Boston Beer keeps blowing thru previous records for its share price.  Yesterday, Boston Beer jumped at one point to $282 a share, before closing day at $280 per share, up about 3% in 1 day.  That led to stock mkt capitalization of $3.6 bil.  That’s a WOW, even while SAM slipped a bit to $278.22 in tuff mkt today!

In Nov, US brewery count "passed the mark of 3,200 brewers in the country," as 1.5 breweries opening per day and over 2,000 in planning, according to Brewers Assn latest release.  Now 13 states have over 100 breweries each, up from 7 in 2013, as Tex, NC, Wisc, Ill, Oh and Fla joined the list (Calif, Wash, Oreg, Colo, NY, Mich, and Pennsy are the others).  

Three small Texas brewers, backed by libertarian Institute for Justice, brought suit against Texas Alc Bev Commission today asking court to rule that 2013 law barring sale of distribution rights by brewers to wholesalers is unconstitutional. Key to this suit, IJ and plaintiffs Live Oak, Revolver and Peticolas Brewing Cos contend territorial distribution rights represent “valuable property” and therefore protected by “Takings Clause” of state law. The group also argues “deprivation of liberty,” claiming the law represents “unreasonable governmental interference” in plaintiffs’ bizzes, particularly as the TABC has “no substantial, legitimate, or rational reason for prohibiting the sale of territorial rights by beer producers,” according to suit filed today in Travis County District Court in Austin.

Suit stems from tussle during 2013 legislative session, when accord between small brewers and distrib orgs in state seemed to prevail. Recall that after negotiation between tiers, 4 bills expanding rights of small brewers in Tex joined by 5th bill late in the game, brought by the Wholesale Beer Distributors of Texas. That bill, SB 639, bars brewers from taking payment by distributors for territorial distribution rights, while explicitly allowing such payments between distributors. Chair of committee, then Sen Carona, tied all 5 bills together, mandating they would “all live or die together.” The Texas Craft Brewers Guild (TCBG) esisted supporting such a compromise, but took the deal to attain rights in other bills, deemed more important and facing possibility of waiting til 2015 for any action (see CBN vol 4 #14). Some small brewers in Tex showed they were less than pleased with the deal (including tough comments from Jester King’s Ron Extract on stage at CBC earlier this yr) and Tex alc bev lawyers Jack Martin & Associates (now Martin Frost & Hill) questioned if small brewers gave up “several pounds of flesh” to get the rights they got later in the year (see vol 4 #34).

So “to vindicate Plaintiffs’ property rights and economic liberty rights,” suit seeks permanent injunction against TABC enforcing ban on sale of distrib rights by brewers. “Territorial rights have value,” the suit notes, because a single distrib “has the exclusive right to distribute a particular beer in a particular territory.” Further, brewers could sell those rights before 2013 and, particularly irksome to plaintiffs, wholesalers can still sell them to other wholesalers. Indeed, IJ alleges the law is “a blatant transfer of wealth from brewers to distributors who got the law changed using political connections” in extensive backgrounder on its website. That law “forces [brewers] to surrender” distrib rights, or “property that the distributors never earned and do not deserve.”

Each of the three breweries that brought the suit rely largely on self-distribution. Live Oak, based in Austin, self-distributes thru most of its territory, using distribs only in Houston. Both Revolver and Peticolas, based in Granbury (outside Ft Worth) and Dallas respectively, only self-distribute, according to suit. All 3 would “brew more beer, enter new markets, enter into agreements with distributors for territorial rights, hire more employees and buy more equipment” if not for the law they fight in suit. Importantly, all 3 are growing but are “unwilling” to hand over distrib rights “for free,” so law makes it “more difficult and more expensive for craft brewers to expand their bizzes,” the suit claims. So “the Texas craft beer Renaissance faces an uncertain future,” the backgrounder notes, as breweries like these 3 “will almost certainly continue to thrive locally,” but expansion elsewhere “is in jeopardy.” If the law is not struck down, “the end result is likely to be fewer Texas craft breweries” and therefore “less choice for consumers across the state.”   The TCBG’s “objections to the law are the same they were in 2013,” board member Scott Metzger said in note to CBN today, adding that “while we aren’t formally involved in this particular action, we support Live Oak, Peticolas and Revolver in their efforts to overturn this bad law.”

Small brewers against large brewers, importers and wholesalers. Retailers and brewers against distributors. Some members of each tier against other members of the same tier. State alc bev regulators, legislators and city officials defending, offending or somewhere between. In recent spate of spats just becoming public, the most common battle lines between industry members may not be nearly as clearly drawn as before. The end of 2014 shows a complex array of alliances that vary about as much as state laws governing beer biz relationships. It’s clear that small brewers have earned a seat at the table for many state and federal policy debates. But that seat can be on different sides of the table depending on the issue, and increasingly, one seat doesn’t seem like quite enough.

As noted above, on federal tax issue, small brewers as represented by Brewers Assn now seemingly in opposition to other big industry players like Beer Institute and NBWA. Similar lines drawn in some of least-developed craft states, like Georgia or Alabama, where distributors often pitted against small brewers and larger brewers rarely, if ever, weigh in publicly. Recall, Georgia brewers guild setting itself up for bigger lobbying effort in 2015 to attain some retail rights for its members. Consumers in Oklahoma have come to back small brewers there, as in Ala and elsewhere. But in Florida, winds seem to be shifting more towards agreement, at least as far as growlers are concerned (see below).

Yet in Texas, 3 small brewers brought suit against Tex Alc Bev Commission this morning. That suit specifically against state regulators. But it also renews familiar battle between small brewers and wholesalers in alleging that 5th in group of 5 bills passed as package in 2013 is unconstitutional. Recall, Tex brewers guild agreed to that package, but reluctantly so after bill in question (SB 639, barring payments to small brewers for distribution rights) intro’d late.  Now a trio of brewers not pleased with the result teamed with Institute of Justice, a libertarian-leaning national law firm, in suit with support, but not guidance, of guild (see below).

In Virginia, retailers spoke out against the city of Richmond’s usage of tax dollars to support Stone Brewing’s coming large-scale restaurant in town, at City Council meeting Monday. While they support Stone’s brewery there, some retailers as well as a founder of the city’s largest small brewery, Hardywood Park, questioned the financial support offered to Stone, according to WTVR. Stone “should have to do it on the same merits everybody else in the city has,” one restaurant-owner said, just as Hardywood Park co-founder noted that “the disparity in the city’s financial support for Stone versus its homegrown breweries and restaurants is vast.” The Council approved $23 mil in support of the brewery, but postponed a vote on $8 mil for the restaurant.

A group of some retailers and some brewers find themselves aligned in Montana too. Tangled story there follows contentious 2013 legislative session, when Montana Tavern Assn brought bill seeking to limit brewery tap rooms. Trade orgs had been meeting to bring bill that allows small brewers to grow without stepping on anybody’s toes. But this week state distribs left that “coalition” citing disagreements between members of orgs and offerings its own solution (more to follow). Part of the issue there is the volume cap on small brewer exceptions in state law, as has become recurring issue in many states. In Arizona, similar issue has resulted in different alliance. There the brewers guild and the Beer and Wine Distributors of Arizona agree but face opposition from the Arizona Wine and Spirits Wholesale Assn. Indeed, wholesalers and small brewers have also come together in California on scanback issue as well as in Kentucky where they aligned to fight AB’s application for another distrib license.

Small brewers also seem natural allies of Idaho Beer & Wine Distrib Assn in petition it filed for declaratory judgment that AB will not be able to operate recently-purchased 10 Barrel brewpub in Boise. The IBWDA reads state statute to imply that 30K-bbl cap, under which brewers may stack licenses, applies even if brewing done outside of Ida. The group seeks judgment to that effect, calling a reading that insists exemptions only apply to suppliers brewing 30K bbls in Ida “truly catastrophic to the three-tier system.”  All in, 2015 likely to be very active as issues, alliances continue to shift.  

Gloves comin’ off early in continuing inter-industry battle over fed beer tax policy in DC.  Before 114^th Congress has even begun, Beer Inst and NBWA launched pre-emptive strikes vs any version of Small BREW Act that does not include relief for all brewers and importers.  Current version of Small BREW has 181 co-sponsors in House, 47 in Senate, but Brewers Assn and its allies have to restart in Jan.  BI’s Dec 8 letter urged all House and Senate members to “refrain from co-sponsoring” any successor to current BREW bill that “does not meet the criteria of covering every brewer.”  Importantly, that includes foreign brewers, via US importers, the largest two of which are BI board members.  BI singled out other concerns about Small BREW. First, defn of “small” brewer that triples current 2-mil-bbl cap to 6 mil bbls; that’s “far from the average person’s definition” of “small,” BI insists.   More important, such a cap significantly expands “already-generous market advantages enjoyed by just a handful of players” (the biggest small brewers) and could impact “state laws governing the structure of the industry.”  That of course is key concern for NBWA, which has loudly and repeatedly rejected notion that 6 mil bbls is “small.”  

 
NBWA’s letter also expresses “concern” regarding Small BREW bill, stating NBWA “does not support this legislation. Policy proposals that would change the industry structure and could create a new classification of a small brewer are problematic. If Congress wishes to reform excise taxes for beer, it should do so in a way that reflects current industry structure and covers all brewers.”  Like BI, NBWA asks members to “refrain from committing your support” and contact NBWA to further “discuss our concerns and position in greater detail.” 

BA called BI missive “regrettable,” adding BA has “never opposed any industry effort at tax reform,” including Beer Inst-backed BEER bill that gives relief to all brewers.  BA responded further that BI no doubt recognized broad support for BREW in current Congress since it’s all about economic development/job creation. That suggests, in BA view, “that the bill could be enacted under the right circumstances.” BA pledged to continue fight for Small BREW “because it’s fair, fiscally responsible and focused on small American brewers.”  BA often notes that Small Brew annual cost to taxpayers is just $64 mil or so, vs $1.8 bil for current version of BEER.  Interestingly, BI letter did not mention BEER bill at all, noting only that BI will advocate for legislation that would “lower taxes for all brewers and beer importers.”  (NBWA letter came in at presstime so no response yet from BA.)

What’s Goin’ On? Failed Compromise on Single Bill; Beltway Jockeying  Why this action at this time, when 114th Congress hasn’t officially begun?  BI felt need to clarify its opposition to BREW, we understand, given there are still dueling bills which have caused confusion aplenty, especially with so much talk about tax and spending legislation in the air, even during lame duck session.  While BA believes BREW can pass and BEER act “not politically viable,” having single tax relief bill on same issue is highly advisable.  Indeed, some would say it’s critical.  In fact, there were major efforts to forge compromise bill.  BI and BA apparently agreed on actual language, we understand.  But BA backed off, in large part because importers included in tax relief, a position not palatable to all on BA’s board. Could be too that many BA members don’t like optics of any compromise with big brewers, especially if they believe BREW can pass on its own.  

Also part of context: Beer Inst letter stresses it represents 90% of beer sold in US, plus suppliers, and BI has long viewed itself as primary industry voice in DC.  Tho BA still has no official presence in DC (that’s coming), as new kid on block it’s made lotsa friends among legislators and stresses that it’s “the voice for America’s 3,200 small Main Street breweries and brewpubs” in Washington and elsewhere. Interestingly NBWA letter to Congress encourages members to “consider NBWA as a resource on any legislation that directly or indirectly addresses the beer or alcohol industry,” including transportation, taxes and regulations as well as “policy considerations that affect privately-held, American ‘Main Street’ businesses like independent beer distributors.”   So there’s some jockeying for position going on here too.  Yet another dynamic:  Beer Inst and NBWA, at fairly nasty odds with each other for years over CARE, have spun back into each other’s orbits via their shared rejection of 6 mil bbls as “small,” which has broad implications at fed agency and state law levels. Together, they represent a formidable force for BA’s fledgling govt affairs folks to oppose.   Meanwhile, just as fed tax battle has realigned different players, so have different state issues.  Read on.                       

Despite loads of competition from every direction, Firestone Walker likely to “crest about” 200K bbls in 2014, co-founder David Walker told Brewbound audience today. He expects the co to trend somewhere north of 40% by yr-end on 151K bbls, much faster than 28% the co posted last yr and putting it easily above 200K-bbl mark. About 80% of that in western states, 75% in Calif and the “bulk of that” nearby its Paso Robles brewery. And he’s not terribly interested in building a brewery across the country to keep growing: “if we could build our brewery in one place, in one region, to us that’s it, that’s great.” Indeed, he recalled visiting Fullers’ brewing campus in London years ago, toured around by its founder and thinking “that’s something to be.” Walking around Paso Robles now, he’s “beginning to see” that future for Firestone.

Big part of 2014 growth remains 805 brand, which David noted was a “reaction” to competition growing up around the brewery in Calif. The brand worked to remind nearby consumers that “we’re local” and “the consumer ran with it.” Recall, 805 nearly tripling in Calif, gaining 1.3 share of $$ in IRI MULC data thru Nov 2. Tho he didn’t point specifically to 805 here, David acknowledged that “our future is moving the import drinker to drinking great, fresh craft beer.” He also noted that “there’s a lot of people who don’t like” big hoppy IPAs. So “we have to, to a certain extent, move their way,” to “satisfy what they’re looking for” and “build out the portfolio for a broader palate.” Part of that will be session beers, including session IPAs, an arena that’s seen much more competition this year and will see more. But David doesn’t shy away from that, saying “bring it on. It actually makes us better.” Since “most of the world doesn’t know who the Hell we are,” David said, “I think we need several thousand voices out there touching their communities and their friends saying ‘hey there, try this.’” Asked about hot M&A topic generally, David said “without question you’ll see consolidation.” And specifically about Firestone Walker’s plans, “we’re going to buy Anheuser Busch next week,” David joked.

In wide-ranging interview with MarketWatch out today, Boston chairman Jim Koch covered lotsa bases.  His comments on 3-tier issues, tho similar to what he’s said in the past, caught our attention, especially as Jim and other small brewers are working hard to get some significant changes in Mass and other states.  Asked whether current “distribution system…will have to change in the near future to accommodate craft-beer growth, or will craft brewers have to adjust to the realities” of 3-tier as it exists, Jim said: “I think it’s mostly the latter because, as a small brewer, we don’t have much say in what goes on at the distribution level. We take the distribution system as we get it.”  In Denver, he noted, AB and MC each have a branch.  “We, like many other craft brewers, end up in a distributor owned by the big brewers and, in Denver, we’re distributed through MillerCoors. I see it going in two directions: You have mega distributors consolidating into bigger operations and you have small craft-centric distributors as well.”  Can Brewers Assn help create “friendlier” distrib environment for craft?  Jim: “I think the BA is doing a very good job trying to make sure the distribution system is small-brewer friendly…. We should be thankful every day here in the US to have this three-tier system. While it’s not perfect and can be improved, and the BA is trying to help it adapt to changes, we’re very fortunate to have this three-tier system.”

There are around 4 mil more “new adults” ages 21-34 in US than cohort ahead of them who are “going to become the most important” for beer, NBWA chief economist Lester Jones highlighted at Brewbound conference this afternoon.   “That’s like adding a whole new state to this country.”  Meanwhile “young male labor force participation” is “lowest it’s ever been,” and 18-34 yr olds who own a home is “lowest it’s ever been.”  But “that’s going to change,” he said, “once they get their jobs, get their families.”  It’s “all about household formation.”  And you “can’t look past the Hispanics” which on avg are 15-16% of total US population, but more like 1/4 of 21-34 yr old group.  There’s “significantly more coming in,” so population “could look radically different in just a couple of years.” 

Then too, “beer market is reflective of our country,” Lester said.  “As higher-end people have done well, they brought with them a higher-end beer segment,” while “the lower end of our economy hasn’t recovered yet.”  Indeed, advance of high-end beer segment soon after 2008 recession mirrors higher income groups that “came out shining” soon after recession.  Top 5% saw personal income rise 5%, and top 20% saw income up 2.3%, while everyone else’s income (remaining 80%) flat or down.  So currently “there’s no opportunity in the below premium” and “lower end” segments, but “that’s about to change,” sez Lester.  “Just now in 2014,” is US “starting to see a true economic recovery,” he added.   

One of those changes may include return to light beer, Lester suggests.  In addition to, lower-end income earners starting to recover, as younger consumers age, get jobs, form households, etc., are they “going to adopt what our parents did?” (referring to shift towards more calorie-conscious consumption as they age).  “It could be craft light beer” they turn to, “but it’s not going to be 240 calorie packed,” Lester said, “and you’re not going to be slamming 6 of them.” 

Not a Bubble But an Overshot; Beer Biz Got 680 SBA Loans for $253 Mil Since 2009; Beer vs Soda Aisles As he’s said in past, Lester doesn’t think there is a craft beer “bubble” on way to bursting so much as a market “starting to overshoot” in terms of the number of players who can succeed.  Question is: “how much capacity can you build before it’s too much?”  He doesn’t know the number, but if it’s BA goal of 20 share, there’s still some run room. “Even the federal government is trying to get in on this” [craft brewery expansion] he added. Since 2009, there have been 680 small business association (SBA) loans to brewer that amounted to a whopping $253 mil. 

Then too, Lester compared beer aisles to soda aisles to reveal how much more choice beer consumers have.  Soda has 71 ft with 142 choices, tho around 37 ft of shelf space owned by Coke, and another 30 ft owned by Pepsi.  In great contrast, beer aisle “choices are phenomenal” and “different”; on avg there are 245 consumer choices in cold box alone and separately 18 stacks along the cooler, he found.    

As ordered by court decision last month, Kentucky ABC’s Malt Bev Director Stephanie Stumbo “conditionally approved” AB’s license to operate Owensboro distrib in extensive 6-page letter late last month (as we reported in sister pub INSIGHTS Express yesterday). But she didn’t want to. The “grave concerns” she expresses about AB’s application, “the most controversial in Department memory,” all stem from director’s role to act in “public interest” and preserve current biz in Ky. So approval “not limited to whether there is a willing seller and a willing buyer,” in her view. Citing “concerns” of “protestors” about AB’s perceived “efforts to create a vertical monopoly in other states,” Stumbo asserts an Owensboro branch could diminish distrib options and “limits access” to other suppliers, “especially craft brewers.” In this case, the Ky regulator largely shares the arguments expressed by small brewers and lays out “legitimate public policy issues ‘that deserve public debate,’” as “court acknowledged” in its order.

Countering “mischaracterizations” that her delay in approving the license was somehow “anti-” AB, Stumbo insists consideration for this application “is really about” 1) preserving “existing Kentucky businesses and jobs at a time when the Commonwealth needs them the most,” 2) ensuring “increased choice” for Ky consumers and 3) access to market for all producers, including in-state “craft breweries,” 4) “protecting independent retailers” as well as “independent beer distributors,” and 5) “preventing a loss of state revenue.” Detailing her second point above, the director notes 195 brands to be “dropped” by AB/Hand family (seller in Owensboro, keeping another operation in Ky). Tho that includes many wine/spirits and one-offs no longer sold, we’re told, Hand also sold small amount of Sierra Nevada, Magic Hat and Vt Hard Cider, reportedly to be split among other distribs. But questions about those brands unanswered, per Stumbo, and paperwork for a full 500 brands not yet submitted to ABC, another reason the agency “has not considered the application to be substantially complete.”

“One of our state’s signature industries” ‒ alc bev producers, distribs and retailers ‒ require promotion, protection “to maintain quality, selection and access,” in Stumbo’s view, and “AB’s success and presence” in Ky “should not be done at the expense of independent businesses.” Among them, Ky’s small brewers, now numbering 28, up from just 2 in 2002. All producers must choose between “only two main competing distributorships in most Kentucky territories,” and “unlike brewery owned distributorships, independently owned distributors will carry products from multiple producers such as Kentucky craft breweries.” And ABC’s “records reflect” AB’s “exclusionary practice in its Louisville distributorship where it refuses to carry any competing brand of beer,” she writes, adding that it “intends to do so in Owensboro” as shown in “submitted brand registrations.” If AB is one of two options, the other indie distrib “cannot logistically carry all other non AB brands,” so “Kentucky consumers will continue to lose choice of brands and will likely see increased cost.”

Interestingly, Stumbo also brings up “concerns” some have expressed about even more limited access for “out-of-state craft brewers,” because “many craft brewers require territorial agreement terms which provide that the distributor will not sell a competitor craft product.” (Editor’s note: not sure how extensive, or legal, that practice is.) Regardless, the ABC malt bev director offers concern that AB will further expand its branches in the state, further affecting competition, in her view. But nonetheless, AB will get license in Owensboro.  Questions remain about whether or not Ky lawmakers will pursue legislation to limit brewery-owned distrib branches in 2015.

Pair of publicly traded craft cos announced letter of intent to form “strategic partnership” for future growth, Craft Brew Alliance announced earlier this week of its new relationship with Appalachian Mountain Brewery of NC. Not a full takeover, the partnership allows for resource and knowledge sharing and could pave way for closer ties. AMB’s revs grew to over $266K in 3d qtr, that co reported, +38%. It produced just a thousand bbls in 2013, according to Brewers Assn stats. North Carolina is a “really vibrant craft community now,” CBA ceo Andy Thomas said, speaking of the deal at Brewbound Session today.  So working with AMB “helps us broaden our reach” to crucial Southeast market where co has much run room. The move will also “bring somebody into the alliance” that Andy and co feel fits well into portfolio approach.