Crafting Beer Policy: An Interview with Bart Watson, Chief Economist for the Brewers Association (Part 2)

In part one of the Chicago Policy Review’s interview with Bart Watson, Chief Economist for the Brewers Association, the Chicago Policy Review’s Will Macheel discussed the role of a beer economist and the history of beer regulation in the United States. While some issues have been a focus of craft brewers and regulators over time (e.g., market access), others, such as water quality and scarcity, are a growing concern for the industry. This article is part two of our conversation, in which we explore some of these contemporary challenges and where the industry is headed.

The following interview, conducted on April 5th, 2023, has been edited for length and clarity.

CPR: What are the main legislative issues you’re focused on right now?

Bart Watson: At the federal level, for years, our biggest issue was taxes. Then we got the Craft Beverage Modernization and Tax Reform Act first passed and then made permanent. So it reduced the federal excise tax for your first 60,000 barrels of production from $7 a barrel to $3.50 a barrel.

Market access issues have always been big. Most of those occur at the state level. The 21st amendment leaves most beverage and alcohol policy to the states, but there’s always federal legislation, such as the Restaurant Revitalization Fund (RRF) and Paycheck Protection Program (PPP).

At the federal level, the USPS Shipping Equity Act is our biggest issue at the moment. This act would allow the Postal Service to ship beverage alcohol where it’s allowed per state law. We think this is a no-brainer. It gives another outlet for revenue for the USPS, and we’ve seen that this can be done safely and effectively by private carriers for years. UPS and FedEx can already do this in states where legal. This is just adding a competitor in the form of the USPS.

At the state level, we’re pursuing more specific changes to direct-to-consumer rules, working with state guilds. Wine is legal I think in 46 states to direct ship. Beer, it’s only 11. So we’re trying to close that gap. There’s no reason that you should be able to ship a bottle of wine and not be able to ship a bottle of beer to a consumer that wants it.

CPR: Water is one of the unsung heroes of beer, being one of the four main ingredients. It’s also used in hop and grain production. However, there are concerns about water scarcity in the U.S. How might craft brewers be affected by changes to the water supply?

Bart Watson: Your timing is very good. Next month, we are going to roll out a Water Risk Assessment Tool for craft brewers to look at this issue at their local level. We worked with an outside group to develop the tool. [Editor’s note: the Brewers Association published their Water Risk Assessment Tool in May, which you can read more about on their website].

One of the things we’re going to try to show brewers with the tool is that their water risk is not only related to water availability. Certainly, availability is at the top of everyone’s minds. And in parts of the Southwest, we’re starting to hear brewers talk very seriously about water availability issues, particularly if they’re in an isolated water table. We’ve seen breweries who have had their water reduced or had to build wells because they can’t get enough water from their municipality.

But water quality is also critically important to a lot of brewers. It doesn’t matter how much water is around if it’s not safe enough to use for brewing. And so brewers will need to think more about water infrastructure and water contamination issues, along with water scarcity, going forward. We hope to be more involved in educating and coordinating breweries on these factors, and playing a role in those policies.

Water is a critical ingredient for many of our supply chain partners. In beer, the most water-intensive part is the water used to grow the grain. It’s not the water that goes into the brewing.  So, water policy is complex.

CPR: What are some of the trends that you’ve been surprised about in craft beer over the years? Additionally, can you give me a sense of where you think the industry is heading?

Bart Watson: I’ve been somewhat surprised how far the IPA trend has gone in terms of its share within craft. You could tell it was going to get bigger and there were clear consumer data points that this was going to be something that would grow. But IPA’s ability to morph into hazy, juicy, and other formats has really allowed it to become by far the dominant style.

As for the market, it was clear to us years ago that we were going to have thousands more brewers. One of the first things I wrote about was how this wasn’t a bubble. I was getting questions when I started at the Brewers Association, and we had 2,000 breweries in the country. People wanted to know: is this a bubble? Are we going to go back? And it was pretty clear from what I was seeing at the time that, no, this was built on solid demand foundations, and so it wasn’t going to change anytime soon. In fact, there was probably a lot of growth and opportunity that was still out there. I don’t know if that’s been surprising.

In terms of the future, I think there is certainly a challenging market right now. We’re going to see some challenges in distribution for craft. Craft does not line up super well with the distribution and retailing system in this country.

Having written my dissertation about large retailers, these are massive companies that are built for scale. They’re not built for the small producer down the street that makes 90% for their tap room and then sells a little bit extra outside. And I think we’re starting to see some pushback from distributors and retailers in the complexity of the category, which is going to lead to pressure. That said, I think there’s still opportunity out there for the small, local, nimble brewers that are focused on their market and can control the variables in that market.

That’s a long-winded way of saying I think the future is going to be somewhat mixed. The unprecedented growth we got in the last 10 years is not going to continue for another decade, but there’s still opportunity in the market for brewers to differentiate and find their local niche.

CPR: Besides the ever-present IPA, are there any styles that you’re seeing become more popular?

Bart Watson: In recent years, there’s been growth on both ends. There are IPAs, driven a lot by double IPAs, that high flavor, higher alcohol by volume (ABV) that are growing very strongly. But we’re also starting to see a lot of growth at the lower end.

There’s a running joke in craft brewing that this year or the next year is going to be the year of craft lager and it never really is. But I think we’re finally seeing a collection of lighter brands of lager—helles, golden ales, blonde ales, Kölsches that are doing well.

I think we’re finally seeing growth too in non-alcoholic (NA) beers. Generationally, I think we’re seeing the next generation of craft drinkers be very aware of the ABV in their beer and how it shapes their decisions.  There are some nights when I want to drink a double IPA. And then there are other nights when I want to drink a super low ABV session beer or an NA.

CPR: What is something you wish I asked you about regarding the economics and policy of beer?

Bart Watson: I think there are a lot of interesting questions around how the policies themselves shape the business models and that iterative interaction. You get this feedback loop between how the policies affect which brewers open and then how those brewers affect the policies.

We didn’t talk about distribution at all. That’s probably the other place that’s really critical. The vast majority of beer in this country goes through an independent beer distributor set up that way by the states post-Prohibition. Understanding how those rules have changed is critical.

We’ve seen massive consolidation in wine and spirits, and beer is trending the same way. We’ve got a single beer distributor who distributes 60% of the beer in California now and is spreading to other states as well. There are a lot of really interesting questions around distribution. And most of the market issue stuff that we end up doing is somewhat in response to that.

While independent distribution is certainly open to, and beneficial for, craft brewers over the years, I don’t want to paint distributors as the enemy in any case. Distributors have a certain scale as well. And so it’s not like free and easy market access for every brewer. A lot of what we do is try to create alternative routes to market. So self-distribution, direct-to-consumer, do those until you get to a certain scale where it makes sense to go with one of these beer distributors. Understanding that world, I think, is critical for being in the beer business, for writing about the beer business, for understanding policy since beer distributors are hugely influential at the public level as well.