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Monday, June 14, 2010

The Six-Million Barrel Craft Brewery

Last week, Abby Goodnough reported that Boston Beer is attempting to redefine "craft brewery" to avoid getting hit with a tiny tax hike. The federal definition puts a cap at 2 million barrels, which Boston Beer will soon surpass. As a consequence, Jim Koch is scrambling to try to change the law:
But help may be on the way: Senator John Kerry, Democrat of Massachusetts, along with Senator Michael D. Crapo, Republican of Idaho, introduced a bill last month that would increase the yearly production limit for small brewers to six million barrels.

The bill would also cut the excise tax rate for small brewers to $3.50 per barrel, from $7, for the first 60,000 barrels produced, and to $16, from $18, for each additional barrel. A similar House bill has several dozen sponsors. The Brewers Association created a distinct definition for craft brewers, said Bob Pease, its chief operating officer, to differentiate small companies from big ones that were also marketing certain beers as craft.
First, the basics. For any brewery producing less than two million barrels, the taxes break out like this: $7 on the first 60,000 barrels, and then $18 a barrel thereafter. Once a brewery hits the 2 million barrel mark, all barrels are taxed at $18. But hey, you gotta draw the line somewhere. Two million barrels is a huge number. For perspective, keep in mind that all the other 1600 craft breweries combined only produce 7 million barrels to Boston Beer's two. By no definition is Boston Beer small.

And by my calculation, Boston Beer would only paying $660,000 a year more under the current rule (out of a tax burden of $36 million) when no longer classed as a craft brewery.

When they hit the 2-million-barrel mark, Boston beer would have to pay the feds $36 million. But if they only brewed 1,999,999 barrels and were still classed as a craft brewery, they'd pay $35.34 million. So it doesn't seem like a catastrophic hit. What it looks like instead is that Boston Beer is trying to use the milestone to roll back taxes in a more substantial fashion. Under the scheme Koch proposes, his tab would decline from $36 million to $31 million when brewing 2m a year. You know the old saying, a million here and a million there, and pretty soon you're talking real money.

I would be in favor of the proposal to lower taxes on craft breweries, but I see no reason to create a law that would give Boston Beer a tax advantage until they grow to three times their present size. The idea is to encourage small craft breweries. Once you hit two million barrels, you ain't small no more. Take it on the chin, Jim, and pay Uncle Sam the full tab. You can afford it.

11 comments:

kevin said...

I'm curious: who's the next largest "craft" brewery after Boston Beer Co? (And, for that matter, who's the smallest non-craft brewery?)

Chris said...

Here's the list of the Top 50 producers by volume:

http://www.beerinfo.com/index.php/pages/top50breweries.html

Depending on your definition of "craft", the next largest after Boston is either Yuengling (#5) or Sierra Nevada (#6).

The smallest one that I'd consider "non-craft" is Cold Springs at #48. They do make some decent stuff under contract (like 21st Amendment), but their house brands (like Gluek) are almost universally reviled by beer geeks.

There's a ton of mediocre (or down right bad) beer on this list:

http://www.ratebeer.com/brewers//cold-spring-brewery/1306/

Anonymous said...

Wow, only Anheuser-Busch, MillerCoors, and Pabst are bigger breweries than Sam Adams. How many barrels do the Big 3 produce? If Sam Adams 2 million barrels are close to the big 3, they have truly outgrown "craft" status.

Anonymous said...

Okay I found out:

Total US Beer production 2009:
205 Million Barrells

Craft breweries only produced 9 million of the 205 million total barrels in 2009.

The Big 3 made 196 million barrels, compared to Sam Adams 2 million.

Even if Sam Adams ramps up to 6 million it is tiny compared to the Big 3.

Anonymous said...

After seeing the plight of smaller breweries in the documentary "BEER WARS" I'm all for the changing of the law. It's ridiculous the amount of sway that Budweiser has--they even bother themselves with sueing smaller breweries for stupid things like using "punkin" on their label (Dogfish). Yeah, they have the greed to do things like that, as if a little brewery like that is a threat to their billions. So I say any money the smaller breweries can save, let them! Laws need changing as the times change! Especially since the old laws don't apply to the new beer boom outside of the Budweiser Beast, and the Budweiser Beast has enough lobbyists to choke a Clydesdale! Power to the smaller breweries!

Scott Davis said...

Meanwhile, Boston Beer is pushing their new "We really are a small brewery" ad campaign. They must have been focus grouping and felt that inevitable backlash of growing too big. It feels only a bit disingenuous for them to make this claim while lobbying for the change in the tax code. -Scott

rusty said...

i'm a little late to the game on this one but this is right on the money. the real question to me these days is "why should we care about boston beer company anymore at all?" are they ACTUALLY craft and all that the word implies? not anymore, not for a long time. they make several different beers that all vaguely taste the same, just different color.

Anonymous said...

I've heard JK use the term 'craft brewery' or 'craft beer' in Sam Adams’ ads.

While he may now be lobbying to get a tax break, the initial concern may have been that if his company's status changes he could no longer use the term 'craft' in ads, and for that and other reasons his beer would start to be perceived differently.

Big companies have 10- and 25-year plans or longer. On that scale, it's easy to see that once he loses 'craft' beer status it's only a few years (< 5) before his company starts to be not only perceived as a ‘big brewer,’ but will actually become one (as far as the market is concerned), forcing him to compete with the real ‘big brewers,’ with which he might not, yet, want to compete.

In reality it’s already happening. I frequently see small stores, or stores in areas without a large demand for real beer, and who because of this can only carry one ‘craft’ beer, and these stores are more frequently filling that slot with Sierra Nevada and even New Belgium, and not Sam Adams.

In this position, having limited ability to compete with the really giant breweries at the top because of the giants’ sheer size and reach, and squeezed from the bottom by what’s perceived as ‘real’ beer like Sierra Nevada Pale Ale, Sam Adams is in distinct danger of either stagnation or even losing market share if they get ‘big beer’ status and reputation too soon. It may require legislative tricks but it’s usually safer being the big fish in a little pond than the little fish in a big pond.

Part of the fault also is Sam Adams’ beer. Their beer used to be my ‘go to’ beer in the early 1990’s. The Cream Stout, the Cherry Wheat, and even the lager were great beers. No matter where I was I could usually find a Sam Adams, and if so I’d have something to drink.

Otherwise my only option was the Bud/Coors/Miller/Pabst beers, and I literally wouldn’t and still won’t drink them for free. It’s not that I’m a snob, I just don’t want to be poisoned. Their beers are more chemicals and sanitizer and fining and anti-foaming agents and pesticides than beer, and most people know that that’s where the cotton mouth and headache and hangover come from, much less so than the alcohol, if at all (and it’s not at all, in my experience). I wouldn’t feed a single one of the Big3 beer co.’s products to a condemned man or a free dog.

But I stopped drinking Sam Adams long ago. It wasn’t that recently that Sam Adams turned into a ‘headache beer’ (as I heard someone refer to them) just like the others. And while the residual-chemicals-in-beer issue is rarely named openly it’s really become a huge problem down to even the smallest micro brewery (ATTENTION BREWERS : THERE IS NO SUCH THING AS NO-RINSE SANITIZER!). Like the guy who referred to ‘headache beers,’ he doesn’t complain to anyone, he simply bad mouths the product and walks away from it, and the beer company has no idea why the numbers aren’t where they should be, or why their next two smallest competitors are gaining ground on them, or why they’re starting to be perceived as ‘big beer’.

Sierra Nevada is one of the cleanest hangover-free beers I’ve had, moreso than most of the craft and micro market, and even moreso than quite a few of the so-called ‘organic’ beers out there. It’s not good for Koch that that’s who’s nipping at his heels. So for good reason, Sierra Nevada and New Belgium and a couple of the other larger craft brewers are chipping away at Sam Adams from the bottom, and they’re so close to the top of the mountain there’s little place left to run.

So to sum up, it seems that Koch’s options now are either 1) make sure he keeps being perceived as small so he doesn’t have to get into scraps with the really big guys until he’s ready, if he ever will be, or 2) have his ass kicked by the two or three of four next smaller breweries making (in my opinion) basically more drinkable beer, or 3) sell out to #s 1 or 2 and avoid the whole problem. Low taxes may be nice, but #1 seems to be the only route to long-term survival.

Jeff Alworth said...

Anon (July 31), do you have any links to support the Boston Beer = chemical beer contention? I would find that MOST interesting, if true.

Anonymous said...

I couldn't agree more. You hit this exactly on the nose.

Anonymous said...

A few things this article and the comments following make me realize:

1. Let's move away from the progressive taxing. Small or big let's keep the tax the same. Even better, move away from the three tier system and let the big breweries compete with smaller ones...that's right, the fact that we have a healthy craft industry is testament to the companies that make up the industry and their willingness to push past the marketing power of the big 3.

2. Headache beer is a function of ingredients, dehydration, and filtration. Highly filtered beers lack the nutrients that facilitate the processing of alcohol by the body, compounded by drinking too little water with this type of beer. Try some unfiltered home brewed beer and you'll have no worries...full of nutrients and brewer's yeast. No rinse sanitizer is used on lots of things and its silly to think you would consume enough to cause any problems. I use no rinse sanitizer while making my brew and have never had a problem.

3. The fact that Sam Adams is less than 1% of the beer industry is proof that they are still a small brewery. I still think we shouldn't treat them differently, but I can't support the argument that they are not small. They are tiny...There is more bud light spilled on the bottling lines than there is sold by sam adams....and Sam Adams is #4.

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