Brewbound Podcast: Bart Watson Breaks Down the Cost Pressures Facing Brewers

[00:00:00] Bound Managing: Bart Watson returns to break down the cost pressures facing craft brewers entering 2022 on this week's Brewbound podcast. Hello and welcome back to the Brewbound podcast. My name is Justin Kendall and I am the editor of Brewbound and I am joined by Bound Managing Editor, Jess Implante. Hello, Jess.

[00:00:28] Jess Implante: Hi, Justin. How are you?

[00:00:31] Bound Managing: you know, bones day. Good, good. And I'm also joined by Brewbound reporter Zoe Licata. How you doing, Zoe?

[00:00:39] Zoe Licata: I'm doing swell.

[00:00:40] Bound Managing: It's great to be back here with both of you. And this week, we've got a big guest. We've got Brewers Association Chief Economist Bart Watson here to discuss all the PPI and CPI you'd ever want to talk about. Don't you want to talk about that, Jess?

[00:00:57] Jess Implante: I do wanna talk about all of that. I attempted to talk about all of that over dinner last night and my husband was like, please no more work. So that's why I have you guys though.

[00:01:07] Bound Managing: Yes, exactly. And multiple other people on Twitter and other spaces that you can talk to about these things. But let's get into the week in beer as it was or the last week and a half or so of beer news. And let's just start with Molson Coors and Coca-Cola. We talked about it, I believe last week when Constellation announced they were gonna do a mixed fresco with Coca-Cola and Molson Coors was like, hold up, you know, we've got something else coming. And here it is, Simply Spiked Lemonade.

[00:01:41] Jess Implante: Yeah, it's a sugar brew based on Coca-Cola's Simply juice line, you know, the bottles that come with the dark green cap. And all of these are lemonades, 5% alcohol, 170 calories.

[00:01:57] Bound Managing: You know, when I think about this brand, I think about my late grandma Lincoln's refrigerator, and she always had, I think it was simply orange juice, but she had the simply products. She may have had the lemonade too, but I don't know why I think of grandma's, but this isn't exactly the brand that I was like, oh yeah, if we're going to do another Coca-Cola brand, this is the one that, you know, we're going to roll with. With Fresca, they at least were like, this is a mixer, you know?

[00:02:23] Zoe Licata: Totally.

[00:02:24] Bound Managing: Is this a big mixer? Am I, am I lost here?

[00:02:27] Zoe Licata: I don't think specifically simply is. I think it's just as much is as any other fruit juice type thing. I don't know of any like at home cocktail mix that requires a simply juice.

[00:02:40] Bound Managing: So, I mean, this is a product that is on the way. How soon are we going to see this out, Jess?

[00:02:47] Jess Implante: I believe they said this summer.

[00:02:49] Bound Managing: This summer. Okay. Summer drink.

[00:02:51] Jess Implante: Yeah. It'll be 12 ounce cans in variety packs. They're all based on lemonade. So, you know, it's like, it's a hard lemonade, but based on cane sugar instead of being a flavored malt beverage. So it's an innovation, but it's not too different from stuff we, you know, we already know, but yeah, you were right. It was funny how, how Molson Coors after the Fresca news broke, they were like, Don't you worry. Coke's still our girl.

[00:03:22] Bound Managing: We're still cool here.

[00:03:23] Jess Implante: Yeah. And here we are.

[00:03:26] Bound Managing: Also in the news and all over your Twitter feeds, I'm sure, is the BBC expose on brew dogs. Should we call it alleged toxicity?

[00:03:39] Jess Implante: Yeah, you know, this BBC disclosure documentary, I assume had been in the works for a long time and BBC reporter Mark Daly really dug into a lot of stuff. I watched the whole thing. I feel like I've watched it now multiple times on replays.

[00:03:55] Bound Managing: Who wouldn't want to watch that multiple times?

[00:03:57] Jess Implante: I mean... Based on last night's dinner conversation with my husband.

[00:04:01] Bound Managing: Was it the appointment viewing that the BBC sort of teased that it would be? Did you think it was?

[00:04:07] Jess Implante: I think so. Yeah. And they've been like, you know, dropping little breadcrumbs from this for a couple of weeks to months now. And I think it lived up to the hype. You know, what we knew from last week was that allegedly BrewDog employees in the UK had felt pressure to provide not entirely correct information to import partners in the US in order to speed up the approval of some beers. They didn't really share what was fully in the recipes of a couple of beers. So we reported on that. And that seemed to be one of the big things to come out of this doc, but there was a lot more, you know, like the first, like I would say, two thirds to three quarters of it really kind of focused on, on things like that, like the labeling incident, but then just like calling out the discrepancies between BrewDog always touting how punk they are and then doing things like accepting a lot of private equity. They talked a little bit about their equity for punks crowd raising campaign and how, you know, there's different types of shares and the regular people that have thrown in money to be part of this company have a share that's not as prioritized as highly as TSG partners.

[00:05:15] Bound Managing: I am shocked by that news.

[00:05:17] Jess Implante: Wow. Well, I hope you have your fainting couch nearby.

[00:05:20] Bound Managing: I know I need to get my old fainting couch. So somebody get the smelling salts for me here. But yeah, I think that, you know, your your punk cred goes out the door a little bit when you've got that type of partnership already.

[00:05:35] Jess Implante: Totally. Yeah. And that was like the first big chunk of it. But the second, like the latter part was really where I think some new information started to surface. And they had talked to a lot of former US employees who have worked at several different BrewDog properties over here. And these employees alleged that co-founder and CEO James Watt behaved somewhat inappropriately with women on staff at the bars and guests. Just a lot of that I don't really think we had seen put on the record until now.

[00:06:06] Bound Managing: A lot of people coming forward.

[00:06:09] Jess Implante: A lot of people, yeah, and a lot of people like show like visibly on camera with like their whole name and their face.

[00:06:14] Bound Managing: Yeah, that's exactly what I mean. And when I was talking about BrewDog's punk street cred, I was of course joking because that is the least least important part of this story or of any story. And you are just hitting on, you know, the exact reason why this was the appointment viewing that it was, was, you know, these people that have put their name behind this, these women who have stepped forward and come out and said, you know, this is what happened. This is what I was told, you know, and this is how, how the environment was.

[00:06:47] Jess Implante: Yeah, there's one woman who, you know, she was a manager at one of the taprooms in the Midwest and on like a manager's meeting ahead of, you know, James's first time visiting the place and she'd been working there. Somebody said to her, hey, you're James's type. So don't be alone in a room with him. That sucks. You know, I'm sure it sucks to hear that. Like, hey, like the most important person in our company is coming and you should just protect yourself.

[00:07:11] Bound Managing: Yeah. And some of the fallout from this, you reported on in your story that Manchester's Cloudwater Brewing said that it has begun the process of winding down its production contract with BrewDog for producing beer for Tesco grocery stores. And also, Ascension Cider said that they have asked that their cider immediately cease being sold to Hawk's Taproom or any BrewDog-owned bars. some of the fallout already being felt there, but there is also the fallout on the other end, which is James Watt threatening to sue the BBC.

[00:07:45] Jess Implante: Yeah, in a tweet, James said that the BBC published claims which are totally false, and they published them despite the extensive evidence we provided to demonstrate that they were false. Reluctantly, I am now forced to take legal action against the BBC to protect my reputation. And obviously, you know, we have two different systems of, you know, sets of libel laws here versus there. So, and I would never pretend to be any kind of an expert about how that works in the UK, because I don't know. But yeah, James said that yesterday. He had also taken to a couple of online forums asking people, you know, ahead of the airing of the documentary, like, hey, it's not too late if you participated and you don't want to, you can back out. And told some people that like, they might not be promised, if they were promised anonymity, they might not always get it. So that all happened before it aired and then it aired. And yeah, now he's saying he's going to take legal action against the BBC.

[00:08:36] Zoe Licata: It's interesting that he said that despite the evidence that they have provided to BBC, but he also refused to be interviewed by BBC. So I want to know, like, how much information they actually gave to them. There you go, Zoe. Great point.

[00:08:50] Jess Implante: He declined to participate.

[00:08:52] Bound Managing: You also got a statement from BrewDog chairman Alan Leighton and part of that statement was that they were encouraging folks to reach out to their HR team and use their independent ethics hotline so they can listen and act.

[00:09:07] Jess Implante: Yeah.

[00:09:08] Bound Managing: The rest of that statement does not sound like they're going to act on James. It says he's committed to making improvements to his management style and he will continue that develop under my mentorship. And I think even James had a statement too saying that in regard to some of those accusations about his behavior toward female staff members, he said, hugely regret anyone feeling in any way uncomfortable around me as the program set out. This is absolutely the last thing I want and something I will learn from immediately. I think that the statement before that was that, you know, sometimes he dates when he's in America and he fully accept, I fully accept, I have taken friends, colleagues, and yes, dates on tours of the brewery. I do not consider this inappropriate.

[00:09:57] Jess Implante: Yeah, I mean, I asked like, what are these steps that James is taking to develop his leadership style? And they did not answer anything in specific. Cause you know, like sometimes people will tell you, oh, like, you know, we have a leadership coach or management classes or whatever, but they wouldn't give me anything along those lines. And it was funny because at some points the concept of like James taking women up to like rooftop bars at these tap rooms came up several times in the BBC. And one of the statements that he provided to the BBC that they cited was that he had never once been on the roof. Then a bunch of people in the documentary were like, no, like we saw him and we saw him on, you know, like the security camera. I don't know. I don't know.

[00:10:35] Bound Managing: Yeah. We'll just kind of leave this here and move on to Jess's story on the beverage bites survey by Goldman Sachs.

[00:10:45] Jess Implante: So I could do this real quick. C-store retailers are predicting 10% growth for hard seltzer in 2022. 71% of them say a shakeout is coming or is already underway in the hard seltzer segment. So we will see what happens.

[00:10:59] Bound Managing: And then Zoe, you pointed out a tweet with our featured guest here. What did we learn from Bart that we aren't going to learn in this interview?

[00:11:07] Zoe Licata: Yes. So during our discussion with Bart for this podcast, he had brought up, we had talked about the new permit numbers from the TTB and he said he hadn't got an update yet, but today he just tweeted out that the TTB has posted their final permit information for 2021. And it showed that brewer permits have grown. They grew more than 13,000 permits for this year. But that is the slowest absolute growth since 2013. So there weren't as many new permits growth wise as there has been in the past. A little bit lower than 2020 even that had 948.

[00:11:50] Bound Managing: Yeah, we used to be able to count on at least a thousand new breweries a year, and you can see it in the chart. In 2017, it was 1,673 new breweries. In 2018, it was 1,252. In 2019, it was 1,469. Then it's down to 948 in 2020 and 848 last year. So that's the growth in TTB brewer permits by year. Another sign that the business is slowing down a little bit from those peak years.

[00:12:24] Jess Implante: Yeah, it's interesting to me that we had like a little every other year pattern. And then obviously things happened since 2020 that made that, you know, made the pattern not continue.

[00:12:35] Bound Managing: Yeah, well, that's enough of us. Let's get to Bart. So stick around for our featured interview with Bart Watson. All right, let's bring on our featured guest, Brewer'Brewers Association Chief Economist Bart Watson. Bart, you're one of the best Twitter follows out there. If you're not following Bart, you need to follow him at BrewerStats. Earlier this month, you shared the Producer Price Index for beer inputs, and that includes barley, paperboard, aluminum cans, and freight. And you compared that to the Beer Consumer Price Index. And the PPI line, It curved straight up while the CPI line was just a flat line almost. And Austin Beer Works did the translation work for us. They said, the cost of making beer has increased much more quickly than the cost to buy beer, which is unsustainable for breweries wanting to stay in business. You wrote that something has to give. So what is that something?

[00:13:34] Bart Watson: Yeah. I don't know what that something is, but the two possibilities are brewery margins have to give in terms of getting destroyed as costs increase on their input side and they don't make more money selling beer, or prices have to increase to consumers. I think we're going to see different breweries take different approaches with that this year, but I do think there's the distinct possibility we're going to see sharper than typical in recent year, price increases in the coming months as breweries look to defray some of those input costs that they're seeing.

[00:14:07] Bound Managing: So of those input costs, which had spiked the most?

[00:14:12] Bart Watson: In that index, you know, barley, which brewers don't buy barley directly, and I should say, you know, that PPI wasn't weighted to the percentages of each that brewers have, you know, which is kind of a rough average of components that the breweries are going to see in their supply chain, so not as scientific as it could be. But barley was actually the highest. I think we're going to start seeing that translate into malt price increases in the coming year. And for those who don't follow the harvest forecast, a lot of that's related to the fact that we had really tough crops in both the U.S. and in Canada this year, real hot, dry summers, and so yields were down about a third. in both countries, but we saw price increases across the board and depending on what brewery you talk to, what their cost structure looks like, cans or other packaging, paperboard. I didn't put labor in there, but labor costs are certainly rising for a lot of businesses. All of those are points of pressure at the brewery right now because you're seeing cost increase everywhere.

[00:15:08] Zoe Licata: Is there going to be any relief on the way for those?

[00:15:11] Bart Watson: You know, we'll see. I mean, some of them, you know, certainly the demand side hasn't changed and the supply side is catching up. So aluminum cans are a good example where, you know, prices went up, you know, Blue Bound reported on this with Paul increasing their price structure. Hopefully, as we see more supply come online, that market will equilibrate a little bit more and maybe prices will come back down as there's more supply out there. Trucking is another example. You know, general freight trucking is up sharply, this is a situation where prices are going to rise, when we just don't have enough trucks and truck drivers on the road, and if that balance can flip, which it can, fairly quickly over time, you could see those prices come back down. Unfortunately, I don't think there's a lot of relief in the short-term, that a lot of these things, if you look at why they've gone up, there really isn't relief in the next six months. This may just be a year where those input costs are a lot higher for a lot of breweries unless they're lucky enough to be on a longer-term contract or a security plan.

[00:16:06] Jess Implante: So Bart, we've heard you and other beer economists say that beer is recession resilient, meaning that people will still splurge on it even when economic conditions aren't great. Do you think that gives us any indication of how consumers might respond to price increases in beer?

[00:16:21] Bart Watson: Yeah, well, you know, the thing we're going to learn a lot about this year, at least in relation to a lot of craft brands, is price elasticity. You know, how much, if the price goes up, how many consumers are going to look to buy something that was back at the original price versus follow a brand up at price. And we don't know that, and it's going to be different for every brand and for every consumer. But that's the thing we're really going to have to watch. Are total beer volumes going to change that much? I doubt it. Will beer volumes change for brands that have to take price up more? Maybe. And that's really what brewers are weighing when they think about this is, I can stay at my price and make less money or no money or lose money selling beer. Or I can take my price up and hopefully most consumers will follow me there, but some might not. And that's the equation that brewers are really juggling right now. And it's not going to be easy. And they're all going to have to decide different levels that they're comfortable taking up or not taking up.

[00:17:11] Bound Managing: I mean, we've heard from a lot of publicly traded companies that, you know, Boston Beer, AB, Molson Coors, all talking about taking price. And I mean, the New York Times had a story over the weekend about price increases, one that was kind of ridiculous, that was like, Somebody was talking about the price of their Chipotle burrito going up, and it was like 60 cents. And so while we talk about price increases, they could come in ways that, you know, don't exactly look like a big harm to breweries or their relationship with a customer, I would think.

[00:17:45] Bart Watson: Yeah, you know, and again, this will depend by by customer and brand, you know, in general, crafts demographics are, you know, a little bit higher socioeconomic status, probably willing to accept price increases a little bit more. And I think in general, right now, the consumer is primed for price increases, this isn't just happening in beer, it's happening in lots of areas. And so, you know, this may be one of those moments where you as a company can get away with a little bit more than you could traditionally, because a lot of people are talking about it generally, the general price environment, not just within beer is, is one that's increasing, but At the same time, consumers only have so much money in their pocket. As price is increasing everywhere, people are on unfixed budgets and things are going to give and maybe that's not in the, oh, we'll pay $0.60 more for this. But then when I look at the budget at the end of the month, I don't have money for as much beer next month. I think we have to be sensitive to not all consumers can just eat price increases everywhere in their daily budget, and different people are in different economic situations. I do think this has the potential to have an effect on some brands. And we'll see how much, you know, people are able to follow brands versus, you know, they look to trade down or find brands that aren't increasing price.

[00:18:52] Jess Implante: Craft beer drinkers typically, and correct me if I'm wrong, but tend to be a little bit more affluent and have disposable income to spend on beer. And they obviously, you know, put a value on that for themselves and that they're seeking out this more expensive, harder to get beer. Right? I mean, like... Yeah, yeah.

[00:19:10] Bart Watson: I've heard about this stuff in the past. You've seen in the past that some of the highest growth parts of Kraft were higher price point ones. Again, suggesting that the Kraft customers are a little less price sensitive and a little more willing to pay. But again, put yourself in the shoes of an individual brand that has to raise price and the way you raise price, it filters through with distributor, retailer, and so you know, six pack goes up, you know, x amount, you're now maybe priced against a set of brands you weren't before. And so maybe a customer is willing to pay that price when they see your brand on the shelf versus a brand that before was, you know, priced above you, and now it's priced similarly, you know, it just, it leads to different decisions in their mind. So As a whole, am I worried about this dragging on craft volume? Probably not that much. I don't think it's going to be a huge drag on overall volume. But I look at it as a category. Individual brands are thinking about it in terms of their brand, where their brand sits on the shelf versus competitors above and below price. And if that moves you within that, that can change the equation for individual brands. So I always try to keep in mind the difference between what's going to happen at the category level and what's going to happen to individual breweries and brands. I think that could be different here where, yeah, craft customers are probably not going to seek out whole different categories because average craft price increases a little bit faster than it has in previous years. But they might shift what brands they buy within that broader craft portfolio because of it.

[00:20:29] Bound Managing: We've spent a lot of time talking about cans recently, but that's not the only packaging issue out there. The BA recently reported that the American glassmakers are not taking any new customers until 2023, which means new orders will have to be imported. For brewers out there looking for alternatives to cans, and now they possibly need an alternative to glass, how should they approach their mix?

[00:20:55] Bart Watson: This is going to be different for every brewery again, and your brands, and what you've done previously, and what you have packaging lines for. But I think they've got to be flexible. Brewers need to be more open to different stuff. I think we're going to see a real hodgepodge of packaging strategies this year. For brewers who can't get printed cans, it's going to be a mix of different label types, pressure sensitive or shrink. Looking at if they have a bottling line, again, assuming you can get packaged. One clarification there is, a bottling company not taking on new customers doesn't always equate to zero supply, right? There are still brokers and so maybe they just allocated those bottles to brokers and so you can find them that way. But I think flexibility is going to be the name of the game and we're going to see brewers who have to put things in packaging that looks different than the year before and have to really strategically think about their mix of brands and which packages need to be allocated to which brands to maximize sales. So it's just going to be a lot more intentionality and I think a lot more thought on on packaging in those sales than in a normal year.

[00:21:59] Jess Implante: Does the spot market exist for glass the way it does for cans?

[00:22:03] Bart Watson: Yeah. I think a lot of the brokers, and I've talked to a lot of packaging brokers in recent months, given some of the challenges, they're a one-stop shop. They'll sell you bottles as well as they'll sell you cans. I think that's developed a little differently just because of the differences in the industry, but certainly still exists in the same way that it does for cans.

[00:22:24] Zoe Licata: What are you hearing from producers with all this and like what they're trying to do to combat this?

[00:22:30] Bart Watson: Well, you know, I think they're trying to catch up. I mean, you know, to give them some credit, some slack. Nobody anticipated an event like COVID that so dramatically changed our demand environment. You know, for cans, we had seen, you know, some level of increasing demand, and that's maybe accelerated in recent years as, you know, water brands move into cans. We're now seeing, you know, the canned cocktails and canned wines. but nobody expected this sudden massive additional jump with the channel shift that we saw from COVID. So I think a lot of them are doing what they can to catch up. Certainly we have more can manufacturing coming online than at any point in recent memory, but that can only happen so fast and they can only swing so far, right? They're all aware that this channel shift that led to the increased demand, part of it is swinging back. And so nobody wants to build 20 facilities only to have 10 of them sit idle in five years. you know the can the can makers are certainly in a tough spot as well because of this rapidly changing environment.

[00:23:29] Bound Managing: You mentioned the can makers and for Ball they've got a number of facilities that are coming online but one of the things that I took away from the Brewers Association collab hour with American Canning was that these new facilities a lot of that volume is already spoken for, basically, when the shovel hits the ground. And so when you look at what Ball has done, a lot of this speaks to a publicly traded company looking for efficiency. And I can totally understand it from their standpoint that some of these smaller runs for craft brewers, it's not as efficient. They have to change the plates. They have to do more work, basically, and make less margin in that time. So they want these longer runs. So when you look at that, you know, and even with more capacity coming that's already sold, I guess that leaves a lot of folks looking for solutions out there. And so, you know, when the stories about this first hit, there was a lot of talk about this is an existential crisis. It's, it's a breaking point for a lot of breweries. Do you see this being that big of a moment or is that maybe a little bit of a hyperbole?

[00:24:40] Bart Watson: I think it depends on the brewery and, you know, and what fallbacks they're able to find. I mean, if you're a brewery that is only in cans, so you can't, you know, pivot to bottle, and has a brand and cost structure that was built entirely around printed cans, having that turned over with six weeks notice in many ways is existential, right? You suddenly need to find a whole new supply for your business. You need to see if you can make that cost structure work. And then you need to plan out and keep going with this business and this new cost structure that suddenly exists, again, after you maybe even set price for 2022 already. So having conversations with distributors and retailers and seeing if you can change stuff. I don't think this was an existential threat for the craft business overall, but for individual businesses, if you talk with them and understand how much the ground underneath them shifted with this, I think it was a real challenge for many of them, especially after a year where a lot of them had finances that didn't look as good as they could have because we just went through COVID. It's not like we're dealing from a position of strength and healthier for every craft company. you know, our brewery is going to make it through it. Yeah, they're resilient. And I think, you know, most, the vast majority are, but that's not to say that for some, this won't be the, you know, the straw with many, many straws in the last couple of years that, you know, really breaks the camel's back.

[00:25:58] Zoe Licata: Similar to this, these changes seem to be impacting new customers a bit more because they can't necessarily meet these minimums. What impact does that have on the competition space? Is this going to make it harder to see these newer entrants be more successful than some of these bigger already existing places that already have these customer relationships and everything?

[00:26:21] Bart Watson: Good question. I think the group that this is affecting most is the ones who have medium scale. They do not have the scale to go to these big long runs, but they are big enough that they were already buying from Ball, buying printed cans, which already requires a certain amount of scale that your average group hub or taproom does not have. For a new brewery getting in right now, they were going to be in sticker or shrink, or they weren't going to be buying from Ball or from Crown directly already, so it doesn't shift too much. But one thing it does is it makes that leap for them bigger. For the brewery to go from one of local scale and selling cans out of the tap room to one that can compete or closer to compete, let's be honest, on things like scale and price with bigger, wider, distributed regional breweries, it makes that jump bigger. And people have talked about this before. One visual I've heard is the breweries. You've got to swim from island to island at various sizes. I think Lester Jones has used that metaphor in the past. And this is one of many things that I think is making that swim longer, that these jumps become bigger. You have to scale up larger when you're trying to make these jumps. And I think it's going to be another thing that, at least in the short term, makes it tougher for breweries to expand at the rate that we've seen. Some still will. There's always unicorns that can find a way to really just, you know, grow in any environment. But it's just another thing that makes it harder to scale up and puts the breweries that were kind of on an island and now find themselves, you know, surrounded by water, you know, in a little bit more of a challenge.

[00:27:50] Jess Implante: Do we know about how many breweries live in that middle ground on that island?

[00:27:55] Bart Watson: Yeah, I think it's a couple hundred. You know, if you looked at the Brewers Association lists, you know, it's somewhere in the top 50 down to kind of maybe even some large micros, depending on your packaging, you know, draft mix. So it's a couple of hundred, but it's much larger in terms of share of craft industry. I don't know the numbers off the top of my head, but just kind of ballpark, maybe a quarter of craft volume sits in this space since, again, that long tail, lots of breweries, but not a ton of volume even collectively. And this is a space where people had started to scale a little bit more. So it's a little bit more of a big deal.

[00:28:27] Bound Managing: One thing I'm curious about, you know, we're not even a month into 2022, but I'd love to get a general sense of your view of Crap Brewery health as we enter this year. Like, where are we at?

[00:28:41] Bart Watson: You know, I think it's a mix. Some breweries had their, you know, their finances in order kind of when COVID hits, and I think most of them have done reasonably well. The government support clearly helps, you know, PPP, RRF, for those who got it, clearly plugged a lot of the gaps for For many breweries, that's one reason we haven't seen the closing rates spike. Brewery health was terrible. We'd have a much higher closing rate than we have now. That said, still it's a challenging environment. Draft's still not back to where it was. I think like many of the numbers, it's in between. It's probably in between where it was for many of those companies when the pandemic hit, but improving relative to last year and hopefully trending in the right direction for many of them as they've figured out this new environment, albeit with changes in the supply chain, and started to chart a path back to where they were.

[00:29:28] Jess Implante: we were talking before we started recording, and I think it's an interesting, I mean, of course, I think it's an interesting question, it's my question, but will craft breweries be able to get back to 2019 levels, even if draft sales remain kind of saggy the way they've been? Because you did a collab hour in December and had noted that restaurants are back to 2019, but one thing that's really lagging behind is draft sales. So if draft sales stay the way they are, what does 22 look like for craft breweries?

[00:29:58] Bart Watson: I think if draft sales, you know, so draft sales to situate those who didn't listen to that are probably somewhere between minus 15 and minus 20 versus where they were in 2019, you know, seasonally adjusted. So, you know, that's much better than, you know, where we were, you know, 2020 full year was minus 50 draft versus versus 2019. So, you know, if we can stay at that, say minus 15 for the full year, that might still be actually be improvement versus 21, where the first half of the year looks more like that minus 50, then, you know, it looked like the late period of the year where we're in that minus 15 to minus 20. Can we get back to growth? I think it's going to be a challenge and really require the kind of the app to resales really kind of pick up and return to the pace that they were at before. package sales seem like they've settled. I think we're going to be at a level where they remain elevated versus 2019, partially because of those draft levels, but below where they were in 20 when we saw that real boom. If you have package number and distributed draft that are both not growing, that puts a lot of weight on that at the brewery to get us back to where we were. Yeah, we're going to be several hundred, if not maybe even a thousand by the end of the year, breweries ahead of where we were when we hit the pandemic. A lot of those doing out the brewery sales, but that's going to take a lot of collective growth. I also say as a final thing, I might answer this question differently if we're talking about per brewery or as a category. I do think craft can get back on a comparable basis and all that to where we're in 2019, probably without draft recovering back to full levels this year. Can we get back at a per brewery level? Probably not, because the difference there is we're going to get back, but with more breweries helping us get there.

[00:31:37] Zoe Licata: We saw last week that Marin Brewing is closing after 33 years, and they cited among the many reasons why was they hadn't received some of that Restaurant Revitalization funding. Because restaurants have already reached those 2019 levels and breweries are beginning to recover a little bit, how likely do you think it is that there could be another round of that funding help?

[00:32:01] Bart Watson: We're still hopeful. You know, there's still bipartisan support for this. You know, getting things done in D.C. right now is complicated, as you can see from many of the packages that are up there. And I'm sure our federal affairs manager, Katie Marisik, could wax more poetic than I on this. You know, big, big spending bills, big tax bills are tough to pass. So within the context that doing anything that costs a lot of money is challenging, you know, we think there is support for this and that it's a no-brainer. You know, as I've said many times about breweries, and I would also apply to restaurants, Not being dead does not mean you're healthy. Restaurants being back where they were in terms of consumer spending levels doesn't mean they're all doing great. Many of them still have additional costs. Many of them have made up those sales with things like delivering to go, which may make them less money than in-person dining, depending on their cost structure and other things. So we think this is still important and the Marin Brewing, I think is a perfect illustration of a business that might be the decision between them closing and them being able to continue on and thrive in the future. So those are the kind of stories we're going to tell and hopefully policymakers will hear it.

[00:33:11] Bound Managing: You mentioned it earlier, we've seen that lower than sort of expected brewery closure number. Is that something that you're sort of expecting to hold this year or what are we sort of looking at as we enter this year?

[00:33:26] Bart Watson: I've been predicting that it's going to rise for two years and those predictions have thankfully been wrong. I mean, this is another one that I keep wondering how something hasn't given, given we've seen these sales drops and all these challenges. I think for one, it suggests that brewery financial health was perhaps better than many people expected going into COVID. I do think the government support helped. Not everyone got RF, but more than 1,000 breweries did. Lots got PPP loans, most of which hopefully were able to be forgiven. I do think we've seen breweries receive helpful support. But, you know, we'll see. I mean, in the long run, you know, this is a competitive business. It's one where costs are rising. And for a lot of breweries, again, they're hospitality businesses where that landscape can change pretty quickly on them. So I may be less pessimistic than I have been the last couple of years where I've been predicting closings will rise just because we haven't seen them rise. But, you know, I'm not counting it out that we could see those closing numbers start to increase at some point in 22 if, you know, if we stay in the unsettled environment that we're in and we don't see additional support for small businesses.

[00:34:29] Jess Implante: Bart, I think, you know, you talking about closings led to one of our favorite industry adjacent terms here at Brewbound, which is that breweries hermit crab into each other, meaning that one either goes out of business or graduates to a bigger space and another one moves into where they had been. And I know one way that you track like who's opening is TCB permits. So do we see anything in the TTB permit numbers that indicate more breweries are going to open? that number had been slowing down for a while, right?

[00:34:58] Bart Watson: Yeah, and what we see in both that number and in our database is that openings are declining, that we still have openings that outpace closings, but that openings have decreased over time and that decrease has perhaps accelerated. So the number of closings was going down pretty consistently pre-COVID and has accelerated a little bit more now with COVID. The TC teases me right now every day, they keep saying they're updating that page where they have the permits, but then they're updating some other part of the page, not the brewery number. We don't have final 2021 numbers yet, but through three quarters, it shows what we've been seeing, which is again, a decrease in the number of new permits. We'll see how this plays out. Putting myself in the shoes of an entrepreneur thinking about what business to open, a hospitality-focused business right now, I can just imagine a lot of the challenges. And that's not to say that some people aren't going to be ready for it and go out there and find new business models, particularly in places that are growing or maybe have less of a hangover from COVID. You can see why, you know, given the competitiveness in the marketplace, the maturity of many markets, and the ongoing challenges around COVID, not to mention, you know, things like rising interest rates to borrow money, why we might be in for a period where we have fewer burial grants than we've had in recent years.

[00:36:12] Jess Implante: I'm sorry the TTP is taunting you.

[00:36:15] Bart Watson: They keep saying the updated by date, and the date goes up because they update something else on the page, and I get really excited when they don't have the updated numbers. Perils of being an economist.

[00:36:25] Bound Managing: Speaking of updated numbers, you're working on your benchmarking survey. Can you give us a little preview of what you've seen so far?

[00:36:33] Bart Watson: Yeah, the official deadline is today, but we'll still be crunching numbers for several weeks. So any breweries listening to this a couple of days from now, certainly fill it Brewers Association.org forward slash B-I-P-S, Beer Industry Production Survey. And what we're seeing, I think, is pretty much what I was predicting in our year-end webinar that we gave. Right now, I lined it up, we're over 10 million barrels comparable year-over-year submitted, and it was sitting at plus seven, which I think is what I had predicted for the full year. That's without new breweries, but also not closings, and the expectation there is some sort of a bias. The people who rush to give us their numbers typically have slightly better numbers than the people who we have to drag them out of a little bit more. But I think what we're seeing is very much what I predicted, a bounce back from the lows of 2020, but not a full bounce back. We're not going to get back to where we were in 2019 in the 2021 craft numbers, but things are on the improvements. And one other stat that I shared at HGA is when you look at the long tail and you look at all the numbers, 60% of breweries are back to where they were in 2019. So we are seeing, while the total category is not back, many breweries have recovered to their 2019 volume levels. doesn't mean they've recovered to the revenue or profit levels, given that shifting from draft in the tap room to package might not look as good on the balance sheet. But breweries are getting back at least in volume terms.

[00:37:54] Jess Implante: I know it's funny you mentioned how people who are up and they're really proud of their numbers, they're happy to tell you right away. One thing that I've noticed in spending as much time with those numbers as I have is that when people were either on an upward trend or they're really happy with the year, they will give you every single barrel, like 19,574. And then if they were down, then they are like, yeah, we did 18,400. just the thing that I noticed.

[00:38:21] Bart Watson: Everyone approaches that differently. I've definitely done this enough years. I also think like you in the psychology of the survey and try to interpret what people are thinking. But lots of interesting things. One thing I always try to do is make it as easy and comfortable to report the number whether you're up, whether you're down. I'm very clear, I've done this on your podcast and others before, to never imply that do not publish means a down year. People do not publish for many reasons. And do that precisely because I don't want that there to be a stigma about reporting your numbers but not having them published. So we try to avoid that as much as possible. If you have a down year, we need those numbers just as much. And the people who are having good years, I mean that helps them see their number of perspective and it helps you as well. And having a down year, you know, see it in perspective of everybody who has down years reports it. So I was pleased last year that we got such a good response rate. I was a little worried about this in a year where it was obviously going to be tough. So hopefully this year as people recover, they'll be more excited to give us their good numbers, but they'll also give us numbers they didn't recover quite as quickly as everyone else.

[00:39:21] Jess Implante: So I just wanna clarify one thing that you said that, cause I find that really interesting. If you see a DNP in the book, it doesn't necessarily mean that they didn't tell you what they have. They just asked you not to publish them to show everybody else, correct?

[00:39:34] Bart Watson: Yeah, exactly. Yeah, we get many numbers that are, you know, they give us the number, but they say we don't want to publish that there can be a bunch of reasons for that, you know, we're changing systems, or, you know, you get breweries who, you know, they have different ownership, and they want to hear to kind of see how the numbers are received before, you know, they put theirs in the mix. So I'm very clear and open and never pressure a brewery to publish, I want to get all the numbers, I want to publish as many as possible, but, but I just want to get all the numbers.

[00:40:00] Jess Implante: makes a lot of sense. So one thing that's been in conversation lately is, you know, the definition that the BA uses to define who's a craft brewer, and I will totally admit that I had gotten this wrong in our story about Monster Acquiring Canarchy because I just You know, I used to work at a member brewery and I know that definition and its iterations used to know it forwards and backwards. So, you know, obviously the three main buckets here that members need to be small, so their production needs to be 6 million barrels or fewer. They need to be a brewer, meaning they have a TTB brewer's notice and they make beer, and then they need to be independent. So I'm gonna read off the website. So it says less than 25% of the craft brewery is owned or controlled or equivalent economic interest by a beverage alcohol industry member that is not a craft brewer. So Monster's not a beverage alcohol industry member. I would have thought that would take them out of the set here, but that's clearly not the case. So, I mean, what happens if we see another large CPG company acquire a craft brew or what will happen?

[00:41:03] Bart Watson: I mean, you know, as the definition is written, you know, a CPT company acquiring a craft brewer doesn't change their stats because they're not a beverage alcohol industry member. I will say, you know, I mean, the definition has evolved multiple times and evolves because the industry changes. You know, if you told people who were writing the first craft brewer definition, you know, many years ago that a company like Monster, that Coke has a stake in, would be interested in these tiny little microbreweries, the craft brewery space in general, they would have been flabbergasted. I think the definition has evolved precisely because the industry changes, and who the industry collectively, and the Brewer'Brewers Association is the collective aggregation of the industry. Our board of directors is made up of small breweries. Who the industry collectively views as a craft brewer changes. That changed over time with ingredients, it changed over time with making other beverage alcohol products, which used to be a part and removed as companies have become beverage companies, and everyone was doing that. So collectively, that made sense. We'll see. These are above my pay grade. My job is to read the rules and interpret, I'm an umpire. I'm not a baseball owner who makes the rules of the game. But we'll see how that evolves going forward, and if that's a question the board is interested in visiting.

[00:42:18] Jess Implante: Cool. So the headline here is that the Canterkey brand stay within the fold as do Sweetwater, Green Flash, and Alpine, which have all been acquired over the last year plus by Aphria and now Tilray, which is a large cannabis company. And I wanted to clarify that one just for my own edification.

[00:42:36] Bart Watson: Yeah, we'll see. I mean, you know, I think the definition speaks to kind of who is and who isn't a craft brewer, as well as things like, you know, market advantage, which, you know, I mean, this was something too, and you know, I know, was considered this kind of capital came into the space, you know, how much is suddenly having, you know, a lot of capital behind you, you know, convey market advantage. And, you know, I mean, there's shades of gray here, right? Some of these things certainly do, but they don't maybe help as much as having a network of breweries and know, the things that like large brewers bring to the table. So, you know, where another CBG or beverage company fits is, you know, is something that the BA board of directors, I'm sure we'll, we'll think through and talk through and decide kind of where those lines are drawn and which colors are which.

[00:43:13] Bound Managing: Well, until they get there, we'll look forward to possibly seeing you at an industry event coming up. And if not, we'll likely see you in, well, we'll definitely see you in Minneapolis, barring like whatever, you know, ninth wave or 20th wave of COVID will be in at that point.

[00:43:32] Bart Watson: Crafters Conference registration is open. Hope to see everyone there. It's, you know, one of the things I've missed most in the last couple of years is seeing industry peers in person. So hope to see all three of you and many listeners to this podcast over a beer in Minneapolis, if not sooner.

[00:43:48] Bound Managing: Definitely. We'll drink beer with olives. I think that's the thing they do, right?

[00:43:53] Bart Watson: I don't know. I'm an Iowan, so we try to steer away from Minnesota traditions.

[00:43:59] Bound Managing: I am too, Bart. So, you know, we got that in common.

[00:44:02] Jess Implante: Ooh, are they like your enemy?

[00:44:05] Bart Watson: Every Midwest state has a healthy rivalry with every other Midwest state. Nice.

[00:44:10] Bound Managing: Yes, it's blood feuds all around. So even in-state, it's a blood feud between Iowa State and Iowa.

[00:44:18] Jess Implante: But the most polite blood feuds, right?

[00:44:21] Bound Managing: Iowa State and Iowa, not so much. Maybe with the other states. With that, we'll say that's our show for this week. Thanks to our one man audio team, Joe. Please like, rate, review and turn on that bell so you get notifications when the Brewbound podcast comes out. Until next week, we will thank you for listening and see you then.