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April 17, 2017

Next act: New challenges arise as craft brewing industry matures

Photo / Lori Valigra Joel Alex, founder of Blue Ox Malthouse in Lisbon Falls, tries a new brew given to him by Brenda Melhus of Norway Brewing Co. at the New England Craft Brew Summit in Portland March 31. Blue Ox supplies malt to Norway Brewing, co-founded by Melhus' son Charlie and his wife Erika.
Photo / Lori Valigra Empty glasses await eager beer tasters
Photo / Lori Valigra Long lines form to taste beer from Dirigo Brewing Co. of Biddeford.

Craft breweries are no longer just competing in the beer industry, but in the bigger alcohol and beverage industry.

That's the view of Bart Watson, chief economist for the Boulder, Colo.-based Brewers Association, who spoke to 500 attendees at the second annual New England Craft Brew Summit in Portland in late March.

“While beer [in general] is losing a lot of share from wine and spirits,” Watson said, “the share of craft beer is increasing. It will have to compete with other alcohol and beverages going forward.”

The Brewers Association pegged U.S. craft brewery production growth at 6%, to 24.6 million barrels, in 2016 compared to 24.3 million barrels in 2015. Of the 5,301 U.S. breweries operating in 2016, 826 new ones opened, up 16.6% over 2015, the association said.

The Maine Brewers' Guild has about 82 members and contributed $228 million and 2,177 jobs to Maine's economy in 2016, including multiplier effects. A recent study by the guild and the University of Maine found that an average of six craft breweries opened in the state each year over the past decade, with breweries spreading beyond Portland to rural Maine, including the recent opening of Drumming Grouse Brewery in Bridgton. Nationally, Watson says, more than two breweries are opening a day, with 5,300 active brewing operations.

Every tank in a brewery creates two new jobs, Watson says. He adds that 60% of Maine breweries operate a tasting room or serve food, adding to their economic impact.

Millennials still are driving craft beer demand, with a thirst for new flavors and experiential tasting, he says.

But there is a slowdown in New England regionally, especially with beers 500 to 600 miles outside their market.

“Distribution will be more challenging going forward,” Watson says.

To self-distribute or not

Brewers in Maine can self-distribute up to 50,000 gallons, or about 1,612 barrels, but with the extra overhead taken by an independent distributor once they reach that milestone, even distributor Tim Wissemann, president of Mariner Beverages in Portland, advises keeping distribution in house as long as possible rather than seeking a distributor before hitting the limit.

“I'd say to everyone that you should self-distribute as long as you can,” Wissemann says. It is expensive to terminate a distribution agreement once it is signed, and it's easier for the distributor to cut ties with the brewery than the other way around, he says.

When it's time to hire a distributor, ask how the beer is stored, their marketing strategy and reporting procedures, advises Steve Johnson, founder of Moat Mountain Smoke House & Brewing Co. in North Conway, N.H.

Those are some of the big concerns beer companies have when handing off control of beer distribution. Bissell Brothers Brewing Co. of Portland found a happy medium, with its former in-house distributor, Josh Schlesinger, starting an independent company, Sleek Machine Distro, to distribute Bissell's beers. The idea was that it is one way to control the way beer is delivered to the market. And, it can trim distribution commissions because Sleek Machine focuses on lean, or less costly, distribution, according to Schlesinger.

Other brewers, like Foundation Brewing Co., had big plans from the get-go and signed Mariner Beverages as a distributor from Day 1.

“We knew our target was to get beyond what we could self-distribute,” says Christie Mahaffey, co-founder of Foundation, which has a brewery and tasting room in Portland. The company formed in 2012.

“But if I started up the company today, I can see self-distribution [as an option] to have a direct relationship with customers,” she adds.

Funding new breweries or expansions

With distribution providing less of a model for growth, neighborhood breweries are coming back now, says Patrick Wright, economic and community development coordinator for the city of Gardiner. And they may qualify for local and/or federal assistance.

“So we need to work with the community on zoning,” Wright says, pointing to Sebago Lake Distillery, set to open in May on Water Street. It has applied for a $90,000 Community Development Block Grant and sold $275,000 of a total $2 million debt and equity offering.

CDBGs are a good way for startups to raise money, but the grants need buy-in from the community, says Andrea Smith of the Maine Department of Economic and Community Development.

“The company needs to create [a certain number of] jobs, and until those jobs are created the municipality is on the hook for those funds,” she says. Not all Maine communities qualify for CDBG grants. Those that don't should contact the Maine DECD, she says.

Another option to get some financial help via a tax credit is to be located in a Pine Tree Development Zone and hire five new employees over two years, says Matt Pore, senior manager at accounting firm Baker Newman Noyes in Portland.

“Being designated in a Pine Tree Zone can virtually eliminate the Maine income tax requirement,” he says. However, it can be a bit time-consuming to get certified, he says. Most counties in Maine qualify, though only a few towns within York and Cumberland counties do.

There are other credits breweries can seek, including using Internal Revenue Service Form 8846, which is a credit for employer Social Security and Medicare taxes paid on certain employee tips, and Form 8903, which is a federal incentive to deduct domestic production activities. Pore says it allows a 9% deduction of production activity income for keeping jobs in the United States.

Another option is Employment Tax Increment Financing, a state program that helps new and established Maine businesses hire new employees by refunding 30% to 80% of the state withholding taxes paid by the business for up to 10 years. The reimbursement rate rises with the level of local unemployment, with businesses located in Pine Tree Development Zones getting the highest rate.

Qualifying businesses must plan to hire five or more new, full-time employees over a two-year period.

An earlier version of this story stated that Form 8903, which is a federal incentive to deduct domestic production activities, allows a 90% deduction. The correct figure, Pore says, is it allows a 9% deduction of production activity income for keeping jobs in the United States. We regret any confusion.

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