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Thursday, December 31, 2015

The Good and Bad of 2015

Until Tuesday, it had been 25 years since I last visited Battle Ground. Back in the day, I frequented the area as a substitute teacher. Tuesday's trip was a beer excursion. I was checking out Barrel Mountain Brewing for an upcoming review.

Battle Ground was a pretty quiet town in the old days. The population in 1990 was less than 3,800 according to Census numbers. The estimated population in 2014 was nearly 19,000. Obviously, a lot has changed. There's a growing, bustling business district now. There was nothing like that in 1990. 

Barrel Mountain Brewing is a pleasing and, I'm quite sure, welcome addition to the local scene. Since opening last summer, they've built a following with a nice selection of beers and a menu I'd describe as standard-plus pub fare. 

I'll have more to say about Barrel Mountain in Willamette Week's 2016 Beer Guide, which hits news stands in February. For now, it serves as an example of possibly the most positive trend of 2015, that being the trend of small breweries expanding into suburban and rural settings. 

Having worked in Clark County from 1990 to 2009, I watched a few breweries come and go. But it was mostly a dead zone. Over the course of the last few years, things have turned. Residents are no longer forced to traverse the Columbia River to find good beer. They can find it closer to home. 

The current trend was obviously a long time coming. For many years, you had to wonder when it would happen, if it would happen. There are a lot of underserved areas, like Battle Ground, that are starved for good beer and ready to support a brewery or breweries. Finally, it's happening.

Of course, the trend isn't strictly confined to suburban or rural areas. Many underserved boroughs in cities are also getting breweries or craft-centric pubs. What's different and especially positive is that the craft movement is spreading to suburbia and the countryside. 

Some fear the US brewery count, which now exceeds 4,000, is untenable. For production breweries, there surely is a limit. But there are an almost endless number of viable locations available to small, brewpub-type operations. Expansion into these areas will likely continue in 2016. 

That's the good news.

On the Other Hand
Probably the most negative aspect of the current craft beer scene is the accelerating pace of sellouts to big beer. The list for 2015 is long and includes Elysian (Washington), Four Peaks (Arizona), Golden Road, Ballast Point and Lagunitas (California), and Breckenridge (Colorado),

No one I know expects the pace of acquisitions to slow. Big beer market share is plummeting. Craft beer market share is growing. Big beer recognizes that tasteless, mass market lagers don't have a bright future. So they're investing in the guys they can't beat. 

I have to admit being less bothered by the buyouts, which I expect, than by the reaction to them by some in the industry. There are those who see the buyouts as nothing more than some sort of natural progression in which big beer embraces craft beer as it's own and moves on.

Nothing could be further from the truth. Big beer, particularly Anheuser-Busch, is buying craft brands so it can use them to leverage its position. They want to blur the perception of what craft beer is and squeeze market access via vertical integration wherever possible, to the detriment of independent craft brewers. 

I'm truly astounded when I hear people praising what the acquired breweries are doing. "Look at all the creative beers they're brewing." It doesn't matter in the least. These breweries enjoy significant advantages over independent craft brewers. It isn't close to an even playing field.

As noted, I fully expect the buyouts to continue. What I'd like to see in 2016 is more widespread recognition of what the buyouts mean for the industry as we've known it. I doubt it will happen, but I can always hope.

There's every reason to believe 2016 will be another highly interesting, entertaining year in beer. I look forward to watching it unfold. Happy New Year to all!

Saturday, December 26, 2015

Anatomy of a Buyout...and Buyouts to Come

After the buyouts of 10 Barrel in 2014 and Elysian in early 2015, I figured Anheuser-Busch would soon add California and Colorado breweries to its trophy case. There was nothing sophisticated about that supposition. It was based on the fact these are top tier craft beer states.

Of course, the California buyout happened a while ago, when AB purchased Golden Road Brewing of Los Angeles. That was out of nowhere because there are fatter targets in the Golden State. The more recent buyout of Arizona-based Four Peaks Brewing was another surprise. But never mind.

The buyout of Colorado's Breckenridge is different. Perusing some of the published and proprietary reports, the acquisition makes a lot of sense for Anheuser-Busch. It represents a significant effort to improve a dreadful ground game and end a lengthy downward spiral.

Since 2007, AB has seen it's business decline by 17 percent in Colorado. Put another way, it lost 263,000 barrels in volume. I don't have the detailed numbers, but you know the losses, like those they've suffered in other states, are in the premium segment. The entire Budweiser family is in free fall, getting beaten to a pulp by craft beer. Not exactly breaking news.

The addition of Breckenridge is a plausible antidote. Colorado's fifth largest craft brewer will stop and potentially reverse nearly a decade of negative AB momentum. The brewery reportedly does 45 percent of its business in Colorado, selling around 30,000 bbls in a state of over 3 million bbls, and grew 10 percent in-state this year.

Breckenridge also has reach and potential outside Colorado, Although it is distributed in 35 states, it does 60 percent of its total business in Colorado, Texas and Ohio. So it's spread thinly in the remaining 32 states. Which means there is significant potential to expand on those numbers via the AB network in those states.

That's all real nice, but there's more going on here. AB's grand strategy is connected to how it is leveraging its business in Oregon, Washington and California, where lax laws allow it to vertically integrate via the ownership of breweries, distributor and retail outlets. That's what it's doing in Colorado.

The stats are clear. Prior to 2015, AB owned a brewery in Fort Collins and a distributor in Denver. During 2015, it acquired Breckenridge (a deal that won't close until 2016) and two additional distributors (Standard and American Eagle). As part of the Breckenridge deal, AB gets two breweries and two retail locations. Plus, it will open a 10 Barrel brewpub in Denver in 2016. By the end of next year, AB will own four breweries, three distributors and three retail locations in Colorado. They have dramatically expanded their footprint across the three tiers in the state.

What does this gibberish mean? It means that if you want to know where the next AB acquisitions are likely to occur, look for high-growth breweries that produce 50K or more barrels a year, have pubs and, perhaps most importantly, reside in states where the laws allow AB to operate in all three tiers.

The suits in St. Louis may very well look outside areas where they already have a craft presence in 2016. But my guess is they aren't done in Colorado, California, Oregon or Washington. Unless the three tier laws are firmed up in those states, there are too many fat targets to ignore.

Thursday, December 17, 2015

Indiana's Goofy Cold Beer Law Lives On

When you look out on the beer landscape, you see a lot of crazy shit. Some states have relaxed their laws and made it easier for small breweries to do business. But there are other states where the laws remain as antiquated as ever. Like Indiana.

It turns out the Hoosier state is one of the few places in the country where you cannot buy cold beer in grocery and convenience stores. That's right. If you want cold beer to go in Indiana, you have to buy it in a liquor store. Beer bought in standard stores is not chilled.

This policy has been a thorn in the behind of the Indiana Petroleum Marketers and Convenience Store Association, which has lobbied for years to get the law changed. Frustration reached the point where they filed suit against the state in May 2013, claiming the law to be discriminatory because it allows cold beer sales in some stores and not in others.

The retailers did not win. This past Monday, the 7th Circuit Court of Appeals upheld Indiana's goofy law. A three-judge panel unanimously ruled that the state has broad authority to design regulatory systems for alcohol distribution. In siding with the state, the panel said retailers would have to demonstrate that Indiana's cold-beer regulatory scheme treats members differently for no rational reason related to the state's legitimate interest. 

What "state interest" are we talking about? Funny you should ask..or wonder. Indiana's goofy law is fear-driven. Indiana officials are afraid that relaxing it would result in many more outlets selling cold beer, thus making it easier for minors to buy beer and more difficult to enforce the law.

This is a little hard to fathom, actually. Most states have some pretty simple laws on the books requiring store owners to check ID before selling alcohol to anyone who looks to be under a certain age. They obviously have that in Indiana, but they evidently feel retailers must be closely watched to make sure they enforce the law. And the state just doesn't have the manpower.

But, hey, Indiana isn't the only state with bizarre laws. Much of the old South is still fighting the Civil War while maintaining bizarre alcohol laws written long ago. Closer to home, Utah and Colorado have some rather odd laws regarding the sale of beer that clocks in above a certain ABV. This is what you get when you put the states in charge of regulating alcohol inside their borders.

Here in Oregon, our laws are pretty soft, but it hasn't always been so. For 50 years following Prohibition, we had a bizarre law that made it illegal to sell unpasteurized beer in stores. You could sell it in restaurants and bars, but not in stores. The law was ruled unconstitutional in 1985, around the same time brewpubs became legal.

I do not know how or if Indiana's goofy law affects craft beer or beer in general. They've got 100 or so craft breweries, so they're doing reasonably well in that department. But I have to believe allowing the sale of cold beer in all stores makes sense. It's been fairly successful elsewhere.

The only thing they have to fear is fear itself. And the bogeyman.

Saturday, December 5, 2015

Good News and Elephants in the Living Room

These are wild times in the craft beer industry. That's not exactly front page news, but growth and change is happening at such a shocking pace that heads are spinning. The elephant in the living room is the ongoing challenge represented by big beer.

On the plus side, we recently learned the US brewery count surpassed the old record of 4,131. Perhaps most interesting about that revelation is that the old record was set in 1873, and was followed by a period of intense consolidation, then Prohibition, then more intense consolidation. The shift back to growth began roughly 30 years ago and it's been a crazy ride ever since.

There's more. For example, IPA continues to be the dominant craft style. Big surprise. In fact, one could easily argue the popularity of IPA has overflowed into other styles, many of which are hoppier than ever. And despite the ascending brewery count, there are still thousands of communities that are large enough to support a brewery and don't yet have one.

In the midst of all the good news for craft beer is the black hole of consolidation. The billion dollar Ballast Point buyout is the lead in that part of the story, and has more than a few craft brewers wondering what their place might be worth. Breweries that sold earlier, like 10 Barrel, Elysian and Goose Island, look at the Ballast Point deal and wonder where they went wrong.

Of course, the larger story on the consolidation front is the impending buyout of SABMiller by Anheuser-Busch/InBev. The multi-billion dollar deal has the potential to turn the entire beer world upside down. That reality has raised the hackles of regulatory types and a few yet-to-be-bought politicians.

Now there's news that a group of citizens from Oregon, Washington and California has filed suit in US District Court challenging the ABI/SABMiller deal on the grounds that it will hurt consumers by restricting competition and choice. No kidding. The plaintiffs aren't asking for any money. What they want is the merger stopped.

There's about zero chance of that happening in our current political climate. They'd have about as much luck getting assault rifles banned. There's little doubt the AB/SABMiller merger, which is largely a global play, will wind up being bad news for America's independent craft brewers. But there's no feasible way to stop it. All you can realistically hope to do is mitigate the impact.

The primary threat to independent craft brewers is only indirectly related to AB's acquisition of craft breweries. You can't get too excited about that because they will never own more than a small percentage of the total number of breweries. The threat is on the distribution side, where Anheuser-Busch is working to leverage its influence and limit independent craft brewers access to market.

That's not a joke. A Wall Street Journal story outlines an AB incentive plan that rewards distributors who focus primarily on AB brands. A couple of anonymous distributors spilled the beans, telling the WSJ they can receive incentive payouts of as much as $1.5 million annually if 98 percent of their volume is in AB brands. A distributor in St. Louis just dropped Deschutes because it had to choose between the incentive program and craft.

Look, Anheuser-Busch will never own or have influence over every distributor in this country. There will always be independents that go their own way. But AB has the power, via its owned and affiliated distributors, to make things difficult for independent craft brewers. The strategy outed in the WSJ article is just one part of that effort.

Many casual and some serious beer fans have their heads in the sand, more or less refusing to see the danger. Fine. Those who do see the threat can act against it by refusing to spend money on AB products, including acquired brands like 10 Barrel, Elysian, Goose Island, etc. There's nothing personal about this. It's business. Giving good money to Anheuser-Busch helps fuel the effort to undermine independent craft brewers.

Enough already.