Growing demand cheers makers of craft beers, spirits

Article by: THE ECONOMIST
Updated: September 9, 2012 - 4:12 PM

In Minnesota, and nationwide, market share is still small, but it's growing by leaps and barrels.

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Stacked Kegs at the Surly Brewery in Brooklyn Center, Minn.

Photo: Carlos Gonzalez, Star Tribune

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LYNCHBURG, TENN. - A president must waste long hours on trivial issues such as foreign policy, the economy and his own re-election. But Barack Obama has found time for something more important: home-brewing beer. And on Sept. 1, he revealed his secret recipe to a grateful nation.

Obama owes a debt to one of his predecessors. Jimmy Carter, though a teetotaler, loosened restrictions on home brewing when he signed the Cranston act in 1978. That act also changed federal excise taxes so that home brewers were whacked with lighter levies than big breweries when they sold their product. Deregulation allowed America's fledgling craft-brewing industry to flourish.

American beer drinkers, who once had little option besides gassy, mass-produced bathwater, may now choose from hundreds of beers of all shades, styles and strengths. Craft beers' share of the national throat remains small, but it is growing. And as beer goes, so go spirits, as laws dating from Prohibition are whittled away.

The Brewers Association, a lobby group, defines a craft brewer as one that makes at most 6 million barrels a year, in which big companies have a stake of less than 25 percent and that uses traditional malt ingredients such as barley. Within that category, sizes vary: Boston Beer Company, the largest craft brewer, sold around 2.5 million barrels, whereas Sweetwater, of Atlanta, sold 95,000.

Minnesota craft brewers include Summit Brewing Co., Surly Brewing Co. and Fulton Brewing. At this year's Minnesota State Fair, craft brewers promoted the state as "The Land of 10,000 Beers."

In the same year Anheuser-Busch InBev, which makes Stella Artois, Beck's and Budweiser, sold 106 million barrels, almost 10 times as much as the entire craft industry, and mopped up 48 percent of the U.S. But craft sales rose between 2010 and 2011, as overall American beer sales declined.

These days bars with 20 taps are common. Connoisseurs of chocolate stouts, blueberry wheats and hopmonsters are spoiled for choice. Even the big breweries recognize the value in craft-beer cachet. Shock-Top, for instance, may be "a Belgian-style unfiltered wheat ale brewed with real citrus peels and coriander spice," but it is brewed by Anheuser-Busch.

According to the Brewers Association, in 2011 there were 1,940 craft breweries in operation. In one sense, this is a novelty; as recently as 1979 America had fewer than 200 breweries in total. But it is also a renaissance: on the eve of Prohibition, which lasted from 1920 to 1933, there were around 1,200 active breweries. With refrigeration scarce and refrigerated trucks scarcer, shipping American beer was then hard; most breweries served only local markets. Today, even small brewers may range far and wide. Drinkers in San Diego can sip a Maine-brewed Allagash, and Dogfish Head, the pride of Delaware, can be bought in Seattle.

America is also enjoying, if not a spiritual renaissance, at least a renaissance of spirits. At the dawn of the 19th century the country boasted 14,000 distillers. By the time Prohibition ended there were barely a dozen (excluding moonshiners). Much like American beer in the 1970s, American spirits were mostly produced by big companies with big brands: Jack Daniel's whiskey, Jim Beam and Wild Turkey bourbon and Smirnoff vodka, for instance.

That has changed. Frank Coleman of the Distilled Spirits Council of the United States says that in 2001 there were perhaps 24 craft distilleries in America--producers of at most 40,000 nine-liter cases a year. Today there are ten times as many. But even that ceiling is high for many independent distillers. Tuthilltown Spirits, a New York-based company that makes vodka, whiskey and gin, expects to produce around 8,000 cases this year. By way of comparison, in 2011 Jack Daniel's sold 4.7 million cases in America and 10.6 million worldwide.

Craft distillers' overall sales may be small, but they tend to be more profitable. They accounted for just over 25 percent of the volume of spirits sold in America last year, but more than 45 percent of the revenue. Their share of the overall spirits market is growing -- measured in both revenue and volume.

Walk into a specialist bourbon bar and you will see scores, perhaps hundreds, of brands arrayed behind the counter. Despite the ersatz homeyness on the labels, many are made by big firms: Jim Beam, for instance, distils and bottles expensive brands such as Knob Creek, Basil Hayden's and Booker's. The label on bottles of Pappy Van Winkle Family Reserve bourbon, which can sell for $50 a glass, says it is "Bottled by Old Rip Van Winkle distillery." No such place exists. The fluid is made and bottled by Buffalo Trace, a Kentucky distillery that makes 12 different bourbons, a vodka, a couple of ryes and an eye-watering, 125-proof white dog (unaged whiskey).

But small, or the image of small, sells; it connotes authenticity, care, continuity. That holds true even for the big guys: John Hayes, the managing director of Jack Daniel's, attributes his brand's global success to "the smallness of Jack Daniel's. It's all made right there ... in the small town of Lynchburg, Tennessee. That resonates around the world."

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