FEDS TAKE TEETH OUT OF MALTERNATIVES

TREASURY TO RECOMMEND 90% ALC FROM MALT

Beer Business Daily has learned that the United States Department of the Treasury, Tax and Trade Bureau (successor to the ATF) will recommend that malternatives’ alcohol (by volume) content must be 90% derived from a malt base, rather than the liquor-based “flavorings” that many malternatives use now to add alcohol. There will be a 90 day comment period for industry participants to offer their thoughts on this proposal.

It was previously thought by many industry observers that the TTB would only require that 51% of the alcohol content be derived from a malt base, which would only require comparatively minor reformulations. Obviously, Diageo would favor such a ruling as it would not require as much of a reformulation.

BUT IT WAS NOT TO BE. The new proposed rulemaking will require that many malternatives to dramatically change their formulations to be more malt-based. The cost to producers to change formulation could run in the millions or tens of millions of dollars, according to a source.

WHERE THE PLAYERS STAND. As an equivalency issue, i.e. beer is different from liquor and is made differently and derives its alcohol differently, the brewers are in favor of this ruling as it makes a clear distinction, branded in federal law, between beer/malt-based beverages and liquor. The spirits companies obviously favor the status quo. But where does that leave wholesalers?

WE SPOKE WITH SEVERAL distributors and one thing is clear: they want their malternative volume, particularly this summer to pull them out of their Q1 funk. A few distribs are worried that a re-formulation to a full malt-based product would have taste consequences which could prove devastating to volume, although at least one distributor told us that his brewer assured him that they can reformulate the liquid into compliance with no discernable taste difference.

THERE IS SOME QUESTION, at least in distributor circles, whether Allied and Bacardi will want to reformulate. Their margins are already cut in half by sharing with Miller and A-B, respectively, and part of the allure of the situation was to sell their “flavorings” to the brewers without tax. It all depends, I suppose, on whether they believe these products will continue grow.

THE STATES. There was some pressure from the state ABCs for the TTB to get this rulemaking done so that they could follow suit with their own regs. Interestingly, the assoc of state ABC execs initially supported a standard of a 51% minimum alcohol by malt. According to their May 7, 2002 meeting minutes, a copy of which was obtained by Beer Business Daily, “A motion was made by Randy Yarbrough [Texas ABC] and seconded by Charlie Ehart [Maryland ABC] to recommend both NABCA and NCSLA support a standard such that a minimum of 51% of the product volume in any malt beverage be from malt. Motion carried.” They got their wish, and then some.

In a memo to explain their proposed rulemaking, the TTB wrote that “we seek to ensure that flavored malt beverages comply with the requirements of the Internal Revenue Code of 1986 with respect to their composition, premise where produced, appropriate tax rate, and system of distribution. We also wish to ensure the proper classification of these alcohol beverages under the Federal Alcohol Administration Act so that their labeling and advertising conform to the applicable requirements of the Act and to ensure consumers are adequately informed, and not misled, as to the identity of these products. We believe the proposed changes will clarify the status of flavored malt beverages under these two Federal statutes and will provide guidance to the State regulatory and tax agencies that oversee their taxation and distribution.”

We are told that the NBWA will take up this issue at their next board meeting at the end of the month. Stand by for more developments.

Developing.. Harry