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June/July 2009

Craft Brewing in Texas

By Bruce Wright

Sparkling rise, cloudy future?

 A little bit of direct sales can have huge effects on your profit margin. - Brock Wagner
founder, Saint Arnold Brewing Company. Photo courtesy of Saint Arnold Brewing Company

Brock Wagner spent seven years as an investment banker, working on billions of dollars’ worth of mergers and acquisitions – but his heart wasn’t in it.

Texas’ craft brewers produced nearly 456,000 barrels in 2008.

“I came to realize that money didn’t motivate me,” he says. “I had to find something I was passionate about.” And that “something” turned out to be beer.

But not just any beer. For more than 14 years, Wagner’s Houston-based Saint Arnold Brewing Company has made beers and ale according to European tradition, without the additives and preservatives common in mass-produced beers, making it a respected leader in the brewing industry.

“Big Beer”…

In Texas, beer is business of the biggest kind. A recent report by the National Beer Wholesalers Association indicates the beer industry contributes more than $16 billion annually to the Texas economy and helps support nearly 148,000 jobs in the state.

A Foamy Ocean

In 2006 (most recent data available), U.S. brewers produced more than 180 million barrels of beer. Texas was the nation’s third-largest producer, with 19.4 million barrels.

And some very large companies dominate the industry. By some estimates, 80 percent of the beer Americans drink is manufactured by just two firms, Belgian-owned Anheuser-Busch InBev and SABMiller, based in London.

At the other end of this spectrum, however, are a host of small companies dedicated to quality rather than quantity, preserving traditional, handcrafted beer styles in the face of a foamy ocean of taste-alike brews.

… and Small Breweries

The Brewers Association, a craft brewing trade group, defines craft brewing as being “small, independent and traditional” – that is, brewers that make fewer than 2 million barrels a year; are not owned or controlled by a company that is not itself a craft brewer; and brew in traditional styles, generally using only hops, malted barley and water.

2006 U.S. Beer
Production:Top 10 States

(In 31-Gallon Barrels)
State2006 Beer
New York7,699,63710
50-State Total180,396,198

* Estimate prepared by the Beer Institute.

Source: The Beer Institute

The association recognizes four categories of craft brewer: regional craft breweries, such as the Spoetzl Brewery in Shiner, which make fewer than 2 million barrels a year; microbreweries, which make fewer than 15,000 barrels annually; brewpubs, which make beer for sale on their own premises; and contract brewers, which either produce craft brews for sale by another company or buy such brews for sale under their own labels.

Craft brewers are hardly a major threat to Bud and Miller. According to the Brewers Association, craft brewers accounted for about 4 percent of all American beer production and 6.3 percent of sales revenue as of December 2008.

But the category is a rare growth area in an otherwise mature market. Craft beer sales rose by 5.9 percent in 2008. Other domestic beer sales were flat at 0.6 percent, while import beer sales fell by 3.4 percent.

Texas has about 40 craft brewers, with several more in the planning stages. The state ranked fifth in the nation for craft beer production in 2008, behind California, Ohio, Colorado and Oregon. Texas’ craft brewers produced nearly 456,000 barrels in 2008, about 8.5 percent more than 2007’s 420,000 barrels. By far the largest is Spoetzl, the nation’s fourth-largest craft brewer and 10th-largest brewer overall in terms of sales.

Three Tiers

America’s craft-brewing Renaissance began in the 1970s and gained significant momentum in the 1990s. Since then, however, the Texas brewing scene has witnessed a series of vanished labels and closed brewpubs.

According to Wagner, the main hurdle facing Texas’ small breweries is the inflexibility of state laws regulating the sale and distribution of beer.

After the repeal of Prohibition, most states, including Texas, adopted some form of a “three-tier” regulatory system for alcohol, which firmly separates the manufacture, distribution and sale of alcoholic beverages. The scheme was intended to prevent the formation of monopolies, simplify tax collections and ensure fair and orderly markets.

In recent years, however, many states have allowed some exceptions to the three-tier requirements. Texas, for instance, now allows its wineries to sell wine directly to visiting customers. For many small wineries, such sales spell the difference between profit and bankruptcy.

2008 U.S. Craft Beer
Production: Top 10 States

(In 31-Gallon Barrels)
State2008 Beer
New York367,8776
50-State Total8,493,765

Source: The Beer Institute

Crafty Brews

In 2008, Texas was fifth among states in its production of craft beer.

For small brewers such as Saint Arnold, however, there is no similar exception. They can offer brewery tours, but visitors cannot purchase the products they’ve seen being made.

Brewpubs can sell beer directly to the public, but cannot distribute their products to other establishments.

Undercut by Out-of-Staters

This puts Texas’ craft brewers at a commercial disadvantage to companies from other states.

“A little bit of direct sales can have huge effects on your profit margin,” Wagner says, noting that he’d make as much selling one six-pack to a visitor as selling 10 to a distributor. “Wineries can do it. It’s a point of frustration for us that we can’t.

“Where breweries are allowed to make direct sales to the public, they use those sales to fund their marketing efforts,” he says. “That allows them to come here and make sales in Texas. I’ve had California breweries tell me they love the laws in Texas, and hope they don’t change, because it gives them an advantage over us.”

Despite the hurdles they face, though, some Texas craft brewers are succeeding.

“Those of us who are still around are pretty healthy – those who made it over that initial hump,” Wagner says. “Our sales keep going up. People in Texas are coming to appreciate craft beer.”

And for Saint Arnold, success has brought the need for roomier facilities.

“We’re excited to be building a new brewery. It’s a $6 million project, going in just north of downtown Houston,” Wagner says. FN

For more information on craft brewing, visit the Brewers Association.

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