Brewbound Podcast: Hard Seltzer, It’s Just Another Word for Innovation

[00:00:00] Jessica Infante: Hard Seltzer. These days, it's just another word for innovation. We're going to talk about it here on the Brewbound Podcast. Hey everyone, welcome back to the Brewbound Podcast. I am your host, Justin Kendall, the editor of Brewbound, and I am joined by my co-host in all things Brewbound, Jessica Infante, the nicest person in the beer industry. Jess, it's been a busy couple of weeks here in the beer industry, aka the Hard Seltzer industry. What are we going to be discussing today? Today we'll be chatting about some of the new Hard Seltzer hitting the market, the MBWA's Annual Convention, and the completion of AB's merger with Kona Maker Craft Brew Alliance. And of course, you can read more about all of these stories and more on Brewbound.com. Solid. Joining our expert panel today to discuss are Lester Jones, the chief economist of the National Beer Wholesalers Association. Lester, thank you for being here. Thank you for having me. Good afternoon. We also have Lisa Derus, a communications consultant and certified Cicerone who ran comms for AB's craft brands for six years. What's up, Lisa?

[00:01:20] Lisa Derus: Hey, how are you? Thanks for having me today.

[00:01:23] Jessica Infante: Finally, we have Komil Gorjuwala, Managing Director of Equity Research at Credit Suisse. Thanks for being here, Komil. Thank you, Justin. We're psyched to have all of you with us. Let's get rolling. Everything is coming up Hard Seltzer. In the last few weeks, we've heard of new introductions from Anheuser-Busch with the Michelob Ultra Organic Seltzer and Bud Light Lemonade Seltzer. New Belgium Fruit Smash and Molson Coors is partnering with Coca-Cola on Topo Chico Hard Seltzer and launching a fourth Hard Seltzer called Proof Point. I'm getting exhausted here. Mike's Hard Lemonade Seltzer from Mark Anthony Brands. The Maker of White Claw is also on the way. Lisa, I'm out of breath. Are we just in re-release season where we're just trading on the brand equity of our top sellers?

[00:02:14] Lisa Derus: You know, if I had to sum up the current Seltzer vibe in one saying, I would just say that as a marketer, I am very bored by Hard Seltzer space at the moment. I mean, exactly what you said. Every new Seltzer brand is just leveraging a pre-existing brand, and those are not really doing anything exciting. It seems like they're just relying on the big brands' names, distribution, and pricing.

[00:02:37] Jessica Infante: Honestly, I feel like we're in the same bucket with the entertainment industry. It's just all sequels and reboots, and it's never really changing. It's another Avengers movie. Absolutely. But with Black Cherry and Raspberry Lime.

[00:02:51] Lisa Derus: Right. Probably the only one I'm a little bit excited about is Topo Chico, but even that's a stretch.

[00:02:57] Jessica Infante: I am pretty excited about that one. I know my brothers are both big Topo Chico fans, so it'll be good to try. Lester, how incremental can these products be? Are they going to grow the segment or are we just going to shuffle market share around?

[00:03:12] Lester Jones: At this point, I think we're going to be seeing a lot of market share shuffling around. When I look at the data as it's rolled out over 2020, those top five brands or so are still owning over 90% of Hard Seltzer share out there. It's just been a lot of churn. It's going to be interesting to see, first of all, how our fourth quarter ends out. I'm already seeing the volumes decline, and the absolute volumes starting to decline in the fourth quarter here, and they're declining at a lot steeper. rate than they did in 2019. In 2019, we had this nice little curve and things gradually float away. Well, the end of 2020, summer ended and things just boom. Now, I'm not sure if that is a can supply problem because we know there's a lot of tightness in the can market given everything that's happened. What I feel is going on is that what's rolling out in 2020, very different than 2019. So it's going to be interesting how this plays out. But back to your original question, a lot of churn in shares amongst the major brands.

[00:04:21] Jessica Infante: Interesting. So Lisa, you're a marketer. I used to be a marketer. How would you advise Hard Seltzer producer to differentiate its brand in this increasingly crowded market?

[00:04:30] Lisa Derus: I mean, I'm biased, but I think that PR and earned media is a great way to break through. And I think that especially a lot of the bigger craft players and the macro brands have done really great PR and marketing programs over the last few years. And frankly, none of these seltzer brands have really done anything. I think you have Bud Light Seltzer looking for their chief meme officer, which made headlines for a few days. And otherwise, it's just kind of, you know, this new seltzer's out. Hey, this new seltzer's out too. Oh, look, we got a new seltzer. I think the most exciting Hard Seltzer news I've seen in the last month is that Aldi is putting a Hard Seltzer in its famed advent calendar this season. So, you know that Hard Seltzer has officially made it. But I mean, with the sales of seltzer, do they really need that much more marketing support? I mean, it seems like the stuff is just flying off the shelves, although no one seems to be particularly brand loyal at this point, except to White Claw.

[00:05:24] Brewbound Podcast: one of the things that is interesting is how consistent these trends are between different categories at different times. A lot of what you're seeing in Selsa right now is exactly the same as what we saw in energy drinks 20 years ago. You had Red Bull and you had Monster and then you had a million different energy drinks across all different platforms. Everybody's trying to get a piece. And in the end it ended up being mostly Red Bull and Monster. And then when you get to third and fourth market share, it was far further. And you could go back 80 years or 90 years, if you like, and you find the same exact thing in carbonated soft drinks with Coke and Pepsi. And so I think when it comes to how would we advise new seltzer players and new providers is to first start small. The reason why Monster and Red Bull did very well is they weren't trying to immediately become the national success story. They were trying to get Southern California really, really right. And so In an environment right now to differentiate yourself I think everyone's trying to grow as quickly as they can the success stories are probably going to be the ones that have Extremely strong regional stories and then start to expand after the dust settles from the period that we're in right now That follows the trends in Craft Brew as well where they start off as regional strongholds and then slowly get distributed more broadly until they're more powerful

[00:06:40] Jessica Infante: Kamil, in your conversations with retailers and wholesalers, how much of an appetite are there for these new products that we're hearing about? And can these companies really get anyone excited about another Hard Seltzer? Because I know Lisa is sort of bored with everything but Topo Chico.

[00:06:58] Brewbound Podcast: I think it's very difficult for the incremental product, but right now the retailers and distributors want all of it. There's not going to be a period of time, at least at this period of time, they won't be done. They probably won't push back and say, we can't possibly take another one because you don't quite know if the next great success story is right around the corner. And eventually that will change and it may change more quickly than people think. But right now it's about getting as many products as you can, getting as much shelf space as you can. Obviously, there's supply problems for the big guys. And so you're looking to fill that supply because you can't sell an empty shelf. So just where we are on the curve, I think there's still plenty of appetite. Now, six months from now, it could look very different. And all of a sudden, there's a lot more focus on the ones that are turning the best. You're probably going to get some bad liquid in the market because there's going to be so many entrants that are racing to get product as quickly as you can. You'll probably find people launching in different package sizes because they can't get access to cans. So you're going to find all these other sorts of things that will end up working themselves into the market as a resolution of today's issues, but then probably disappear fairly quickly.

[00:08:04] Lester Jones: I'd actually reiterate exactly what Camille said. I think a lot of people are looking for that. A lot of distributors and retailers are looking for that one golden ticket that's going to be special beyond the existing products out there. So there's still an appetite for new products, new innovation, trying to see what works in a specific market. you know, our individual markets have become very unique and different. It's not just an average U.S. beer market anymore. It's a very special market. There's Pacific Northwest, there's Mid-Atlantic, there's, you know, there's New England, there's down South. All these markets are very unique. And the idea that you can find special brands that work in special places, and like you said, in Southern California, really You can really develop a market, and that market's actually big enough to sustain a very profitable and large brand. It does not necessarily have to float to the top of the national rankings to be a success. And what Camille said is that I think a lot of people are looking for that one thing that works great in their market.

[00:09:15] Lisa Derus: I have a question for the group. Does anybody think that canned cocktails have a shot at taking any of Seltzer's share?

[00:09:24] Jessica Infante: 100%. I think it's a gateway. What do you think, Camille?

[00:09:28] Brewbound Podcast: Yeah, absolutely. It can't just have the right product. It has to be the right product at the right time. And there have been attempts, failed attempts at canned cocktails many times in the past, and it's never really worked. It feels like this moment in time is the right time. You've got a lot of folks drinking seltzer. I don't know what percentage of the population is aware that you're having something malt-based as opposed to something spirits-based. And in most categories in CPG, there's a premium version. And then there's a more mainstream version. And you wonder if these canned cocktails, if they try to play the premium tier of it, there could be an appropriate place for them. It's also important to remember that 50% of Seltzer sales are coming from outside of beer. And so when you're already sourcing 50% from spirits and wine, you're already sourcing from a spirits and wine customer. If you're able to put that together for them in something that is similar to Hard Seltzer is, the bulk of Seltzer is today, I think it probably has a long runway.

[00:10:28] Jessica Infante: Lisa, we mentioned these regional brands, and we've seen a few Hard Seltzer brands find success, such as Ashland in San Diego and Boulevard with Quirk in the Midwest, especially in Kansas City, where that brand's already a top three brand. Just to name a couple, could we see this regional strategy begin to take some of that 90 plus share of the top five players?

[00:10:52] Lisa Derus: I think maybe, but I think a lot of your seltzer drinkers are probably shopping based on price and not looking for those quality attributes associated with the Craft Brew. Maybe there's a shot, but I would think that the volume is still going to be dominated by the Trulies, the White Claw, the Bud Light Seltzer, the Natty Light Seltzer, etc.

[00:11:14] Lester Jones: Even though the overall market will grow, the shares, I think, will still lean towards the dominant players in the marketplace.

[00:11:23] Lisa Derus: Yeah, and I have to think that the consumers that are buying those Craft Brew brand seltzers are doing it because, oh, well, I love Boulevard, so I'm going to check out the Hard Seltzer they got. They're not seltzer drinkers that are necessarily trading up from White Claw to the Boulevard drinker. I think those are maybe kind of interchangeable between those more value seltzers, but I don't think they're looking to get something more premium like a Craft Brew seltzer. Maybe they would trade up to a canned cocktail, maybe, but it seems like they're perfectly happy buying the White Claw and Truly.

[00:11:54] Lester Jones: Yeah, I don't think there's a trade up proposition in Hard Seltzer space. Let's just say that Hard Seltzer, you know, it's not like you can drink a blue moon and go to something else or pick, you know, a more mainstream craft and then start getting more exotic or more complex or, you know, higher end. That's just not going to happen in Hard Seltzer world.

[00:12:15] Lisa Derus: And you can tell some of them are trying. I mean, you've got Vizzy, which has the antioxidants, and that's interesting. And now you've got Michael Vulture coming out with their more premium seltzers. But I mean, I agree, it's all pretty much the same.

[00:12:28] Brewbound Podcast: One of the things for the craft folks to be careful about is the success of Seltzer has come from a very different proposition that the consumer wants, something light, something lower calorie. It's not been the proposition for craft. And sometimes when you use your brand name across, even though there's a lot of growth, you have to be very careful in if that alerts the consumer to something about the core of your business. And I'll kind of use, uh, this is not a perfect example, but I, you know, recall when Campbell soup launched a low sodium soup, uh, when you consume, you know, once they launched it, told everybody like, holy shit, there's a lot of salt in the regular version. Um, and kind of hilariously and unfortunately the low sodium version tasted like it needed salt. And so I think when you're in, when you're in craft and if you launch Hard Seltzer, you don't want that to then alert the consumer that every time they're drinking kind of the core of your product and the brand that they love, it might be a 250 or 350 calorie moment.

[00:13:26] Jessica Infante: Well, I've got a follow-up on that, Komil, because this seems like a golden goose thing with Anheuser-Busch in particular. Michelob Ultra is the second best-selling beer right behind Bud Light right now. It's just ascending. Bud Light Seltzer is finally chipping away at some of that Hard Seltzer share, getting about 10 share for the company. How much fear do you have that this could cannibalize those ascensions?

[00:13:54] Brewbound Podcast: You know, it might. I think milk of ultra probably has the most at risk, but at the same time, it could also be very incremental, right? We're looking at a category in salsa going from almost non-existent to 10% of the beer industry. Or the way I'd like to look at share of salsa is share of total beverage alcohol, given that half of seltzer consumption is coming from outside of beer, but that still means it's, you know, it's gone from nowhere to being about 6% of total beverage alcohol. So it's not okay to not participate. You have to do something. And I think this is their, their way of doing it. They have a very strong brand to do it with ultra seltzer. It might be a little bit different with Bud Light seltzer. One of the things that we had to watch very closely is when you launch something with so much fanfare as they did with Bud Light Seltzer in January, which I completely recognize feels like it's the equivalent of 1996 or something, given how much has gone down. But there was so much focus at retail, so much focus from distributors. We asked a lot of questions on, hey, are you forgetting about Michelob Ultra? Don't forget how well that's doing. And yeah, sure, everybody's kind of pivoted one way, but when everyone's focus is so specifically aimed on one thing. And you did see when Bud Light Selsa came out, retail execution was off the charts. It came out, obviously, did very well out of the gates. But Michelob Ultra dipped down. And managing that part of the portfolio is very, very tricky. But it's not that just because it's hard doesn't mean it's a reason to not do it, given Selsa doesn't seem to be something that's temporary. I see Lisa nodding. Maybe I'll see if you wanted to add anything.

[00:15:26] Lisa Derus: Oh, just nodding furiously in agreement. And I'm still thinking about what you said about opening the consumer's eyes to what the original product has, which I think is very interesting, especially, you know, you look at kind of one of the other things that the bigger brewers are going after now, which is, which is hazy IPA and that, you know, you don't want to compare calories on Hard Seltzer to a hazy IPA. So it's an interesting contrast there, but yeah, just furious agreement.

[00:15:54] Jessica Infante: Lester, it is NBWA conference week. And in your year in review seminar with FinTech yesterday, which I watched, you showed a chart. Oh, you're welcome. Thank you for giving me such great stuff to tweet because I got a ton of engagement. But you showed a chart of week by week Hard Seltzer sales, and it looks like they may have reached a peak. So during the infamous pantry loading week in March, what, like week 11 of the Hard Seltzer sales reached basically like summer holiday weekend levels, but then they continued a steady climb to Memorial Day and then the 4th of July, and then it fell off precipitously at the start of fall, which you mentioned a little earlier, maybe. Have we seen the peak for this year and what do you think this means Hard Seltzer seasonality?

[00:16:37] Lester Jones: Absolutely. We've seen the peak for the year. Last year proved to be a very summer centric product. And you know it fell off as expected. It is it is very seasonal and it will play out just like the rest of the beer market which tends to be all focused in the summer. We'll have to see what happens. I mean, this 2020 is going to be unlike anything we've ever seen. I think the spirits industry is going to see a big smack in the face come the fourth quarter. I just kind of feel that in my gut that relative to how sales play out, I think we may see beer fare a little better. just because of the supply constraints hopefully start healing as we get into the fourth quarter, whereas everyone has probably stocked their liquor cabinets to capacity over the summer months. Then when we get to that peak selling for wine and spirits in the fourth quarter, it's just not going to be necessary. It's going to be interesting, I think, to just watch this play out to see how it works, but peak, yeah, it's going to slow down.

[00:17:41] Jessica Infante: Another question for the group. Do you guys think we'll see like seasonally themed flavors Hard Seltzer? Like, is there going to be a peppermint mocha Hard Seltzer or like pumpkin spice? Are we going to see anything like that? Lisa, what do you think?

[00:17:52] Lisa Derus: We've seen a few, I think already. There was at least one pumpkin spice seltzer, which good, they should be doing that. I mean, people will buy it. So I hope there's more to be honest. That's hard to do it, you know, at scale for the bigger guys. But I think these Craft Brew should absolutely be coming out with a peppermint Hard Seltzer.

[00:18:09] Jessica Infante: It definitely seems like a way to win when you don't have to deal with the complexities of scaling.

[00:18:13] Lisa Derus: And that's the sentence I never could have imagined myself saying. But here we are. Thanks, 2020. Yeah, times are tough. Like, we could all use a peppermint Hard Seltzer right now. Like, something good in a lot of 2020.

[00:18:26] Lester Jones: I'm going to just disagree on just basic principle grounds, but...

[00:18:31] Jessica Infante: I'll enjoy one for you.

[00:18:33] Lester Jones: Thank you, Como.

[00:18:34] Jessica Infante: One thing we've seen over the summer is out of stocks. So White Claw maker Mark Anthony Brand said it left one and a half million barrels on the table this summer due to out of stocks. Does that indicate that we still don't know where the ceiling is on Hard Seltzer?

[00:18:49] Brewbound Podcast: Definitely. We don't know. I know a lot of people make guesses especially analysts like myself have a lot of guesses. But the reality is it's very difficult to know where the ceiling is on the stuff especially when you're out of stocks. I get a lot of questions as well where we cover the whole consumer spaces. What's the ceiling on disinfecting wipes. Because Clorox has been out of them forever. So we don't know how much they the what if you know it's really not a what if we had as much as we can and everybody has to be careful not to have too much in case that number is too low but the reality is while Mark Anthony brands was out of stock while truly was out of stock there was quite a bit of new competition there was variety there was things in the stores it just wasn't the biggest pack sizes and the out-of-stocks also existed down to some of the other beer names and such and so Look, I think that it did put a lid on the degree to which it could have grown, but it probably hasn't changed the underlying demand equation. Whereas we kind of move forward, and as you guys probably, I'm sure as everyone knows, Mark Anthony has opened two facilities, one in New Jersey, one in in Arizona, as capacity becomes more available, they'll start filling in that demand. So I think the out-of-stocks limited sales, but did not limit demand. And you'll just start filling in that demand as the capacity comes online. I think it'll probably make it a little bit harder to be one of the newer players. This is why I get back to what we kind of mentioned at the very beginning, which is try to be strong regionally. California is the fifth largest economy in the world. Texas is the 10th largest economy in the world. Still plenty of money that you can make, But if you keep it small and strong, you have a better chance of success because the benefits of filling the empty shelves are starting to abate.

[00:20:24] Jessica Infante: Lester, shifting gears a little bit here. I believe yesterday you called Molson Coors, said something to the effect that they're on a quest to be the ultimate beverage company. They forged a number of partnerships. Starting with a jv with yingling uh deal to make market and distribute Topo Chico Hard Seltzer Which we've been talking about and a 10-year distribution deal with la cologne coffee roasters. Yeah That's in addition to last year making a minority steak in uh, la libations That's a lot of activity something that we haven't seen from them. Maybe since they went on that Craft Brew buying streak a few years back So how much is too much before the company loses focus on its own brands?

[00:21:11] Lester Jones: That's a good question. I mean, clearly, the term is blurring of the lines. You know, what's a beer, what's a wine, what's a spirit, what's Hard Seltzer? It boggles my mind. I mean, to sit back and think about, you know, we once upon a time, we had very clear lanes and people colored in the lines and they stayed there and it was very well behaved. And now everyone's out misbehaving and becoming big beverage companies. It's a crazy time and I think for any company to figure out how to grow and make their shareholders happy and keep their employees working and their factories humming along and making things, you got to be open-minded. I'm going to give them a pass and say, march on and do the best you can to keep your distributor partners happy and keep the retailers happy and come out with new stuff for people to drink. I'm a beer guy, I like the idea of just beer, but I don't represent all 240 beer consumers out there. So you got to give them something to keep them entertained and keep them coming back to the stores for more.

[00:22:14] Jessica Infante: Lisa, this is your former top competitor. What do you think of when you see those moves being made?

[00:22:22] Lisa Derus: First of all, I have to give a hat tip to the communications team at MillerCoors because I imagine they've been very, very busy the last few months with all these announcements. Consumers are drinking less beer than they used to be. and these other segments are rising in popularity, and the companies are going to do what they need to do to make money, and that's going to be getting into these other segments. I think, is every one of them going to land? No, but is it worth them exploring? Absolutely. You don't know what's going to be the next Hard Seltzer or moneymaker for these companies.

[00:22:55] Jessica Infante: Jamil, did these deals raise any red flags for you, or is this all blue sky or blue moons for Molson Coors?

[00:23:03] Brewbound Podcast: I think it's tricky, because when you're getting into soft drinks, you're getting into the world of Coca-Cola and PepsiCo, Keurig, Dr. Pepper, really big juggernauts. And they are fully aware that there's fragmentation in their categories as well. They're building a lot of their own smaller brands. Coca-Cola used to have a 50% equity stake in LA Libations that Molson Coors now has. So you're starting to blow the lines, but it's not as if you're coming up into a category that is fragmented. you'll be able to leverage scale and resources. So it's very tricky in terms of how they're going to have to tread carefully in terms of how they want to be relevant in the category. It sounds like the sort of thing that should benefit distributors probably will benefit retailers and new means of distribution. But by the time the economics accrue up to the parent company, I think it's very difficult. Will that be able to offset the declines of Miller Lite and Coors Lite. Generally, the way we like to look at companies is once you have the core stabilized or the core strong, you then have the permission to innovate beyond the core. Here, it sounds like they're looking to innovate beyond the core to offset some weakness in their primary products. And I don't know if all of that stuff collectively can get them there.

[00:24:14] Jessica Infante: So Como, we just talked about out of stocks in Seltzer, but another thing that is like really out of stock is aluminum cans. So how big of an issue do you think these shortages are? And even with Ball has two new plants and they've added two existing plants that will be online next year, do you think that's gonna be enough to meet demand? Or do you think we're going to see the most hated acronym in the business persist, which would be OOS? What do you think?

[00:24:39] Brewbound Podcast: they'll benefit from the fact that we're going into a seasonally slower time. So that should help them. It's also not a surprise anymore. The thing about the can shortage is when COVID arrived, everybody switched from out of home to at home consumption, where they consume a lot more cans than they do bottles, which makes perfect sense. So there's no more surprises. Now we know the problem, we're addressing the problem and things are starting to slow down. The issue at hand will be nobody wants to put on more capacity than they know they'll be able to fill. So we don't know what is permanent, what is temporary, and we're talking about cans, we're talking about real capital, we're talking about big factories and aluminum, all these sorts of things, and the ability to manage that supply chain. We've seen most of course, what's happened over the years, because beer has declined for 20 years, what we've seen is just a careful kind of tightening up of the supply chain, so it was less prepared than it otherwise would have been for what we just went into this summer. I think now everybody wants more supply. That's great. But what if we just continue on the trend we had before? What are you going to do with the factory that you put in to deal with the 2020 issue? And so I think it's something that we're going to have to watch for a while. I think we'll probably see some unique efforts to either whether it's dealing with glass or dealing with volume packs sizes and stuff. I think you'll see some kind of unique efforts trying to deal with it, but we're not out of the woods by any means.

[00:25:55] Lester Jones: Just remember, 10% of the beer market was always in kegs and draft, and those kegs are sitting there. At any time, things could change such that those kegs could go back into production and start getting filled again, which would just immediately alleviate a lot of the demand for cans. you know January 1st we have a vaccine and we get the all clear to go back and travel and go back to bars and restaurants. Then all of a sudden those those kegs get called back onto the field and start playing again. And anyone who invested all that money in canning is all of a sudden going to see significant drop in demand. So like you said it's big business to invest in a can plant. And with all the uncertainty and that keg float just sitting on the sidelines, they're just waiting to get called back into action. When that happens, it'll dramatically and instantaneously shift the whole dynamic in how we package and produce and sell beer.

[00:26:56] Jessica Infante: AB finally, finally closed on its acquisition of Craft Brew Alliance. This was a story that first broke, I think, maybe on my fifth week on the job, and here we are a year later and it was finally completed. The Brewer's Collective, which is AB's craft division, now has 23 craft brands. First of all, how relieved are you that you don't have to manage comms for 23 brands?

[00:27:20] Lisa Derus: or for that year long announcement period.

[00:27:23] Jessica Infante: Seriously, and how difficult will it be to get the attention and priority within not only a crowded craft division, but a company that's growing with a number of beyond beer offerings?

[00:27:33] Lisa Derus: Yeah, I think both very good points. I mean, there's two things that strike me about this deal finally closing. The first is the number of brands the portfolio now has. You mentioned 23, so that's nearly doubled overnight. So that is a lot of brands competing for dollars from a pool that's a limited size, including a lot of teams that are not used to competing for dollars in that way. So that will be very interesting. to see how the company allocates resources. Obviously, it seems like Kona is the lead horse here. So that's getting the bulk of dollars for now. But you have some of the smaller players, it'll be interesting to see where they are in a few years from now. And the other thing that has been really intriguing to me from the start is that you have at least 3 brands in the CBA portfolio that are geographically extremely close to A.B. Kraft brands. You have red hook in seattle, which is near lesion. You have um appalachian mountain brewery Which is about 90 miles outside of ashville where wheat is and then you have winwood Which is less than one mile from beza sur in the winwood neighborhood of miami so for a company and a portfolio that distributes resources and tries to command consumer attention largely by small regional geographic areas. I have no idea how this is going to play out, and I'm very fascinated to see. I truly do not know what the company will do with two Craft Brew in the same neighborhood in Miami. That is just fascinating to me.

[00:29:07] Jessica Infante: I am so glad you brought this up because Justin and I were talking about this earlier and you mentioned exactly what we were thinking about. How does this work? Because so many of them are so close. But one thing that you can see in the new structure that they laid out is that they've kind of created like a varsity squad and a JV squad. So they have what they're seeing is nationally available brands like Kona and Elysian Shauna Golden Road. And then I'm sure I'm forgetting one. And then everybody else kind of operates on a geographically split level. So if you were trying to come up with calm strategy for some of these guys, what would you do and how would you do it?

[00:29:41] Lisa Derus: You know, it's such a good question because they're essentially targeting the same consumers and you know, you have to think about also, I mean, there's so much, there's so much inner workings within the teams that work for these breweries as they're acquired. So I wouldn't say that there weren't folks at Devil's Backbone that were upset when Wicked Weed got purchased because they were close and they were geographically, even though they're significantly more far apart than You know the napple action brewery is so you have kind of some hurt feelings perhaps from people that work at one brewery saying oh So now you don't think we're good enough in this region. You need to bring in someone else To supplement of course here. It was a package deal. It wasn't like they were out shopping for these individual breweries But I think there's a lot of internal tension that could be happening there um fighting like I said fighting for resources because they're all coming from the same pool and at a certain point the company's not going to go full steam ahead with two breweries that are that close to each other unless they have very different value propositions. So Wicked Weed, obviously, is very much in one niche category. And I don't know much about Appalachian Mountain Brewery, but they don't seem like they're a direct competitor. But you have to think about how they're going to win local advertising dollars, marketing sponsorships, things like that.

[00:30:57] Brewbound Podcast: Yeah, I think it's less to do with the glut of brands within the ABI portfolio, but more the glut of craft brands in general. And it is one of those periods of time where we've obviously exploded in terms of how many participants. I think we're at 8,000 or something, Lester, you'll remember exactly. It's very sad, it's very unfortunate, but COVID is going to be a very tough time for them. We don't know how many will be on the other side. And it is a moment that may end up benefiting somebody like an ABI that can afford to lose money for some period of time, they end up being maybe on the right side of this thing. Not by design, you can't plan for this sort of thing, but it's a very difficult period for Kraft. It was already massively fragmented. The SKUs were fragmented, the number of players were fragmented, and many of them had nearly all of their exposure to on-premise, which as Lester Jones mentioned, didn't just decrease by two-thirds, but did so instantaneously, right before St. Paddy's Day. And so within ABI, it ends up being, yes, they sure they have a complex portfolio, but it's probably one of those periods of time where there's also going to be a lot of opportunity.

[00:32:00] Lester Jones: I was personally shocked the other day, the TTB posted brewery permits for September 2020. And I think there was 700 new permitted brewers in these statistics compared to the end of 2019. which means they issued 700 new permits, which is just mind boggling. And that took us to like 12,300 or 12,000 plus permitted brewers in the country during a period when all of that tap room and brew pub business has just been shut down. So, yeah, huge disconnect in just the macro statistics of what's happened out there. I can't imagine that, you know, there must've been permits that were, you know, stuck in, you know, some kind of hopper somewhere forgot about him. I don't know. February. What's this permit? I better issue it now. Nothing else is going on.

[00:32:54] Jessica Infante: As we entered the pandemic, and Lester, you and I talked about this just a minute or two ago before we started recording, but there were calls on consumers to support independent retailers and nearly 100,000 small businesses have closed down around the country. How much support have you seen for independent retailers? And I'm going to throw this out to all three of you. So Lester, let's start with you because you inspired it.

[00:33:14] Lester Jones: Well, independent retailers are taking it on the chin in this current economy. There was a story, I think, in the Wall Street Journal today. They just looked at the zip codes and they looked at which businesses got PPP money and which ones didn't. And it was clearly the larger, more established companies did better than the small mom and pops in some economically challenged areas. So mom and pop and independent is taking a hit for Craft Brew drinkers that are much more of a buy local and act global. As a mantra from the very beginning, I mean, this is something that is significant. I think we're gonna lose a lot in small neighborhood bars. We're gonna see a lot of small neighborhood retailers go by the wayside in this pandemic. because it's kind of easier to just go towards the larger, more well-established chain retailers out there. So I think we have a crisis and I think Craft Brew consumers need to think about where they're buying their beer and think about, you know, if they don't have all the bells and whistles of the major retailers out there that, you know, maybe you can behave a little differently and support your local mom and pop shop.

[00:34:31] Lisa Derus: Yeah, I agree with this. I know anecdotally two of my clients saw their sales at grocery skyrocket in the spring because I think exactly what Lester was saying, folks are going to one store if possible and doing all their shopping there. And things are tough and uncertain economically, so folks are looking at value packs as much as possible, I think 15-pack cans. We're doing quite well back in the march-april time frame. So yeah, I I certainly haven't seen anything super promising for The smaller shops except for the folks that are kind of trying to rally Hey, we need to support our small local businesses because these could very well close as a result of this pandemic And then we'll be doing all of our beer shopping at you know, big box stores

[00:35:14] Brewbound Podcast: I think the difficult part about it is the consumer is willing to support it, but the economics of the business just might not be able to support how they might have changed. So the thing about retail, the big difference between being a supplier and a retailer is the margins at retail are really, really thin. And so if you're an on-premise retailer or a restaurant and you're now only able to fit 50% of what you used to be able to fit, it's very difficult to make money even if you have all the demand and all the support in the world. And so until we can figure out a better economic structure where their businesses are viable at lower volume, it's going to be very difficult to stem the tide of closures.

[00:35:56] Jessica Infante: Before we get it out of here, what's one topic in the beer industry right now that you all don't believe is getting the attention that it deserves? And we'll go lightning round, starting with Lester. What's one topic that's not getting the press it deserves?

[00:36:12] Lester Jones: Hospitality, hospitality, hospitality. We have to save American beer culture. I spent a lot of time in Austin, and I was just shocked that they, I mean, you can put a band in a park and put everyone six feet apart and give them a beer for crying out loud. And instead of just throwing money around willy-nilly to whomever you want, you know, we need to be supporting the hospitality industry, and that includes live music, and that includes, you know, the bartenders and the waitresses and the musicians that, you know, make beer, that support beer culture. And I appreciate social distancing, but whoever came up with that term should be shot. It's physical distancing. Stay six feet apart. Don't cough in my face. But damn it, make some live music and share a beer at a safe distance. That's all I can say.

[00:37:07] Jessica Infante: Lisa, what should we be talking about that we're not?

[00:37:10] Lisa Derus: Yeah, I would say, you know, shameless plug to get out there and vote by November 3rd. I think we've seen that the actions of our government have strongly impacted kind of all things with the hospitality industry, the brewing industry. And I think we can all agree the best bet is to end this pandemic as quickly as possible and get back to normalcy. So I encourage everybody to research your local candidates, national candidates, and go out and vote for whoever you think will do the best job of getting us back to normalcy.

[00:37:42] Jessica Infante: Camille, take us home.

[00:37:44] Brewbound Podcast: Yeah, I'm thinking there hasn't been enough discussed about the opportunity for beer related to the declines in wine. Wine had been growing for 20 years pretty steadily. It was down for the first year ever. Last year, you're probably hitting a stage where wine maybe is, it actually plateaued for about seven years after taking a share from beer and now has started to decline. Some of this, of course, is seltzer, but the exciting thing about seltzer that probably it really isn't being discussed, and we talked about this about a year ago, is it has really kick-started the entire industry to think about itself as a growth category again, a growth industry again, where brewers and distributors and restaurants, people were putting capital down and spending money to try to grow. Seltzer kicked that off but usually what happens is you only need one thing to kick it off and all of a sudden that investment gets shared across a series of things. You're not seeing that in the same way for wine. Of course I feel badly for wine because it started to decline last year and obviously with the wildfires and such it's not ideal so I'm not suggesting anything kind of predatory but what I really mean is for beer to have lost share for 20 years to an industry and that starting to reverse, it's probably not just going to be one year. that that of that reversal is probably going to continue for a period of time and there's already some backbone already some momentum on the beer side of spending money behind trying to grow again not being about efficiency anymore not being about pricing anymore not being about consolidation in the same way although the distributor tier is a little bit different and there's there's something there there's an opportunity there these things are typically generational the share gains, right? So spirits and wine gained share for about a generation, the generation prior to that beer gained share. We're now coming to the other side of it in the 2020s, because it was around the late 90s when it switched one way. And that probably means we've got a ways to go in the beer business.

[00:39:33] Jessica Infante: That's our show for this week. Thanks to Lester, Lisa, And Kaumil for joining us for episode two. Thanks to all of you for tuning in. A big thank you to our audio team for making this listenable. A reminder to register for our free Spooky Brew Talks event on Thursday, October 29th. That is Jess laughing in the background. We'll be joined by Dogfish Head, Sam Calagione, Trillium's Esther Tetreault, Frame Family Brewers, Josh Frame, Brewers Association, Chief Economist Bart Watson, Elite Brands of Colorado's Terry Secola and Wegman's Mark Agnello. Please like, subscribe and review wherever you listen to podcasts. Drop us a note via email at podcast at Brewbound.com to share your thoughts and suggestions for topics and guests. We'll be back in a couple of more weeks. See you then.