As puritanical rules retreat, the American market for beer and spirits is growing more competitive

Prohibition hangover

Sep 8th 2012 | LYNCHBURG, TENNESSEE | from the print edition

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 September 1st he revealed his secret recipe to a grateful nation.

Mr Obama owes a debt to one of his predecessors. Jimmy Carter, though a teetotaller, loosened restrictions on homebrewing when he signed the Cranston act in 1978. That act also changed federal excise taxes so that homebrewers 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 6m barrels a year, in which big companies have a stake of less than 25% and that uses traditional malt ingredients such as barley. In 2011 such brewers shifted nearly 11.5m barrels of beer. Within that category, sizes vary: Boston Beer Company, the largest craft brewer, sold around 2.5m barrels, whereas Sweetwater, of Atlanta, sold 95,000. In the same year Anheuser-Busch InBev, which makes Stella Artois, Becks and Budweiser, sold 106m barrels, almost ten times as much as the entire craft industry, and mopped up 48% of the American market. But craft sales rose between 2010 and 2011, as overall American beer sales declined (see chart).

These days bars with 20 taps are common. Connoisseurs of chocolate stouts, blueberry wheats and hopmonsters are spoiled for choice. Even the big breweries recognise 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-litre 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 4.7m cases in America and 10.6m worldwide.

Craft distillers’ overall sales may be small, but they tend to be more profitable. They accounted for just over 25% of the volume of spirits sold in America last year, but more than 45% of the revenue. Their share of the overall spirits market is growing—measured in both revenue and volume—whereas that of “value” spirits (think $8 litres of formaldehyde-tasting vodka in plastic bottles) is shrinking.

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.” In recent years Jack Daniel’s has rolled out two new brands—Gentleman Jack and Jack Daniel’s Single Barrel—designed to capitalise on Americans’ increasing fondness for craft spirits.

Some craft distilleries, of course, are wholly independent. Bill Welter, an ex-banker and passionate golfer who got the distilling bug while living in Scotland, makes vodka, bilberry gin, rum, rye and whiskey in Michigan. His Journeyman spirits are available in four states. Some grew out of other operations: Rogue, from Oregon, makes gin, rum and whiskey, but is better known for its line of craft beers, just as Anchor, a San Francisco brewery, began making a first-rate Junipero gin and Old Potrero rye only after a century of brewing beer. This model helps mitigate start-up costs, and gives distillers a steady stream of non-spirit revenue.

That is an immense help, because unlike brewers, distillers are taxed at a single excise rate, whatever their size. Last year Maurice Hinchey, a congressman from New York, introduced a bill to tax small distillers at a lower rate. It was forecast to save small distillers around $1.71 per bottle of spirits, but died in committee.

Spirits are also subject to stricter regulation than beer and wine, which may be made at home for personal use; spirits may not. Beer and wine tend to be available at more retail outlets—grocery stores and petrol stations, for instance—than spirits.

Beyond control

Some of the sillier regulations are fading. Take “dry counties” (counties in which alcohol sales are restricted). How much they actually curb drinking is unclear, but they are certainly a boon for liquor stores just outside their borders. Around 6% of Americans live in dry counties or towns, largely in the evangelical South. Yet such places are growing scarcer. Since 2004 voters in Texas have made 450 out of 576 dry municipalities “wet”.

Some states still prohibit alcohol sales on Sundays, though those “blue laws” are fading, too. Since 2002, 16 states have voted to repeal bans on Sunday sales. Today buying spirits on Sunday remains illegal in 12 states, but only one (Indiana) maintains a blanket ban on all alcohol sold on Sundays. Even majority-Mormon Utah is changing. In 2009 it ended its requirement that people who wanted a drink join a “private club”. Still, restaurants that serve alcohol must keep their booze out of customers’ sight, and it may not account for more than 30% of their total revenue.

From bootlegger to leg

But if the trivial legacies of Prohibition are fading, two more market-defining ones remain. First, 18 states maintain some form of monopoly control over the sale of alcohol, whether at the wholesale or retail level. Some “control states” merely sell to independent shops through state-owned distributors; in others consumers can buy alcohol only from state-owned outlets. Some states maintain that tight regulation reduces alcohol abuse. Utah, for instance, claims that not having independent shops eliminates incentives to sell more alcohol and to sell to underage patrons. Such arguments are specious at best. There is little difference in alcohol-abuse rates, deaths from alcohol-related causes, binge-drinking or drink-driving rates between “control” states and those that license alcohol sales through private shops.

Control states tend to offer consumers two things they do not want: higher prices and less choice. High prices can mean less tax revenue: customers in Pennsylvania, for instance, a control state with the highest average alcohol prices in the country, can simply head to a neighbouring state to buy their booze. Control-state laws also tend to criminalise consensual, non-harmful behaviour. A bartender in North Carolina who wants to stock a particular spirit that the state does not sell has to drive across the border to South Carolina to buy it. When he brings his booze back into North Carolina, he commits a crime. Such laws are so widely flouted that they erode respect for the law in general, just as Prohibition did (see picture).

How long such rules will survive is an open question. They may be irksome, but governments seldom abandon a steady source of taxes. Still, the retreat of other laws that tell adults when and where they may tipple gives hope—as does a market increasingly hospitable to start-ups, innovation and quality.

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