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08.2009

Massachusetts Beverage Business

archivedFeaturedArticles

Article By: Lew Bryson

Hot and relaxed sunning on the Cape enjoying the brisk breeze and a cold, cold beer.
Wish that kid next door would shut up.
Just me and my beer and the deep blue sky, reflecting the deep blue ocean,
rolling in all the way from Europe.
Wonder if those clouds are going to turn into a storm?
Soon it’s going to be time to start grilling dinner,
some wicked fresh bluefish I got off a charter guy i know . . . and a couple more beers.
Hmmm . . . Better drink up the good stuff; the wife invited her brother’s family over.
For now, though, it’s just me and the beer.
Aggh, August. If only it was really a perfect time for beer.
 


Things are – relatively – good, like a sunny day at the beach.  The latest Gallup Poll on what Americans prefer to drink confirms that beer is still on top.  But the beer biz has its own versions of that whiny kid, a threatening storm, and unwelcome guests.  There are uncertainties, downsides and flat-out looming disasters to deal with.

White House chief of staff Rahm Emanuel said shortly after the election, “You never want a serious crisis to go to waste,” and proponents of beer tax increases are moving strongly at federal and state levels, urging legislators to plug gaping budget holes with booze dollars.  The recession (Emanuel’s serious crisis) is having effects overall, and some odd effects on the beverage alcohol industry.  The Miller Coors joint venture and the Anheuser-Busch InBev merger/acquisition are working out through final stages, and imports continue to weaken, as the spunky craft brewers continue to buck the economic mainstream. It’s best to be ready for anything.


A tax on both your houses.

The worst news is an increase in the amount of taxes that Massachusetts imposes on alcohol beverages, including beer.  The Commonwealth, like most other states this year, is in the midst of a budget crisis: with the economic contraction, tax revenues are down and the demand for government spending – programmed and non-programmed – is up.  So the Commonwealth, like a number of other states this year, is looking to alcohol for some of the money to patch the holes.


Technically, it’s not an actual increase in the beer tax, the excise tax the state levies on beer at the producer and importer level.  That tax will remain the same, and it’s not insignificant.  Since beer is already taxed at that level of the producer-to-customer chain, beer (and wine and spirits) has been exempt from state sales tax.  That’s what’s being changed, and there’s a kicker on top of that, the simultaneous 1.25% increase in the sales tax.


“On the state level, the excise tax turns over about $7 billion,” said Frank Anzalotti, Executive Director of the Massachusetts Package Store Association (MassPack).  “Billion.  With a ‘b’.  Now, with this financial crisis, they’re removing the exemption on sales tax on alcohol.


“I wouldn’t be feeling very good about an increase when you look at how the cost of the product is made up now,” he explained.  “The cost of product to the consumer includes 4O cents on the dollar in state and federal taxes.  They’re going to add sales tax to that, and at the same time they’re increasing the sales tax to 6.25% from 5%.  To other businesses, that’s an increase of 1.25%, not negligible, but you can work with it.  For us, it’s a 6.25% increase, all at once.”


MassPack had a tough job explaining the issue to voters.  People read and hear “lifting the exemption from sales tax”, and it sounds like booze has been getting a break, that package stores and drinkers aren’t carrying their share of the load.  The truth is that the beverage alcohol industry, producer to wholesaler to retailer to customer, has been paying more than their fair share on the backside for years.


Bill Russell at Buzzards Bay Brewing in Westport said the aMassachusetts Brewers Guild tried to explain the tax to people.  “The reason for the exemption is the excise tax,” he said.  “But people don’t understand that, because there aren’t that many industries that have a tax levied on just their goods.  It’s double taxation to put the sales tax on it.  It’s counter-intuitive, at this time in American history, when we’re spending a tremendous amount to boost the economy, that we’d be increasing taxes on the very businesses we’re asking to re-invigorate it.  And ultimately, Buzzards Bay Brewing won’t be paying the sales tax, the consumer will.”


Russell knows that small brewers will feel the effects of the tax increase more than others.  “This will kill small brewers like Cape Cod Beer,” Cape Cod’s owner Todd Marcus wrote recently in his local paper.  “The money made in our business is not made by the people who make the beer – at least not on a small scale.  The margins are low and the overhead is high.  Capital equipment, liability insurance, health insurance, and raw material prices rise every year.  Historically, premium products like locally produced beer and wines are affected the most by tax increases.”



Hello, New Hampshire!

Everything gets more expensive with a sales tax increase, of course, which doesn’t give you a lot of options for ducking the tax as a consumer.  Except that this is New England, and the border’s often not that far away . . . and only Rhode Island would now have a higher sales tax. 


Opponents of the sales tax increase pointed out that this will make tax-free New Hampshire more popular than ever.  “Maybe we should call this the New Hampshire economic stimulus bill,” Senator Robert L. Hedlund, a Weymouth Republican, remarked in The Boston Globe.


Political humor notwithstanding, it’s certainly not a stimulus for Massachusetts package stores.  “Who gets hurt?” Anzalotti asked.  “The consumer, and the small business people.  We’re not big conglomerates, we’re one and two person businesses.  Massachusetts’ laws at the time of the 21st Amendment were written that way, they controlled access to alcohol in that way.  And to tell the truth, alcohol is something that should be controlled.”


Joe Gomes, the store manager at the Blanchard’s in Allston, summed it up.  “Look, people have x-amount of money to spend,” he said, “on food, on rent, on utilities, and x-amount of that on beer.  That’s it.  If you put 6.25% in tax on it, and they have to pay that, they have less to spend.  A lot of the little stores that are just getting by are going to take a hit.  And the stores by the border?  If I lived up there, I know where I’d be buying.”


Dan Demuth, the store manager at the Yankee Spirits in Sturbridge, probably understands it better than most.  His store is just a short 1O minutes from the Connecticut border, and he lives in Connecticut himself.  “Gas is more expensive there,” he said.  “Not only do I buy gas here, I bring my wife’s car once a week to fill it here.  Of course I do.


“You have to look at how much you’re pushing out of state,” he said of the tax increase.  “We’re a destination store: people come here from a ways off to buy liquor.  But they don’t just buy from us and leave: they eat here, they get gas here, they go to Old Sturbridge.  The politicians aren’t looking at all the sales that might be lost.  They won’t even create the revenue they hope, because people will go across the border to buy. 


“People think, ‘There’s so much alcohol was sold in Massachusetts last year, 6.25% of that would be great,’” he continued.  “But how much of that will leave?  They lose business now to New Hampshire.  It’s going to mean a loss of jobs, because even the bigger stores close to the border are going to have to lay off to stay in business.  Any sales that go out of state?  You don’t get any of it.  Nothing.”


That’s what frustrates Gomes: it’s most likely all for nothing.  “I was around when the feds raised the beer tax in 1991,” he recalled.  “They said, we’re going to raise so much money over so many years, and lo and behold, beer sales plummeted.  It took three years to get back to almost where they were.  It was a drop in tax revenues for three years.  But do they remember that?  Never, just ‘Give us more, give us more.’”


The industry has been successful in fighting tax increases, but not this year.  “It’s the state of the economy,” Anzalotti acknowledged.  “But what I haven’t heard is anything from their end.  What have they done to pare down the costs of government, their staff and expenditures?”


He doesn’t see this ending well for the guys on Beacon Hill.  “It’s a no-win situation, and I wouldn’t want to be a legislator in this crisis,” he said, not without some sympathy.  “I remember when we voted to reduce the state income tax to 5% [in 2OOO], and the legislature overrode the referendum.  A lot of people got voted out, or saw what was coming and decided not to run for re-election.  There was a pretty big turnover in the legislature.  I could see that happening again.”


SUPPORT YOUR LOCAL BREWER.

Thing is, Massachusetts brewers were just getting back on an even keel after last year’s huge increases in materials costs; hops and malt soared in 2OO8.  “We were decimated by the materials crunch,” said Ned LaFortune at Wachusett Brewing.  “We’ve had to push the consumer to the edge on price.  My job’s been fighting that, righting the sinking ship.  We’ve been fortunate to have been in massive growth mode the first half of the year: 18% in the first quarter, and almost all Massachusetts-based.  But they’re talking about an approximate 5O cents per six-pack tax increase, and that will put us into the over-$1O a six-pack range.”


LaFortune is right, though: it’s been growth mode for craft beer.  “When I look at the Massachusetts stats for beer sales over the last year,” he says, “the big guys are all posting no growth or minor losses, and we’re posting in the mid-teens.  Where’s it coming from?  I think it’s coming out of them, this is a replacement market.  I don’t think there’s anything radical, like population swelling in the 21-year-olds.”


“We’re doing a lot of business in craft,” agreed Gomes.  “We’re selling tons of that.  In the past year, we expanded our specialty beer section and got in a bunch of new products.  Variety is one of our selling points.  Every time we’ve expanded our walk-in cooler, about a month later we’re saying, gee, we need more.  We’ve got twenty doors, and we’ve still got some two-door standalones because there’s no room in the walk-in.”


Evan Harrison, the bar manager at The Independent in Somerville, saw it too.  “People are getting more ambitious,” he said.  “When craft first came out, people drank IPAs mostly.  Now they’re drinking American-made Belgian style beers, ambers, stouts – they’re not intimidated.  They’re drinking things we couldn’t sell a year ago.  They might drink Bud all the time before, now they’ll drink a German pilsner.”


Count Harrison among that last group . . . maybe.  “I’ve always been a Bud drinker at heart,” he said.  “I don’t like to think about beer when I go out: just gimme a Bud, okay? But I still get offended if they just bring me a Bud the second time.  Hey, I might change my mind!  Because I notice that people don’t just rattle off what’s on draft anymore.  They’ll have a list, different beers, tasting notes, different sizes, suggestions about food.” That’s a substantial change, one that points to more people catching on that beer can make you money on margin as well as volume.


Josh Cohen, the owner of Moe’s Tavern, in Lee, has seen a change in the kinds of craft people want in the two years he’s been open: the “extremes” are not driving his customers crazy.  “We’ve keyed in on a very drinkable, mid-range, 5 to 6%, no more than 7% beers on most of our draft lines,” he said.  “All sales are up, but we’ve gotten into a nice groove with pale ale, IPA and pilsner variations.  I find I can sell a half-barrel of Dogfish Head 6O Minute IPA in less than a week, it’s a good baseline as the house beer.  It’s important to our customers that we carry all those wild beers you read about, and we try to get small quantities, but we don’t make our money off those.  We don’t sell any macros, but as long as we keep 9 of our 11 drafts very drinkable, people are really going for it.”


Cohen’s hot brands? “Dogfish Head is our house beer, the 6O Minute is the only tap we don’t rotate,” he said, adding as a disclaimer that he went to high school with brewery owner Sam Calagione.  “Other brands that really stand out big are Stone, Bear Republic, Great Divide, Oskar Blues, Lagunitas, and Founders is huge for us.  We do a ton of Allagash, particularly the White.  We carry a big selection of Troegs, a ton of Victory, and Stoudt’s sells well.  We’ve gotten good at picking beers for everyone.”


“We’ve been a craft beer bar since we opened three years ago,” said Patrick Magee,  the owner-manager at Atwood’s Tavern in Cambridge.  “We’ve always had a clientele that looked for nicer, higher-end beers.  But now people who come in for reasons other than our beer have been asking for the high-end beers, too.  The clientele seems much more knowledgeable about beer, and more of them are likely to talk beer than in the past.”


He’s mixing up long-time favorites with some new arrivals.  For instance, he’s “doing very well with Sixpoint, out of Brooklyn, and Smuttynose always does well here,” he noted.  “I’m about to start bringing in Speakeasy from San Francisco, and more of their stuff is coming in, I’m looking forward to that.  Allagash White is a real strong sell for us this time of year.”


I wanted to find out how the mainstream brands were doing in more traditional bars (more on that later), and was surprised by what I heard from Steve Uliss, the owner of Firefly’s BBQ (Framingham, Marlborough and Quincy).  Have you seen any changes in what beers people are drinking over the past year, I asked him.  “Yes,” he answered.  “We’re selling more microbrewery brands.” He noted Butternuts Porkslap Pale Ale and Landshark Lager (the latter being an A-B brand, actually).  He also mentioned the biggest sellers across their three stores as Samuel Adams Boston Lager, the Samuel Adams seasonal beers, Bud Light, Bud, and Blue Moon. 


What else? Ken Majka, owner of the Lady Killigrew, tucked away out in Montague, sees beer prices going up and up, but “people have continued to consume and pay it,” he said.  “A few years ago, if you’d asked me if people would buy a $7 beer without thinking about it, I’d have said, ‘no way’.  But they are.”


“Local beer is good for us,” he continued, “and out here, ‘local’ kind of means ‘from New England’.  So Smuttynose does well, and Mayflower is great, does really well.  We pull no punches, we only serve the good stuff.  We have four taps.  We’re putting more in, getting a coldbox, but we’ve been too busy to do construction.”


It’s obviously not all toss it up and watch it fly; there are large pockets of reality in craft beer sales.  Take the Italian craft beers that everyone was so hot and bothered about last year: chestnut beers, tobacco beers, $25 a bottle beers. 


“The Italians?” asked Gary Lucia, beer manager at Vinnin Square Liquors in Swampscott.  “We got rid of them before the recession.  They were crazy.  We still have a few – Baladin, Panil Barriquée – they’ll be fine.  I’ve seen a trend to the more economical buys on the craft side.  Sixers and varieties are still alive, but some of the Belgians and higher-priced imports are treading water.  Instead of the $1O/75Oml bottle, they might look at Bear Republic in a $5/22oz.  Racer 5 is a great beer, 7% ABV, and it’s consistent.  Still, anything new from Dogfish immediately leaves the store.  I don’t understand it, he’s just making crazy beers.  Anything rare sells: Ballast Point Sculpin IPA was here for about a week and it was all sold; Avery 15th Anniversary, the same way.”


Sometimes it’s just buying less.  “We see people that were buying cases of craft beer,” said Demuth, “now maybe they’re getting 12-packs and maybe a case of domestic.”


A DOMESTIC DISTURBANCE.

Speaking of the domestics . . . all three of the biggest American brewers went through some shuffling last year (which, of course, left all three of the biggest American brewers no longer American: the largest American brewer is now Massachusetts’ own Boston Beer Company).  That seems to be shaking out okay. 


“The Miller Coors thing seems to be working out pretty well,” said Gomes.  “Bud’s been taking some price increases, and I’m sure that’s part of the acquisition: the Belgians want their money back.  Always happens.  It’s still doing okay with our customers; they gripe, but they buy.”


Lucia saw brand emphasis shifting.  “InBev would like to bury some of the other brands AB distributors are carrying,” he said, but he’s not talking about outside brands, he’s talking intramural rivalry.  “They’d rather they sold Hoegaarden than Shock Top!  They’d rather promote their beers than the Michelob and Bud beers that spun off recently.  I wouldn’t doubt that.”


Demuth thought things weren’t settled yet.  “A lot of it’s still in progress,” he said.  “Some of the companies have cut back: positions eliminated, they reduced staff.  But that hasn’t affected us.”


Something that could have big effects: the Belgium-based top management of Anheuser-Busch InBev announced that they intend a major consolidation of A-B wholesalers in America.  It’s still early, but that’s been a concern since before the merger, and something that could seriously change the landscape; not just in Massachusetts, but across the country.  A-B wholesalers have largely been spared the consolidation taking place in other houses; it could be their turn next.


That’s at high levels.  As I said earlier, I wanted to find out how things were going for the major brands in bars that didn’t focus on craft beer.  So I talked to Mike Cronin, owner of Cronin’s Publick House in Quincy.  “We’re a blue collar, working class bar,” he said, “so we’ve continued to have good luck with Bud brands: Bud, Bud Light and Mich Ultra.  We don’t really have a lower-priced option.”

He’s been trying to help that blue collar clientele.  “We’ve absorbed price increases,” he said, “though maybe our profits aren’t as good.  We’ve seen prices from all of our vendor shoot up; most of them put in a fuel surcharge, and then it never came off.  We may have seen bottle sales shift to draft because of the cost.  We keep our draft lines very clean, we have them serviced every week.”


As the warm weather comes in, he’s seeing Bud Light Lime tick up, but he’s also seeing an uptick for Corona Light; “People are adding their own limes,” he said, chuckling.  Blue collar or no, he’s also seeing pretty good sales on Samuel Adams Summer Ale. 


BUYING MORE, SPENDING LESS

The major imports – Corona and Heineken – stumbled over the past 12 months, but it’s hard to say why.  It might simply be a matter of money.  “You do see a lot of people price-shopping, and more sale items are moving,” said Demuth.  “The budget brands have picked up, as a certain percentage of customers trade down.  Things like Keystone Light, Natural Ice, Busch, High Life: they’re through the roof.  I look at my Keystone Light sales, and I see someone who was drinking Coors Light.  High Life used to be a premium brand, then it slipped in price.  Now it’s selling tremendously.  That’s trading down.”


“There is downtrading,” agreed Colonial Wholesale President Frank Sousa.  “That could have been predicted.  Probably the best period to compare this to was the federal excise tax increase in 1992.  It created opportunity for the bargain brands.”


Sousa’s seeing motion on package sizes, too.  “The 18-pack is a winner; the move to the 18-pack was unanticipated,” he said.  “On a per can basis, it’s almost always more expensive than a 3O-pack, but the pricepoint is lower.  If you study a little bit of history, talk to people with institutional knowledge, you could have predicted it.  Pricepoints have always been part of the business, but you have to make judgments on where to go.”

“It’s a time of opportunity for legacy brands,” he added, “but it all depends on how the typical consumer would evaluate their quality.  It’s all about price/value.  There are no true local lager brewers any more.  Someone has to fill that role.  Small craft regional brewers touch some of those characteristics, but they tend more to be product-oriented than brand-oriented.


It’s hard for them to hold onto the concept of a flagship – Samuel Adams being the exception.” Sousa showed admirable restraint in not mentioning Narragansett, one of his brands, which is having some small but significant success re-establishing itself as one of those local lager brands.  Something to watch for in the future.


Shane Blanchette is the Vice-President of Sales at Consolidated Beverages in Auburn.  He’s seeing great sales . . . at a price.  “We’re off to our best start in a number of years,” he said.  “The downside is that customers are trading down in brands; the lower-priced brands are on fire.  Meanwhile, our craft portfolio is exploding, double digits, better than it ever was.  Craft drinkers are staying loyal and there are more people getting into that category.  They’ll have a set; they’re not loyal like a Bud drinker, they’ll have four or five that they’ll drink.”


One premium mainstream brand that’s not been traded down from is the hot newcomer that blew into town last summer.  Now it’s back after a slowed-down winter.  “Bud Light Lime?” asked Lucia, and laughed.  “It came back with a vengeance.  I am constantly trying to figure out the numbers on that one every week.  I try to order every other week, but it’s never the right number.  They always buy more.  Having to pay attention to beers like Bud Light Lime is frustrating, I’m a craft beer guy.  But they pay for all my high-end beer, and I do appreciate it!”


If I seem to be ignoring the elephant in the room – the frighteningly slack economy – it’s because the economy – for now, at least – seems to be ignoring beer.  Wine sales are hurting, especially north of the $2O mark, but beer continues to be at least steady, if not growing.  Craft does continue to sell well, and sales are up; light beer remains steady; bargain brands are booming.  The only categories that aren’t quite as buoyant are the imports and the really expensive single bottles, and even they still sell, with cautious ordering. 


Majka at the Lady Killigrew summed it up neatly, if a bit profanely.  “I couldn’t be happier,” he said.  “We opened three years ago.  Everything was great, and then last year, it’s ‘Oh shit’.  But the numbers keep going up, while we wait for the ball to drop . . . but it hasn’t.”


Things have changed tremendously in the world of beer sales in the past twenty years, fifteen years, five years . . . twelve months.  “The world is changing,” Joe Gomes summed up.  “We have to adapt.”  Now that taxes will be going up, you’ll have to adapt to what is likely to be an unfair environment, and figure out a way to compete with cross-border bargains.  You’ve had to adapt to new wrinkles in big brands that seemed like they would never change – something that’s probably not over yet. 


Adapting means selling different beers, and managing a much, much bigger list of brands.  It means learning as much about beers as you ever did about wines.  It means keeping an eye on trends beyond ordering more cases of Beer and Beer Light when holidays, like the July 4th comes around. 


Beer still make you tons of money; it probably keep your doors open.  Craft brings excitement and a sweet drop-down to your bottom line.  Bargain brands keep people coming through the doors, keep them as your customers. 


There are clouds on the horizon, but it’s still a great day in the beer business . . . so far. 


The world is changing.  We have to adapt. 




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