Industry members and alc bev regulators themselves welcome change to current laws, standards and practices, at times. At others, the same folks resist any change at all costs. Examples of each showed up during Natl Conference of State Liquor Admins this week. But distinguishing between good change and bad change can be difficult in an industry experiencing so much other line-blurring.

Good Change: Unity, Taxes; Bad Change: FDA Oversight Leaders of brewer orgs agree on more than just wide-ranging tax bill recently introduced, as they've always maintained: they don't want to see the Food and Drug Admin more involved in beer regulation. "Newly emerging relationship with FDA" was Brewers Assn ceo Bob Pease's response to question about biggest challenges faced by panel of leaders at BA, BI, NBWA and retailer org American Bev Licensees (as reported in INSIGHTS Express). And BI prexy Jim McGreevy agreed: "making sure TTB continues to be the regulatory agency for beverage alcohol in the US" is major challenge.

Bob cited 3 recent instances when FDA oversight on brewers increased: 1) "new burden" of menu labelling guidelines, 2) spent grain proposal that brewers successfully beat after united "push back," and 3) series of "inspections" or "audits" of brewing facilities, marked by "lack of consistency" and "no framework or game plan" for them, including inconsistency of documentation sought. Jim concurred that FDA's growing involvement "not a welcome development" and that TTB "needs to be fully funded." Note that's also a provision of tax-focused bill intro'd by Sen Wyden last week. Indeed, panel provided another opportunity for beer org execs to sing from same hymnal on proposed changes to tax code. And stream of headlines citing unity between big and small brewers on changes to tax code now flowing across US. But again, unified support for these specific, carefully-considered tax tweaks doesn't mean these leaders seek broader overhauls. NBWA prexy Craig Purser warned against "hell fire urgency to change" current rules on federal and state stages and encouraged legislators to be "careful and cautious not to throw the baby out with the bathwater."

Flexibility Good, Blurred Lines Bad? Fewer Minn Officers, Alc Bev Confusion in Okla, "Cocktail Caviar" Innovation and creativity, while drivers of craft growth, can challenge alc bev regulators that are caught between expansion of licensees, their activity and constriction of funding, staff. In Minnesota, 2 field officers (recently down from 3) enforce rules followed by 27K alcohol licensees, one of the 2 said on NCSLA panel. They're having trouble figuring out how to accommodate constant stream of new ideas, including mobile breweries, retailers looking to drop product thru chute directly to truck beds and/or boats, and locations that want to operate under one license one day and another the next. Officer also noted fast growth of small brewers in state. Minn brewery count doubled to 70+ since 2011 (per BA), when "Surly Bill" passed allowing breweries to sell pints on-site. Also going on there, brewery taprooms and brewpubs just given right to fill growlers on Sundays, tho state bars other off-premise Sunday sales, a perennial issue in the state.

Folks in Okla have trouble even figuring out what's alcohol and what's not. Official from that state's regulatory agency showed about a dozen items that looked like non-alc products but had alcohol (among 'em: Tippy Cow rum cream, alcoholic popsicles and Rogue's Voodoo Doughnut Bacon Maple Ale). On same panel, pair of entrepreneurs introduced "pop-able pearls of liquid alcohol" to enhance food items, called "Cocktail Caviar," as well as combo hardware/software for retailers to better measure pours, limit over-service, monitor/report consumption patterns and more. How long will "bev" remain firmly attached to "alc"? Is tech always good? Using technology to help improve and track work supported by many, but others worry about data collected and responsibility to manage that safely, demonstrated by discussion during SCOL Conference last fall.

Differing views of new technology also voices when it comes to social media. Calif ABC already insisting that a Facebook post can constitute an illegal "thing of value," even tho forging connection directly with consumers has proven to be boon for small players. Meanwhile industry atty Marc Sorini suggested "some assumptions" industry members have made about that phrase "don't hold up." For instance: "if you run a good Super Bowl ad, and there's a 5% uptick in the off premise, wasn't that 'thing of value'?" And that's before even touching some of the more common instances of line-blurring brought up where small brewers are concerned: 3-tier. That system's has done "remarkable job" accommodating expansion of bizzes, but there's room for "other options" like self-distribution for fledgling brands, said John Beaudette of MHW LTD (importer, distributor and service co). Bill Kelley of Beer Distribs of Mass defended independent middle tier's ability to provide choice and "robust competition." And Dimitrios Christopolous pointed to pressure points from internet sellers and relationships formed by private label products. And the complicated conversations over these issues continue.  

Long article in Boston Globe on revitalization of Narragansett since brand was purchased from Pabst in 2005 talks about how it's "becoming a popular alternative to Pabst Blue Ribbon among price-sensitive beer drinkers at hip Brooklyn bars." Narragansett was "cheapest of the top four fastest-growing beers in Brooklyn in the past year," noted paper, citing GuestMetrics data that tracks about "415 brands at 18 locations in the borough." Only Allagash, Bell's and Blue Point outgrew Narragansett last year and each "can sell for almost twice as much." A handful of NYC bars typically sell 16oz cans for about $4 each. "It was making a huge stomp on Brooklyn" about two years ago when Brooklyn-based bar, Brew Inn opened up, and "everybody was ordering it, everybody wanted it," bartender Adam Bohanan told paper. Another bar manager in Williamsburg said at first most customers couldn't even pronounce the name right, but "now people come in and ask for 'Gansett," and he sells "a ton" of it.

"In the early days we chased some of that college business," but "it's just not the right way to build a brand," since they ultimately "don't care what's on the can," said owner Mark Hellendrung. Instead, his customers are "urban, cities, craft-beer drinkers," he said (very similar to what Pabst has said about PBR in the past). When Mark purchased the brand from Pabst, it had shrunk from a once 2 mil bbl brand to "fewer than 600 barrels" and got just $100,000 in revs in 2004. This past yr 'Gansett produced 78K bbls and "pulled in" $12 mil in revs, paper notes. Mark points to changing the recipe to add more hops and make it slightly maltier back in 2005 as a difference maker that differentiates it from PBR. And "everything we try to do is bringing Narragansett back to life through a historical lens in a contemporary context." All in, "about a third" of its sales now come from outside New England, tho still 80% comes from D.C, Philly, NYC, Providence and Boston metro areas.

Tho no new deals have emerged for couple mos, craft m&a remains extraordinarily active, so just wait. Craft Brew News has heard of over a half dozen deals in works, for part or all of craft brewers, including several in top 30. And we have strong sense there are others we know very little if anything about. Just yesterday, First Bevs managing partner Townsend Ziebold gave yet another provocative take on this still-crazy scene and why craft will continue to be deal-rich environment at Brewbound Session in Chicago.

At "Critical Mass," EBITDA Margins of 25-35% "We're at a tipping point," asserted Townsend, where craft biz becoming tuffer for many players (see grafs below for details of why). That's even tho First Bev expects overall double-digit growth for craft to continue for yrs. Meanwhile, valuation multiples at "all-time-high." A number of craft bizzes are making good $$ and lots of folks want in. Tho valuations could still stay high for awhile, more players are thinking about getting out or selling a stake for a variety of reasons (the money being offered, succession planning, big cap ex projects coming etc). "Once you hit critical mass" in craft (which Townsend didn't define), EBITDA margins "are incredibly healthy," like 25-35%, said Townsend. And with major domestic brewers losing volume, craft up double digits and no major supplier yet a big player in craft, big players also at time of "peak strategic need." But that won't always be true; they'll make a small handful of acquistions and then "cement" and "execute" their strategy. Plus the "stigma" of selling to private equity "is gone" with more private equity deals coming. So there's a "little bit of a race to the door," said Townsend, and part of that arises from FOMO (Fear of Missing Out). Townsend doesn't think we're at the "top of a bubble," but craft is at a "peak" in terms of operating performance. It gets tuffer from here.

"Local Competition" Hinders Geographic Expansion Why will craft get tuffer for many? "We have reached saturation" so that "local competition is a major impediment to growth," according to Townsend. That's "hindering geographic expansion" for many players, except the leading natl players or those who've already "planted flags" so that "you've got your beachhead." Even if you "want to expand regionally," nowadays shelf space and share of mind with distribs often "not there." So velocity "getting harder and harder to maintain" while distribution "harder and harder to gain" and "even harder to hold." Not that many yrs ago, he pointed out, a brewer like Boulevard (a First Bevs client) established position as the "local" craft in Omaha, Neb. But that wouldn't remotely be possible today.

Greater Investment Required; Take Some "Chips Off the Table"? On top of that, he noted much "more investment" will be required of craft brewers over next couple of yrs, in sales, mktg and more simply to keep pace. At same time, it's going to be "more difficult to take price." Large domestics "have a lot of flexibility" with on premise pricing and that could become "very competitive ground." Where does that lead? "Ultimately, you get to margin erosion across board." Then too, "cap ex cycles getting bigger and bigger," where if a brewer wants to go from 200K to 400K capacity or from 400K to 800K, could cost $50-80-100 mil. Such big investment decisions are "one of primary reasons" that some "clients" seek M&A solution, even if it's just selling a stake, thinking "I'd like to take some chips off the table." Still, this is a "great industry," Townsend reminded; he's not being gloom and doom, and craft could "get to 30 share."  

Sierra Nevada's two new intros, Hop Hunter and Nooner Pilsner are the two best-selling intro brands in IRI supers, at $2.4 mil and $2 mil respectively yr-to-date thru May 17, Dan Wandel pointed out during Brewbound conference. "Last year was a bit of an anomaly" with Sam Adams Rebel IPA and Sierra Variety Pk boosting new product sales to over $90 mil. But this yr should likely be "more in line with previous years" fallin' "right in that $42 million range." Again, no surprise that IPAs are majority of new top craft products this yr. There's 8 IPAs (4 session IPAs, see above) that made the top-15 new products list including 4 of the top-5 - Sierra Hop Hunter, New Belgium Slow Ride, and Sam Rebel Rouser and Rider. And interestingly this marks 3 of 4 years in a row Deschutes has had a new top IPA intro: Pinedrops IPA this year, Fresh Squeezed IPA last yr, and Chainbreaker IPA in 2012 (River Ale was a top intro in 2013, listed as a "session" Pale Ale).  

IRI tracked 888 IPAs in natl supers YTD thru May 17, Dan Wandel shared at Brewbound conference. That's already 147 more since the end of 2014. And Dan wouldn't be surprised if that number passes 1000 mark "sometime in 2016." Majority of newly tracked IPAs in scans are still the largest substyles: 75 new American IPAs (496 total) and 32 new Imperial IPAs (231 total). However, as Dan pointed out at our BMI Spring Conference in May, both of those substyles of IPA are losing share of total IPAs to Session IPAs and interestingly, Imperial IPAs losin' most share of all (see May 14 issue). There's 15 new session IPAs tracked so far this year (43 total), including four top new intro brands - #3 New Belgium Slow Ride ($1.7 mil), #5 Sam Adams Rebel Rider ($887K), #7 Full Sail Session IPA ($330K) and #9 Oskar Blues Pinner ($252K). Total Session IPAs collectively up 271% and snagged incremental 3.8 share of IPA to 6 yr-to-date. Gotta note, both American and Imperial IPAs each still growing solidly; up 32.4% and 21.6% respectively and each gaining share of both craft segment and total beer.

Top-100 Craft Brewers Sell Avg of 3.1 IPAs per Co; Lagunitas Has Most $$ in IPA; AB Has Most IPAs Top-100 craft brewers in IRI data (which includes Craft Brew Alliance, Magic Hat/Pyramid and AB acquired craft) sell an average of 3.1 IPAs per company in IRI-tracked foodstores, Dan noted. Lagunitas has most total sales from IPAs by far, at $22.7 mil in foodstores, followed by Sierra ($14.7 mil), NBB ($11.5 mil) and Boston Beer ($10.3 mil). Ironically "AB has the highest number of IPAs now" (not even including Shock Top); they have 10 total including offerings from Goose Island, Blue Point, 10 Barrel and Elysian. However, it's only 7th highest supplier in total IPA $$ sales.  

Craft segment in Great Lakes Region looks "pretty different" than natl craft in IRI supers, IRI's Dan Wandel noted during presentation at Brewbound conference yesterday. First off, "Great Lakes region was actually #2 in dollar growth," so far YTD, only behind Calif. Craft previously "underdeveloped" here but now "it's starting to catch up," said Dan; $$ reached 18 share of supers YTD, ahead of natl number. One of the main differences in Great Lakes region is that more of total growth is coming from mid-sized craft vendors, from 8th to 29th largest co. Nationally, more of the growth is coming from long tail (50th to 803rd), Dan noted. Either way, both nationally and in Great Lakes region, top craft cos have lost double-digit share since 2010, as mid-sized and smaller cos continue to climb the share ladder.

Lookin' at list of top cos, nearly all of the top locals are puttin' up strong numbers. Bell's (+16%) jumps up to #2 craft supplier with 9.3 share of $$ in the region vs #10 nation-wide at 2 share. Great Lakes Brewing (+11%), New Glarus (+23%) and Founders (+61%) each up healthy in their home region, at 4th, 6th, and 7th largest craft suppliers, tho Great Lakes lost 0.6 share to 6 and New Glarus share flat at 5. Founders and Lagunitas (+65%) were largest share gainers among existing cos; each gained 1 share of craft $$ in Great Lakes supers to 4.7 and 3.4 respectively. And Small Town Not Your Father's Root Beer gained incremental $2.3 mil, and picked up 2.6 share of craft here. A few other locals made bottom half of top-15 list too: Short's (+20%), New Holland (+36%), Revolution (+88.5%).

Boston Beer's Beer Down 7%, NBB Slow After Big OH Intro; AB Craft Down 2% Meanwhile, Boston Beer craft beer portfolio (excluding Alchemy & Science) is down 7%, shed 3.7 share in Great Lakes region vs down 3.5%, -2.5 share nationally. Yet Boston's beer portfolio still remains ahead of all others at 11 share. New Belgium is 3d largest co in the Great Lakes region, tho it's only up 2.1% following last year's huge intro in Ohio. Sierra is only one of big-3 craft cos that's growing strong in the region; it's 5th largest co, up 28%. Then too, AB's craft portfolio is down 1.6% YTD in Great Lakes region compared to +15% nationally (including Elysian), suggesting Goose Island is relatively stagnant at home in IRI and in surrounding states.  

That was quick. Not Your Father's Root Beer just rolled out to a number of states in last couple of mos. It's still far from national, but it's selling fast, according to several sources, and creating buzz far beyond its Chicago origins. Now here comes Boston Beer, epitomizing a fast-follower strategy. Its Coney Island beer unit will launch Coney Island Hard Root Beer later this month and the brand has already received numerous chain authorizations for summer and/or fall in many states. So Boston is jumping into this still tiny niche with both feet. (This report appeared in INSIGHTS Express earlier today.)

Recall, Boston Beer purchased Coney Island Brewing in Dec 2013 as part of Alchemy & Science unit. Coney Island's brewery in Brooklyn will open later this month. Now Coney Island will be used as vehicle to launch its own Hard Root Beer. And as Boston notes in deck introducing new brand, Coney Island Brewing is a "brand with national appeal" because "86% of people have heard of or are aware of Coney Island… and have positive associations with the locale." Its "strong nostalgic recall" and "brand associations" (i.e. "hot dogs, boardwalks, roller coasters, rides and Fun") have "obvious consumer connection to Root Beer," sez Boston.

This "emerging segment" is "gaining sizable share of craft in the US," sez Boston deck. In Chi IRI multi-outlet data alcoholic root beer is 4.3% of craft. In Toledo, it's 3%. In Cleveland 2.8%. That's virtually all one player. If alcoholic root beer got to 3 share of craft nationally, that could be 9 mil cases in 2016, notes Boston. That's why it's putting so much weight behind this; Boston and Alchemy & Science will spend $5 per case and launch the full force of its chain selling organization against this opportunity. Then too, "many of our wholesaler partners do not carry Not Your Father's Root Beer" and drinkers "prefer" taste of Coney Island, sez Boston. Two other interesting points: "Drinkers believe Root Beer brands should be merchandised and priced with craft beer." And 70% of regular Hard Root Beer drinkers drink craft beer. Pabst too believes alcoholic root beer is a huge opportunity. So let the race begin. And who knows who else will come in!  

During press conference today in Oreg, with cans of Hopworks Urban Brewery IPA and cider behind him, Sen Ron Wyden announced intro of federal excise tax reform for all alc bev types. The Craft Beverage Modernization and Tax Reform Act (S 1562) hit Senate yesterday and has wide-ranging effects on just about every alc bev-producing biz in US. Note that bill name starts with "craft."

As we wrote last issue, bill provides some tax relief to all brewers and importers, with the deepest cuts given to the smallest players. Importantly, bill maintains current structure of reduced rate provided to domestic brewers under 2 mil bbls, which is not extended to importers and would not be under this bill (our report yesterday suggested "all brewers" of this size would pay lower rate). Recall, new bill would cut tax rate from $7 to $3.50 on first 60K bbls from brewers under 2 mil bbls. Importers shipping less than that into US would pay $16 rate on all bbls. That's same as rate brewers over 2 mil bbls would pay on first 6 mil bbls. So that provision doesn't fully assuage concerns small foreign brewers and their importers raise about inequity of this structure.

Other Provisions Ease Small Brewer Paperwork, Legalize Home Distilling, Expand TTB Funding Focused on small alc bev producers across categories, bill offers multiple other tax credits and reduced rates. It incorporates, seemingly carte blanche, provisions in CIDER Act, widening tent for hard ciders taxed at beer rates rather than higher wine rates. It expands credits on the first wine gallons produced for wineries of all sizes. And it slashes tax rates paid by distillers, again of all sizes, from $13.50 per proof gallon to $2.70 per proof gallon on the first 100K gallons "produced or imported annually." And lots of other provisions that make life easier for small alc bev producers also appear in bill. Those clearing path toward brewery collaborations and simplifying bond requirements and recordkeeping for small brewers likely to be welcomed by many. Intriguingly, bill would also decriminalize "home hobby distilling" and "expand TTB program integrity funding and increase TTB regulatory appropriations," per info on bill from Wyden's office.

Brewer Orgs Tout Separate Work, Unity to Members; NBWA, OR Winegrowers, American Craft Spirits Assn on Board Both US brewer orgs sent messages supporting Wyden's efforts and bill to members, reminding of the work they've done on separate tax bills. The new bill took the senator and his staff 5 months to nail down, according to Brewers Assn's note to members from CEO Bob Pease. The bill "contains all the elements of the Small BREW Act," Bob reminds, which the org still does "support." That's counter to our suggestion that Small BREW would be "going away," after Wyden's bill intro'd. Meanwhile, Beer Institute shared that this bill "reinforces the differences between beer and hard liquor by continuing to tax them differently," in note titled "Beer Industry Unites Behind Wyden Tax Bill," from prexy Jim McGreevy. Preventing tax equalization remains key focus for BI.

Tho bill does provide tax relief to distillers of all sizes, will be interesting to see if DISCUS, which often seeks tax equalization measures, will fully come on board too. But as we calculate, AB gets $12 mil benefit per year and big distillers get $1.1 mil at most; that may be an uphill climb. DISCUS sr veep govt affairs Mark Gorman told CBN: "Senator Wyden's bill is a starting point for further conversation about making alcohol taxation more fair and regulation more efficient. That's what he intended it to be, and we think it's a positive thing that Senate Finance Committee leaders have opened the door to this discussion." But support from American Craft Spirits Assn prexy Thomas Mooney of House Spirits Distillery in Portland, OR, and Oregon Winegrowers Assn board director Steve Thomson of King Estate Winery also included in release from Wyden. NBWA also finds the bill "a step in the right direction." Lots more analysis to come and lotsa time to do it. As Larry Bell said at Brewbound Session yesterday, he, like most observers, does not expect this bill or any tax reform to move until 2017.  

Craft beer continues to spread globally, and now it's starting to emerge in several Eastern European cities, according to San Diego Reader article dubbed "craft beer's eastern front." The author, Dominic Carrillo, documented what he feels is "a San Diego-inspired, homegrown, craft beer revolution on the Eastern Front," after visiting several bars in cities such as Warsaw, Poland, Belgrade, Serbia and Sofia, Bulgaria. At one bar called Jedna Craft Beer in Warsaw he witnessed a "familiar" scene with "IPA-scented wooden bar(s)," a beer list with "expanded" variety and a bearded, "hipster" bartender with thick-rimmed glasses that wouldn't give him any attention until he ordered a stronger, hoppier beer. A Bulgarian bar called Kanaal Bar in Sofia started importing "artisanal Belgian Beer" 3 yrs ago and the bar was still "vacant" last time he visited about 15 mos ago. Yet this time around he attended a "craft-beer tapping party" for Serbian brewery, Kabinet craft beer, which was "packed and warm with smiling people excited to try out new hoppy India pale ales." Indeed, until recently "there was no quality local beer in Bulgaria," said Dutch "wine-turned-beer entrepreneur," named Karel. In 2013 Karel purchased what was then the 1st local craft beer in Sofia, called White Stork, and he also distributes Kabinet beers in the area.

Every bar and brewery owner or employee he spoke to referenced several breweries from San Diego and other California breweries as major sources of inspiration, including: AleSmith, Stone, Ballast Point, Sierra Nevada, Lagunitas, Russian River, Anchor, The Bruery, Bear Republic, and some he's "never even heard of." Once each of them heard that the author was from San Diego they instantly showered him with attention and questions about his experiences with American, and specifically California craft beer. "For many international brewers and beer aficionados, San Diego is their Mecca," he opined. Recall, craft beer "swept through Western Europe a few years ago, mostly in England and Denmark," he acknowledges. But microbreweries "popping up in former communist capitals" like Warsaw, Belgrade, and Sofia "is a new and fascinating development." These cities still "all about 15 years behind San Diego," but "that's not the point." Rather, the point: right now "it feels cutting-edge here."  

Evolution of craft revolution continues in quirky ways. Brooklyn Brewery, already one of the most internationally-oriented US craft brewers with over 1/3 of its total volume sold abroad, seeks to bulk up its exports/global biz even more. That's while it has no plans to expand beyond the 25 states it sells in US now, having added just one (Nev) in 2014. Brooklyn announced a partnership with Coopers Brewery in Australia - one of its "sleeper markets" COO Eric Ottaway told distribs last fall - to expand distribution (Brooklyn's been exporting there since 2011) and brew locally. Coopers will brew Brooklyn Lager down under; Brooklyn will continue to export other brands from here.

Tho 10,600+ miles separate the Brooklyn and Coopers breweries, "we have come to feel at home in Australia," Brooklyn's blog post on the partnership claims. Eric and other Brooklyn execs have made the trek numerous times and plenty of Aussies have shown up in Brooklyn's taproom fully familiar with its brews and brewmaster Garrett Oliver, per the blog. Back when Brooklyn was in distribution biz (pre-2003), it carried Coopers brands in metro NYC, another connection. Brooklyn has also collaborated with Australian brewer Mountain Goat on a beer called Ridgy-Didge, Aussie slang for "authentic." "Authentic" no doubt travels far and wide in craftland. But Brooklyn is truly stretching the notion of "local" this time. Recall, Brooklyn has already teamed with mega global brewer Carlsberg to build a brewery in Stockholm and is preparing to open a second Euro brewery in Norway later this summer. Eric also on the board of Pabst, being a long-time buddy of ceo/majority owner Eugene Kashper. So, between its big export business, foreign breweries and relationships with big brewers, Brooklyn truly has unique model. And it's a model that's not really far different, except in scope and scale, natch, from the global mega brewers themselves, as it builds different kinds of partnerships in different parts of the world to expand its brands.

Coopers is biggest Australian-owned brewer (SABMiller/Foster's and Kirin/Lion are the big players there), with about 5 share of the biz, according to Australian Financial Review. It shipped about 660K bbls there in 2014, +7.4% and has posted consistent growth for over 2 decades. In Australia, as in many developed mkts, craft has been growing in overall mkt that's been contracting. Indeed, per capita beer consumption in Australia "has halved since a peak in the mid-1970s," according to Business Insider, and is lower than at "any time since the end of World War II." In addition to craft, US beers have prospered there recently. Indeed, exports to Australia expanded more than 3-fold from 2011 to 2014, hitting 225K bbls last yr. Australia is 5th largest export mkt for US beer and we have huge beer surplus with Australia. Only 3500 bbls of Australian beer shipped here last yr.