Ballast Point depletions again up "strong double-digits" thru 3 mo period ending Aug 31 putting co up 40% thru fiscal first half, Constellation CFO David Klein shared during Q2 conference call earlier today (Recall, Constellation's fiscal year begins in Mar). And there's still plenty of oppy on distribution side, currently in 43 states plus DC with ACV in the low 20s, compared to other top craft cos in low-to-mid 50s. However, first half trend suggests a marked slowdown for the qtr, which captures peak summer selling mos, since depletions were up 60% in Q1 thru May. (Editor's note: slowdown seemingly happening outside of tracked scans, since last we saw Ballast brand family up 94-96% YTD thru Aug 14 in IRI MULC, tho that's not entirely apples-to-apples since it includes Jan & Feb too). But Ballast giving total Constellation biz a clear boost nonetheless. Net sales reached $46 mil for three mos thru Aug and $88.4 mil for 6 mos. That's already 3.7% of total Constellation beer sales and lifted trend nearly 5 pts YTD thru Aug. All in, Constellation Beer Brands Division net sales grew 20% for both three and six mos to $1.22 bil and $2.37 bil respectively, as Mexican imports biz keeps zoomin'.

Meanwhile, Constellation CEO Rob Sands took a couple shots at prior Ballast mgmt team on call, many of whom recently left co to join Ballast Spirits offshoot now named Cutwater Spirits, while justifying why co's "optimistic" about changes that were made. New team "far exceeds what the previous team had" in terms of "knowledge" from "wholesaler relations" and "sales execution" perspective, and more, Rob stated. Next phase for Ballast "needs a degree of professionalism I don't think the old management could bring." New CEO Marty Birkel is "one of the stars in beer, period," after running natl sales for Constellation's beer biz during its "fastest growing period." New Chief Sales Officer Dave Mills was Ballast's #2 sales guy, already running Calif, a very large % of Ballast's total biz, Rob reminded. And co still has "same production team." So Rob and co "excited about the changes that were made" and remain "acutely aware of the type of culture that needs to be maintained." Gotta note, both Dave Mills and new VP of Distributor Strategy and Sales Operations Mike Laguardia are still relatively new to Ballast Point. Both joined co just in the last 1-2 yrs and Dave Mills had no prior beer experience to Ballast, coming from "numerous years in high construction materials" and running "a pharmaceutical company selling to Rite Aid and Walgreens" (see Aug 31 issue).

Craft Over-SKU'd & Over-Spaced but "Bigger, Stronger, Faster-Growing Brands...Will and Should" Get More Space When asked about upcoming shelf resets, Rob acknowledged that both craft and premium domestics are "over-SKU'd and over-spaced," especially compared to high-end imports. "We spend a lot of time thinking about" that and have "strong position to advise our retailer customers" thru its CatMan initiative. "You're going to see some shakeout there" he asserted about craft. But "bigger, stronger, faster-growing brands like Ballast Point will and should be given more space and more SKUs for the obvious reasons. It's moving and it's highly profitable. 

Contract brewing concept, Brew Hub LLC signed its first ever international partnership with 3 yr old South Korea-based, The Booth Brewing, co announced. "International partnerships have been part of our business plan since we were founded," Brew Hub prexy Jerry Mullane said. "It's an ideal collaboration and we look forward to working with many more international craft brewers." In fact, Brew Hub "currently in talks to set up similar arrangements with brewers and 'big-time' importers/exporters in China, Hong Kong, Australia and the United Kingdom," CEO Tim Schoen separately told Forbes.

The Booth's flagship Kieuk Session IPA and Kukmin IPA will be brewed and packaged in Lakeland, FL, but oddly only for export back to South Korea, per release. Additionally, Brew Hub will begin exporting its Craft Collection brands, "beginning with Keybilly Island Ale, to The Booth in South Korea." So Keybilly will have access to each of Booth's 7 brewpubs located thruout Seoul as well as "its wide network of bars" in the area. Keep in mind, The Booth already imports several other "global craft beer brands" as well. It currently only produces 480 bbls/yr but expects to ramp up to 3K bbls thru new partnership. And interestingly, co is taking over old Lost Coast Brewery site located in Eureka, CA (see Oct 23, 2015 issue), expecting 18K bbls/yr facility to be up and running by end of this yr. This marks the 3d US brewery we know of that's struck some form of partnership with a South Korean brewer. Brooklyn partnered with Jeju Brewing earlier this yr and late last year Northern United Brewing (makers of Jolly Pumpkin and North Peak Beer Co) partnered with South Korean-based Playground Brewing, tho nature of partnership unclear (see Dec 9, 2015 issue).

Meanwhile, two years into operation Brew Hub just beginning to work on its 3d expansion for Lakeland, FL facility, expected to be complete by March 2017. Recall, Brew Hub's second facility in Chesterfield, MO is still in process of being built and expected opening date is pushed back to sometime in 2017. Co's adding 12,600 sq-ft "of production space" up to 76K sq-ft total, that'll boost annual capacity from 100K bbls/yr to 130K bbls. And new additions "will enable Brew Hub to produce and package cider for the first time" too. "Our growth is happening faster than we ever imagined," said Tim.

Gotta note, it'll be interesting to see how relationship with largest supplier Cigar City evolves now that Cigar City will begin brewing at parent co Oskar Blues' Brevard, NC facility starting this Nov. But either way, seems like Brew Hub remains confident that it'll be able to fill out capacity as it continues to expand it, still planning to ultimately open total of 5 breweries across the country. "To date, we've had over 280 extensive engagements but only 14 clients," Tim told Forbes. "If we took on everyone we'd be sold out for the next 45 years," added Tim's son Chris Schoen.  

 Across its portfolio, Yuengling makes beers it believes can "compete with the premium domestics, the imports and the craft beers," Jennifer Yuengling, operations veep, said during talk in Philly this week, Philly Voice reports. But "we might be caught up in a stigma," father and prexy Dick Yuengling said, noting that its seasonal line of beers, often in styles seen more often in the craft segment, haven't done as well as the co thought they might. And it's all about price, Dick thinks. Craft case prices often far exceed average Yuengling prices, even for its more craft-competitive seasonal or specialty releases. "We're well under $25 for the craft segments of our portfolio," while its flagship lager is less. That brand's always competed squarely in premium segment, priced with brands like Bud. So, Dick believes "people think because they're paying $45 for a case of beer that it's something out of this world." But "beer is beer. It's not difficult to make," he said. Instead, "it's difficult to make it consistently and have the same taste attributes that you're looking for." Interestingly, mixed results for some of smaller Yuengling brands in IRI multi-outlet + convenience data thru mid-August (note that scan data doesn't capture big swath of Yuengling biz in homestate Pennsy). Its rotating seasonals actually up 50% by $$ YTD thru Aug 14. New Oktoberfest added just a few thousand incremental cases following launch. But Porter down about 25% and Lord Chesterfield Ale -30+%.

Recent fast pace of change in the alc bev biz often strains some of older regs that guide its participants, adding pressure from all directions. Not uncommon for longtime observers to be "amazed, in the last five years, how the landscape of alcohol has changed," as director of Colorado Liquor & Tobacco Enforcement Division, Patrick Maroney described his feelings in opening remarks at recent CLE Wine, Beer & Spirits Law meeting in Colorado Springs. He's witnessed repeated "challenges to the three-tier system as we know it," and "if we don't tackle this head on," he said, "we're going to be in a lot worse place." He was one of many regulators and industry lawyers to highlight these challenges, while also reminding that it's this system that allowed for and supported the surge in small producers in recent years.

Industry Innovation Blurs Lines Between Alc Bevs, Tiers Total alc bev biz "would be flat to declining at the moment" without innovative new brands, said legal consultant and past veep/general counsel for Constellation Brands, Ron Fondiller. Increasingly those new products do not fit neatly into strict "beer," "wine" or "spirits" designations: "bourbon-infused wine, tequila with wine in it," barrel-aged everything, Ron noted. Federal labeling regs may make this difficult at times, he highlighted, without digging too hard into web of state laws that treat different types of alc bevs differently. Instead, he noted appearance of cannabis inspired or even infused beverages, which "mixes the presumption of illicit drugs with alcohol." That's "absolutely politically stupid," in his view, since "as an industry, we have worked for years to make sure the two are separate."

Beyond that, "there's a mixing of tiers," according to Wine & Spirits Wholesalers of America prexy/CEO Craig Wolf. He sought to "raise the profile" of private label alc bevs and how bringing them to market can involve a retailer "acting outside its traditional role as a retailer." For example, "what degree of control does the retailer have over the supplier and over the wholesaler actions," like with allocation, he asked. "How does that change the dynamic of the entire industry?" Some of these retailers seem to be functioning as suppliers and/or wholesalers, but aren't licensed that way, he argued. Since federal laws "didn't even anticipate" current market structure, where biggest players often in the retail tier, do "the same rules that existed back 85 years ago" apply?

Third Party Providers Ease Consumer Interaction, Open Loopholes? Then there's innovation by unlicensed pseudo-industry members. Lots of third party providers (TPPs) set up shop to grab perceived market oppys, including apps like Drizly and Instacart, which both seek to answer consumer demand for delivery of alc bev (and other) products. Legal reps from those companies spoke of difficulty identifying applicable state laws. There's often a disconnect between sales/marketing folks at these companies and legal/compliance, noted Drizly's general counsel/senior veep of industry affairs, Nidhi Kumar. And forget specific guidance from regulators to these companies on how they should operate, which has helped lead to many different biz models, some of which seem far from compliant, commented moderator Carrie Bonnington, atty at Pillsbury Winthrop Shaw Pittman. Note that even these two relatively "transparent" models, as Carrie called them, which largely act as agents of retailers, seek ways to sell services back to suppliers and somehow promote their products over others, something regulators likely to be "uncomfortable" with, Carrie said.

Seeking More Guidance from Regulators, Running to Keep Up State regulators at CLE meeting acknowledged need to provide more guidance to industry members. While Patrick highlighted his work on outreach and education of wave of new industry members, rep from Michigan Liquor Control Commission, Teri Quimby, said there "could be a lot more done by a lot of the regulatory agencies in terms of guidance." But as industry expands, these regulators' resources increasingly stretched thinner. Colorado may be adding 3 new investigators devoted solely to trade practice violations, but for now it's still only got 16 investigators across all departments for the entire state. Meanwhile, it's seen a 5 to 6-fold increase in breweries and brewpubs over last 5-10 years. Similar is true at national level, where TTB may be getting some more resources to help handle administrative and investigative burden. But that's hardly keeping up with jump in number of licensees, permittees, applications and so forth. Importantly, laws that aren't being enforced become that much harder to defend in court and therefore easier to erode. Look to arguments in Mass pay-to-play cases, for example.

Serious Questions Coming in Courts, from Free Speech to Antitrust Arguments While small tweaks and increasing number of exceptions to 3-tier system largely enacted through the legislature, it's the courts that will see cases with potential for broader impacts. "A judicial opinion" could come down affirming that there are "so many exceptions that [the 3-tier system is] not reasonable anymore," Stephen Humphress, general counsel for Kentucky Alc Bev Control said. In fact, ruling earlier this year sending Retail Digital Network case back to lower court said just that, as both Marc Sorini, of McDermott Will & Emery, and Matt Botting, general counsel at Calif ABC discussed (with notably opposing views; recall Matt also spoke of case at recent Calif Craft Beer Summit, see Sept 16 issue). Other industry attys see the possibility of "challenges to this industry under antitrust laws," Tuck Duncan of Duncan Law Offices noted. Add it all up and it sure feels like we ain't seen nothin' yet.  

Plenty of upside for "out-of-aisle Craft and Crafty-Import displays throughout the stores in the back half of the year," wrote consultant Bump Williams in monthly letter yesterday. (Note that a version of this article appeared yesterday in INSIGHTS Express.) An increase in merchandising for holiday seasons leads him to "expect Craft to bounce back nicely at the end of the year." That sure would be welcome, though not a lot of indication that's picked up yet. At same time, Bump's retailer clients all working hard to figure out Spring shelf resets, but are "lacking direction" from both "category 'leaders'" and "smaller 'growth' engine companies." They're particularly wanting more info on performance of new brands, including where they're sourcing volume from and what kinds of consumers they attract. Bump sees plenty of opportunity for "more innovative and growth-oriented Regional Breweries" to fill in gaps in analytics as well as provide sought-after cross-category merchandising oppys considering shelf space overall not growing. Among other concerns and topics of interest for these (mostly) big retailers: "Space Management Still an Issue as the Category Captains' Self-Interests at Stake Before Retailer Health and Wellness," read slide on "US Retail Landscape" Bump shared; trade-up and interest in "LOCAL" not going away; retailers "Finding it Easy to 'Hide' Private Label Brands. 

The industry is "starting to see a change to where maybe we are starting to hit the top," in terms of total SKUs, said Bell's founder Larry Bell on panel with Summit quality manager Rebecca Newman, Binny's head buyer Pat Brophy and Supreme Beverage's Michael Schilleci moderated by Eric Best during NBWA annual mtg earlier this week. Seasonals were particularly under fire, criticized across the board. "We hit a real constipation point," Larry quipped, as distribs were already "backed up with seasonals" heading into fall. So seasonals "peaked out a bit last year" with "old fall beer all over the place," Pat added later. It got to the point where you could find 2014, 2015 and 2016 versions of pumpkin all together, Larry said, perhaps half-jokingly. There "has to be support behind it" and "some real thought." So "maybe it's time to slow down on seasonals." Gotta note, craft seasonals $$ down 7% and volume down 10% YTD thru Sep 4 in IRI multi-outlet + convenience, including much steeper 15-18% drop for latest 4 wks. Looks like another tuff year for fall seasonals, even against easier comps.

Binny's implements "cut off dates" for seasonal orders, trying to better manage seasonals altogether, said Pat. So "no more fall seasonal beer" orders by Oct 15 and off the floor by Nov 1 - Nov 15. Yet pumpkin beer consumers "are out there" and "if you're gonna turn several cases a week," then "product will see the sales floor." When it comes down to it, "choice is what people want." And "we have the luxury of space" so it "can generally try most things once." Indeed, largest Binny's store has 3325 beer SKUs, Pat shared.

Running Out of Ideas for Viable New Styles? Quality 101 Check Points Then too, people "are starting to run out of ideas" for Limited Release brews, Larry thought, since there's already been so much experimentation. "Just because you can throw a caramel apple pie into a fermenter doesn't mean that you should," he added. Brewers that've "survived doing beer of the month" now have to think "do you have a flagship?" And "if you're a new brewery the hardest thing to do is develop a flagship. That doesn't happen overnight." Ultimately it's all about "timing and a balance" said Rebecca. Summit does one-offs "all the time" and has done "extremely well with programming." But she too questioned ability to "continue to create commercially relevant beers" while constantly rotating.

Barriers to entry still "as low as they've ever been" and "you can get yourself set up" relatively "cheap." But "are you willing to reinvest" and "take care of those quality issues?" Larry asked. He's seen plenty of examples of "infected" beer in the mkt "that should've kissed the sewer," so to speak. Are all these new breweries coming in "gonna be sustainable? Probably not." Rebecca stressed that wholesalers should ask a series of "quality 101" questions when taking on various new local cos, and to make sure brewers have quality programs to begin with. It's generally thought that 15% of your operating costs should be for quality, Rebecca said, but she thought even that's a bit "low." And when a beer is infected in any way, "everyone who's involved with that brewer should be on notice," she added. Then too, from the other end of the spectrum, PE lookin' for return on investment "very well may pressure" brewers "to do things that they shouldn't do."

Taprooms Gotta Stay Taprooms, sez Pat; On Retailer Assn Radars; Still Good for the Industry "I think taprooms need to stay taprooms" said Pat. "They need to recognize where they fit." And "growler fills a week in advance" are "no good." Michael agreed that "taprooms can be good" but "operating full bar, food trucks coming in, bands coming to play," that's competing with retail bars. These issues "are gonna come to the forefront more through the retailer associations," said Larry. And generally, "trade practices are gonna come to the forefront more" and "those are gonna be the growing pains of the industry." But overall "having taprooms and promoting beer in general is a good thing." Ultimately, it's more options for consumers "encouraging people to make beer their choice."

Next Gen Transition "Hardest Thing to Do" for an Exit Next generation transition "doesn't work for all breweries" and it's "the hardest thing to do as far as an exit," said Larry. "Easiest thing" is to "get a big check and walk away," natch. "It takes a lot of time to do the wealth transfer," and "a lot of work with lawyers and accountants," but above all "have to have that second generation that has the passion." Larry's daughter Laura "is very involved day to day" and actually both Laura and his son David Bell "started getting financials when they were 15 years old to learn about the business." Separately, "my dad never showed me financials when I was 15" Michael chimed, but Supreme also "a work in progress" for another next generation to come on. "Our goal" is to "satisfy our needs" and "to have a nice profitable business" that "sustains into the next generation."  

Those 15-pks of coming New Belgium Dayblazer Easygoing Ale we characterized as "eye-catchin' purple" last week, are "in fact, a royal blue," NBB spokesman Bryan Simpson alerted. A purpler shade of blue, perhaps, but blue all the same. Note that recent session can entry from Lagunitas, Twelfth of Never, comes in a truly purple can, tho 12-pk case has white background with purple text. 

Alabama Supreme Court upheld summary judgement handed down over a year ago, dismissing suit brought against SweetWater and distrib Supreme Beverage by competing Birmingham wholesaler AlaBev (see CBN vol 6, no 62). Recall, AlaBev claimed breach of contract, but judge found no "valid territorial agreement," according to AL.com report. AlaBev appealed. Disagreement goes all the way back to 2012.  

Road to on-site sales at production breweries in Mississippi now paved following agreement reached between state brewer and wholesaler orgs. The groups sent release last week outlining provisions of draft bill they plan to nail down and introduce in 2017, reprinted by Jackson Free Press. Draft language will allow tap room sales at breweries producing less than 60K bbls per year (all breweries in the state right now) with limit of sales of about 2 cases for off-premise consumption. But note that, at this point, proposal limits on-site sales to 10% of annual production or 1,500 bbls, "whichever is less," according to release (our emphasis). That 1500-bbl limit is about 10% of production of largest in-state brewer Lazy Magnolia. So that puts pretty low bar on how much beer will be sold directly to consumers by breweries in state. But some sales better than none, it seems. Proposed bill would also raise cap on brewpub production to about 2,500 bbls. Measure will "make Mississippi breweries more competitive" and "translate into capital investment and job creation," Matthew McLaughlin, outside counsel to Miss Brewers Guild, said in release. It also "will strengthen the relationship" between brewers and distribs in state. Miss Beer Distribs Assn members "want to help" in-state brewers "succeed and thrive while not causing irreparable harm to the beer industry's three tier system," said Ricky Brown, prexy of org.

Of course, if proposal moves through legislature and becomes law, it'll leave Georgia as only state in US that prohibits direct sales by breweries, as Atlanta Journal Constitution columnist opined, wondering if his state is the "worst...for craft brewing." Column also reviews year-plus-long saga of law change allowing sales of tours at brewery tap rooms, where they can offer free "souvenir" beer. Between the two states, Ala ABC just decided to pull data collection requirement from proposed rule that clears on-site sales at state breweries at meeting today, Ala Brewers Guild tweeted out (see issues from Aug 3 and Sept 14 for more). Wasn't just folks in state that howled over proposal to collect names, addresses and more from folks buying beer at breweries. Legal consumer advocacy group, Pacific Legal Foundation, jumped in with comment letter to state regulators and op-ed reprinted by Forbes too. That group not thrilled with "intrusive, creepy plan" to collect names and addresses of beer buyers in Ala. Further, "someone familiar with the anti-competitive alcohol industry might suspect the law's true aim is to make it difficult for craft breweries to sell their tasty concoctions," writes PLF's Anastasia Boden. Hmm. Recall, PLF was behind lawsuit in Fla on behalf of retailer, suing to allow sales of 64-oz growlers in state a few years ago.

Speaking of non-industry organizations inserting themselves into regulatory debates: Mercatus Center joined in conversation again with op-ed in Washington Post last week. "Craft breweries do not need subsidies, but they do need help," wrote Christopher Koopman and Thomas Savidge, using news that local Port City Brewing got public grants from city of Alexandria and state of Virginia for expansion to make their point. "Giving money to brewers simply masks the biggest problem facing the industry's continued growth: Craft brewers face outdated, counterproductive and oftentimes redundant regulatory mess," the folks at free-market supportive Mercatus claim. Old regs "fail to account for changes in the market over the last eight decades and have become poorly disguised gifts to established breweries and wholesalers," in their view. "Subsidies" only help some brewers rather than all brewers, so "instead of getting financially involved, get out of the way," column concludes. It appeared around same time as lengthy feature on opening of Caboose Brewing in nearby Vienna, Va. The state's regs are "really messed up," claims one of two founders, both of which are entrepreneurs who came from outside alc bev industry. The two asked their wives to open up Ferment Nation distrib after learning about franchise laws in the state, deciding to "commit to a lifelong, verbal, non-exitable contract...with the two people with whom they had already made such agreements," (allowable in state) according to DC Inno report. 

Minneapolis, MN-based Fulton Beer expects to finish yr between 28-30K, up from just under 22K bbls in 2015, reported Minneapolis/St Paul Business Journal. And co still has plenty of room to grow at its 80K bbls/yr Minneapolis facility. Recall, almost all of Fulton's biz still in MN as of last yr, after growin' 40% to 20,532 bbls in-state (see Jun 16 issue). But due to state law limiting growler sales to brewers producing less than 20K bbls, Fulton now no longer able to sell 'em.

Growlers currently "make up about 10 to 15 percent of the company's retail sales," co-owner Jim Diley told paper. "It's always been kind of a cornerstone of our business," he said. "It contributes overall to our bottom line for sure, and you know it employs people at the end of the day." Fulton currently employs 3 people solely dedicated to growlers whose jobs are now "in jeopardy," he added. Back in 2011 "Surly Bill" was passed that (among other things) allowed brewers "to sell up to 500 bbls worth of growlers a year with a license as long as total production" was below 3500 bbls/yr, paper recalled. That cap was raised to 20K bbls/yr in 2014. And there's always the possibility for a new proposed cap to be intro'd down the road. Fulton will throw a "Fulton's Death of the Growler" event on Sep 30, the day its license expires, to celebrate the "'bittersweet' milestone."