Association: Malternatives must reformulate

The National Beer Wholesalers’ Association announced last night that its Board met in Washington, DC to discuss how they would publicly come out on the proposed TTB standard for malternative formulation (see BBD 03-21-03 and 03-24-03).

Although we predicted this, it was not a foregone conclusion that the wholesalers would support the measure (which would mandate that 90% of the alcohol for malternatives must be derived from malt), as many distributors have gained tremendous revenue from FMBs over the past 1-2 years and some don’t want to tinker with a profitable formula. In fact, one distributor told me last week, “I can’t believe we’ve let Anheuser-Busch kill this segment for us.”

HOWEVER, several distribs who have spoken or written to Beer Business Daily over the past year have expressed concern that malternatives, and particularly Diageo, were using the FMB category to further blur the lines between beer and spirits from a tax and channel access perspective, and as a back-door way to encroach on the Holy Grail of marketing: network TV. So it’s almost no wonder that the NBWA has made this endorsement.

THE ACTUAL RESOLUTION from the NBWA says that they support “the proposed 90/10 standard, as outlined by the Tax and Trade Bureau (formerly ATF) and as published in the Federal Register. Of course, under the 21st Amendment, each state has the right to define and regulate beer.” This last statement is a nod to state regulators who have been clamoring for direction from the TTB, any direction, so they know which way to jump.

REHR. Indeed, in a conversation with NBWA president David Rehr on the eve of the announcement that the TTB would file this proposed 90/10 ruling, David told BBD that the NBWA distributor leadership would probably back the proposal, but he wanted to wait until they held their board meeting before he made assumptions.

PURSER SPEAKS. NBWA VP Craig Purser, called at home in the late evening by this rude editor, told Beer Business Daily from his child’s nursery that “we support the TTB’s proposed measure because it defines beer in a way which is consistent with federal and, indeed, many states’ current alcohol regulations.” (His young children had nothing to add to this statement other than some whining over juice boxes, which are not malternatives but could be if you added ‘flavorings’).

THE BIG ISSUE. The big issue for distributors is whether malternative producers.. mainly Diageo, Miller, A-B, and mike’s.. will be able to reformulate their liquid according to the 90/10 malt rule and still provide an equally appealing beverage. Some have pointed to Zima, which already does comply, and said no. A-B and Miller have privately said they indeed can reformulate to create no discernable taste difference to the average consumer. The big question mark is Diageo.

DIAGEO ADDRESSES CONCERNS. Diageo president Paul Clinton, in a letter to David Rehr dated March 26 obtained by Beer Business Daily, said that while it is indeed possible to reformulate to produce a ‘liquid’ under the 90/10 standard, “it is unclear to us that any brewer has tested a reformulated product on a commercial scale.” Paul is uncomfortable with the fact that even a slight taste profile difference could crater the category. He goes on to write that “even a 50% compromise [which is what Diageo and the FMB Coalition are pushing for] will impose on the industry and that will have a negative effect on margins for suppliers, distributors and retailers. While some large brewers may have the ability to reformulate at a “90/10″ standard, not all FMB suppliers are large brewers.”

PAUL ON EQUALIZATION. Paul re-states the company line that Diageo is against all tax increases on beverage alcohol, including beer, wine and spirits. “We do not support tax equivalence,” he writes in his letter to David.

BECKER ON TTB RULING. The NBWA Board had a lot of reading to do as it also considered the Beer Institute’s position from president Jeff Becker. The BI supports the TTB proposed ruling, and points out that the 0.5% standard (same as 90/10) is an “allowance made by federal regulators to accommodate the use of commercially available flavors. Anything different would alter the traditional notion of beer or malt beverages that is currently in federal law and most state laws.”

KEEP IN MIND that even non-alcoholic beers can have up to 0.5% alcohol. A ripe banana has more than 0.5% alcohol.

FIXING THE STATE PROBLEM. The Beer Institute puts forth the notion that any departure from this 0.5% precedent in federal and many state laws would “severely disrupt the unique statutory and regulatory distinctions in federal and state laws governing taxes, distribution channels, and other fundamentals of our industry.” Several states have definitions of beer based on alcohol derived from malt base, and this ruling would seemingly take care of those state concerns.

WILL THIS BECOME THE RULEMAKING? Diageo and the FMB Coalition are fighting it hard. However, it’s a tough road. I predict that it will become the law of the land, and while it may throw some smaller FMBs off the shelves, A-B, Miller, mike’s, and yes, Diageo will most likely reformulate.

TEXAS WBDT exec Mike McKinney recently told me something that, curiously, is a propos now. He said, “You know, there hasn’t been any sassafras in root beer in a long time. But it still tastes like root beer.” Old timers know that root beer used to be brewed with the root of the sassafras plant, but flavors now simulate the taste.

P.S. Many thanks to the many distributors who have already emailed in our Spring Survey. It is a great barometer and gut-check for me to know these market conditions across the fruited plain.