Brooklyn Brewery was recently “awarded two state grants totaling $6 million,” to help fund $70 mil project to build a 2^nd brewery in Staten Island, reported SILive.com.  However remains to be seen if Brooklyn will be able to build at the Staten Island site it’s eyein’.  While “The West Shore is our leading choice…there are layers of environmental review that will be required before individual sites can be built on,” ceo Eric Ottaway told paper.  So Brooklyn working with all involved parties “to determine the likely timelines for such approvals.  Recall, Brooklyn hoping to have brewery built by 2017, tho “wouldn’t be surprised” if it slips to 2018 (see Sep 23 issue of CBN).  Co’s also considering “alternative sites” in NJ and Lower Hudson Valley tho “we’d like to be in New York City,” said Steve Hindy at our BMI conference last mo (see Nov 12 issue of CBN).     

As Sun King Brewing approaches 30,000 bbl production cap for small brewers in Indiana, co decided to cut distribution in areas outside Indy metro area to ensure it stays under cap, reported Indiana Business Journal, among various other state papers covering story.  (Editor’s Note: IndyStar sez they’ll continue distributing to Bloomington area too).  Under current state law, brewers that ship 30K bbls or more in IN can no longer operate a tasting room, or self-distribute.  Sun King on pace to produce 28,500 bbls in 2014, according to paper, and would likely blow past 30K bbl mark in 2015.  So Indiana brewers guild will lobby for state to double cap to 60,000 bbls in upcoming legislative session, to “keep it in line with the federal definition of a small brewer,” Sun King co-owner and guild president, Clay Robinson told IndyStar.  Interesting that Sun King chose to terminate distribs in anticipation of passing 30K bbls next yr, rather than waiting until outcome of legislative session, or ‘til later in 2015.  Outside of Indy area, Sun King uses three distribs: Monarch/World Class Beverage, Indiana Beverage, and North Vernon Beverages, IBJ noted.

Then too, this decision “will not affect” decision to build $8.8 mil 2^nd brewery in Fishers district, since state law considers that “a separate facility with its own” 30K bbl limit.  However new facility won’t open in late 2015, and “latest plan” only calls for 5K bbl annual production, which wouldn’t take much burden off current facility.  Also gotta note, any beer shipped out of state doesn’t affect brewers’ ability to have tasting room and/or self-distribute, according to paper, so Sun King could potentially look to other states to grow biz.  Tho Indiana “is where we want to sell our beer,” Clay told IndyStar.      

Bill to allow 64-oz growler in Fla presented by state senator and house  rep yesterday at press conference hosted by Dunedin Brewery.  Bill from Sen Jack Latvala and Rep Chris Sprowls specifialy allows 32-, 64- and 128-oz “individual container” if it: 1) is filled and sold by specific vendor/brewer licensees; 2) has label with info that IDs manufacturer and brand; 3) has “unbroken seal or be incapable of being immediately consumed.”  Mitch Rubin, exec director of Fla Beer Whoelsalers Assn called it a “Good bill.  We suggest ABV by volume in the label requirement.”  Recall, press release from FBWA last week also suggested bill that would create new section of law separate from manufacturer sealed containers, limiting growlers to “glass, ceramic or metal” and “requiring sanitation and room for expansion to prevent explosions for product integrity and public health.”  Some of those suggestions – specifically the requirement that growlers be sanitized and limiting type of container – had prompted pushback from lobbyist for craft brewers, Josh Aubuchon in comments to press.  And there may be separate bill backed by FBWA to close retail loopholes that created such a stir last yr.  But for now, promised parallel tracks in operation and (mostly) clean 64-oz growler bill in sight.        

State Claims Current Package Ban Helps Deter OverconsumptionWhile Fla legislators ponder a bill to allow 64-oz growlers in Fla, the state responded to the lawsuit filed back in Oct to challenge the ban of 64-oz packages.  The state atty general’s office asked the federal court to dismiss the suit for two key reasons.  First, the plaintiff-retailer “has no constitutional right to sell 64-oz growlers,” or any alc bevs for that matter, since that’s a privilege granted by the state, not a “right.”  Crafted Keg cannot sue for a due process or equal protection violation of a right it does not have.  Then too, “the discouraging of excessive drinking is a rational basis for the statute concerned,” the AG argues, so the ban should stand.  The AG referenced a 1999 Senate report that it relied upon the last time it modified packaging rules.  That report stated: “An argument has been made that the current container sizes encourage moderation by prohibiting container sizes greater than 32 ounces…. Container sizes larger than 32 ounces may promote excessive drinking or send the wrong message to young people.  To avoid these negative effects, the safe course would be not to allow such large sizes.” 

Other language expressing legislative intent to “encourage” sellers to “implement responsible policies” and prevent “over-service” and “over-consumption” also supports the ban, the AG argues.  He also notes that if patrons can buy beer in containers of over 32 ounces, some “may assume that it is reasonable for an individual to drink such bottles or jugs.  Further, they could honestly say, if asked by a spouse, friend or police officer about their drinking, that they had only had ‘one beer.’”  (Gotta say, we hadn’t thought of that.)  It’s also “inevitable,” according to the AG that some folks who might order a 64-oz growler “may decide, after consuming 32 ounces that they have had enough.”  So the ban “meets its rationale of helping to deter excessive drinking.”  Will AG restate this rationale or defend “the safe course” as legislature debates new bill? 

Combo of estimated 11-12% revenue growth, 20% EPS growth through 2017, and current return on investment capital at 24%, the “highest in our beverage coverage ex-Monster,” had CSLA’s Caroline Levy upgrade Boston Beer (SAM) from outperform to buy in latest report.   Indeed, continued success of Angry Orchard and “core craft beer business,” has Boston Beer growing nearly 3X faster rate than any other US beverage co they track.  Caroline points to SAM relative size in industry, still “under $4 bn by market cap and just 1.5% of the US beer market by volume,” and sees “runway for double-digit sales growth (at least through 2017),” as more consumers shift to craft and cider segments.  Also points to “investing heavily to expand capacity,” as well as “sales, distributor management, and R&D” this yr that in turn “should enable a $100m improvement in [free cash flow] generation” next yr due to much lower capex.  So net-net, CSLA upping all estimates for Boston, including raised target price from $280 to $345.  Recall last week CBN reported SAM stock reached new 52 wk high at $282/share; since then 52 wk high reached even higher $289.38, and at press time SAM trading at $287/ share with $3.72 bil mkt cap.  

Craft gained almost 3.5 share of $$ in Ohio foodstores to 23.4 for 13 wks thru Nov 30, according to IRI data. It’s easily the 2d largest beer segment in OH supers behind domestic premiums at 32.7 share for 13 wks. Craft just under 19 share of $$ yr-to-date, but gained even more share, 3.8 points.  Craft growth great guns here; +31.6% in OH supers YTD, pushing overall beer $$ sales gain to +5%. In fact, craft virtually all of of beer’s $$ growth for 11 mos of 2014.  Craft over 5 share pts larger than imports in OH. Unlike other US markets, Mexican imports remain small part of OH beer sales.  Craft is growth driver there.

Major Players a Major Part of OH Craft Sales, Especially Seasonals; New Belgium 8.5 Share of Craft in Year One Top 5 craft players over half of craft $$ in OH.  Boston Beer nearly a 5 share player of total beer $$ in state (4.7), but about 1/4 of its biz in Angry Orchard.  Local fave, Great Lakes, at 3.7 share of beer $$, but volume up just 1.5% YTD.  New Belgium is #3 craft brewer in intro yr, at 1.6 share of $$ YTD.  Sierra is also over 1 share of OH mkt, growing double digits. And Bell’s is #5, at 0.6 share of $$.  Deschutes got about 0.3 share of $$ in intro yr. 

Seasonals play especially well in OH foodstores. Top 2 craft brands there yr-to-date thru Nov 30 both seasonal offerings: Great Lakes, +15% YTD, and Sam Adams, +10%. Five other seasonals among 20 largest craft brands for 11 mos in OH supers, including Southern Tier at #10, +43%. Sam Adams “Seasonal Overlay,” second rotating seasonal offering, plus Sierra, New Belgium and Bell’s seasonals all make the cut too.

New Belgium grabbed 8.5 share of craft segment $$ in its first yr in OH, led by Fat Tire at about half of NBB sales, #4 craft brand YTD and ahead of other established flagships: Boston Lager, Sierra Pale and Great Lakes Dortmunder Gold.  But all those are holding on, growing in low-singles YTD. Other big intro of 2014, Rebel IPA, got near 1.4 share of craft thru end of Nov. It didn’t quite overtake larger IPAs GLBC Commodore Perry (+5%) and Sierra Torpedo (+4%).   But it’s larger than fast-growing Bell’s Two Hearted (+32%). Another pair of IPAs just outside of top 20: Columbus Brewing’s IPA, +47%, and NBB Ranger at just over 1 share of craft $$ in OH.

Not-So-Pretty Brand Trends for 13 Wks: 9 of Top 20 Brands Down, Some Steeply  As we’ve seen elsewhere, plenty of brands slowed over last coupla months. That shows up in spades in 13 wks thru Nov 30 in OH grocery data. But look how dominant Great Lakes Christmas Ale is this time of year. It’s far and away #1 craft brand for 13 wks (over 12 share of craft $$) and it’s #5 total beer brand during this period, a half share behind Bud. It’s #3 craft brand YTD, even tho it’s only available in back half of the yr. But it’s not doing as well as it has in past: GLBC Xmas -7.7% for 13 wks and -10% YTD in OH supers. Similar story for other local brand, Thirsty Dog 12 Dogs of Christmas: it’s #7 craft brand for 13 wks at near 2 share of the segment, #25 craft brand YTD, but -5% for 13 wks, tho a little better YTD, -0.5%.

Meanwhile, YTD low-single digit gains mainly turn to declines for 13 wks. Half of top 10 brands down during more recent period, including top 2 GLBC Christmas and Sam Seasonal, -4.3%. Top brands of all kinds struggled to grow in most recent 3 mos in OH. That includes flagships (Boston Lager -6%, GLBC Dort Gold +0.4%, Sierra Pale -4%), variety packs (Sam Adams -14%, GLBC -3%) and others (Sierra Torpedo -1%, Sam Seasonal Overlay -16% and GLBC Burning River Pale -11%). Then too, Magic Hat #9 down 12% for 13 wks, flat YTD, Dogfish Head 60 Min -8% for 13 wks, +6.5% YTD, and Oskar Blues Dale’s Pale -5% for 13 wks, +6.6% YTD. Note that for Dogfish, 90 Minute is both bigger and healthier (by $$) than 60 Min, +33% for 13 wks, improving YTD trend.

Other Regional Differences: Alltech, Fat Head’s, Madtree and Rhinegeist  A bunch of regional and local brands also show up in OH data, most notably Alltech’s Kentucky brands. All in, Alltech $$ +24% yr-to-date thru Nov 30 in OH supers, with lead brand Kentucky Bourbon Barrel Ale +10% and #11 craft brand in state. Its seasonal Kentucky Pumpkin Barrel Ale still small but nearly 6X its size last yr. Meanwhile, second-largest in-state craft Fat Heads +33.5% YTD, with brand trends all over map. Christian Moerlein -5% YTD in OH supers, Columbus Brewing +41% and Thirsty Dog +3%.

But pair of hot young breweries coming on strong late in year. Madtree total biz near 0.3 share of total beer $$ for 13 wks, bigger than Deschutes. And Rhinegeist Truth IPA, new to scans this yr, got 0.4 share of craft $$ YTD and 0.65 share for 13 wks. It’s Cougar Blonde and Franz Oktoberfest combined got another 0.8 share of craft for 13 wks. Two more late-in-year changes in OH scans: SweetWater 420 came in at 0.3 share for craft during most recent 13-wk period and Boston Beer/Alchemy & Science’s Jack O’Traveler pumpkin shandy got over 0.7 share, #23 craft brand for 13 wks.

After months of informed speculation, turns out Founders will indeed sell a minority of its biz to Spanish brewer Mahou San Miguel, as anticipated.  Founders founders Mike Stevens and Dave Engbers will stay in control of their own destiny, but they do have big new partner with a 30% stake, Mike told CBN. Mahou San Miguel is the right partner for San Miguel because they understood “our desire for legacy” to be “multigenerational,” according to Mike, especially since it’s the same family for the last 125 years. This deal is an opportunity to “etch in stone” Founders’ “future,” said Mike.   Also this deal is about “international growth opportunities” as San Miguel sees craft will have a “place globally” and wants to be a leader in that. Mahou San Miguel has 7 breweries, but there are currently no plans to brew Founders beer abroad.   Yet this marks another significant chapter in the evolution of craft brewing.  Founders clearly one of the hottest of all craft brewers in recent yrs, running up from 12,000 bbls in 2008 to close to 200,000 bbls expected in 2014 (about 190,000 bbls, sez Mike). 

Stake in Founders actively shopped in recent months thru major Midwest investment bank R.W. Baird.  Utilizing a big established investment bank represents a departure from most previous craft transactions (NY investment banking firm Lazard is handling another transaction in the works).  What’s more, the Founders deal book was apparently widely dispersed.  Indeed, MillerCoors among Founders’ many suitors.  MillerCoors reportedly offered $300 mil for the whole kit and caboodle. That’s a pretty penny.  But Founders turned them down as its founders preferred to stay in.  Instead, they did a deal for 30%, perhaps for higher implied valuation. 

Deal not done to offset the cost of expansion, according to Mike.  ”The partnership had nothing to do with expansion,” said Mike.  Founders will spend $40 mil on its current expansion, done thru debt-financing. The debt will continue to be held by Founders.  That’s on top of $26 mil for prior expansion.  This is for a biz that didn’t make a profit from its founding in 1997 until 2008.  So this all has to be pretty heady stuff for guys who were broke not too long ago.  

Eight Craft Transactions in 2014  Meanwhile, this is the 8^th craft transaction that Craft Brew News has tracked so far in 2014, the most since we started the newsletter in 2010.  Only 3 of them involved purchasing an entire company, 2 of those by AB (Ten Barrel and Blue Point) and another by Green Flash (small but highly regarded Alpine).  Others were investments by private equity cos/family offices (SweetWater, Southern Tier, Uinta), plus a 48% stake for an ESOP (Harpoon) and now Founders.   Several different ways to go.  Mahou San Miguel is another international brewer that looks to capitalize on craft’s US growth, following in the footsteps of Duvel in this regard.  Founders is also the 6^th BA top 50 brewer to do a transaction in 2014.  And there are 3 more deal books out there for top 30 craft brewers, CBN understands. Something is changing here in a major way. 

Last issue of CBN we noted that Ballast Point announced it’ll enter Wisc with Wirtz Beverage in Jan 2015.  However, we left out that Beer Capitol Dist will get beer brands in its territory (Milwaukee area) while Wirtz has beer brands in rest of state, and spirits brands statewide.    

Boulevard Brewing will enter OH with Cavalier Dist starting Jan 2015, marking its 5^th new state since Sep.  Indeed, Boulevard has been actively expanding footprint these past few mos, as it entered Northern NJ with Peerless and Philly area with Muller in Sep, and Fla with Brown Dist and SC with mix of MC and AB distribs in Oct.  Gotta note that just over a year after Boulevard acquired by Duvel Moortgat USA, total DMUSA trends have been sluggish in scans over last handful of mos as volume down 4%, $$ up 1% in latest 13 wks thru Nov 30. 

The punchline comes quickly in letter Arkansas Attorney General sent to state Alc Bev Control Division director this week: yes, manufacturers and retailers of alc bevs can indeed “obtain an interest in a microbrewery-restaurant,” or brewpub. But after quick initial response, the AG takes a couple winding code-citing pages to explain. The kicker: “a microbrewery-restaurant, by its nature” (and indeed its name, we’d note) “is a co-mingling of the first and third tiers,” the AG writes. Importantly, the law voted on by Ark legislators concerning brewpubs “expressly trumps any contrary laws set forth elsewhere in the Code.” So even tho separate Ark law bars interest between tiers, licensed manufacturers as well as licensed retailers can operate brewpubs in Ark. But importantly, the AG does not believe that this specific ruling somehow collapses “three-tier separations.” Indeed, “these separations continue to apply outside the microbrewery-restaurant context,” as “a manufacturer would still be precluded, for instance, from operating a retail liquor store.” The ability for first- and third-tier license-holders to operate bizzes in other tiers “would thus remain restricted to the narrow market of” brewpubs. For reference, brewpubs in Ark may produce up to 5000 bbls and can sell beer from other manufacturers purchased thru wholesalers. While we know of no official plans yet, this ruling seems to clarify that TGI Friday’s or AB, say, could operate or have a stake in a brewpub in Ark.

First responders to Texas lawsuit against state alc bev regulators we reported last issue point out a number of intriguing details likely to not only weigh on this court’s decision but also set this case apart from others we’ve seen. A few of those details highlighted by veteran alc bev atty Drew Jaglom. First, he said, by making a “state constitutional claim, the plaintiffs knock any 21st Amendment issues out of the box.”  The 21st Amendment might trump the state law at hand, but a state statute can’t violate its own state’s constitution. “So this is purely an issue of state law,” Drew observes. Second, case asserts that there’s a “history of brewers selling distribution rights in Texas,” Drew notes, but “none of the plaintiffs assert that they’ve ever sold their rights.  Rather they say they want to sell those rights, but now can’t.” If in fact there’s a history of selling rights, “the plaintiffs have a good argument,” Drew believes, as “a plaintiff that had previously sold distribution rights, but now can’t, would make for a stronger case.” Though oddly not stated in suit, Live Oak, one of plaintiffs, “sold distribution rights prior to 2013 to get beer into Houston,” according to an Austin American-Statesman report today. If true, the Tex Attorney General may have a tougher row to hoe fighting the suit.

The assumption that none of the plaintiffs had ever received payment for territorial distribution rights suggested to Drew that Institute for Justice (IJ), the firm bringing the suit on behalf of the brewers, “couldn’t find” a plaintiff that had. And if in fact no brewers had sold their rights up until 2013, then the state has an argument supporting the ban since the “industry course of practice” has been that “brewers haven’t previously sold their distribution rights so they haven’t treated it as a property right and in fact nothing was taken away by the new law.” Generally, Drew agrees with some other industry attys and certainly small brewers who note that “there is no reason why only the second person (distributors) should have the right to sell” distribution rights.

But this flies in the face of traditional beer policy, general counsel for the Wholesale Beer Distributors of Texas Keith Strama implied in comments to the American-Statesman. “This issue goes to the core principles of how Texas regulates beer,” he said to the paper. He and many other distrib advocates consider such payments as investments in suppliers and “allowing a distributor to invest in a brewery would fundamentally alter the system and limit the independence of the distribution tier,” Keith said.

Tidbits picked up by that paper and others point to some of the other unique aspects of this suit. Plaintiffs claim “politically-connected and influential beer distributors in Texas improperly advocated to change the legislation” in 2013, the American-Statesman wrote, citing comments from IJ attorney Arif Panju and Live Oak co-founder Chip McElroy “at a news conference” Wednesday. But it’s not distributors or legislators on the hook for those alleged “improper” actions here, it’s the Texas Alc Bev Commission. Legal news site Inside Counsel notes suit’s assertion that sales of these rights represent a viable “revenue stream” for small brewers and having to do without it “could potentially make profitability more challenging for them.” The source also pointed to IJ’s comparison of this Tex law to “the government forcing authors to give the rights to their books to publishers for free.” But again, it’s precedent that’s key: authors have long been paid by publishers, while the history of payments to brewers for distrib rights is comparatively sparse. In all, it seems that litigators from IJ focused on civil liberties and free-market values may be bringing some arguments that buck beer litigation tradition. So will be interesting to see how the TABC and Tex AG respond.