Silver Eagle Boycott

I was just about to leave for Hay Merchant... now I know why they haven't said anything about BB10 release today....

Crazy stuff. I hate InBev... and being south of Houston.. I've always hated the slowness and lack of caring by Silver Eagle distributing.... they have always been terrible.

 

I wonder how this will work with other InBev distributors throughout the state.

 

This does suck, especially for these business' Though Hay Merchant specifically can't keep boycotting everything. Pretty soon, they will have an empty tap wall. For me, there is no way I am going to stop buying Saint Arnold, Karbach, and especially Firestone Walker. At least until there is no difference between the price of liquor and beer. Though if prices do get as bad as all that, I might just have to go to Julep for happy hour more often instead of beer bars

 

So, I've been thinking about this and talking with @FreetailBrewing on Twitter, and I think I'm at the point right now where I'm actually gonna stand up for the distributors in this case, though I never want to.

So the current setup is:
Brewery pays for a keg.
Brewery charges a deposit to distro for keg.
Distro passes this deposit on to retailer.

From the distributor's standpoint, they are net flat - same amount is going to be paid to the brewery as they receive from the retailer. So here's where things get tricky: the current deposit of $50/60 represents a significant mismatch from the actual cost of a keg, which is twice or three times that price.

One could imagine bad actors entering the marketplace, starting retailers, paying the $60 deposit, and never returning kegs, opting instead to sell them for $120 a piece. That's simple arbitrage and easy, risk-free profit. If enough retailers did this, the price would rise to a market equilibrium state, where it currently is nowhere near.

Hell, some of you have probably participated in this. Need a keg to turn into a kettle for homebrewing? Why spend $125? Go to a retailer, buy a full keg of your favorite beer, drink it, and keep the keg. The deposit of ~$50 is gone, but you just saved $75. And who suffers most in this case? The brewery. The retailer is net flat (you paid the deposit that they paid), the distributor is net flat (the retailer paid the deposit they paid), but the brewery lost money (something slightly less than the amount you saved since they buy in bulk).

A keg is essentially a loan - the brewery is selling the contents of the keg (the beer) to the distributor, who in turn sells, with a markup, the same contents to the retailer, who in turn sells, with a markup, the same contents to consumers. However, the keg is never part of the sale - it's a borrowed container to hold the actual sold items.

When you borrow something with value, you lay down collateral, the value of which meets or exceeds the value of the borrowed item. Any homeowner or car-owner knows this immediately to be true, though in that case, you're borrowing money and using an item as collateral. Why do we therefore expect a brewery to lend out an item (a keg they had to pay for in the first place) but accept as collateral less money than the value of the lent item?

The distributor has every incentive to return the keg (they want to sell more beer), but the end user (the retailer) has every incentive not to - they can turn around and sell the keg for more money than the collateral they put up.

In actuality, the fact that breweries are expected to take the hit is, to me, absurd. The producer should never be the one to have the greatest burden - both the distributor and retailer are middlemen in this case. They both want zero risk while the producer suffers whenever the system is taken advantage of.

This means the current system represents a subsidy, from the brewery to the retailer. The subsidy went down $10 but it's still a subsidy.

 

I personally never understood how low keg deposits have always been. It makes zero sense. You should pay for the keg, then get a refund when you bring it back.

When I go borrow an expensive tool from Autozone, I pay the tool's full price. Then I get (most of?) it back upon return. It's been a few years, but that's how I remember it. It would be ridiculous for them to let me borrow a $150 tool on a $50 deposit. How are kegs any different?

 

I have been saying the same thing @nathanmiller - I don't see why the bars think they will be getting much sympathy for a keg deposit. In a perfect world, the bars that are the problems would have to put down a full deposit while bars that never have issues would not have to. But, that would be incredibly hard to track. Even if Hay Merchant had 100 kegs from SE, this is a difference of $1k for a large bar. $1k is operating expense that they will not see really, but in the whole scheme of things, it is a one time cost. They probably would make more money just from selling the beers (especially BB10) over the next week than just boycotting it.

I get their anger, but I think it is over the top.

 

That's interesting. Thanks for the enlightenment @nathanmiller

 

If these bars continue to take the bullying from the distributors, eventually we'll be renting glassware. And ya, I'll be completely okay with paying a deposit for a snifter at bar. Then having to return said snifter when I want another beer... No thanks. I'll go to a bar that doesn't charge me a "vessel" deposit, or consume a packaged product instead.

 

It would be nice for the TABC to do a serious audit of the keg deposits charged by Silver Eagle and all the Inbev distributors. The big distributor monopolies need a microscope shoved up their ass.

 

Bindlestick in Leander and Bluebonnet Brewing just starting going to one-use plastic kegs that are 100% recyclable. Maybe this will help with the above mentioned problem.

 

So is Petrol the only bar boycotting now? In their message they indicated that Hay Merchant and Flying Saucer were too, but both those places got BB10. Also I just don't see Flying Saucer not serving SA or Karbach...

 

We want to keep selling as much of Silver Eagle's best stuff and right now we will have to do that by selling cans or bottles because we are just not prepared to pay the most in the state for our shell deposit yet. The question for us is "why is Silver Eagle charging more than anyone else in the state for it's shells?" Seems off that we pay more for a beer made less than a mile from our door than any other city in the state does. Once we work out the hometown tax then we can move on. We plan on doing $3 dollar bottle or can beers all week from Saint Arnold, Karbach, Firestone Walker, Sierra Nevada and we will try to support other Silver Eagle breweries as soon as possible. Tonight we are celebrating Saint Arnold Amber's 21st Bday with $3 Ambers all day (Which we purchased last week).

 

I am curious why the distributors should be left with a higher keg deposit than the bar? If the bar loses a keg, the distributor then has to cover some of the costs.

I get why they are doing it - but there probably is a better way to do this.

 

The thing about this that has me scratching my head is Petrol Station's attempt to paint this as another example of ABI screwing over the little guy when in reality it's just a business decision designed to prevent further loss. If Karbach raised their deposits to SE due to loss, I guarantee that no one would bat an eye. But ABI did it, so it's obviously evil.

 

The more I'm reading about this, I am coming to the opinion that this issue is more complicated than I first realized.

 

Indeed. Cooperage accountability is a very important part of the draft beer business, especially to breweries that spend thousands of dollars on kegs (millions in the case of ABI). A brewery has to plan on having a certain number of kegs dedicated to each draft account. Let's say my bar has one dedicated Freetail line (and we basically do). We need at least 6 kegs in the pipeline to maintain that line. One for the tap wall. One for a backup in the cooler. One sitting empty outside my cooler waiting to be picked up by Silver Eagle. One at SE waiting to be returned to the brewery. One at the brewery filled with beer or waiting to be filled with beer. One at SE ready for delivery to my account after my backup is tapped. And so on. I don't like paying deposits for kegs, but it's a necessary part of the business, because each keg sold on the black market or re-purposed for homebrewing has a considerable cost to the brewery that owns it. ABI made a calculated business decision to try to recoup their loss. It sucks that it has repercussions for craft beer bars, but it's not a case of them trying to screw us. After all, places like Hooters are now going to be paying more for their Bud Light.

FWIW, I'm not trying to exonerate Silver Eagle. It seems like they certainly could have handled this better. I just want to bring some clarity to the issue. This isn't a big guys vs. little guys issue. It's a symptom of the very real problem of keg loss.

 

Out of curiosity, how many BA'S would raise prices if part of their business was seeing lost revenue due to theft?

 

Hi everyone, the following is a copy and paste of something I just put on my blog about this topic. Cheers, Scott

http://blog.freetailbrewing.com/201...-deposits-boycotts-and-everything-in-between/

That’s not your keg: Some thoughts on deposits, boycotts, and everything in between.

So here I am again, about to embark on a long-winded blog post about a topic that may in fact be bad for my own well-being in the long-run. It won’t be the first time, hopefully it won’t be the last.

If you haven’t heard by now, a handful of Houston-area bars have agreed to boycott beer from Silver Eagle Distributors over a recent increase in keg deposit fees. Some of the breweries that Silver Eagle distributes: Saint Arnold, Karbach, Firestone Walker, Sierra Nevada, 8th Wonder, Rahr, Six Point, Anheuser-Busch, Modelo, and… you guessed it, San Antonio’s own Freetail Brewing Co.

I’ll start this out by saying that I’m well aware the opinion that follows may result in my beer never again being sold at any of these bars engaged in the boycott, and I’m willing to accept that. I’m willing to accept that perhaps my opinion even means that I can’t sustain distribution in Houston at all. I accept that too, because this is a sword I’m willing to fall on for the industry I love. I’ve always prided Freetail in our transparency and honesty to our suppliers, business customers, peers, and fellow beer drinkers. That’s disclaimer #1.

Disclaimer #2. I understand and I can sympathize with the perspective all parties involved. I’ve paid deposits for other breweries’ beer, and I’ve collected deposits from wholesalers, retailers and consumers alike. I’ve been a part of each side of the transaction. I get it.

I first heard of this story as it was relayed to me by our salesman on the ground hearing a rumor that I confirmed directly with one of the retailers, confirmed with Silver Eagle, and confirmed with a fellow brewer in the Silver Eagle portfolio. My initial reaction was to be concerned from a business perspective. Our new production brewery, and especially our Houston distribution, is so young that hiccups like these have major impacts on our financial well-being and viability. Putting those concerns aside, I thought to myself: “I get it… and I don’t think anyone is really wrong here.”

But I’ve come to change my opinion, and while I have a lot of respect for folks like Ben Fullelove (Petrol Station) and Kevin Floyd (Hay Merchant) and what they’ve done for craft beer in Houston, I respectfully disagree with them on this issue.

Disclaimer #3: if this dispute were just about advance notice of deposit increases, I would concede that point and agree with those with the complaint. But that isn’t the crux of the debate, the debate is over the fact that keg deposit fees are increasing, and may increase in the future. Bars don’t like it because it’s an additional upfront cash outlay, and that cash is best suited elsewhere. I can understand this perspective, but it doesn’t make it the only viewpoint and it doesn’t make it the correct one.

Disclaimer #4: this dispute actually has nothing to do with me other than the fact that my beer isn’t purchased anymore. I didn’t raise my deposit amount that I charge to my wholesalers, so I’m not the reason the deposits went up. However, I’m one of the brewers most impacted by this because as one of Silver Eagle Houston’s smallest supplier’s, most of my volume is at the same craft-centric accounts involved in this boycott. Maybe that’s why I don’t have an issue falling on this sword: I’m already shut out of all these places for a reason that has nothing to do with me anyway, so what’s to lose?

A keg deposit, is just that: a deposit. Just like any other deposit, when you return the item in the condition it was received (or, in the case of kegs, covered in beer and other miscellaneous things), you get your deposit back. The reason we have keg deposits is because kegs are extremely expensive, and keg loss is a major issue in the beer industry that costs small, independent craft brewers MILLIONS OF DOLLARS every year. (The Brewers Association, which full disclosure, I am a current Board Member of, has estimated that lost and stolen kegs cost craft brewers between $5.3 and $15.8 million annually.) The truth of the matter is that in almost all cases, the cost of a keg deposit is significantly more than the replacement value of the keg. The last order of kegs I made, the total cost of which was as much as a brand new Mercedes-Benz (and not an entry level model), came out to $131.62/keg after accounting for production, embossing, screen printing, palletizing and shipping. To really eliminate keg loss/theft, the market really should be charging a deposit fee significantly higher than the replacement cost of the keg to incentivize the retailer/individual to return it. So long as you are only paying a $50 deposit for something worth $131.62, why would you ever return it? (I know the answer to this question: they get returned because most bars are run by trustworthy people who see more value in selling more beer than owning stolen kegs).

But we don’t charge deposits that ensure maximum returns. The market charges a rate that is less than replacement cost off the contract of trust that has been established between the brewer, the wholesaler, the retailer and consumers in cases where they can buy kegs. The amount of the deposit is set by the brewer at a level that reflects the level of risk the brewer is willing to accept that his kegs might get lost. As losses mount, some brewers may feel compelled to increase that deposit amount to cover those losses. Remember: this costs breweries millions of dollars a year, from the global giants to the smallest breweries.

Some people have asked: why not just punish the bars who are losing the kegs instead of everyone? Well… they are. Only bars that don’t return kegs end up losing their deposit. Bars that return kegs, get their deposit back. If they have another order, that deposit can be applied to the next purchase. I’ve had instances where only paid $5 for a keg of beer because we had four shells to return and we were only buying one keg. In other instances, we were buying more than normal, so we had to put down new deposits. Some people have said “you only get your deposit back when you decide not to sell anymore beer.” But that’s how all deposits work. If you rent an apartment, you only get your deposit back when you move out.

Others have asked, why not only charge the higher deposit amount for the kegs with higher deposits? That would be one way to do things, but in my opinion it creates an accounting quagmire that isn’t worth the trouble. If Scott’s bar is carrying Saint Arnold and wants to buy a keg of Freetail next week, the bar doesn’t have to worry about if there is a difference in the deposit – they get credit for the same deposit amount. This makes things nice and simple for both the wholesaler and the retailer. In my time buying beer from other breweries, the toughest part about managing my outstanding keg deposits was keeping track which ones were are various price levels. Having them all the same price made things a lot easier for me.

Lastly, many have said this is about greed from Silver Eagle. The reality is that Silver Eagle pays keg deposits too. Every week when they come pick beer up from me, I charge them a deposit on kegs and give them credit for returns. If they never return a keg, they lose their deposit. The system of deposits rolling downhill keeps accountability on the person who last “rented” the keg. If Specs, for example, sells a keg to Joe Blow, they are going to collect a deposit. If you don’t return the keg, you don’t get the deposit back. Specs is free to charge whatever price for the deposit they want, since they are responsible for getting that keg back to the wholesaler or they will lose their deposit. If Joe Blow loses it, he is on the hook. If Specs loses it, they are on the hook. If Silver Eagle loses it, they are on the hook to me. When anyone loses it, the brewery is on the hook because the deposit didn’t cover the cost of the keg.

[Note, not discussed here is the topic of bars that hold kegs to age, sometimes for years. This has a real cost to breweries to. We expect a keg to turn over 10-12 times a year, so a keg out of commission for years at a time means it needs to be replaced. I'm not saying this practice needs to stop, but it is something to be aware of]

In the end, this is a nuanced situation that doesn’t have easy answers that boil down to “damn the man!”. In this case, “damn the man” is actually hurting Freetail, Saint Arnold, Karbach, Rahr, 8th Wonder, etc., because we are the ones who rely on these bars to sell our beer and keep us in business.

I won’t be responding to comments to this post because our blog has major spam problems right now and comments get lost. I will, however, respond to any comments posted in the Beer Advocate Southwest Forum in this thread. I’m committed to transparent business practices and am more than happy to engage in a discussion on the topic. I invite any retailers who disagree to engage with me too. Some of you have my cell number, reach out, or let’s talk on the BA forum. There may be something I am missing and my mind is always open to new perspectives.

Cheers,

Scott

 

Sorry for the jumbo font, it copy/pasted that way