Kentucky, North Carolina, Georgia: flashpoints for beer policy debates over last year, all eyed closely in report from Center for Public Integrity today, quickly picked up and republished by TIME. Much of rehash and roundup of those tussles between various beer biz interests will read familiar, but digging by nonprofit CPI turned up some interesting stats and on-the-record comments for piece originally titled “Drunk on power: booze distributors ply statehouses to keep profits flowing.” You already know where this is headed.

While not quite as inflammatory as some local press during these debates, a clear critique of distributor influence on state politics runs throughout piece from an org aimed at “revealing abuses of power, corruption and betrayal of public trust by powerful public and private institutions.” For example: alc bev distribs “bankroll scores of lobbyists and give millions of dollars in contributions in election seasons” all to “protect the post-Prohibition regulations that guarantee their business,” according to the article. “But recently two economic forces have encroached on wholesalers’ power and territory, putting them on defense,” it asserts, namely AB and craft brewers.

Alongside tuff tone, article includes lotsa nuggets and plenty of numbers. During this legislative session, alc bev suppliers sought some form of direct sales “to circumvent distributors” in “at least 22 states,” stats from Natl Conference of State Legislatures show. CPI counted 315 registered lobbyists for distrib assns across US (except Wyoming) and found wholesalers gave “roughly $14.6 million to state candidates, parties and ballot issue groups in the 2014 elections,” according to Natl Institute on Money in State Politics. That’s compared to $5.3 mil from suppliers and $2 mil from retailers, and the $5.9 mil distribs gave to federal congressional campaigns.

Kentucky Branch Battle  Focus on KY clear in article. Both opening and closing arguments given to Rhinegeist Brewery, which recall also had to divest recently-opened distributorship in the state due to law change: “We were just kind of a gnat caught between these two Mack trucks colliding,” co-founder Bryant Goulding told CPI. Those metaphorical trucks, AB and KY Beer Wholesalers Assn, were among many co’s, orgs and politicians that declined comment for the story. But same NIMSP data shows KBWA gave $14K to state lawmakers “during 2014 elections alone,” while AB made single $500 donation in 2008.

“Stifle” or “Foster” Small Brewers: NC, GA  In their “power position,” wholesalers “can stifle the growth of craft breweries or small wineries,” claims CPI, “or they can foster them.” Section of article entitled “Limiting the craft brewers” begins with story from NC Rep Chuck McGrady, who sponsored small-brewer backed bills there this session. “Not long after” distributing draft of bill to other lawmakers, “two of the co-sponsors called and asked him to remove their names,” author writes before quoting McGrady: “Those legislators told me the beer and wine wholesalers in their area had already called and they were big contributors to the campaign,” he said. “They still supported the bill, but they didn’t want to be on it. It was really rather striking,” he told CPI. Repeating argument that NC has most “progressive” laws of southern states, NC Beer & Wine Wholesalers Assn exec director Tim Kent said “you’ve got a small group of brewers who are trying to deregulate the industry,” in explaining opposition to proposals.

Undressing political contributions of key politicians there and in Georgia got chilly receptions from NC Rep James Boles and GA Sen Rick Jeffares. NC brewers charge Rep Boles, co-chair of committee where “bills stalled” this yr, “wouldn’t let them be heard.” Brewers also point to Sen Jeffares as legislator who rewrote original “Georgia Beer Jobs Bill” so that brewery visitors pay for tours, not tastes. NISMP shows key donations to both lawmakers from state wholesalers for unopposed 2014 campaigns. Neither commented.

Alc Bevs with a Pot Chaser in Nevada?  In Nevada, alc bev wholesalers gave 13% of total funds raised by campaign to legalize recreational marijuana via 2016 ballot measure. That totaled $87,500 thru last December. Current version of the ballot measure mandates all pot distribution thru alc bev distribs for first 18 mos. We found that each of 5 wholesalers that donated to “Regulate Marijuana Like Alcohol” campaign (note identical language to Colo measures) all distribute beer.

Considering Sources of Attacks from All Sides  The long, in-depth report adds to CPI’s “Consider the Source: Who’s Calling the Shots in State Politics” series, initiated last year largely after $2.88-mil donation from Laura and Arthur Grant Foundation. The group has been charged with “liberal” or “progressive” leanings that skew its reporting, even if it bills itself as “nonpartisan.” That’s in direct contrast to many previous attacks on 3-tier system or distribs penned by free-market think tanks like CEI or Mercatus Center. So besides “encroachment” from biggest and smallest suppliers, wholesalers taking hits from both ends of political spectrum.

Yesterday Craft Brew Alliance announced its improved but still relatively soft Q2 result, including earnings down and below expectations.  Today BREW share price went into nosedive, down $2 and 19%.  Now at less than half of its 52 week high at $8.82 (at press time).  Its market cap dipped to $168.5 mil.  Pace of change in the industry was “inconsistent” with CBA “expectations,” specifically in Calif market, ceo Andy Thomas explained on today’s conference call.  Andy elaborated further during Q&A: “We didn’t think we would be coming out of the 1st half down 3%,” but rather originally expected to be “positive slightly” thru 1st half.   In particular, really the “only thing” CBA “didn’t anticipate” was how difficult California would be this yr.  Indeed, Calif is “better than 20% of our mix” and “distribution losses” (of primarily Redhook and Widmer brands) that “we didn’t anticipate” drove declines there.  Calif “local craft” is “large” and “more formidable” relative to rest of the country, and Andy expects “an acceleration” of challenges in what he called “most developed large craft beer market.”  Editor’s note: we’ve been writing all yr about disparity between Calif local craft’s accelerated growth in-state while larger out-of-state brands are havin’ far tuffer times.  Yet even with tuff Calif and overall first half results, Andy “feel[s] really good about our outlook in the market” overall in 2d half.  Andy and co “not fooling ourselves” that “California will continue to be tough” but he acknowledged Kona’s ability to grow there this yr despite increased challenges.  All in, growth in “mid-singles” to close out the yr should get CBA to revised 1-3% guidance, said Andy.  Note that guidance down from +6-8% after Q1.

Then too, several times thruout the call, management referenced plans to “partner with legitimate local brands” across the country, as they have with NC’s Appalachian Mtn, as well as continue “home market strategy” with current portfolio.  As local becomes “increasingly” important, more partnerships will create “more local in more places that we can win,” Andy explained.  Recent “regulatory approval of our Portsmouth brewery as an alternate proprietorship” is “a milestone that now enables additional partnerships to take root,” he added.  Then “put Kona and Omission on top of that” and continue to grow legacy brands (Redhook and Widmer) in home markets.   Lookin’ at specific home markets, Redhook “improved” depletions in Wash to +5% in Q2 and Longhammer IPA was up 17% there. Widmer Bros up 7% in OR and Widmer Hefe up 9% YTD, which is probably “brightest they’ve been” since “middle of last decade.”  Kona up 22% in HI and now represents 43% of total portfolio; and Square Mile Cider up 55% YTD and is 2d largest cider brand in PacNW.   So while CBA “expect[s] the journey to be bumpy” it will continue “adding more focus to certain brands in specific geographies” to “sustain long term growth,” said cmo Ken Kunze. 

Draught Draggin’ Overall Biz as Package Shipments Improved in Q2  Breakdown of draught vs package mix shows tuff draught trends are draggin’ CBA’s overall biz thru first half of 2015.  Draught is increasingly becoming less of CBA’s total mix at 22% during Q2 and 23% YTD.  Yet draught shipments were down 5.6% during Q2 and down 9% YTD while package shipments improved to +3.5% in Q2, tho still down 0.6% YTD. 

CapEx Projects Should Provide Investors “Level of Comfort”; “Absolutely Critical to Gross Margin Growth” When asked to provide investors with “level of comfort,” Andy replied “where we’re revving up capacity” should be “first level of comfort.”   Recall, CBA plans to expand Widmer Bros Portland capacity by 200K bbls/yr to 750K bbls total and add 100K bbls/yr brewery for Kona in Hawaii by Q1 of 2017.   Andy reminded each core market is “growing nicely” and expansions will help CBA become “more efficient…in support of that.”  Indeed, both capex projects, but particularly Kona brewery will be “absolutely critical to the gross margin growth,” chimed recently appointed cfo Joe Vanderstelt.   That’s because Hawaii still receives lots of Kona product from mainland, so Kona expansion will “eliminate a lot of freight costs,” added coo Scott Mennen.  CBA is “really focused on getting to that 35% [gross] margin in 2017.”  Co’s “very conscious” of “low return on equity return on investment capital,” and to “get the margin levels we’re looking for” co needs to “improve on those investments,” added Joe.   

 “Too Much” SKU Rationalization for Redhook? Asked if perhaps CBA SKU rationalization for Redhook brands was “too much,” Ken Kunze replied that “in terms of gross margin,” it “was necessary.”  However “we probably took too deep a cut in some areas given the way the market evolved,” Andy conceded.  Going forward CBA will continue “broadening the breadth of the portfolio” for Redhook as well as other brands, however they’ll do it “selectively and in limited geography,” added Ken. 

Brewers Assn estimated continued craft growth of 16% in 1st half and craft up 17% in IRI multi-outlet + convenience yr-to-date thru Jul 12.  That’s still spectacular growth.   But underneath that brilliant and shiny surface, the ground is shifting wildly.  Even without a meaningful slowdown in overall segment trend (yet), craft landscape is far more turbulent than in preceding period when a rising tide lifted all (or nearly) all boats.  (Sorry about the mixed metaphors). 

Clearly, the segment has gotten far more crowded and competitive.  You can see that in much slower growth numbers and even declines from many leading craft brewers in the 1st half.  Boston Beer chairman Jim Koch and ceo Martin Roper have repeatedly pointed to “increased competition” in craft market in recent quarterly conference calls. They weren’t kiddin’: it’s getting tuff out there.

Four of the top 10 BA-defined craft brewers were flat or down in the US in the first half.  That includes low single digit declines for each of the top 2, Yuengling and Boston Beer.  In fact, their trends look similar to what AB and MC got in the overall beer industry.  Two others are flat-to-down slightly (at least in US): New Belgium and Brooklyn.  Brooklyn up 12.5% overall in 1st half, but that growth all from exports.  It struggled a bit in US, especially as its largest mkt (NYC) went thru protracted and painful distribution transition.  Deschutes depletions up 5% so far this yr, compared to 17% last yr.  Shiner also reportedly up mid-single digits. Harpoon down slightly in 1st half.  And Craft Brew Alliance, which is part of our list but not BA’s, also up just 1% in 1st half in depletions, while shipments down (see below).  That’s 7 of top 15 (on either list) up 5% or less, including 4 down.  Something has changed. 

Meanwhile, other recent high flyers slowed at least somewhat.  Even Bell’s up “just” 15%, amidst capacity constraints, compared to its own expectations earlier in yr of 25-30% growth.  And Dogfish Head up 9-10% in 1st half, slightly shy of its projections.  Many players, including several of these, profess contentment with their current results.  After all, they’re still growing their biz, solidly and profitably, without getting over tips of their skis.  But it does raise all kinds of questions about what’s next.

Other top craft brewers still put up spectacular results.  As we’ve reported Sierra Nevada up 20%  in 1^st half and Lagunitas up 45% or so.  Those 2 craft brewers alone should grow around 400,000 bbls in 2015 at present rate.  And Firestone Walker, riding its hot 805 brand, expects to be 35+% again in 2015 even as it’s capacity constrained and in process of being acquired.  Founders up around 50% in its first yr after selling stake to Spanish brewer Mahou.  Ballast Point doesn’t typically give out its overall # these days, but its doubling in Calif scan data. Other stars of scan include SweetWater +33% and Stone +38% yr-to-date thru Jul 12 in IRI multi-outlet + convenience. 

But much of craft’s growth currently driven by relative newbies: craft brewers with explosive growth in tight local mkts (for example, Saint Archer in San Diego, which got to 17,000 bbls in just 2 yrs in SoCal) or the literally 700 new brewers that opened their doors in the last 12 months.  But where do they go (grow) from here?

Option of great growth simply through territorial expansion is quickly getting taken off the table, multiple sources assert.  Each mkt has its own cohort of local, regional and national players already duking it out to grab a bigger chunk of the still rapidly expanding craft pie.  When the growth rate of the segment slows substantially (as it must inevitably somewhere down the road), then watch out.

Not Your Father’s Root Beer gained all-incremental 0.2 share of all beer cases in Nielsen-tracked foodstores thru 7/25, making it #3 growth brand just behind Modelo Especial and ahead of Stella Artois. So it juices up trends of whatever bucket you put it in: couple of top craft brewers flat-to-down so far in 2015, while FMBs also having tough time due to softness of Rita family. Regionally, NYFRB making even bigger impact: it hit 7 share of craft retail sales in Chicago, Nomura’s Edward Mundy wrote in report on Boston Beer investor day (see above).

Boston’s Coney Island Hard Root Beer already on shelves and plenty others expected to join soon or prepping to scale up. Among ’em, Nashville-based “Wild Ginger Brewing Company” is “putting the beer back in ginger beer,” with it’s Wild Ginger Beer canned offering in 8 states, mostly in southeast, it announced this week. The co “redefines a small town approach to brewing,” it says, noting that founder Jamey Grosser “could never find an alcoholic version” of ginger beer he “loved,” so “decided to make one.” The brand’s currently produced in LaCrosse, Wisc, according to COLA filed with TTB (also where most NYFRB is produced). And this ain’t first alc bev venture for Jamey either. He resurrected Popcorn Sutton’s Tennessee White Whiskey from namesake moonshiner’s recipe with Hank Williams Jr distillers back in 2010. Tennessee Branding Co, which picked up trademark for “Wild Ginger” a year ago, grabbed “Wild Root Original” TM earlier this yr, so don’t expect the redhead on the label to be alone for long.

Plenty of questions remain about how long it’ll last, but this party does seem to be just getting started. And even if it’s not happening in same house as long-running craft rager, the invitations employ a lot of the same language. Use of “Brewing Company” and do-it-yourself origin stories with references to “small batch” sizes have long been craft category calling cards. As Nomura’s Edward wrote, some “blurring of definitions” seems to be going on here. CSLA’s Caroline Levy pointed to positive impact hard root beer is having on flavored malt beverages, not craft. And is their largely sweet flavor profile luring drinkers away from cider, contributing to dramatic slow-down of category in recent periods, Edward wondered. Note that cider category springing up much like craft, with growing number of small-scale producers called out by Boston execs during earnings call last week. But only recently have FMB-marketers started keying into authenticity themes and entrepreneurial storylines that start in basements and garages, so successful for craft brewers and popular with millennials. On the one hand, nostalgia or novelty of alcoholic sodapops could encourage drinkers to stick to sweet and fruity. On the other, the craft-aligned cues used to sell them could fuel further attention on these values. But those arrows seemingly point in opposite directions. 

Lexington, KY-based Country Boy Brewing is expanding operations within Kentucky with a second location in Georgetown, reported Targeted News Service. Country Boy, which you may recall was quite vocal in its opposition to dealing with AB’s (soon to be sold) local branches, will “invest nearly $4.4 million” in project that “will create 20 jobs” and expand its capacity to 10K bbls annually. Added production will allow Country Boy to expand beyond its 4-state footprint.   Co-founder Daniel Harrison is thrilled to bring a brewery to his hometown. “We know this expansion will let us make more quality craft beer to send to other markets, but also let us create a place in Georgetown where folks can come and enjoy the taproom experience and create a real community,” said Daniel.  Local officials are thrilled too, and approved up to $275K in state tax incentives to help Country Boy offset costs of expansion, noted Georgetown News-Graphic.  Country Boy will receive $200K from Kentucky Economic Development Finance Authority (KEFDA) and add’l $75K from the Kentucky Enterprise Initiative Act (KEIA).

While 3,700+ breweries are operating in US, according to Brewers Assn’s count, there were 5,525 brewery permits filed with TTB as of Jun 2015, NBWA chief economist Lester Jones shared with CBN.  Quick math: that’d be nearly 1,800 breweries in planning that already have their permits, and who knows how many others in planning that aren’t permitted quite yet.  Here’s a handful of recent newcomer announcements.

City Lights Expects 15K Bbls in First Yr; 50K Bbls in 3-5 Yrs in Milwaukee New proposal to renovate a 20th century water tower in Milwaukee’s Menomonee Valley into a brewery has plans for fast-paced growth.  City Lights Brewing proposes to convert former Milwaukee Gas Light Co water tower to be able to “brew around 15,000 barrels in its first year, with around 15 employees,” and 50,000 bbls “within three to five years” and “up to 50 employees,” owner Robin Gohsman told Journal Sentinel. 

Microbrewery, Cidery, Meadery Combo to Open in Hazel Park, MI this Sep A microbrewery, cidery and meadery combo concept called Cellarmen’s plans to open 12,000 sq-ft facility in Hazel Park, MI by “mid-September,” reported Detroit News.  Co will only brew beer for “in-house sales,” however plans for 16 oz cans of cider and mead to be distributed as well, co-founders Jason Petrocik and Ian Radogost-Givens told paper. 

Two New in Western NY 12 Gates Brewing and West Shore Brewing are two new brewers planning to open in western NY by the end of this yr, reported Buffalo News.  This fall 12 Gates will open an 8K sq-ft facility in Williamsville with an initial annual cap of 12K bbls that could be quickly expandable to 18K bbls.  One of the 10 partners involved is Bill Campbell, owner of another upstate brewery, New Buffalo Brewing, noted paper.  Plans are to “be able to find this on tap in every bar in Buffalo” and eventually start canning.  Meanwhile, West Shore hopes to open by end of this yr.  Co will use “equipment at 12 Gates” to brew in the meantime while lookin’ to lock down production space in Clarence, NY.

Lexington, KY-based Country Boy Brewing is expanding operations within Kentucky with a second location in Georgetown, reported Targeted News Service. Country Boy, which you may recall was quite vocal in its opposition to dealing with AB’s (soon to be sold) local branches, will “invest nearly $4.4 million” in project that “will create 20 jobs” and expand its capacity to 10K bbls annually. Added production will allow Country Boy to expand beyond its 4-state footprint.   Co-founder Daniel Harrison is thrilled to bring a brewery to his hometown. “We know this expansion will let us make more quality craft beer to send to other markets, but also let us create a place in Georgetown where folks can come and enjoy the taproom experience and create a real community,” said Daniel.  Local officials are thrilled too, and approved up to $275K in state tax incentives to help Country Boy offset costs of expansion, noted Georgetown News-Graphic.  Country Boy will receive $200K from Kentucky Economic Development Finance Authority (KEFDA) and add’l $75K from the Kentucky Enterprise Initiative Act (KEIA).

Conventional wisdom suggests that large suppliers with sophisticated sales teams manage major retailers best. But logical, if contrarian, conclusion about small brewers’ work with retailers highlighted in latest letter from Bump Williams Consulting. Personal touch from brewery founders has been part of consumer attraction to many craft brewers. Now it seems like retailers appreciating that too, according to Bump. “Small brewer owners are closer to their businesses than the bigger brewers from multiple perspectives,” Bump wrote after mid-year reviews with retailers. They get “beer drinking trends and consumer wants” and participate in educational events at retailers, sometimes in person. They show “active involvement with retailer relationship building programs” and embark on “SKU management initiatives.” They show “flexibility in marketing investments” and use locally relevant social media messaging. They understand “the importance of On Premise brand building” and reinvest back in US bizzes. Indeed, they’re “easier to approach and work with on category building programs” and have “open discussions about business trends.” These comments an interesting contrast in context of report noting frustrations with continued decline of big premium brands and distributor consolidation.

A coupla weeks ago, well before Reuters article mentioned above, Lagunitas founder Tony Magee took to his <ahref=” http://lagunitast.tumblr.com/post/124290257106/optionality”>tumblr</a> page once again. This time he shared (extensive) thoughts about various options craft brewery owners face when “in the wake of, in the process of or actively engaged in consideration of their own futures.”  He admits to being one of those owners and lists 5 possible futures: “doing nothing,” ESOP, private equity, initial public offerings, and strategic buyers.  Tony finds some fault with each, natch. “Doing nothing” and seeing what happens could go either way, in Tony’s view. After riding out the tide, “order may reappear” with more oppys, but “things could get tougher too and options may become even more limited.” Many deals have already occurred and many expect coming “tidal wave” of more; “this sort of talk is unsettling,” sez Tony and ultimately “suggests” that nature of the biz is “changing in a dawn-of the-dead-body snatcher sort of way, in a zombie apocalypse sort of way.” He raises spectre of post-acquisition deep discounting. And while those who do nothing stand by, new owners are “probing the segment for weakness” looking to “disrupt” and “all of a sudden your neighbor, who you knew and drank beer with in the backyard is trying to eat your left leg.”

Meanwhile, ESOP is a “blur of cross-collateralization and obligations” that ultimately leaves the employees with “a big debt burden that does not provide for future growth.”  Private equity’s typical 3-5 year “lifespan” is a “sort of time-bomb” that “could be sold to anyone at that point and ignite the zombie apocalypse.”  IPO’s come with “serious responsibilities,” government regulations, and will likely be “tricky” for “smaller players.” Indeed, “all but one of the half-dozen craft brewers” that went IPO route in the 90’s “have been taken private again,” and AB didn’t go public until it was over 100 yrs old and “something over 50 million barrels big,” Tony reminds.  Lastly, strategics “are like the Borg from StarTrek; You will be assimilated. Resistance is futile.”  And these cos are “complex organizations” that “sometimes have conflicting objectives”; i.e “Peach Pumpkin Ale Hipster Superbowl ad thing” just after acquisition of “a good Craft brewer.”  All in, Tony’s “unnerved by all of the transactions going on within the industry” and believes “zombie-apocalypse is being seeded right now” with only “a few years” before “its spawn will begin to show themselves in a Chaos Theory-driven way.” 

“Genuine Joint Venture” is the “True 6th Way”; the Lagunitas Way? However, “there is a 6th way,” sez Tony in a following post: “a joint venture.”  It has to involve “shared respect” and “enough autonomy that the baby can actually become itself on its own terms.”  Tony believes that Firestone Walker sale to Duvel is “progress towards that 6th way even if it misses by a little bit” since it’s based on “an element of mutual respect for what we in craft have found.”   Ultimately “the true 6th way will involve partnerships, true partnerships, genuine Joint Ventures where what it is that has been found can grow and develop and become central to the future,” Tony concludes.  Is this the direction that Tony and co are leaning toward?  Stay tuned.  

After tuff Q1 Craft Brew Alliance improved a bit in Q2 tho still slow goin’ halfway thru: depletions flat and shipments +1% in Q2 “primarily” due to “weak performance in our Redhook brand family” out of home-state of Washington, co announced. Indeed, Redhook volume again took double-digit hit on both shipments (-15%) and depletions (-14%) for the quarter, putting YTD shipments down 16% and depletions down 12% for the yr.   Recall, last yr co received incremental boost from Redhook KCCO Black Lager.  Meanwhile Kona and Omission depletions each up double-digits and Kona quickly turned around weak Q1 shipments (-1%) to +15% this quarter, +9% YTD.  However Omission shipments slowed to mid-single digits (+4%).  And Widmer “continued its steady turnaround” tho still down 4% for quarter and 8% YTD.  Gotta note, majority of sales decline is outside of home mkts.  Depletion volume in HI, OR, WA combined up 7% in Q2.  All in CBA shipments down 3% YTD, and depletions up 1%.

Meanwhile, net sales increased 3%, $58.5 mil in 2d quarter but it had loss of $600K. Gross margin increased $18.7 mil yet still down 90 basis points “as a result of higher cost of goods sold per barrel, which included increased production volume in anticipation of our Memphis brewery coming online.”  SG&A costs increased by $1.1 mil, +28%, “due to lower sales and planned increases in sales infrastructure and marketing expenses.” Operating income took near million-dollar hit during 2d quarter this yr. That only cut further into operating margin for first half from 3.1% in 2014 to 0.6% this yr. So net income per share slimmed down to a penny.