RTD, IRC, FMB: What the Hell is Happening to “Beer?”
“Beer?” Source: AB InBev
What follows is an old-school blog post—a messy, probably incomplete exercise in thinking out loud to understand the complex, evolving phenomenon of seltzers, canned cocktails, and assorted flavored-malt beverages. As such it’s an invitation. Please add your experiences, knowledge, corrections, and predictions. I could write a well-sourced article on this subject, but there are so many players and so many competing—and in many cases contradictory—versions of the story that it resists summing up. A shaggy-dog approach seems best suited to this whole mess.
Why should beer fans care? In terms of the products, maybe we shouldn’t. These new beverages may be popular but they’re no more interesting gastronomically or artistically than sports drinks. I’m personally not much interested in “craft seltzer” and its “natural” strawberry flavoring. These are mass market, industrial products and the polar opposite of cræft. They are incredibly popular at the moment, though, and they’re immensely important to the beer industry. We can’t ignore them.
The popularity of these drinks has grown so much that they are destabilizing all alcohol sales, including beer. A couple decades ago, the US alcohol market was a tidy affair. The products were sorted into neat categories and their routes to market followed rules specific to each. Sure, there was a small trade in “alcopops” or “malternatives,” malt-based sweet drinks that didn’t taste like beer, but they were safely tucked into the low-tax “beer” column. All of that has changed in the least five years as new categories emerged that started blurring the lines.
At first, it seemed like the creaky old model of taxing, distributing, and selling beverage alcohol would suffice in this new world. It was a kludge, but it appeared to work well enough as canned cocktails, sugar-fermented drinks and malt beverages all got slotted into one of the old channels. All that has changed with the success of these products, though, which now collectively sell more than craft beer. Producers want to sell them as cheaply and efficiently as possible, and they don’t want to screw around with the byzantine system of taxation and distribution left over from a time when we were just exiting Prohibition. They also want to pay low taxes, and are bending the meaning of “beer” beyond anything sensible.
Let’s break down what’s happening.
RTD, IRC, and FMB
These beverages fall into several categories. They are confusing and overlapping, and refer to layman categories as well as specific regulatory codes.
Flavored Malt Beverage (FMB). The oldest category, FMBs were built on a beer chassis to avoid any of the headaches we’re currently experiencing. Taxed as beer, historically made by breweries, they are sweet, beer-like beverages that don’t taste like beer. For products 6% and lower, by law they have to be made from 51% malt, and they must include hops (however few). FMBs over 6% must be made with 97% malt. Flavored malt beverages can taste like fruit or tequila (or anything), but they must follow those rules.
Ready-to-Drink (RTD). Typically used to designate canned cocktails, it is far from a discrete category. RTDs can include seltzers, wine coolers, and other oddballs, but is mainly understood to signal beverages made like cocktails, with a spirit base. When made with spirits RTDs are taxed at a higher rate than beer/FMB.
Internal Revenue Code (IRC). This refers to sugar-based beverages and is regulated under Internal Revenue Code 27 CFR Part 7. The rules are super convoluted, and I won’t go too deeply into them here—follow the link if you want more. Mainly we’re talking about seltzers, but not the ones that qualify as FMBs, but rather the ones made with sugar. And here’s the amazing part: if a seltzer is made with sugar, it can include spirits and still be regulated as a beer.
Wine-based beverages. The lack of a handy acronym for this group is instructive—there just aren’t many of these out there. A wine cooler would qualify. They would be taxed as wine, not beer.
To summarize, all these beverages can be taxed as beer (low-tax), wine (higher taxes), or spirits (highest taxes), and it’s all based on what they’re made of, not what they taste like. So a wine cooler made with 51% malt and 49% wine and a “cocktail” that tastes like tequila but is made with agave flavoring and malt-derived alcohol are both classified as “beer.” Seltzers are classed as “beer” but might be made of anything and fall into different tax categories. Producers mostly want these to fall under beer because of the lower taxes, which is why we’ve inherited a situation in which this category is now festooned with a lot of weird stuff.
“Beer?” Source: Pabst.
Distribution
Why a 12% beer and a 12% wine are taxed differently has to do with legislative sausage-making. Yet if that were the only issue, the market would adapt without much complaint. Where things really go off the rails is distribution and market access. Beer, wine, and spirits all have different distributor models. Back when the only issue was throwing a few cases of Zima in the beer truck, no problem. But now this segment is huge and sprawling, so who gets to distribute it matters a lot to the wholesale tier. Now we have a big problem: all the distributors want in on this burgeoning new market.
I am going to outsource a description of the implications here to someone who sells FMBs and deals with this thicket of regulatory and wholesale complexity.
“Because FMBs and ‘IRC beers’ are taxed and sold as beer, they are typically distributed as beer. There is no law that says a distributor should carry only beer, or wine, or spirits or one or the other. It’s just convention, because the distributor handles all the paperwork and government interaction for paying taxes and following whatever regulations there are around sales. [They] also will be very focused on the channels of sale, the ‘route to consumer.’ So if we take New York State for example, beer can be sold anywhere with an alcohol license and beer wholesalers focus on that, while wine and spirits can only be sold in liquor stores and bars with a Wine & Spirits licence, so wine and spirits wholesalers focus on that.
“Two states which illustrate different ends of the spectrum: Idaho and Utah. In Idaho, they are very lax on their definition of canned cocktails. Anything up to 5% ABV is taxed as beer, from 5-14% is taxed as wine (they consider both ‘strong beer’ and ‘low proof spirits’ within this, but the tax rate is the same) and wine from 14%-16% abv is taxed as wine but must be sold in state liquor stores. There are no liquor taxes as it must all be sold through the state liquor stores. But the upshot being: all RTDs (assuming they're not higher than 14% abv) are taxed and sold the same.
“In Utah, all wine, spirits, and any sugar-brew-base and FMBs containing any spirits must be sold in the state liquor stores (there’re 46 of ‘em!). To be sold in a grocery store your product must be: under 5% abv and 100% alcohol derived from malted barley or a mix of malted barley and other cereal grains. White Claw and a couple of Smirnoff Ice and other FMBs are sold in Utah grocery stores. How? They are reformulated and made in batches just for the state.”
The upshot is that the old separation by type makes less and less sense. We’re no longer talking about a couple cases of Zima. In fact, the FMB + RTD market is plenty big enough to support a network of wholesalers who sell nothing else. Yet rather than splitting off, distributors are consolidating to scoop up this new volume. And as distributors consolidate, the stakes are getting very high. (Worth noting as well: they really don’t want craft beer, which is impossibly fragmented and complex for a relatively small volume. Craft beer is massively inefficient. In this new market, small breweries served by distributors with big books are increasingly ignored.) The looming specter that has many in the industry quaking is a new entrant: what happens if soda giants jump in? My source expanded on the stakes.
“Take Topo Chico hard seltzer for example. It’s a Coke brand made under license by Molson Coors and sold through the beer channel with sugar-based booze, so it’s technically a beer. But the consumer doesn’t care about any of that. It’s like Topo Chico and vodka as far as they’re concerned.”
If there’s a massive distribution realignment, then everything changes. The weird laws governing beer make it an even less attractive product—especially if you factor in craft breweries. Distribution is already a bizarre, antiquated artifact of a different time and has needed blowing up for a long time, and this could be the disruption that will light the fuse. Of course, everyone has good reason to be anxious about this. Explosions are messy and often deadly.
“Beer?” Source: Lone River
Beer, Not “Beer”
I am somewhat sympathetic to how we got here. Beer is generally a low-alcohol, low-price tipple for the masses. Wine is higher in alcohol (therefore more dangerous), and at 7-8 times the strength of beer, spirits are the most dangerous. Each has their own trade organizations and lobbyists. Because of the product differences and industry horse-trading, lawmakers ended up writing the rules separately for each category.
But the world we live in doesn’t look the same. It hardly makes sense to call a 5.5% rum-and-coke canned cocktail a “spirit.” It makes even less sense to call it a beer. Looking at the abstruse and fragmented set of laws that govern alcohol, we might ask what problem we’re trying to solve. Fundamentally, the equation should be based on strength rather than the source of the fermentable sugar or mode of processing. Liquors that are 40%+ alcohol are dangerous and it makes sense to tax them at a higher rate and restrict where they can be sold. But it makes no sense to do that when you’re comparing drinks that are all under 6%. Who cares if the base beverage is fermented wine, sugar, or malt, or very dilute spirits?
Changing the laws would change how we think about beer—and that’s probably a good thing. For one, it would instantly sheer off a large chunk of volume and give us a more accurate sense of where those sales are. “Beer” has been growing because we include all these acronym beverages, but remove FMBs and it’s not looking good. Seeing that change, and where it’s happening, is fundamentally a good thing. Little breweries are thriving and their revenue model seems to be healthy, even if the barrels of beer they sell is low by historic standards. Yet it’s quite useful to see that FMBs are mainly cannibalizing domestic mass market lagers, not craft. One of the alarming trends is how many breweries now talk about “liquid” and consider anything that comes out of their tanks fundamentally the same. More power to them, but we shouldn’t let that debased thinking seep into our minds, too.
Beer is an ancient fixture of human culture. A pint isn’t just a flavor of alcohol juice. It represents an accretion of everything that comprises culture: communal consumption, history, process, disasters, law, and agriculture. American IPAs, to take the latest development in beer’s 12,000-year run, emerged because of new hop breeds, consumer and brewer interest in the way they smell and taste, and brewing modifications meant to accentuate them. They became popular because people sat together drinking and discussing them. Bud Light Lemonade-flavored Ranch Water Seltzer Product is, by contrast, alcohol juice. No one gives two sh*ts about how its made or where, nor do they discuss it as they drink it, nor would they care even the slightest if it vanished. It exists solely to raise the blood alcohol content of the drinker. It’s the American cheese of the alcohol world. People will happily get drunk on it, but they will never care about it.
Beer has survived everything from wars and plagues to industrialization and globalization. It will survive seltzer. Yet how healthy it remains in the near term has a lot to do with the forces swirling around it. For the first time in ninety years, we may soon see the first fundamental restructuring of the alcohol market. Even if you don’t care about Bud Light Lemonade-flavored Ranch Water Seltzer Product, you should care about that.
All right, I’ll turn it over to you now. Thoughts?
Beer.