The Impending Train Wreck Over 10 Barrel

As train wrecks go, some are more entertaining than others. That's especially true when there's a trainload of bullies on one side of the track and some more or less regular folks on the other. When you see the bully train jump the track and crash, it's a good feeling. Admit it.

Well, there's a nice little train wreck brewing right here in Portland. It involves our old friends, Anheuser-Busch, along with Maletis Distributing and 10 Barrel Brewing. Not a love triangle, exactly. The dispute is over who will distribute 10 Barrel in the Portland area.

You may recall that 10 Barrel was purchased by AB last year. The intended outcome of that purchase was that 10 Barrel brands would be distributed by AB-owned Western Distributing in this area. The problem is, Maletis owns the franchise rights to 10 Barrel here.

Keep in mind that Maletis is what's known as an independent AB distributor. That means they distribute the normal line of AB products within their territory. They own franchise rights within that area, just like they own the rights to 10 Barrel there, purchased long ago.

Another thing you need to know is that franchise laws are on the stiff side in Oregon. That essentially means a large national company can't simply come in and unilaterally revoke contracted rights to sell their products. They would have to show cause for that action..or buy the rights back.

There's more. If franchise rights are stripped without cause or compensation, the injured party can sue and receive triple damages. So doing something stupid or flippant can be costly in these situations. Not that anyone involved in this case is stupid or flippant.

This is a nice reminder that brewery acquisitions can be messy. Aligning distribution rights can be a challenge. When AB bought 10 Barrel, it surely assumed acquiring the rights from Maletis would be a slam dunk. That might have been done by swapping brands. But Anheuser-Busch has nothing to swap that Maletis wants or needs. They'd prefer cash.

Apparently, the folks who brew "The Hard Way" have not made Maletis an acceptable offer. So Maletis continues to distribute 10 Barrel brands in the area where it has the rights to do so...an area that extends into Western's territory. Needless to say, the brass at AB are incensed. They want their brand. And they want it now!

There's a bit of a back story here, which is that Anheuser-Busch has been unhappy with Maletis for a while. They don't like the fact that Maletis has built a broad craft portfolio. That kind of thing detracts from the corporate montra, which is to move red, white and blue product. Maletis is rumored to have been told its days as an AB distributor are numbered.

The plain reality is that Maletis just doesn't get along with its cranky Uncle Bud. They've put up with him for convenience sake for a long time. But they aren't compelled by law to hand over the rights to 10 Barrel or any other brand unless they feel the price is right. And so far the price has not been right.

Anheuser-Busch's response? Because they've been unable to hammer out a financial deal, AB plans to withhold two new brands they're rolling out. Maletis won't receive them. Who knows what other punitive measures might be in play. Always use the stick if you're stingy with carrots.

This seems a dubious move. These new brands aren't going to have significant traction here. Maletis will simply hang on to 10 Barrel until it gets the price it wants. If it's true that Anheuser-Busch wants to end Maletis' run as an AB distributor, those rights will also have to be bought back.

What we have is an escalating conflict caused to a large extent by the growing power of craft beer. AB is trying to expand its craft portfolio because its own brands are in freefall. Maletis has a nice craft portfolio and doesn't feel inclined to be a subservient partner with its cranky uncle.

This train wreck is gonna be a hoot.

Thoughts on the Oregon Beer Awards

Last night's Oregon Beer Awards at the Doug Fir Lounge provided a nice, if brief, look into the soul of the state's craft beer scene. The event was organized by Willamette Week, with help from a few others, and coincides with the release of its 2015 Beer Guide. Get a copy.

Maybe the most shocking thing about last night's affair is that it's the first event of its kind. Oregon's craft beer industry is more than 30 years old, yet there had never been any kind of pubic awards event like this one. Pretty hard to believe.

Inasmuch as this was their first time out, you can understand that there were some issues. There were long lines to enter the building and more long lines to get a beer. Organizers clearly did not anticipate the level of interest this event would generate. I suspect they will do better next year.

There's no reason to list the winners here. Results have been posted over on the New School site and on Brewpublic. As well, I'm quite sure WW will have a web version of the Beer Guide live in the next few days. [Ed note: it's here.] Redundancy is not a virtue, at least not here.

How they determined winners is another matter. It was not by fiat. Instead, group of some 20 experts came up with 15 categories and pared the nominees to roughly 10 in each category. Voting was done by a pool of industry-connected folks...brewers, pub staff, distributors, writers, homebrewers, etc.

Although I wrote a covey of snippets for the Beer Guide, I was not one of the 20 or so "experts" who chose and narrowed the categories. Possibly that was an oversight, possibly not. What's an expert, anyway? Regardless, the ballot was pretty consistent with what I would have included.

Looking out on the crowd of attendees got me thinking about an article that appeared on the Aljazeera America website the other day. The article outlines some of the significant challenges faced by craft beer as it deals with increased competition from within (a doubling of the number of craft breweries since 2008) and from without (buyouts, AB branch distributors, etc.).

For big beer, the writing is on the wall. Part of the reason the Oregon Beer Awards attracted such a sizable crowd is that younger drinkers are moving away from crap macro and toward craft beer in droves. More than 40 percent of Americans aged 21-27 have never even tried Budweiser...this according to AB's own stats. That's scary for the guys that brew "The Hard Way."

The fallout of this situation is financial opportunity. With Anheuser-Busch actively looking to buy craft breweries and with craft growing by leaps and bounds, there is a boatload of money floating around in the marketplace...certainly more than we've ever seen.

A significant downside to that reality is we have people entering craft beer mainly because they see an opportunity to make money. Some see it via growth of their own brewery over time; others see it via getting established and cashing in within a few years.

As I looked out on the crowd at the Beer Awards, I wondered how many of the attending brewers will be content sticking to the ideals of integrity and quality, and how many are mainly in it for the money. I suppose we'll have the answer in a few years.

Maybe sooner in some cases.

Brewery Buyouts and Looted Ideals

This morning I received a press release from the Brewers Association announcing the keynote speaker at the upcoming Craft Beer Conference in Portland. The theme of that address will be innovation and passion in the craft beer industry, things that differentiate it from big beer.

Simon Sinek, an anthropologist and leadership expert, will deliver the keynote speech. Sinek is evidently well-known for advancing the concept of "Why"—the idea that people don't buy what you do, they buy why you do it.

That concept has been an integral part of craft beer's cover story from the beginning. Most brewers got into this business because they believed strongly in creating something special and doing things right. Money was a secondary concern for these folks.

I guess someone at the Brewers Association decided now might be a good time for 11,000 CBC attendees to hear a renewed talk on the "Why" concept. Possibly this has something to do with the recent buyouts and sellouts in Oregon (10 Barrel) and Washington (Elysian). Just a guess.

Buyouts past, present and future damage the psyche of people who work in the craft beer industry. I'm not talking about the owners of the sellout breweries, who are essentially trading their ideals for boatloads of cash. I'm talking about the rank and file.

One of the best things about the craft beer scene is the countless people you run into who have a deep passion and commitment when it comes to making and selling good beer. Most of these folks are hooked on that feeling and do what they do for a relative pittance.

I've seen this movie before. I've worked it before in industries where we thought we were selling something authentic and special. You work in these industries because you embrace the "Why" concept. Later on, you find out you weren't so smart.

When a craft brewery is bought by Anheuser-Busch, it isn't just those employees whose ideals are looted. It's people who work in pubs, taverns and stores where the sellout brands are sold. These folks thought they were representing a product with soul and integrity.

Only to discover they were taken in and that money was all that mattered. That's what gripes me most about these buyouts.

Good and Sketchy Times at the Craft Brew Alliance

The Craft Brew Alliance, represented by the Widmer, Kona, Redhook and Omission brands, released its preliminary financial results for 2014 last week. If you keep your gaze fixated on that report, the news is all good. You have to look a bit deeper to see potential problems.

Some Highlights

• Net sales increased 12 percent over 2013, topping the $200 million milestone.
• Shipments grew 10 percent, compared to 4 percent in 2013.
• Contract brewing and related sales increased 33 percent.
• Diluted earnings per share reached 16 cents, compared to 10 cents in 2013.
• Gross margin expanded to 29.4 percent, compared to 28.1 percent in 2013.

The report paints a picture of a company that is doing quite well. The CBA is based in Portland and has strong roots in the Northwest, but its brands are making a strong statement in markets throughout the country. The first full quarter of brewing in Memphis helped contribute to what was, in fact, a record year for the company.

The Sketchy
If it's true that every grey cloud has a silver lining, then the reverse must also be true. In the case of the CBA's 2014 results, there are some issues. For example, growth slowed to 7 percent in the fourth quarter, when sales to retailers were up just 2 percent. The report says that "primarily reflects the SKU rationalization of seasonals across the portfolio." Fine.

By far the most significant factoid on the grey side of the ledger is the fact that CBA volume was down 5 percent in Portland, Seattle and Bay Area grocery stores, according to IRI (Information Resources, Inc.) data. These are the top craft markets in the country and the CBA is traditionally a big player in each (#1 in Portland and Seattle; #3 in Bay Area).

The CBA report doesn't mention or attempt to explain...no reason to in a stellar year. But volume losses in traditional core markets in a record year mean the company did extremely well somewhere else. Info in the report and IRI data suggests the CBA's most robust 2014 growth occurred in underdeveloped craft markets in the East.

That makes perfect sense if you think about it. Mainstream CBA beers are in a tight spot in mature craft markets like Portland, particularly in grocery stores, where competition for shelf space is brutal. The place where their beers shine is markets that have recently jumped on the craft bandwagon. There isn't much competition in these "soft" markets and the CBA is tapping them with gusto.

None of this means the CBA makes crappy beer. Far from it. I'm not a big fan of the standards, but I've enjoyed some fantastic specialty beers on recent trips to Widmer's Gasthaus pub. They always seem to have seasonals and specialty beers on the board. CBA beers may not have a strong presence in the area's elite taprooms and beer bars, but they are brewing some great beer.

Future Angst
OLCC stats for 2014 (through November at this point) put the CBA at the top of the heap for barrels sold in Oregon. Of course, they are selling far more beer outside the state and Northwest. A big reason for that is the arrangement they have with Anheuser-Busch, which owns roughly 30 percent of the company and has an extensive, nationwide distribution network.

Some wonder where CBA products fit into AB's strategy going forward. With the acquisitions of Goose Island, 10 Barrel and Elysian, and their efforts to acquire and operate branch distributors wherever the law allows it, will AB shift its focus to fully-owned brands at the expense of partly-owned CBA brands? Inquiring minds wonder how that will play out.

Changing the Rules on Direct Beer Shipments

As promised at the end of the long-winded piece on the proposal to increase the self-distribution cap for Oregon brewpubs, it's time to talk about the second piece of pending legislation. This one isn't as complicated and, in the minds of some, may not matter.

House Bill 2731
The objective of HB 2731 is to rectify the fact that Oregon breweries cannot legally ship beer to out-of-state consumers. At the moment, they are technically free to ship to in-state addresses, but shipping outside the state is a no-no.

If you take a look at the draft document, you'll see the sponsors merely added "malt beverages" to an existing law that applies to wine and cider. Shipping wine and cider to in- and out-of-state consumers has been legal for a while. Adding malt beverages to the language would make it formally so with beer.

How and why wine and cider came to receive special treatment is related to a 2005 Supreme Court case, Granholm v. Heald. In a 5-4 decision, the Supremes said states that allow wine shipments within their own borders cannot close their markets to out-of-state wineries.

It's instructive to note how the Court arrived at that decision. As you may know, the 21st Amendment, which ended Prohibition in 1933, gave states the right to regulate alcohol within their borders. The Court essentially found that, while states have the power to regulate alcohol, only Congress can regulate commerce between the states...based on a clause in Article I of the Constitution.

So any state that allows direct shipment of an alcoholic beverage within its borders cannot prohibit out-of-state firms from shipping to that state. The rub with beer here in Oregon is that it was not included in the legal language that made direct shipment of wine and cider legal. HB 2731 would change that.

The primary sponsors of the bill, Cascade Brewing and Rogue Brewing, argue that adding beer (malt beverages) to the language of the existing direct shipment law would enable Oregon breweries to ship to the 37 or so states that currently allow such shipments. And maybe they're right.

Oregon beer distributors aren't so sure. They're taking a neutral position on HB 2731, but only if a reciprocal clause is added. The clause would specifically say that out-of-state breweries can ship to Oregon only if our breweries can ship there. That seems reasonable, although the Supreme Court ruling suggests it may not be necessary.

Of course, the elephant in the living room with this bill is the economics of beer. Direct shipment of wine works economically because the price is relatively high. Most beer lives at a lower price point that is not a good fit for direct shipping. However, barrel-aged beers such as those produced by Cascade and others are priced such that direct shipment makes economic sense.

As with the self-distribution bill, the Oregon Brewers Guild is taking a neutral stance on direct shipment. And for exactly the same reason, which is that HB 2731, if passed, will likely benefit only a few of its members. The Guild doesn't actively support or fight bills of this nature.

It's going to be interesting to see what happens. My guess is the rising popularity of high-priced specialty beers dictates that some version of this bill be passed. The demand for Oregon beer outside the state is going to be far greater than the demand for non-Oregon beer here. In other words, this will probably be good for our economy.

Legislature Considers Lifting Self-Distribution Limit

As many who stop by here know, there is pending legal and legislative action related to craft beer in a number of states. Some of these efforts involve antiquated growler policies or inept selling restrictions. And let's not forget the efforts to slow Anheuser-Busch in Kentucky and Idaho.

Here in Oregon there are two pieces of legislation in the pipeline. There hasn't been any significant reporting on these proposed measures that I'm aware of. That's largely because the current session of the Legislature only convened on Feb. 2. Everything is pretty new.

Senate Bill 138
The first and most significant bill is SB 138, which would remove the current self-distribution limit imposed on brewpubs. Today, the limit is 5,000 barrels/year, which means brewpubs can sell direct to wholesale accounts up to that number. The limit was 10,000 barrels in the original Brewpub Bill, passed in 1985, and it has bounced around over the years.

If passed, SB 138 would essentially rewrite a portion of the existing brewpub law (ORS.471.200). The principal sponsors are Art Larrance (Cascade Brewing), Rogue Brewing and McMenamins. If you dial up the working text of the bill, you'll see the sponsors have simply italicized that portion of the existing law that they want changed. They have not entered a new suggested limit.

In fact, these guys would like to see the self-distribution cap removed entirely. That's the way it works if you have a brewery license in Oregon. You can brew and self-distribute all you want. SB 138 would give brewpubs the same privilege if the cap is removed. By the way, it's the brewery law has allowed Anheuser-Busch to buy and operate distributors here. Food for thought.

I've been copied on a few of the emails that are circulating leading up to a hearing scheduled for this Wednesday in Salem. There will be quite a few hearings, I suspect. Besides upping the barrel limit, the sponsors hope to get some additional stipulations built into the language of the law.

First, they want the eventual barrel limit (assuming it isn't unlimited) to apply only to beer sold to customers outside their own systems. For example, McMenamins could brew all or most of its beer in one gigantic brewery and distribute as much as it wants to its own pubs. But it could only sell up to the statutory limit to outside establishments. Second, only barrels sold in Oregon would count against the limit. Beer self-distributed elsewhere wouldn't count.

The motive behind the legislation is sketchy. OLCC stats (through November) show that an overwhelming majority of Oregon brewpubs will sell less than 5K barrels in the state for 2014. Only the top 20 or so will exceed the cap. Rogue and McMenamins, which have a lot of pubs, might benefit via a higher cap. Cascade (Barrel House and Raccoon Lodge) is well down the list and doesn't appear to be in a position to benefit. Unless there's something we don't know.

Removing the barrel limit or making it very high could lead to the creation of a network or networks of tied-houses around the state. Large brewers could own pubs where only their brands would be sold...a lot like the good old days before Prohibition. That kind of arrangement is precisely what the three-tier system was designed to prevent. But some brewers don't like distributors and wish to clip their wings. That appears to be the main thrust of this bill.

I'm not sure attention spans allow for it, but everyone needs to understand what's going on here. Since 1985, brewpubs have been able to operate outside the three-tier system by self-distributing to build their brand. Once they exceed the barrel cap, they're required to sign with a distributor and rejoin the three-tier system. The intent of SB 138 is to alter the conditions under which that happens.

Oregon's Beer and Wine Distributors haven't yet weighed in. My guess is they'll put up a pretty good stink when they do. Why? Because SB 138, particularly if the eventual cap were unlimited or very high, might threaten their business. The state's larger brewpubs could decide to brew and self-distribute massive quantities of beer, taking distributors out of the profit loop.

As for brewers, the Oregon Brewers Guild is staying neutral on this bill. Why? Because they typically support legislation only when they think it will benefit all members. When they aren't sure or if they know a bill will benefit only some of their members, they stay neutral. Clearly, they know the score with SB 138: it will benefit only the few.

Will the barrel limit be removed? Probably not. The beer distributors have the power to block that. Will it be raised? Quite possibly. Even though the current limit only impacts the state's largest brewpubs, raising it to the original 10K barrels could happen. It might even go higher. The politicians and lobbyists have some serious negotiating to do.

In the next day or so, I'll get to the second piece of proposed legislation.

Heathen Leads "Fussy" Beer Charge in the Couv

Saturday afternoon I went on a little junket to Clark County. I figured I'd repeat last year's pre-Super Bowl routine with a trip to Heathen Brewing for some beer. It worked like a charm last year and things were looking pretty good until, well, you know. But never mind.

You may recall this brewery lives in a residential garage in rural/suburban Vancouver. Sunny Parsons is the owner/founder and his home is next to the brewery. Real convenient. The brewing operation is more or less directed by Rodney Stryker, one of craft beer's up-and-coming cool kids.

These guys became a borderline household name in the summer of 2013, when their Transgression IPA won the Battle of the Brews competition at the Oregon Brewers Festival. At the time, Heathen really wasn't set up to take the ball and run with it. Transgression was a special beer, made especially to make a splash. They didn't have the facilities to produce it on a grand scale.

Well, the folks at Heathen have been up to no good since my visit a year ago. They've packed the remaining space in the garage with fermenters and there are two more outside. They've also added some additional employees, have 14 beers on tap and sell 22 oz bottles (at 50 percent off on Saturday!). They're fast-tracking their success now.

I had wondered why I kept seeing Heathen bottles, including Transgression IPA, at area bottleshops. They've yet to make much of a splash in the grocery channel, but that's often a challenge for small breweries. The extra production capacity, which has consumed most of the old tasting room space, has put them in position to build on their success.

Rodney and Sunny in 2013

Talking to Sunny about the road ahead, he said they are in the process of putting together a production brewery in another location. He will drop a fairly sizable chunk of change getting it off the ground. It sounds like they may go with a fairly basic setup initially and build it out as demand for their beer grows. That seems like a smart move.

The real bombshell is the barrel program they've launched. Rodney showed me around a secret location where they've got 60+ barrels simmering. Some of these contain Epitaph, a barrel-aged Imperial Stout. But Rodney's pet project is the other side of that space, where he has some sour beers aging. I was stunned to find them so immersed in barrels.

There's more. Once the production brewery is up and running, the current brewery will be retooled to produce strictly wild and sour beers. I didn't pry into how that might happen. I suspect most of the fermenters will be moved, because you want to age these beers in wood. Their current mash tun looks like a deep coolship, so it could work as their inoculation vessel for the wild stuff.

In case you're wondering, you can find some of Heathen's specialty bottles around town. Their beers are distributed by Point Blank in Portland and I've seen Epitaph and the bourbon barrel-aged barleywine, Reindeer Tears, here and there. I suspect the supply of these bottles will increase with time and eventually there will be some sour beers, too.

It's hard to believe. Not that long ago, Vancouver was a laughing stock on the craft beer front. They had seen quite a few small breweries come and go. To see what they're doing at Heathen is pretty cool. The brash branding really fits with who they are. They're having fun working their asses off doing something they enjoy: making great "fussy" beer.

Asked about a possible sale to Anheuser-Busch, Sunny shook his head. "That's not really on my mind or part of our plan." You have to ask.