May 302017

Observes the law beerOver the years of posting stories, there have been a number written about individuals who, for personal reasons, violated either federal, state or contractual law.  Examples of such violations include: selling Old Milwaukee kegs as Schlitz, trans-shipping Coors out of a warehouse to eastern markets, dumping beer in Mexico, changing ABV dates on packages in 3.2 states, and brewery executives filing fake invoices for advertising.   While all these actions were illegal, all were done for individual gain.  And all of the above resulted in either loss of the distributorship, loss of job and fines, or prison time.  All for individual gain.

Much has changed in the beer industry in the last ten years, starting with InBev’s takeover of AB.  More and more ABI’s intent has become apparent in their management of their U.S. business, especially in light of their massive volume losses.  In recent months, AB branches in three separate states have been cited or fined for unfair trade practices.  Anyone see a trend here?

There was the yearlong California ABC investigation of the AB branches which resulted in a $400K dollar fine.  Half the fine will be returned to AB if the branches “behave!”  In Massachusetts, the AB branch was notified of a hearing in June concerning the branches’ activities of providing a” thing of value” to the retail trade. And, finally, in Colorado, the AB branch, American Eagle, was fined the state’s maximum of $5,000, in addition to a 14-day suspension for unfair trade practices.  The branch had to close for five days, with the remaining nine days being held in abeyance for one year, however, the $5,000 was paid in lieu of active suspension.

It seems obvious that AB is either interpreting the state ABC laws to benefit their own interest, or blatantly ignoring the state statues and doing what it takes to gain an advantage over the competition.  When considering the risk of getting fined or caught, versus the reward, AB’s attitude seems to be to move forward and take that risk.

To AB, these penalties are just a slap on the wrist.  If the state ABC agencies really wanted this illegal activity to cease and desist, then the state should make the penalties damaging enough to AB to feel the consequences.  The reality, however, is that it will simply not happen.  Closing a branch for a week is manageable.  The wholesaler can build retail inventories so that out-of-stocks will be nonexistent.  One week off for all employees is also manageable by the branch.

If the penalty was for a branch to shut down for an entire month, however, that could raise some eye brows!  AB products would be out of the market, employees would be out of a pay check for a month, and if the branch is unionized, that might create additional issues.  Imposing such stiff penalties, however, could create a backlash for the ABC.  The state would lose tax revenue and the unemployed workers could potentially become angry and negatively vocal.

Considering AB’s powerful lobbying, tax revenues, and political clout, the industry will continue to see these small penalties assessed.  And because AB owns these branches, there is no risk of a vendor pulling their product for contract violations.

Until the states get tough, the chances of AB continuing to play this game are quite high.  If you’re going to play, you must be willing to pay!


 Posted by at 6:00 am
May 232017

Jim KochThis Saturday Jim Koch will turn 68, and as we do every year at this time, let’s take a look at Boston Beer in 2017.  Unfortunately, what we see is not a pretty picture.

In the recent IRI data, ending April 30, 10 of the top 17 growth craft brands are totally owned, or partially owned, by larger brewers.  This includes the top five brands, the top three of which are owned by either MC or ABI.  The only craft beer on this list is Seasonal Overlay, a Sam product, which is in the sixth place. Perhaps this data reveals more about Boston Beer’s current status than anything else.

In a recent three-hour investor meeting, Sam laid out three strategic priorities: (1) return Sam Adams/Angry Orchard to growth; (2) eliminate waste; and (3) increase long-term innovation.  The new CMO, Jonathan Potter, has implemented a new brand direction which was well received by the industry analysts.  So the question is: what needs to happen in the craft beer industry to make to make Sam successful again?

Some decades ago, when distributors only represented one major brewery, if their major brand started to decline in volume, the strategy was to eliminate a route and consolidate the stops onto other routes.  In almost every situation, when a route was cut, the decrease in volume accelerated.  The opposite was true for increases.  When a route was added, the trends increased.  It was simple; more feet on the ground produce growth in a brand.

In reviewing Boston’s three priorities for the coming year, only eliminating waste is controllable.   Returning their two key products to growth will be challenging at best. And while Boston has long been known as a company on the cutting edge of innovation, recent years have produced little success.

If Boston fails to turn around their trends, cutting costs will no doubt positively impact their stock prices, thereby putting the company in a more attractive position, should Koch decide to sell.  One analysist put Boston’s odds of selling at one percent over the next five years.

More and more what is coming into play is the impact that the major breweries are having on the brands they are acquiring.  With the resources that an ABI, MC, Constellation, or Heineken can bring to a craft, it is no wonder that IRI data reflects that the top growth leaders are crafts owned by these major breweries.

Much of the success of these acquired brands occurs when their new owners are able to expand their footprint. That being said, however, the impact of their resources is obvious. It makes sense that any potential buyer for Boston would be a major brewer.  A major brewer would be willing to pay a premium and could leverage their resources and synergies.

Just two years ago this week, Boston’s numbers showed growth in the double digit range, while their stock prices were setting new heights.  How Boston will look two years from now is unknown, but what we do know is that Jim Koch will be 70!

Happy 68th, Jim!





 Posted by at 6:00 am
May 162017

Beer monopolyWhen searching for beer on line, Amazon has more than 101 pages of books listed under the beer category.  The majority of these beer books are about styles, bars, countries, or cities and their beer culture or history.   There have been, however, a few beer books published offering more than simply beer styles.

There are also a small number of beer books written by disgruntled former owners or key executives that bash their previous companies.  You may remember some of these: Silver Bullets: A Soldier’s Story of How Coors Bombed in the Beer Wars or Beer Blast, by Philip Van Munching; or the sad story of Stroh’s, Beer Money: A Memory of Privilege and Loss.  These are just a few of the compilation of titles available.

Several books are very interesting and well written, including: Bitter Brew, the inside story of how InBev acquired AB.  There are, however, two publications that stand alone in assisting the reader in understanding just how the beer industry wound up in its current positon.  Ambitious Brew: The Story of American Beer by Maureen Ogle, is an outstanding read of the history of beer in the U.S.  In fact, Ogle has recently published an update focusing on the rise of crafts over the last 20 years.

Another well written book and recently published book, The Beer Monopoly by Ina Verstl and Ernst Faltermeier, focuses on four brewing companies: ABI, SABMiller, Heineken, and Carlsberg.  The book details how each company came into existence and how their unique corporates cultures evolved.   The authors examine the respective business models of each company, thus giving the relevant indicators explaining each company’s survival.

As one nears the end of The Beer Monopoly, the question arises as to the future of the industry.  While these four companies achieved the success they have today brewery acquisition, one has to wonder how future growth will be attained.  The question becomes: what beer companies are still remaining to be purchased?

The Chinese and Russian beer industries did not unfold as major markets, as so many had predicted. Industry pundits claim a marriage between Heineken and MolsonCoors makes the most sense.  Now that SAB is gone, Heineken is the distant second to ABI in size, and this marriage would narrow that gap.

There are some very good German breweries that are still family owned, which could come into play.  Krombacher, at over five million hectoliters, would be one to watch.  Other German beers include Veltins and Warsteiner.  On this side of the pond, there is Moosehead in Canada, which is still independently owned.

That said the large American crafts could very well become the next target.  Boston, Sierra Nevada and even New Belgium come to mind as more and more the industry is seeing these highly successful crafts struggle to grow. The belief that the three remaining major players are limited in their ability to expand more, globally, makes these breweries much more attractive, thus driving up their value.  Lagunitas, Goose Island, Ballast Point and others have taken advantage of this opportunity.

In upcoming posts, we will look at how these two writers, Verstl and Faltermeier, positioned each brewery, and have given insights into what the future of the beer industry holds.

Congratulations, I knew the record would stand until it was broken…..

Editor’s note: With this post, our recorded views pass 100K. I would like to thank all those who supported this weekly blog, whether you are a reader, or have provided comments on the various beer industry topics thought out the years, I thank you for your support.





 Posted by at 6:00 am
May 092017

AmazonLast month, at a retailer appreciation kick-off event for a new brewery, a longtime importer reminded me of a prediction I had made 15 years ago regarding the future of wholesalers.  Given the direction of the industry at that time, it was clear that the biggest change would occur at the middle tier.

With the onslaught of new brands and breweries, it seemed that the middle tier would be over whelmed, and to some degree, this is exactly what has happened.  Distributors are no longer asking for brewery personal support in their markets, they are ignoring breweries that will not position support people or teams in their market.  For example, six months prior to rolling out in Austin, Bells, transferred three experienced sales people to work the market up until the roll-out point.  From the wholesaler’s perspective, the first month’s sales were a success.

For those breweries that are established, similar to Bells, wholesalers are functioning as a warehouse and a delivery system for these breweries.  Wholesalers are demanding that breweries function in this role, and the breweries are delivering on this request. My prediction 15 years ago went even further, as predicted sales would be generated with brewery sales teams and orders would be transmitted to the wholesaler, who would logistically delivery the beer.  Under this scenario, the wholesaler would work off lower margins, assuming the wholesaler has no sales department, or a limited sales department.

Long term vision for wholesalers should narrow to protect the three tier system, not the franchise laws.  The three tiers ensure the continued existence of wholesalers, even if they evolve into just a warehouse, delivery, and merchandising function. One can already make the case that wholesaling is well on the way to that model.

Perhaps the biggest threat to the middle tier is not the craft brewers, or even ABI or MC and others with retail taprooms, but Amazon.  Amazon is, where legal, testing ways to crack into incorporating beer and/or alcohol into their business model.  If Amazon manages to do so, no doubt their involvement will dramatically change the beer industry.

Amazon Prime members do not pay for delivery charges, and one would assume there are millions of Prime members. From a breweries’ perspective, Amazon could be an attractive partner.  Think of all the possibilities!  On the other hand, from the wholesalers’ view, Amazon could be a major nightmare.  The emergence of Amazon delivering beer could signify the end of the middle tier.

If, however, the middle tier would work with Amazon, and become the warehousing and delivery function of Amazon, wholesalers could continue to play a significant role in the industry.  Consumers could order from the Amazon site, Amazon would process the order through their local wholesaler, and the wholesaler would, in turn, deliver the beer order.

Amazon becomes the retailer, and the wholesaler is able to direct-deliver the beer.  This might even evolve into an Amazon order including products from two, or even three different wholesalers, but with only one wholesaler responsible for delivery of the product(s).  Consider all the possibilities.

All the industry tiers should understand that Amazon is not going away. Something will happen that will change the industry and its access to market. It is just a matter of when said change will happen.   Maintaining the middle tier should be the main goal, however, what the middle tier will look like, is up to the wholesalers.

Compromise works well in this world, but only when you have shared goals….


 Posted by at 6:00 am
May 022017

TexCraft BrewersMarc Sorini, the noted lawyer for the law firm, McDermott, Will, and Emery, recently outlined his opinion, noting that the expansion of brewery owned brewpubs or retail outlets, sometimes referred to as satellite outlets, will not disrupt the market.  He goes on to state that even in California, a state that has as many as six outlets, such brewery expansion would not mean much in terms of market penetration.

Sorini believes that having that many “would be fine,” but he also goes on to state that the industry has to be “vigilant” and not destroy the current system.  Likewise, he believes that taproom expansion is over blown and that every state has limits on the number of brewery-owned taprooms.

It is safe to say that many wholesalers do not have the same point of view as Sorini.   Texas House Bill 3287 clearly states that all license-holder-locations should count toward taproom cap totals for on-site sales. The current law allows taproom sales from a brewery up to 225K bbls. per year, however, when the law went into effect, none of the industry tiers had the foresight to know the ramifications of either AB or MC buying a Texas craft.  Which, as we know, is exactly what happened with the sale of Revolver and Karbach to MC and AB, respectively.

Texas wholesalers, sensing that in such situations as stated above, wholesalers could lose more control over the middle tier, introduced House Bill 3287.  This house bill was meant to modify the law, thus ensuring that all locations would be included with the license holder.  Thus, in the above mentioned case, AB and MC sales would be included in Revolver and Karbach sales, thus making the operation of such taprooms illegal.

The WBDT have asked the Texas Craft Brewers Guild for their support, and at this moment, no member has supported the bill.  Interesting!  While the wholesalers sense these acquisitions as a threat to the three tier system, the craft brewers see it as a possible threat to the value of their business.

Since taprooms are a key part of any breweries’ revenue stream and marketing, if one eliminates the taproom aspect of a breweries’ operation, the value of that brewery will significantly decline.  Such actions also close the door to a breweries’ ability to leverage themselves to potential buyers.

In essence, what this bill brought to light is a snapshot of the direction of beer.  AB and MC, losing massive volume, are buying key crafts in markets that make sense, while at the same time, using their ability to access taprooms to control the retail tier of the three tier system. Wholesalers in Texas are protecting the tied house provisions, while the craft breweries are looking to protect their own interests and keep their ability sell out at a premium or top dollar.

There might not be another situation in this country which is more the personification of the beer industries’ special interests than this HB 3287.  On the surface, there does not appear to be any compromise available, but the industry should know soon.  Stay tuned.

There are times in politics when you must be on the right side, and lose.

 Posted by at 6:00 am