THE GIST
Alarm bells are sounding for the beer industry as spirits producers work to amend federal excise taxes and other regulations around liquor-based, ready-to-drink cocktails (RTDs). Beer has been losing market share to spirits for two decades, and beer makers see lower taxes as a threat that could provide wider retail availability for spirits-based RTDs and increase spirits’ dominance.
This challenge was amplified in an April 8 newsletter from Beer Business Daily, which reported that Boston Beer Co. founder and chairman Jim Koch sent a letter to several beer industry trade groups urging them to “wake up” and work together to “push back against this growing campaign.”
In the letter, Koch calls for a unified opposition to lower excise taxes and greater retail availability for spirits-based RTDs. The Distilled Spirits Council of the United States (DISCUS), a trade group that’s the primary backer of these proposed reforms, is lobbying at federal and state levels for the change. According to DISCUS, 13 states are currently considering new RTD legislation.
As Koch put it in his letter: “For twenty years, spirits companies have eaten our lunch. … Let’s not let them eat our dinner.”
The beer category has been largely stagnant or losing volume in recent years—except for the explosive growth of hard seltzers and other flavored malt beverages (FMBs). FMBs are a key part of what’s kept the “beer” category afloat—they’re taxed at the same rate as beer and are governmentally categorized as beer. They’ve grown their share of the beer category from 7% in 2017 to 15.7% in 2020.
WHY IT MATTERS
The economic necessity of hard seltzers/FMBs is true for small and large beer companies alike. The Brewers Association (BA) reported craft beer volume declines of -9% in 2020, an unprecedented drop explained largely by COVID-19’s closure of bars and restaurants. But if craft breweries’ hard seltzers and FMBs are taken into account, craft beer volume would have grown +1% in 2020.
Beer companies as a whole need FMBs to maintain any kind of a market foothold against spirits. But spirits-based RTDs compete with hard seltzers for drinkers’ dollars, so an explosion in spirits-based RTD sales would come at the expense of the beer category. This becomes relevant to beer producers, as DISCUS’ proposed regulatory changes would likely make spirits-based RTDs cheaper to produce and more available on retail shelves.
RTDs are already expected to grow in the U.S. at the expense of beer and FMBs—even without the reforms DISCUS is pushing. RTDs represented 6% share of total alcohol sales in the U.S. in 2019, a slice that’s expected to increase to as much as 25% by 2024. That’s according to data cited last year in a DISCUS presentation by Brandy Rand, chief operating officer of market analysis firm IWSR.
“It’s not exactly that RTDs are pulling just from the beer category, but overall they’re actually adding more volume to total beverage alcohol,” Rand noted in the presentation.
But the slice they do potentially steal from beer is significant. In his letter, Koch writes that DISCUS estimates beer could lose 45 million barrels should these reforms pass. For context, that amount is more than Bud Light, Coors Lite, Miller Light, and Michelob Ultra sell combined in chain retail stores tracked by market research firm IRI.
The reforms aim for two main goals:
To lower excise taxes on spirits-based RTDs: Currently, spirits-based RTDs are taxed at a much higher rate than their malt-based counterparts, such as hard seltzers. Federal excise tax for a 12oz can of a 6% ABV RTD beverage is 5 cents for a malt-based product, 10 cents for one with a wine base, and 15 cents for one with a spirits base. Excise taxes are also higher on spirits at the state level compared to beer or wine. This makes spirits-based RTDs more expensive to produce. DISCUS is pushing to have excise taxes lowered to be more equivalent with malt- and wine-based products.
To increase retail availability of spirits-based RTDs: In many states, distilled alcohol can only be sold in certain stores, whether private liquor stores or state-run liquor stores. About a third of states allow liquor to be sold in grocery stores. DISCUS would like to change that, freeing up more grocery and convenience stores to carry spirits-based RTDs. This would put spirits-based RTDs literally on shelves with hard seltzers and beers in more places, increasing spirits’ competition with FMBs and beer overall.
The leg up that malt-based RTDs have had on spirits-based RTDs is two-fold: They’re available in more stores, and they’re often cheaper per ounce. DISCUS’ proposed reforms threaten both those advantages.
The segments of beer that have grown in recent years are craft and imports, while domestic beers have slumped. Drinkers are trading up: paying more for what they perceive as higher-quality products. RTDs—considered a premium product—that are priced near hard seltzer, craft beer, or imported beer would pose a massive threat.
Currently, the largest barrier to more companies creating wine- or spirits-based RTDs is the cost to make and sell them. A DISCUS survey of its members found that among distilleries not already producing RTDs, 61.5% would be more interested in pursuing them if federal excise tax rates were reduced.
Legal changes that allow greater retail access have already proved a boon to spirits-based RTDs’ growth. Virginia enacted a new law in July 2019 to allow beer wholesalers to sell spirits-based RTDs under 7.5% ABV, and to allow those RTDs to be sold anywhere wine is sold. The change was supported by Waterbird, a Virginia-based company that produces spirits-based canned cocktails. Spurred by success in that state, Waterbird is targeting a national expansion this year to 40 states.
It’s these types of efforts, though, that Koch is eager to rally a counterweight against. His own company, Boston Beer, is increasingly reliant on hard seltzers and FMBs for survival—much like the overall beer category. Year-to-date, Samuel Adams’ sales account for 10% of Boston Beer’s overall sales; Truly Hard Seltzer and Twisted Tea combine to account for nearly 75%. Dogfish Head Craft Brewery, now merged with Boston Beer, launched a line of spirits-based RTD cocktails in February as its beer sales declined slightly in the past year. Encroachment from other spirits-based RTDs likely dulls Boston Beer’s shining star brands.
“I appreciate Jim calling the issue out to us,” says Jim McGreevy, CEO of the Beer Institute (BI), a beer industry trade group whose membership includes the country’s largest breweries. “I think [tax] equalization is an existential threat to the industry and we should push back against it in any way it comes up.”
McGreevy says the BI has communicated about this issue with the BA and the National Beer Wholesalers Association (NBWA), and that the beer industry as a whole will oppose proposed changes at the federal and state level. Spokespeople from the BA and NBWA acknowledged they are working on the issue alongside the BI.
“Spirits has always wanted what beer has in terms of access, market, and tax issues,” McGreevy says. “It’s important for us to protect those advantages.”
Across the board, beer recognizes the threat excise tax equivalency, as well as greater market access for spirits, would pose to the industry.
The spokesperson for the BA, which represents the country’s small and independent breweries, echoed McGreevy’s sentiment—expressing a bit of apprehension as well.
“Successful alcohol policy has always recognized the fundamental differences between beer and distilled spirits,” the spokesperson said in a statement. “We accordingly take the threat of tax equivalency very seriously.”
Words by Kate Bernot