Killing Craft?

When the world’s largest brewer, AB Inbev, asked reg­u­la­tors around the world to ap­prove their mega-merger with Sabmiller, they promised to steer clear of mo­nop­o­lis­tic be­hav­ior. But their re­cent move to block the sale of South African hops to Amer­i­can craf

Craft Beer & Brewing Magazine - - Contents - By Jamie Bogner

AB Inbev’s re­cent move to block the sale of South African hops to Amer­i­can craft brew­ers has raised new ques­tions about just how far they’ll go to pro­tect their own mar­ket share.

SMALL AND IN­DE­PEN­DENT CRAFT

brew­ers across the coun­try re­ceived the un­for­tu­nate news re­cently that global brew­ing gi­ant AB Inbev would cease sales of hops from its South African Brew­eries (SAB) hops farm­ing sub­sidiary. The va­ri­eties grown and bred by SAB Hop Farms—south­ern Pas­sion, South­ern Aroma, South­ern Star, and more—will no longer be sold to other in­de­pen­dent brew­ers and will only be avail­able to the brew­eries owned by AB Inbev.

Hops Bro­ker Greg Crum of ZA Hops was the sin­gle largest U.S. im­porter of th­ese South African hops and had worked for years to build a mar­ket for them in the United States. While SAB’S hops farm­ing unit grew the hops, the mar­ket in South Africa for th­ese unique fla­vor and aroma hops was lim­ited, and big­ger Amer­i­can hops bro­kers were more fo­cused on the evolv­ing fla­vor hops of the Pa­cific North­west, New Zealand, and Aus­tralia, leav­ing th­ese South African hops “undis­cov­ered” by Amer­i­can brew­ers.

“I moved back to the States in 2012 and had a sneak­ing sus­pi­cion that brew­ers in the United States would be in­ter­ested in what were then a few of their ex­per­i­men­tal va­ri­eties,” says Crum. “I moved to Al­bu­querque, New Mex­ico, from Cape Town and reached out to brew­ers in­clud­ing Jeff Er­way of La Cum­bre Brew­ing.”

“Greg ap­proached me back in 2012 with th­ese hops,” says Jeff Er­way of La Cum­bre Brew­ing. “I’m not go­ing to say they’re the great­est hops in the world, but they were unique. Some of them smelled like the most rank gar­lic and onion I’d ever smelled in my life, but a cou­ple of them were just ab­so­lutely fan­tas­tic. That year, we were his only cus­tomer, and ev­ery year since we’ve bought some.”

La Cum­bre’s first or­der for South African hops, and the en­tirety of Crum’s first year of busi­ness in 2012, was a whop­ping 220 pounds of South African hops. Last year, that num­ber rose to more than 18,000 pounds (9.1 US tons). His pro­jec­tion for the 2017 har­vest was to bring in around 44,000 pounds (22 US tons). While that amount of hops is a tiny frac­tion of the global yearly har­vest, it rep­re­sented about 10 per­cent of the hops that SAB Hop Farms planned to ex­port to for­eign mar­kets in 2017.

La Cum­bre’s award-win­ning beers can claim some of the credit for the growth in pop­u­lar­ity.

“All four batches of Project Dank that have won any medals or awards were made with those hops,” says Er­way.

But the ad­vent and growth of the New Eng­land–style IPA was the tur­bocharger that ac­cel­er­ated the South African hops “brand.”

“The fo­cus on aro­mat­ics, lower bit­ter­ness, and softer mouth­feel helps th­ese hops mesh well with that kind of style, and that’s driv­ing in­ter­est,” says Crum.

Fall­out From the AB INBEVSAB Miller Merger

The cur­rent sit­u­a­tion that Crum and his small craft-brewer clients find them­selves in is a di­rect re­sult of the merger of AB Inbev and SAB Miller, which passed reg­u­la­tory ap­proval ear­lier this year. While AB Inbev ini­tially stated to the SAB Hop Farms sub­sidiary that it would take a hands-off ap­proach in re­gards to their man­age­ment, ac­cord­ing to Crum, that pol­icy changed two months later.

“While I was wait­ing to get a con­tract in place [for the up­com­ing crop year, since South African hops are har­vested in March] the Inbev merger hap­pened and bunged ev­ery­thing up,” says Crum. “The merger was only fi­nal­ized in South Africa in Jan­uary or Fe­bru­ary, and at that point they were told by the ABI peo­ple that they were tak­ing a hands-off ap­proach to the SAB hops farms, and they should carry on just as usual. [That] ob­vi­ously didn’t turn out to be the case.”

AB Inbev Global Hops Pro­cure­ment Di­rec­tor Willy Buholzer, when reached for com­ment, at­trib­uted the shift in pol­icy to a poor har­vest.

“South Africa is not a tra­di­tional hop-grow­ing re­gion. SAB’S R&D ef­forts made it pos­si­ble to grow hops in South Africa, but it is still less than 1 per­cent of the world hop acreage and pro­duc­tion. This year, South Africa suf­fered from low yields.

“Pre­vi­ously, SAB has sold a small sur­plus of lo­cally grown hops to the mar­ket. Un­for­tu­nately, this year we do not have enough to do so given the poor yield. More than 90 per­cent of our South African-grown hops will be used in lo­cal brands Cas­tle Lager and Cas­tle Lite, beers we’ve com­mit­ted to brew­ing with lo­cally

“I had a meet­ing with the hops di­rec­tor for ABI, and he was very clever,” Crum says. “In our phone meet­ing, he said point blank ‘this is go­ing to give our brew­ers a com­pet­i­tive ad­van­tage.’ There is a rea­son they’re do­ing it, and that’s it. That’s the only rea­son they’re do­ing it. They don’t give a shit about th­ese hops. Giv­ing them­selves an ad­van­tage and hurt­ing the craft-beer in­dus­try—that’s it.”

grown in­gre­di­ents. In sup­port of the lo­cal in­dus­try, we ad­di­tion­ally sell hops to South African craft brew­eries. This means that less than five per­cent can be al­lo­cated to other An­heuser-busch Inbev brew­eries out­side of South Africa.”

From his con­ver­sa­tions with Buholzer, Crum be­lieves that other forces, and not the har­vest num­bers, have driven the de­ci­sion.

“I had a meet­ing with the hops di­rec­tor [Willy Buholzer] for ABI, and he was very clever,” Crum says. “In our phone meet­ing, he said point blank, ‘This is go­ing to give our brew­ers a com­pet­i­tive ad­van­tage.’ There is a rea­son they’re do­ing it, and that’s it. That’s the only rea­son they’re do­ing it. They don’t give a shit about th­ese hops. Giv­ing them­selves an ad­van­tage and hurt­ing the craft-beer in­dus­try—that’s it.”

The num­bers seem to back up this ar­gu­ment, as 5 per­cent of the farm’s out­put might roughly equate to more than 55 tons of hops dis­trib­uted to AB Inbev brew­eries out­side South Africa, or more than dou­ble the amount fore­cast to be sold to ZA Hops in the United States in 2017.

Crum also ques­tions the va­lid­ity of the de­mand from AB Inbev brew­eries.

“Buholzer flew over to the United States and was ob­vi­ously try­ing to drum up ‘sales’ within his ten or eleven Abi-owned brew­eries,” says Crum. “And it didn’t work—they weren’t able to ‘sell’ them— but they don’t care. They’re not go­ing to let craft brew­ers have th­ese hops, what­ever the cost or the long-term repercussions. That is the bot­tom line.”

This in­ter­nal “sales” ef­fort to find a home for th­ese hops hit a fever pitch when ABI flew U.S. brew­ers to South Africa to build in­ter­est in us­ing th­ese hops.

“It hurts me,” says Er­way. “A few weeks ago, I saw a bunch of friends who work for brew­eries now owned by ABI post­ing

pic­tures to so­cial me­dia from Capetown, South Africa, and I said to my­self, ‘Well, there goes those hops.’ I knew that was ex­actly what was go­ing to hap­pen—they were go­ing to keep them all for them­selves.”

Buholzer, how­ever, claims that the pol­icy this year isn’t an end to ex­ter­nal sales of hops.

“Know­ing the high de­mand for South African hops lo­cally and abroad, we are work­ing to ex­pand lo­cal hop acreage. De­pend­ing on the 2018 crop out­come, we may once again be able to sell more hops to brew­eries out­side of South Africa.”

Wide­spread Im­pact

Few in­de­pen­dent craft brew­ers have built en­tire brands around th­ese South African hops pri­mar­ily be­cause of the un­cer­tainty of long-term avail­abil­ity.

“We still have al­most a thou­sand

pounds of South­ern Pas­sion and South­ern Aroma, but we’ve never built a brand around a sin­gle va­ri­ety of th­ese hops for this very rea­son—we knew the avail­abil­ity was touch-and-go,” says Er­way. “SAB down there has al­ways had a mo­nop­oly on both the bar­ley in­dus­try and the hops in­dus­try, so the idea of build­ing a brand around that is not ex­actly a straight­for­ward thing.”

Other brew­ers, such as Weld­w­erks (Gree­ley, Colorado) had just started brew­ing with the South African va­ri­eties and have had to put fu­ture plans around them on hold.

“We were plan­ning on con­tract­ing for 500 pounds of each of two va­ri­etals,” says Weld­w­erks Co­founder and Head Brewer Neil Fisher. “That’s not a lot, but enough to do 400–500 bar­rels of that brand next year.”

“For a freshly har­vested 2016 hop at $10 per pound, they’re fairly fruit-for­ward,” says Fisher. “It’s hard to find any hop like them at that price—el Do­rado is pretty much the only one we can get con­sis­tently for less than $10 a pound that’s some­what con­tem­po­rary. So th­ese were a cool way for smaller brew­eries to in­cor­po­rate ex­per­i­men­tal and lesser-known va­ri­etals that were use­ful in an IPA. And now, they’ve van­ished from the mar­ket­place.”

“South­ern Pas­sion and South­ern Aroma both have played a role in [Project Dank IPA],” says Er­way. “Is it go­ing to ruin the beer to not have those hops play a role? Maybe not. But as an IPA brewer, I look at hops like a painter looks at tubes of paint. They’re tak­ing sev­eral col­ors out of my pal­ette. And that kind of sucks.”

Ex­tra Bit­ter­ness

One as­pect that hits both Crum and Er­way the hard­est is the work they both put into cre­at­ing more in­ter­est for the hops in the United States. Crum’s sales pitch and Er­way’s rec­om­men­da­tions, fol­lowed by fan­tas­tic beers from brew­eries such as Mod­ern Times (San Diego) and Cel­lar­maker (San Fran­cisco), got the prover­bial ball rolling and cre­ated fa­mil­iar­ity among craft-beer drinkers. Now, not only do those early pro­po­nents of the hops have lit­tle to show for it, but they face the added in­sult of hav­ing built the hops “brands” to a point where AB Inbev can now ex­clu­sively ben­e­fit from it.

“The fact that through my use of th­ese hops, and Greg go­ing out to sell them, we got hun­dreds of brew­ers from around the coun­try to try us­ing them, and now th­ese brew­ers from ABI are say­ing to them­selves, ‘now we want them’—i think that speaks to the true col­ors of who ABI is and what their goals are,” says Er­way. “I re­ally hope the Jus­tice De­part­ment takes

While the im­pact of 44,000 pounds of hops leav­ing the U.S. craft-beer mar­ket will barely be felt—that rep­re­sents only a frac­tion of one per­cent of the world­wide yearly har­vest—the specter of mar­ket gi­ant AB Inbev buy­ing el­e­ments of the brew­ing sup­ply chain, to limit craft brew­ers’ ac­cess to raw ma­te­ri­als, is daunt­ing.

note of this when de­cid­ing who ABI can pur­chase [in the fu­ture] and how they can do busi­ness in this coun­try. This is just a symp­tom of who they are and what they’re try­ing to do to our craft-brew­ing econ­omy.

“It’s just crazy that Greg and a few of us brew­ers have built up the de­mand for th­ese hops—the no­to­ri­ety of them, or their ‘brand’—and all of a sudden, now that ABI has ac­quired SAB, they’re go­ing to take them off the mar­ket and keep them for them­selves. It’s un­be­liev­able, and pretty crappy.”

Crum built his hops bro­ker­age busi­ness from the per­spec­tive of a for­mer pro­fes­sional brewer, with an ethos to serve brew­ers with high-qual­ity prod­ucts, no un­nec­es­sary long-term con­tracts, and prices that made fla­vor­ful hops af­ford­able. Now, he has to ac­cept that AB Inbev brew­eries will pay an in­ter­nal rate that’s far less than what he could charge in­de­pen­dent craft brew­ers.

“The price that SAB Hop Farms pro­posed to me [for the 2017 crop] would have had me pay­ing $12 per pound,” says Crum. “Now, they’re not go­ing to get $12 per pound from ABI [brands], I can tell you that. It’s cut­ting off your nose to spite your face. They don’t care if they take a loss on their South African hop­grow­ing busi­ness unit. They don’t care if they take a loss on Wicked Weed or Goose Is­land. It’s all about the brand eq­uity for their big­gest brands.”

This pol­icy change also spells the end for Crum’s busi­ness, ZA Hops. His at­tempts to se­cure hops from grow­ers in other coun­tries have been un­suc­cess­ful, so he’s faced with the prospect of clos­ing his busi­ness.

“The rev­enue from 20 met­ric tons of hops is sig­nif­i­cant. Gross rev­enue would have been around $900,000,” says Crum. “That’s what I was look­ing at in 2017. Again, the mar­gins on that are small, but for a one-man op­er­a­tion, that’s a sig­nif­i­cant amount of loss.”

Crum fought hard with his con­nec­tions in­side of the SAB Hop Farms to cre­ate an al­ter­nate case for the busi­ness de­ci­sion mak­ers in­side AB Inbev, based on the higher rate that non-owned brew­ers would pay for their hops.

“When SAB Hop Farms and I were putting to­gether a strat­egy to counter the [cor­po­rate] di­rec­tive, one of the things we dis­cussed was that from an emo­tional stand­point, the big­gest im­pact on this is the lost re­la­tion­ships [with small craft brew­ers]. But that’s emo­tional, and so while we pointed it out, we re­al­ized that we’re never go­ing to ap­peal to bankers—be­cause that’s ba­si­cally what [ABI man­age­ment] are—with emo­tion. It’s all about money. So we pre­sented defini­tively con­vinc­ing num­bers that they would make a hell of a lot more money from craft brew­ers than they would sell­ing at a huge dis­count to their ABI folks—not to men­tion that de­mand is way big­ger on the craft side. And I think it def­i­nitely did have some im­pact—they took a solid month to make up their minds.”

Fu­ture Sup­ply-chain Con­straints

While the im­pact of 44,000 pounds of hops leav­ing the U.S. craft-beer mar­ket will barely be felt—that rep­re­sents only a frac­tion of one per­cent of the world­wide yearly har­vest—the specter of mar­ket gi­ant AB Inbev buy­ing el­e­ments of the brew­ing sup­ply chain, to limit craft brew­ers’ ac­cess to raw ma­te­ri­als, is daunt­ing. Yearly gross rev­enue for all U.S. hops pro­duc­ers is less than $500 mil­lion, and AB Inbev makes enough profit in a given year to buy the en­tire U.S. hops in­dus­try, if they chose to do so. Los­ing small for­eign va­ri­etals is some­thing Amer­i­can brew­ers could re­cover from. Los­ing in­de­mand hops such as Ci­tra™ or Mo­saic™ could de­stroy the mo­men­tum be­hind the en­tire craft-beer cat­e­gory.

“Given this sit­u­a­tion and what they’ve just done, I wouldn’t be sur­prised if [buy­ing out other ex­clu­sive hops va­ri­eties] isn’t one of their tar­gets,” says Crum. “They have the money to buy out the guys who own the patents [on cer­tain hops va­ri­eties]. And if they buy up enough craft brew­eries who need th­ese hops, they may look to con­trol the [hops] mar­ket again.”

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