and which we reported).  “The dispute with Coca Cola is only about the registration of the trademark.  There has been no challenge in court to our right to use WHITE CLAW HARD SELTZER SURGE  trademark when we are ready to launch in 2020.”  The US Patent and Trademark Office Examiner “accepted our filing for registration.”  Coke’s “notice of opposition is a fairly routine matter and will be decided by the Trademark Office.”  Mike’s “does not believe any confusion is likely… given that Coca Cola’s” regional soft drink SURGE is a “soft drink” and “our product is an alcoholic beverage.” Coke’s product “already coexisting with a number of other surge products in the beer and wine category.”  What’s more, “these brands will be merchandised and available in completely different segments of the retail environment.”  Phil concluded that Mark Anthony “will continue to defend the White Claw Hard Seltzer trademarks and are excited for the… Surge line extension to enter the market as planned in 2020.”

After months of speculation, deal finally announced today. Constellation will sell to small midwest brewer Kings & Convicts, with transaction expected to close by end of fiscal 2020 (Feb 2020).  Since Constellation paid $1 bil for Ballast Point in 2015, not much has gone right with that acquisition.  Ballast Point did have one yr of growth but has since declined dramatically, including 35% decline in scan data thru Aug.  Deal handled by investment banker Credit Suisse, and will reportedly go for surprisingly low price.  But purchase price not disclosed.  Deal is to “acquire the Ballast Point brand and a number of its associated production facilities and brewpubs, excluding Constellation’s Craft & Specialty operations in Daleville, Virginia,” i.e. its VA brewery.

Liquor store owners in NY have long stymied attempts to expand wine sales to grocery/c-stores.  Similar battle now going on in neighboring Massachusetts.  Big c-store chain Cumberland Farms a big backer of ballot initiative that would expand wine/beer sales to many more c-stores and ultimately end current cap on retail licenses in state.  That cap is 7 now, goes to 9 next year and if ballot initiative passes, cap would disappear.   Cumberland has 200 stores in MA.  That’s spooked traditional liquor store owners, natch.  They’re challenging legality of ballot initiative already certified by state attorney general.  They argue that the “Frankenstein-like” initiative is impermissible since it asks four separate alcohol policy questions and misleads voters, reports Milford Daily News and others.  Those 4 questions: 1) whether beer and wine should be sold in unlimited number of food outlets; 2) whether a single company can own unlimited number of licenses; 3) whether all buyers would have to provide age identification; 4) whether portion of alc bev excise tax should be used to fund state ABC.  Store owners charge that Cumberland attempting an end-around of the legislative process “by confusing voters into giving this single company unprecedented control of the retail alcohol marketplace with a potential 200-store network.” 

For its part, Cumberland sez “while our opponents’ continued objections lack merit in our view, they are hardly a surprise.  We fully anticipated that entrenched special interests would challenge this proposal at every step of the process, and that’s exactly what they’re doing with their lawsuit challenging the Attorney General’s certification.”  Meanwhile, effort to gain signatures to put initiative on 2020 ballot continues apace, with 130K signatures already gathered (80K needed).  Spokesman for liquor store owners said group’s lawsuit is a “moment for all locally owned retailers of beer, wine and spirits against a retail Goliath from the UK that is trying to dupe voters into giving them unparalleled control of the Massachusetts marketplace.”   As in similar battles elsewhere, other tiers in tuff position of possibly benefitting from increased access, tho at increased cost, while not wanting to anger current customers.   

Just 0.2% of beer is sold online, compared to 15-20% of CPGs because “complicated federal and state regulations make it impossible for most companies to sell beer this way,” said letter from Wit Strategy on behalf of new e-commerce platform. Well, plenty have tried, and continue to try.  And here comes TapRm, based in NYC, with its own unique variation. TapRm, which started in May 2019, is actually both a wholesaler and a retailer, as is possible in NY state.  So TapRm is already exclusive distrib for many very small brands, with lots more that want to come on, it sez. Warehouses are in Brooklyn and Queens where 80% of its volume is in cold storage, founder Jason Sherman told INSIGHTS. Retail store is across from Brooklyn Navy Yard.  And at same time, it has e-commerce site (TapRm.com), where consumers can buy their favorite beers or try brand new ones. Prices aim to be more competitive, especially on brands that TapRm distributes too.  It promises delivery to Brooklyn and Queens in 2 hours, and anticipates spreading that out to the rest of NYC next yr, when it will also expand to select other mkts.  TapRm claims that its model can work in 41 states, tho that may take some legislative rejiggering.  TapRm recently raised $1.5 mil in funding for its new model, led by the Broe Group, with participation from VU Venture Partners, Branded Strategic Hospitality and others, wrote Tech Crunch. 

TapRm pedigree also unusual. It was started by ex Zx Ventures exec and Harvard-educated lawyer Jason Sherman. Jason was 7^th or 8^th Zx employee, he told INSIGHTS.  Zx now has 3000 employees, and made 150 investments, he added, with quite a few in e-commerce space, since laws don’t prohibit ABI doing that in most of world.  Jason did legal due diligence work on many of those acquisitions, he said.  And he “watched them grow,” paying especially close attention to what worked in e-commerce. And now he’s applying that learning to TapRm. 

Here’s lingo from its website: “Brewing up an E-Commerce Revolution in Beer. We deliver the nation's most innovative beer and hard seltzer brands to your door in 1-3 days, usually cheaper than at retail and exclusively found on TapRm. We deliver to any New York address including homes, apartments, offices, bars and bodegas. Free Shipping On Orders Over $25 Until Dec 2nd @ 11:59PM (Normally For $100+ Orders).”

As ABI continues to maneuver on a global stage and look at all kinds of possibilities even while it still has huge debt load, it’s interesting to note that AB did lots of deals right here in US in 2019.  Most high profile of course is for Craft Brew Alliance.  AB has deal to buy 68.8% it didn’t own for $221 mil, pending Dept of Justice review.   But AB also bought Platform Brewing in OH and Cutwater Spirits earlier this year. And it bought the rest of Babe Wine (initially owned just a stake). AB also bought distrib Markstein Bev in San Marco, CA.