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Next Generation Thoughts on Three Tier

Craft Business Daily:

Yesterday’s “Four Under 40” NBWA general session panel showed some craft and consumer love for three tier and a couple predictions on deal speed and strategy in the segment.

Atlas Sales VP Bud Dunn moderated the panel. He pressed its members on their views of three tier.

“Bite and Booze” personality and the panel’s “consumer” rep, Jay Ducote, believes “The ‘fourth tier’ loves the three-tier system and the choice it gives the consumer,” he said. Perhaps more accurately, he continued that “people don’t understand the abundance of consumer choice [that] is coming from the three-tier system … but look at any other [consumer product] market: tobacco, soft drinks; you don’t have the consumer choice you do with beer.”

Country Boy Brewing owner D.H. Harrison echoed the sentiment. “For us in Kentucky, it’s of paramount importance to keep the three-tier system how it is; it’s helped us grow.” That’s especially important because in the beginning, “we were so dumb we didn’t know what to be scared of,” he said. The market was a little more complicated than they thought.

First Beverage Group VP Ryan Lake offered the virtues of three tier’s quality control. There’s “no system in world that can do recalls like three tier, which is huge. And you’d never see the craft landscape today without three tier.”

ON DEALS. Bud also asked about the pace of craft deals and the “whys” behind it.

First Beverage’s Ryan is involved in many such deals, and he seemed pretty certain: “You’re going to see more deals for sure. How many, we don’t know … when the fervor [will] die down, it’s hard to tell.” Eventually we won’t see “one every week” like we do now. And deals could also beget deals: some see the consolidation around them and “they’re reaching out because they don’t know what to do.”

But marketplace challenges are causing brewers to seek help from strategic partners, though “some still will go it alone just fine,” with models like Country Boy: “very local, very fresh. You can run that model for as long as you want to.”

What’s attracting investors? They like two things, said Ryan: “They like to make money, and they like to not lose money,” he said to laughs. On the making money side: “Craft is one of the few consumer products segments that’s this big and still growing this quickly; kind of an anomaly. And a lot of craft brewers, once you’re over a certain barrelage you’re pretty profitable.” Ryan estimates you can be profitable at 3,000 barrels with a tasting room, or about 7,000 if you don’t have one. That’s much different from the dynamics of the spirits industry.

And investors love distribution because it’s a solid business (i.e., harder to lose money). For the U.S. macro beer market, in a “bad year you’re down 1%-2% volume,” but likely flat in revenue. So they’re very attracted to the stability of that space.

ON THE FATE OF HARD ROOT BEER. Bud asked about the potential of hard root beers, which has seen a meteoric rise.  “It’s a $10.99 6-pack of root beer, it’s an anomaly,” Nashville distributor BountyBev chief Kurt Strickmaker said. “I just can’t get my brain around it.” He usually sees a $9.99 threshold for price to consumer, “but at $10.99 where I’ve seen it, it’s still flying off the shelf.” He’s still waiting for one of the Big Three to come into the market and take the space over.

But the “consumer” of the panel was cautious. “Seems to me like it’s just maybe a fad,” said Jay. It’s “super drinkable, it’s a root beer, it’s got booze in it, and [consumers] run out and get it but … six months from now, we might be saying, ‘what root beer? Not my who?’ I don’t know that it’s going to have that staying power. It might flash up and dip … but I don’t know.”

WHERE THE INDUSTRY WILL BE IN FOUR YEARS. Who knows, said Kurt Strickmaker. “We might be NBMWA: ‘National Beer and Marijuana Wholesalers Association.'”

But probably more seriously, he advocated for the health and proliferation of small distributorships. “It’s working in Nashville, I don’t see why it can’t work in every metro.” After all, “Who is going to have time to focus on these local brands?” Fact is, he said, “we’re growing brands and relationships; if we have more distributors then we’ll have more great relationships.”

Ryan believes the demographics bode well for craft and imports. He hopes craft can “stay innovative” and that the craft distributors become bigger, which he thinks can happen.