After our report on the words some wine execs had about competing with craft beer and spirits last week, we checked out the full presentation given by UC Davis’ Robert Smiley at the annual Wine Symposium and found a few more notable quotables.  Views these wine execs have of craft beer were more varied, including some distinct skepticism.  “From our perspective it looks a lot like beer trying to mimic wine,” one said, “because wine is the original kind of craft, right?”  Touché.  That exec added that more craft “doesn’t dramatically increase the choices that the consumer has over the wine category, that’s already incredibly widespread and fragmented.”  While not sure “there’s a lot of swapping between wine and beer,” this exec believes “you’re definitely going to see the beer consumer start to face the same confusion as the wine consumer faces.”  MillerCoors ceo Tom Long issued a similar “confusion” warning at his co’s NBWA mtg this wk.  Another wine exec referred to “fashionable, hot things,” when talking about craft beer, noting “trends go up and down on these new innovations.”  But “I’m thinking craft beer actually expands the market” for wine, he added.  Another is “not sure that they are having an impact,” noting “some blurring” between alc bev categories.  However, ”the consumer is very interested in finding authentic brands that are handcrafted,” which many wine brands are, this exec insists.  Finally, another continues “to see a proliferation of wine brands” alongside “an explosion of craft beer and craft spirits, that potentially compete, and hell, there’s even recreational marijuana that now made its way into the states. So I think it’s sort of a share of buzz issue.”

Draft supply of wildly popular double IPA Pliny the Elder will come out of Firestone Walker’s Paso Robles brewery for a limited time as Pliny-maker Russian River Brewing replaces its current brewhouse with a new 4-vessel 50-bbl system.  This doesn’t mean more or less Pliny.  It just means Russian River can keep up with producing and distributing the beer while the new brewhouse from AAA Metal Fabrications is installed, next Feb.  Phew.

Russian River founders Natalie and Vinnie Cilurzo announced the partnership with Firestone Walker just days after Marketplace ran a radio story about the “case study in ‘scarcity marketing’” that is Pliny the Elder (not to mention the even scarcer Younger, we’d add).  After going over the usual Pliny rundown with Natalie, the story points to a study with wine that suggests people’s entire drinking experience, including brain activity, changes if they believe they’re drinking something that’s difficult to find (even if it’s not).  

A temporary rule originally put in place by the US Alcohol and Tobacco Tax and Trade Bureau in late 2012 turned permanent this week, as the agency published a final rule “intended to reduce the regulatory burden on small brewers,” according to the agency.  Those burdens?  Bonds and excise tax reporting.  Which small brewers?  Those whose “excise tax liability is reasonably expected to be not more than $50,000 in a given calendar year” or didn’t need to pay that much the year before.  Based on the $7/bbl rate on the first 60K bbls for brewers under 2 mil bbls, the rule affects brewers producing about 7100 bbls or less.  Besides a reduced “penal sum” to a flat $1000, these brewers enjoy the luxury of reporting to the agency quarterly instead of monthly.  The TTB must be enjoying the reduced paperwork too, since it had over a year before the temporary rule was set to expire, next Dec.  How much less paperwork?  A lot.  Judging by the Brewers Assn stats, it looks like over 90% of BA-tracked brewing co’s, well over 2000 of them, produced less than that 7100 bbls in 2013.  At exactly 90% of brewers, that’s a 60% reduction in reports filed by brewers and processed by the agency.  At 3000 brewers (we’re over that now), that’s 21,600 reports.  And at the current pace of brewery openings, the percent of brewers liable for less than $50K in excise tax payments is only likely to increase.  Another interesting tidbit: we estimate these quarterly-reporting brewers shipped about 1% of total US shipments last yr, about 2 mil bbls, again based on BA stats.  Considering the fast rate of growth in this group, expect that to be higher in 2014.

“When we invest in private companies, we seek opportunities in industries undergoing fundamental change due to powerful, long term forces,” recent investors in Southern Tier, the Ulysses Group, wrote in letter to distribs.  “The beer industry is a perfect example of this,” it continued, one “shaken...to its core and changed for the better” by craft.  The group made that assessment based on “about 5 years” of researching beer and small brewers “in earnest,” and “when we met Phin and Sara about a year ago, we finally found the people and the brewery we wanted to partner with for the long haul.”  Indeed, letter draws clear line between “family investment firm” like itself and “private equity firms” that “flip companies quickly.”  Folks at Ulysses “are under no outside pressure to sell investments,” and so are “far more long term and strategic,” noting some private co investments stretching into 25-30 yrs.

Tho “not much” will change, Ulysses Group promised distribs “an increased investment in sales and marketing,” particularly “feet on the street in a number of regions” and perhaps some more sales mgrs to boot.  Calling themselves a “resource,” offering “capital,” “strategic guidance” and networking for the brewery, Ulysses is committed to not “meddling” in brewing operations.  Meanwhile, 4 Ulysses folks, including prexy John Nash (whose family is source of “most of the money we manage”), head of private investments Paul Barnett and 2 others, “focused on listening and learning for the foreseeable future.”  Paul and colleague Toby Rando will sit on board and “will get to know many of you well.”  The group also took a moment to sing SoTier praises, sharing criteria they had when looking for craft brewer to invest in, including “world class” beers, a “state of the art brewery,” strong core mkt sales and “100% dedicated” founders.  While acknowledging they saw plenty of that while visiting “many of the top 50 craft breweries in the country,” the group expressed hope “that you appreciate just how special Southern Tier really is.”

Private equity firm TSG Consumer Partners does indeed have a minority stake in Atlanta’s SweetWater Brewing, as we’d been hearing and reported late last week.  The brewery confirmed the investment over the weekend with a note from founder Freddy Bensch.  SW “recently had some folks in our investor pool who were ready to start allocating funds towards their kids’ college tuitions,” so the co “began looking for ways to create liquidity for some of the old timers while also bringing on a new minority partner that could potentially add long-term value to our brewery,” Freddy said in statement.  The decision to go with TSG took “much soul searching,” per Freddy, and lots of time getting to know the “likeminded people” at the firm, “who share our solid core values.”  Brewery operations “will remain unchanged whatsoever,” he assured.  This is the second recent announcement of TSG’s investments in brewing companies.  Recall, it’s part of investor group that just announced deal to buy Pabst.

A broad look at top 100 craft brands year-to-date thru Sep 7 in IRI’s multi-outlet + convenience channel shows a lot of health, generally.  But you didn’t need us to tell you that.  There’s more red on vol side than in $$, natch;   81 different brands have grown $$ sales thru just over 8 mos of the yr and over 50 of em up double digits.  That’s as less than half of the 19 declining brands YTD are down double-digits.  But overall, these top 100 brands having a hard time hanging onto share in this fast-growing category.  As a group, they’re just over two-thirds of craft $$, but down almost half a share-pt thru early Sep.  Less than half these top brands gaining share.  And of that 67% of craft $$, just 11 brands comprise the first third and brands #12 to #100 are another third.  Top 11 brands up near 19% YTD, basically setting the pace for the entire category.  Other 89 brands up about 22%.  Top 35 brands earned about half of all craft $$ for retailers thru Sep 7.

Can we talk about craft growth in IRI without talking about IPAs?  Nope: 28 IPAs from 20 different suppliers make top 100 craft brands in IRI’s MULC channel YTD.  As a group, they’re up 45% and pull in a full 70% of all IPA $$, about two-thirds of total IPA growth.  These 28 brands now over 16 share of craft $$ alone and up over 2.6 share thru Sep 7.  And just 2 of them down, both from large suppliers that intro’d new IPAs in 2014 and back-to-back in rankings by $$ too: Sam Adams Latitude 48 (#78, -44%, but much much more than made up for by huge Rebel intro); Deschutes Chainbreaker White IPA (#79, -5.4%, made up for by small growth of Inversion and intro of Fresh Squeezed).  

Of course, the shorter the period and the more developed the channel, the more negative signs start to pop up in these lists.  Still 28 IPAs on top 100 for 13 wks thru Sep 7 in IRI’s MULC data.  But Latitude 48 dropped off list entirely with Stone Ruination (up 28.5% YTD, doing great), replaced by Deschutes’ Fresh Squeezed and CBA’s new Widmer Bros Upheaval IPA.  Still just 2 IPAs down for 13 wks too, but they’re Deschutes’ “older” IPAs, Inversion (-4%) and Chainbreaker (-16%).  Total number of declining brands increases to 25 for 13 wks, 11 of them down doubles.  How about craft’s most developed channel, grocery for 13 wks?  About a third of brands down (32) and 14 down doubles.  By and large, declining brands in foodstores for 13 wks are familiar, older brands, in fact 14 of them are flagships or brewers’ largest brands.  It’s tough out there for craft stalwarts, but not impossible as largest brands for top 4 all growing: Sam Seasonal (not Boston Lager, -5%), Sierra Pale, Fat Tire and Shiner Bock (Lagunitas IPA still the big exception, still flying up 50%+).

Lotsa attention to craft and craft issues at NBWA convention earlier this week.  NBWA leadership again questioned why small brewers seeking changes to state franchise and other laws when craft biz so successful and that success linked so closely to those laws.  Three small brewers – Lagunitas’ Tony Magee, Devils Backbone’s Steve Crandall and No-Li’s John Bryant – praised and defended distribs/3-tier system.  (More details to follow.)  Then too, MillerCoors CEO Tom Long had some interesting things to say about craft in presentation to his distribs.  Key theme in Tom’s talk: MC will drive “quality” message going forward for its premium light and other brands.  Tom said he was “itching” to talk quality to dispel “some big misperceptions” about MC size and “some even bigger misperceptions about our premium lights.”

MC makes “quality beers as perfectly and consistently as anyone in the business,” Tom declared, a fact “no brewing expert would dispute.”  But MC has allowed misperception that its size and natl scope “hinder” its ability to make great beer.  In fact, MC size/scope give it “significant advantages” to brew quality beer.  And that will become “bigger differentiator” for MC going forward.  Indeed, Tom cited BA’s director Paul Gatza “warning” craft colleagues at CBC this yr that explosion of craft brewers could “compromise” quality across craft.  So MC will get “explicit” about quality and will “push for that same kind of transparency… for all brewers, large and small…. We are no longer going to stand by and allow our scale to be demeaned as a weakness, when it is actually a strength.”  Specific messaging in MC’s quality drive will be very interesting to watch.  

Meanwhile, Tom also believes “we are approaching the tipping point of the over-fragmentation” of US beer at both distrib and consumer level.  “Consumer fatigue” with vast choice “becoming especially true in beer.”  Explosion of brands, styles, sub-styles, etc confuses consumers, in Tom’s view.  Tho broad choice “essential,” brands “must mean something” to consumers.  For MC, that means creating/investing behind brands, like Redd’s, that “scale and stick.”  MC has plans for new Leinenkugel and Blue Moon seasonal and other brands to compete in craft, Tom and other MC execs told distribs. 

Craft Brew Alliance’s natl sales conference very professionally put together and often had look and feel of a larger supplier very much in keeping with its slogan “Soul of a Craft Brewer, Body of a Big Brewer.”  Key to its vision to win “right now” is that its full portfolio can be source of incremental gross margin for AB distribs, cmo Ken Kunze pointed out, especially in an industry that is at a “once in a generation... inflection point” a “pivot point,” that Ken again referred to as a “renaissance of beer.” In recent yrs, the MillerCoors network “winning more of those incremental gross margin $$” with their broader import and craft portfolios, Ken noted. This situation really “driven by historic strength” of AB, compared to relative weakness of Miller and Coors, which “forced those distributors to add brands” so that “your strength became their strength,” in a form of “wholesaler margin jiujitsu” where “situation has completely flipped.”

And so CBA emphasized that it has “bigger role to play” to help AB distribs combat that disadvantage, Ken said. “We really want to embrace the AB wholesaler network. I’m not sure that’s always been true, but it’s definitely true today,” he added. And that starts with gross margin. Growing gross margin “is the quickest way to share of mind.”   Recall, CBA seeks to grow its gross margin 500-700 basis points in next 5 yrs. Closing the meeting, ceo Andy Thomas reiterated theme of alliance with AB distribs. “We believe in you so much that we put our money where our mouth is.”  CBA is only brewer “who pays for allied access to AB system,” 25 cents a case. “So you can all be here. We know we can’t get there alone.” And Andy noted that CBA “working actively” with “our partners in St Louis, so they don’t get in your way.” (Recall, AB owns about 1/3 of CBA). This yr, “we will see you at SAMCOM,” Andy noted, AB’s upcoming wholesaler convention.

Andy called these “extraordinary times” in the beer biz, times of “chaos, clutter, confusion and consolidation” with an “unprecedented number of new products, doing nothing more than continuing to encourage cross-category consumption.” But “future is very bright” as result of “all that change” which he also called an “awakening” for beer biz. With CBA’s portfolio, brands, natl brewing, retail activation, “seamless” alliance with AB network, and “experienced” leadership (including some AB vets), Andy said, CBA well positioned to “take advantage of the right now moment.”

CBA has big goals for next yr, including returning flagship Widmer Hefe to growth, brewing 100,000 bbls in Memphis and stretch target for its Omission brand of 1 mil cases. This yr, Redhook brand growing at 6% clip, even with 38% reduction in SKUs (CBA cut SKUs 25% across the entire co). And Kona Big Wave is up 53%, while Widmer’s Upheaval IPA is the 5th fastest growing IPA. Kona’s Castaway IPA also a successful new entry for CBA. CBA is very focused on IPA and wheat oppys as those are 2 biggest segments in craft. Next yr, CBA will bring lots more new entries in currently hot spaces, including Redhook Seedy Blonde Apple Ale, Widmer’s Hefe Shandy and a Session IPA (Oreg-only), plus more brands with website the Chive, KCCO Gold and White (Tex only).

CBA reported 9% depletions growth thru Jun. But up just 5% in IRI multi-outlet + convenience thru Sep 7. The difference in scan vs all channel has to do with its SKU rationalization disproportionately affecting scan volume, sez source. Its largest brand in scan (and 12th largest craft brand overall by volume) is Longhammer IPA, up 6.6%, then Widmer Hefe, still down 3.4% in IRI YTD. While Kona Longboard Lager just flat, Big Wave up 81% in IRI. And Omission is #92 craft brand and nearly doubling.Redhook ESB down double digits. Its Kona Variety Pack up 32%, but other brands variety packs underperforming. Interestingly, CBA has at least 10 of top 100 craft brands in IRI. 

Boston Beer “doing it again in 2014,” with “another amazing year, growing another 10 million cases,” about +20%, estimated Jim Koch at Boston Beer mtg during NBWA convention earlier this week.  Similar to last yr, Boston Beer total volume likely to be bigger than the next 8 craft brewers combined and “bigger than the growth from next 30 craft brewers” in 2014.  Again Boston having success thruout each high end category it plays in.  If you include Angry Orchard and Twisted Tea in craft picture, Boston Beer has probably “3 of the top 5” craft suppliers this yr; Sam Adams #1, Angry Orchard #2, “likely bigger or close to bigger than any other craft brewer,” and Twisted Tea #5 behind Sierra and New Belgium, with Lagunitas hot on its tail.  It’s “not really a booming cider category,” but rather “an Angry Orchard phenomenon,” and Twisted Tea “the king” of its “small kingdom” at 98% share of hard tea mkt, noted Jim.  Not to mention Rebel IPA already the largest craft brand intro in history (see Aug 28 issue).

High End Will Be Over Half of Profits by 2020; “Huge Fundamental Change” Jim made predictions for future of the biz using same Leaky Bucket PowerPoint slide he showed at our Chicago conference last Jun.  Recall, “Leaky Bucket” highlights potential 2-3 mil bbls per yr decline of “mass domestic brands,” leaking into many different categories, for yrs to come, that Boston, among others, is trying to pick up with “thimbles and tea cups.”  His belief is “those brands as a total group will never grow again in our life time,” similar to Mike Mazzoni and some other industry leaders in recent yrs.  Right now Craft, Imports, and “Domestic Specialty” (Leinie, Blue Moon, Shock Top, Goose, etc.) combined are about 25% of volume, and it’ll “probably be more like 35 to 38% volume” by 2020, sez Jim. More like 42% of volume by 2020 including cider and FMB’s, “over half of revenue and the gross profit…That’s a big change in the beer business.”

Craft Share Can at least Double by 2020; “Onslaught” of New Breweries Won’t Stop; Wine Parallel Craft portion “can double” by 2020, sez Jim, which would be about 16-18 share depending on whose definition of craft you’re usin’. The “consumer is also on our side and will be for a long time…growth of craft beer will not be constrained by lack of capacity,” and there’s “not gonna be a shortage of malt, not gonna be a shortage of hops,” he insisted.  There’ll be about “700 breweries opening in the United States this year” bringing total to about 3400, sez Jim noting “even the Brewers Association can’t track them all.”  Tho barriers to entry are low, “barriers to exit are high,” Jim reminded. “Breweries don’t go away…somebody else just buys the equipment and starts brewing on it.”  “This onslaught, I don’t think will stop.”

Jim used number of US wineries as prime example of where beer biz can go.  In US “there are over 8,000 wineries,” and “here in Louisiana there are 15 wineries…is this a great wine terroir?” he cracked.  There are 74 in Okla, 75 in Fla, 130 in Ariz and NM, 200 in Oh, 341 in Tex, and 3600 in Calif.  However “only about 5% of them (total wineries) sell significant amounts of volume through” distribs and retailers.  Rest is through direct sales, tasting rooms, and “some limited distribution” in local mkts. “Does that sound familiar? Does that sound like tasting rooms, growler fills and self-distribution? That’s what’s going to happen, I think, in craft beer.”  Jim sees no reason there can’t be 8,000 craft breweries.

Real Issue: At What Point Will Mo’ Breweries Not Generate Mo’ Profit for Retailers; Some Retailers Already There “The real issue” is “at what point will more breweries not generate more profitability for wholesalers and retailers…My sense is that many retailers are beginning to get to the point” already, sez Jim.  “They expand their shelf space” (and total taps) but they’re not selling more beer.  “Turns out about 70 to 75% of beer currently moves through retailers who don’t have room for anything…but lead regional and local brands (top 5 or 10) but not much of the long tail,” Jim found.  So around “30% of retailers” can currently accommodate the long tail (craft-centric chains and independents, big grocery stores, specialty on premise), and at some point long tail “can’t grow beyond what the retailers can hold.”  To back his point further, Jim found total number of new craft brand families have notably slowed this yr off premise in IRI tracked chains, and on premise the avg number of taps per account (tracked wholesaler draft surveys) starting to “level off” as well.

A lot of ups and downs can come during 21 years of operating a small brewpub and brewery, and story of Atlanta Brewing Co, now Red Brick Brewery, includes plenty, per long cover story for Creative Loafing Atlanta this week.  The Red Brick story sheds light on many different facets of craft biz, from ensuring beer quality and bringing in/training up homebrewers to professional brewers to distribution and ownership issues.  It includes interesting segment on negotiations to sell to AB at one point and difficulty aligning views of investors, top management and lead brewing team members.