Kentucky's Country Boy Brewing on Why Branches are Bad for Craft

FILED JANUARY 28, 2015

Dear Client:

While last week we reported that a craft brewer/distributor in Kentucky doesn't support a new bill in the Kentucky state house which would further deny A-B the ability to buy more branches in the state, another craft brewer pointed out that the KY Craft Guild does support the bill. BBD got on the phone with 5k barrel a year Country Boy Brewing co-founder DH Harrison, who has expanded much of his brands through A-B distributors throughout the state. (They are growing at about a 100% clip each year) We spoke with DH during a can-to-bottling switch on his break. DH is a plain speaker, as is common in the South, so he tends to tell it like it is. Here are the highlights as to why he's not a fan of branches:

"Well, Harry, you can start everything off by saying we're small business, we're small brewers. You know I'm co-owner and co-founder of Country Boy Brewing and I'm still here running the canning line at the brewery today. I think you'll be hard-pressed to find any of the large brewers in the world with their owner saying anything close to that. But of course, the branch in Louisville, their argument that A-B's been in Louisville since '78, which was a struggle in '78 for them to be there and today craft beer is still doing well.' Well, okay, I get it.

"But I would submit craft beer is doing well Louisville in spite of them being in Louisville. They have a distributor that they own that does not and will not carry any other craft brands. So in Louisville you basically got one distributor if you want to go with a major, big-time distributor. Now we're with a smaller high touch distributor in Louisville just because our main market is here in Lexington. He works great for us. But at the same time I understand the Yuenglings, the big guys of the world -- and we hope to be there some day -- they and we love to see competition. It works well for us as brewers and works well for the consumers. One of our great partners here in Lexington is West Sixth Brewing. We do a collaboration beer every year and they're great friends of ours. To be honest, statewide, we're not in any of the same houses in distribution and it works awesome for us. Because it makes the distributor work hard to get our brand on tap because they go head-to-head for us local beers. Accounts love Kentucky beer and they're going to put both of us on. But that healthy competition works great. And it's access to taps at the end of the day. If they want to own all of their distributors in the state and I assume that they would and they don't carry any other craft brands, wow does that help any craft brewery in the state? It doesn't.

"Kentucky gets a bad rep nationwide for being barefoot and redneck and all that kind of stuff. But even in Kentucky man, no one is buying the argument that it's big bad, big money craft brew against A-B trying to keep them down. That's a BS argument in my book, come on.

"The argument that it's just free market, you know willing seller and willing buyer, let's let the free market run and why do we let the government get involved? Well first and foremost, alcohol is one of the most regulated industries nationwide, always has been. Quite frankly always will be. I don't think there's anybody out there that's going to make the argument that we should regulate alcohol less [Ed. Note: except chain retailers, foreign spirits makers, and all wineries]. So there's my first issue with that. Then second, as we've already seen in Louisville, if they want to buy every distributor in the state that sells A-B and distribute their own brands, that's actually less free market. That's an argument against the free market. That's more monopolistic so I don't see either way that that argument works. Just because what they're doing is diametrically opposed to the craft beer movement.

"Our A-B distributors do an excellent job for us. When we first opened up, we were with our small distributor in the Louisville statewide. He does a great job for us, he was just getting started, we were just getting started..... In Lexington as we grew, we were growing a little bit faster than he was and through an amicable split, both of us talked through it. We switched to Kentucky Eagle, who is our A-B house here locally. They took us to the next level: we're in Kroger, we're in SpeedWays, we're in gas stations, they've taken us way above and beyond where we thought we'd be. So through the relationships we have with Kentucky Eagle, they said, 'hey when you're ready to go to northern Kentucky we have relationships with their A-B house their, we'd love to put you in touch with them. It's a very similar the transition and is easy, we help each other, we work together.' In Western Kentucky we go with an A-B house, Eastern Kentucky we go with an A-B house. It just made sense for us and like I said before the relationship that we have with West Sixth, who are with MillerCoors distributors statewide. It works very well for both of us.

"Now in areas like Louisville, Bowling Green, Owensboro, that water is very, very muddy now. If we want to go into Louisville and expand, we have one option and that one option has every other major craft brand in the city. So what's the incentive for us to grow there, what's the incentive for them to push our brand there if they're mired in the middle of 15 other great local craft breweries?"

C-STORE COUNTS UP 1%

The U.S. convenience store count increased to 152,794 stores as of December 31, 2014, a nearly 1% increase from the year prior, according to the 2015 NACS/Nielsen Convenience Industry Store Count. The convenience retailing industry has roughly doubled in size over the last three decades.

Texas continues to lead in store count with 15,434 stores. The rest of the top 10 states for convenience stores are California (11,403), Florida (9,810), New York (8,247), Georgia (6,766), North Carolina (6,301), Ohio (5,539), Michigan, (4,907), Illinois (4,670) and Pennsylvania (4,604), which nudged Virginia out of the top 10.

Other fun facts: Convenience stores account for 33.9% of all retail outlets in the U.S. It's higher than the U.S. total of other retail channels including drug stores (41,799 stores), supermarket/supercenter (41,529 stores) and dollar stores (26,572 stores). And the industry continues to be dominated by single-store operators, which account for 63.0% of all convenience stores -- and 83.5% of store growth last year.

TTB FINDS 30% OF RANDOMLY SAMPLED MALT BEVS NONCOMPLIANT

In recent years, the TTB has taken to sampling a random set of products to test for compliance. In 2014, the agency sampled 450 products (190 spirits, 155 malt beverages and 105 wines) and found as many as 139 (30%) of the products were noncompliant.

This marks a slight increase in noncompliant products from the 2013 results. Of the 140 noncompliant products, spirits had the highest percentage of noncompliant products at 39%, malt beverage had 30% and 20% of the wines tested were noncompliant.

"The most common compliance issues we identified involved alcohol content that did not match the label and was outside regulatory tolerances, or that placed the product in a different tax class than indicated by the label," TTB wrote.


Interestingly, noncompliant distilled spirits were much more likely than malt beverages to be "over" the appropriate alcohol level than "under": 42 of 83 noncompliance issues flagged for spirits were for alc levels "over," while just 14 were flagged for being "under." For beer, however, 18 were "over" and 16 "under."

Another common issue involved labels that did not match their approved Certificate of Label Approval (COLA) due to unallowable revisions.

ROLLING ROCK NEWARK NIXES BOTTLES FROM GLASS-LINED TANKS

The abandonment of a bottling line at Anheuser-Busch's Newark brewery will have further repercussions than the 60 layoffs reported last week [see BBD 01-21-2015]. The crossover to all-can production also means Rolling Rock bottles will lose one of their historical aspects: glass-lined finishing tanks, per report by Lehigh Valley Live.

Newark is the only one of four A-B breweries that produces Rolling Rock and sends it through the glass-lined tanks. The method is so synonymous with the brand that it is etched onto the back of the bottle in its quality pledge dating back to its origin in Latrobe, PA: "From the glass lined tanks of Old Latrobe ... ."

Brewery manager Kevin Lee said in a statement that the switch to all-can production is "necessary to best operate the Newark brewery, which produces many of our signature brands, including Budweiser and Bud Light. We are always challenging ourselves to optimize capabilities at all of our breweries."

Once the bottling line is deserted, likely in the first quarter of 2015, "single-serving containers of Rolling Rock finished in glass-lined tanks will only be available in cans," according to A-B. But this isn't the end of Rolling Rock in bottles. A-B's facilities in Baldwinsville, Fort Collins and Los Angeles will produce 12- and 7-oz. bottles of the brand.

A-B has downplayed the changeover, claiming that the modernization of breweries has initiated a transition out of glass-lined walls and into stainless steel for finishing tanks.They contend that the lining will not affect the final product.

"Anheuser-Busch is committed to and we continue to achieve Rolling Rock's original profile," VP of supply and head brewmaster for A-B, Pete Kraemer said in an email. Pete went on to "ensure that Rolling Rock beer drinkers will receive the same premium extra-pale lager they expect."


TRUTH SQUADDER SAYS BI AND BI TAX PROPOSALS "DARE CONGRESS TO RAISE TAXES"

Sometimes it's hard to keep "Truth Squad" anonymous. But we won't tell you which industry insider sent this very titillating but anonymous editorial after yesterday's issue on BA/BI tax bill infighting:

"Dear Truth Squad,

We are long past compromise...

Staying true to form, the industry billionaires and millionaires are going head to head over a few pennies they found left lying on the ground. This is the ultimate in pennywise and pound foolish behavior that will severely damage the industry. Neither BA nor the BI proposals offer real excise tax relief for brewers or consumers. Neither proposal calls out the federal excise tax as a regressive and redundant tax on brewers and consumers.

Both BA and BI proposals offer only a few pennies of savings on a per serving basis. In fact, brewers and importers have enjoyed a decreasing excise tax rate for decades as inflation has eroded the real value of the tax in today's dollars. The $7.00 small brewer excise tax from 1977 equals a fraction of a penny per 12 ounce serving in 2014 dollars. As both sides waste their well-earned political capital over pennies, their industry's real enemies are busy working on inflation adjusted taxes and equivalency based excise tax proposals. Being penny wise and pound foolish at this time is a huge miscalculation in government affairs strategy.

The BA and the BI are daring congress to raise taxes with their actions. Historically the industry is long overdue for a tax increase and industry profitability is at an all-time high. Liquor is gaining equal marketplace access alongside beer with each new year and excise tax parity between liquor and beer will follow - that is the DISCUS long term strategy and it is working. If the BA and the BI continue down this path unchecked, the end game will cost brewers, importers, suppliers, distributors, beer retailers and beer consumers dearly. We are long past compromise, we should be doing damage control and not fighting over pennies."


BEER BRIEFS:

WORD ON THE STREET IS that Pabst has sent termination letters to its distributors in Ohio. What's next, Indiana? Recall Ohio has a window where new ownership at a brewer can switch distributors more easily.

GODADDY MOCKS A-B'S "LOST DOG" SUPER BOWL AD. GoDaddy has been known to push the envelope with their Super Bowl ads. This year their spot features a missing puppy that seems to take a page out of "Homeward Bound," trekking through mountains and crossing over bridges and train tracks to find his way back. The pup's admirable return is met with bitter irony as we learn that the owners just sold him on a website they engineered through GoDaddy. It appears to be an obvious jab at Anheuser-Busch, who plans to unveil their "Lost Dog" spot during the big night as well. You can watch the GoDaddy spot here, per report by Ad Age.

Until tomorrow, Harry

"Play by the rules, but be ferocious."
- Phil Knight,



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