Craft beer craze brews up wholesale industry changes

Things used to be a lot simpler at A.B. Beverage Co.

 

Many years ago, nearly every shipment the beer distributor received was Budweiser, Bud Light, Michelob or some other “macro-brew” produced by Anheuser-Busch, the St. Louis-based brewing giant whose beer A.B. Beverage has been supplying to the Augusta area since the end of Prohibition.

 

These days, with the “craft beer” industry growing by leaps and bounds, the distributorship’s warehouses are starting fill up with microbrews that many younger beer drinkers prefer over the big- name brands that have dominated store shelves for decades.

Pallets of Natural Light, Busch and Michelob Ultra are still stacked to the ceiling at the company’s Evan sheadquarters and in its Aiken distribution center. But there’s also plenty of bottles, cans and kegs from companies in Georgia’s small-but-growing craft beer industry, including Atlanta’s Monday Night Brewing; Jekyll Brewing of Alpharetta; Marietta’s Red Hare Brewing Co.; The Southern Brewing Co. out of Athens and Augusta’s own Riverwatch Brewery.

A.B. Beverage General Manager Doug Varnadore said craft beer is only about 5 percent of his business, but will probably grow along with the market in general.

“There’s no doubt it’s on fire,” he said. “Especially with millennials.”

Like most of the nation’s 3,000 independent beer distributors, A.B. Beverage – founded in 1933 as Aiken-Barnwell Beverage – has had to change with the times. Overall, the U.S. beer market last year shrank 0.2 percent while the craft beer segment grew nearly 13 percent, according to The Brewers Association.

The national craft beer trade group forecasts craft beer will capture 20 percent of the nation’s $105 billion beer market by 2020.

For Varnadore’s company – the metro area’s last locally owned beer distributor – it simply means the product mixon his delivery trucks will be slightly different.

“It’s the same volume going out the door, just different brands,” said Varnadore, whose third-generation company distributes beer to nearly 1,000 businesses in 11 counties in Georgia and five in South Carolina. “People aren’t drinking more, just differently.”

A.B. Beverage recently expanded its 50,000-square-foot Evans warehouse specifically for craft beers, which they keep at 34 degrees. The rest of the warehouse is kept at 62.

The expansion also will give the company more room for wine and liquors; after decades as a beer-only distributor,it obtained a wine and spirits license earlier this year.

Facility Manager Terry Wicklum recalled some of the construction workers at the warehouse were excited to see the warehouse stocked Red Hare.

“These were mud-on-the-boots kind of guys,” he said. “If I were to stereotype them, I never would have thought they would be interested in Red Hare.”

At any given time, the warehouses hold between 180,000 and 200,000 cases, enough to supply metro Augusta for 14 to 18 days. The inventory has become so diverse that warehouse employees are directed what to pick and pack each night by a Vermont-based inventory management firm that delivers instructions through a “Siri”-like electronic voice to each employee’s headset.

“We’ve doubled the SKUs in the past two years,” Wicklum said, referring to product bar codes known as stock keeping units.

The company also added a second sales forecaster to the team to focus solely on craft beers.

“We do 2 1/2 million cases a year here just for (Anheuser-Busch) products,” Operations Manager Charles Lewis said.“If we didn’t have somebody else doing the craft beer stuff, it would be hard for me to keep up with.”

About 30 beer-laden tractor-trailers arrive at the Evans facility every week, mostly from Anheuser-Busch breweries in Cartersville, Ga., Jacksonville, Fla., Williamsburg, Va., and Columbus, Ohio, the latter of which produces the special aluminum bottles.

Part of the craft beer boom can be attributed to greater choices available to young people.

“Beer drinkers are created every day when people turn 21,” said Brian Roth, co-founder of Athens-based The Southern Brewing Co. “When I turned 21, my access to beer was limited to a few select brands. My son is now 22 and he’s only known craft beer. So there’s this entire generation of people whose first beers are well-done craft beers.”

During the past 35 years, the number of U.S. breweries increased from 92 to nearly 4,200. Many of the most successful craft beers grew out of the homebrewing hobby, which was legalized in 1978. The creation of the Boston Beer Company, the maker of the Samuel Adams brand beer, in 1984 set the stage for small-batch beers’ big renaissance.

But no matter their size, breweries must abide by the “three-tier” system that each state has followed since the repeal of Prohibition in 1933. Regulations vary, but generally each tier – brewers (one), wholesalers (two) and retailers (three) – must be independently owned and operated and non-integrated.

“From a business standpoint, it doesn’t let a single entity control an entire market,” said Martin Smith, assistant director for the Georgia Beer Wholesalers Association, which represents the state’s distributors.

The system also ensures smaller producers have the same opportunities to compete as the large ones. Smith cited Mexico – where the beer industry is controlled by two conglomerates: Grupo Modelo, the maker of Corona and Pacifco; and FEMSA, maker of Tecate and Carta Blanca – as an example of what can happen without a check-and-balance system in place.

Craft brewers in Georgia are lobbying for a change to state law to allow them to sell beer directly from their breweries, as breweries in 42 other states are permitted do to varying degrees. But they say they’re not trying to displace wholesalers and retailers, many of which have millions invested in capital equipment.

A.B. Beverage, for example, maintains a fleet of 60 trucks and vans. It pays a $10,000-a-month electric bill to refrigerate its beer. And it employs 135 people in two states – two of whom do nothing but travel the market flushing yeast and bacteria buildup out of customers’ taps and lines.

Roth said his company couldn’t make such investments, nor employ the sales staff needed to get his beers in the 6,500 licensed establishments in Northeast and East Central Georgia, which includes the metro areas of Athens, Augusta and Gainesville.

“I’d be doing everything but brewing,” he said. “This way, the headache is on them.”

Georgia, with only four dozen craft breweries, ranks 48th in the nation for breweries per capita. Its craft brewers’ association wasn’t founded until 2010.

Wholesalers, being larger and more established, wield more political clout in Georgia. And they also generate a lot of revenue for the state – A.B. Beverage pays about $500,000 a month in state and local taxes alone. Roughly 45 percent of the cost of beer is taxes, according to The Beer Institute, a trade association.

Roth could have chosen any one of a half-dozen distributors to market his beer in the Augusta area. He chose A.B. Beverage, same as Pennsylvania-based Yuengling &Son Inc. did in 2008 when it sought to expand into the Georgia market.

“You have the right to go with anybody you want to,” Varnadore said. “It was their brand and they went out andsurveyed the market to see how companies were serving the market and they chose us.”

In addition to the beers of Anheuser-Busch, a subsidiary of Belgium-based Anheuser-Busch InBev, A.B. Beverage also distributes beers for New Belgium Brewing Co., Magic Hat and Southern Tier Brewing Co.

Once-scrappy startups such as Sierra Nevada, Sam Adams and Fat Tire are now so ubiquitous they’ve practically lost “craft” status to the newer hyper-local brands being produced at the largest number of breweries in America since the late 19th century.

A consolidation in the industry may be brewing. Anheuser-Busch InBev bought Goose Island in 2011, ending its craft brewer status. Miller Coors did the same for Athens’ Terrapin Brewing Co. earlier this year when it bought a majority stake in the company. Seeing potential to make big money off of buyouts could be fueling craft beer’s growth.

“A lot of brewers do it for the love of the beer, but a lot of them do it for the business,” Varnadore said. “In other words, they’re like any other American – they want to build up a business and sell it.”

Augusta has two established craft brewers, Riverwatch Brewery, which sells only kegs for on-premise consumption;and Savannah River Brewing Co., which plans to sell bottles and kegs. Both have signed distribution agreements with A.B. Beverage.

Varnadore said he has been approached by a third company interested in developing a brewery.

But he and Roth wonder how much craft beer customers and retailers can support.

“When do they start canceling each other out?” Varnadore said. “If a store like Bi-Lo says they can only put four IPAs on the shelf, they’re going to have to get rid of the fifth that sells the least.”

Which is another reason small brewers seek more latitude to sell direct to the public. Roth said he believes Georgia can find a happy medium that preserves the benefits of the three-tier system while allowing producers to offer“reasonable” amounts of beer direct to consumers.

“We need to be having more intelligent conversations on both sides of the aisle,” Roth said. “It’s not necessarily this David-and-Goliath issue all the time. The state of Georgia could get together and figure out a way to give some concessions to breweries and still protect and shore up the franchise laws.”

In the meantime Varnadore’s company is going to keep delivering what customers want, whether it’s decades-old brands like Budweiser or the latest fad (remember Zima?).

He predicts the next hip trend will be sour mash beer.

“It’s a malt product aged with bacteria growing in it,” he explained. “It leaks through the barrels, like a wine.”

When asked how it tastes, he summed it up in one word: “Terrible.”

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