Beverages

Why Is 3.2% Beer Drying Up?

As states pass laws allowing full-strength brews, retailers lose low-alcohol beers—and gain opportunity

CHICAGO -- Al Capone, speakeasies and now 3.2% beer: All are fading into ghosts of Prohibition as the number of states that restrict c-stores to selling the low-alcohol beer shrinks to only two. Meanwhile, the opportunities for retailers in the newly full-strength states are only beginning to reveal themselves.

First, a little history lesson: Shortly after the Volstead Act repealed Prohibition in 1933, several states enacted their own laws limiting the maximum amount of alcohol in beer to 3.2%. Today, only five states still enforce these laws, which require c-stores and supermarkets to sell 3.2% strength while private and state-operated liquor stores mostly enjoy a full-strength-beer advantage.

But within the next year, three of those states—Oklahoma, Colorado and Kansas—will enact laws that allow c-stores to sell full-strength, or “full-point,” beer. The sales opportunities for retailers in these states are considerable.

“In Kansas, Oklahoma and Colorado, what you are seeing is a comprehensive beer renaissance taking shape,” says Joe Vonder Haar, president and CEO of iSee Store Innovations LLC, St. Louis.

Merchandising Opportunities

The beer bar is being raised as more consumers seek brews with higher alcohol content.

In Kansas, Thomas Miller, director of operations for Topeka, Kan.-based Haag Oil Co., is following the yellow brick road—right into the 33-store chain’s soon-to-be-established beer caves, with an infusion of new brands, craft beers and an opportunity to sell higher-profit, single-serve varieties chilled on ice.

“We’ve begun looking at new brands and have toured some Missouri stores to get a sense of their beer departments,” says Miller, whose chain will be able to sell full-strength beer thanks to the Kansas full-strength beer law, which takes effect in April 2019. “We’ll run numbers about how much more we project to sell, and how much more space to allot. If we don’t have room for walk-in cooler space, we’ll bring in satellite coolers.”

A treasure trove of merchandising opportunity awaits. “With full-strength beers, there’s a chance for us to sell a significant volume of 24-ounce cans, which is new for us because with 3.2% it’s been all about six- and 12-pack sales,” Miller says.

Opportunities abound, but some transitioning states are experiencing growing pains. Oklahoma in May suffered a shortage of 3.2% beer stemming from the transition to so-called “high beer” as the new law takes effect Oct. 1—a domino effect that could affect Kansas and Colorado.

The bigger issue in Oklahoma, however, is the large universe of c-store companies yet to secure licensing and perform employee training. “It is vital that anybody who plans to carry any alcohol begin the licensing process as soon as possible to avoid wait times,” says Candace McGinnis, executive director of the Oklahoma Petroleum Marketers and Convenience-Store Association. “The current wait is 60 to 90 days to issue a license, but that wait will dramatically increase as Oct. 1 approaches.”

Larger chains, such as Oklahoma City-based Love’s Travel Stops and Tulsa, Okla.-based QuikTrip Corp., have obtained licenses, while smaller companies have been slow to act, McGinnis says. Employee training, which can be completed online, is another prerequisite for selling high beer.

To accelerate the merchandising end, McGinnis says the association invited 30 craft beer and wine exhibitors to its trade show earlier this year to engage with c-store companies and allow members to sample brews and strike distribution agreements.

“This whole process is new territory for us,” she says. In addition, Oklahoma has 14 dry counties that voted to become “wet” beginning later this year, adding another complication to the transition.

Supply Side

C-store retailers in Utah and Minnesota, meanwhile, are still restricted to selling 3.2% beer, but they will face a potentially dwindling amount of supply. When Oklahoma and Colorado (Jan. 1, 2019) commence full-strength-beer merchandising, the percentage of 3.2% beer required to meet demand will plummet from 1.8% of all beer brewed in the U.S. to 0.7%, says Dave Davis, president and chief legal officer for Salt Lake City-based Utah Food Industry Association.

About 1,160 miles west of Kansas, Patsy Varpula, pricebook category manager for Las Vegas-based Fabulous Freddy’s, just wants some supply assurances for the chain’s Utah stores. That state accounts for about 30% of total U.S. 3.2% beer sales. As demand for 3.2% dwindles, a potential cut in supply would leave Utah retailers in a lurch.

“Our Utah store beer sales make up anywhere from 6% to around 10% of in-store sales,” says Varpula, whose chain owns and operates eight stores in two states. “I imagine this would drop to 2% to 6% (with supply disruptions) and we’d eliminate beer caves and stick with a door or two of offerings.

“If MillerCoors and Anheuser-Busch decide that 3.2% production will end or be cut back,” she continues, “we’d be forced to try and fill the void by other means, starting with local craft brewers.”

With no state legislative proposals on the table to incorporate full-strength beer, Utah retailers “are tracking supply closely, and it’s a problem—to the tune of losing as much as 40% of supply,” Davis says.

“We’ve been working with brewers on solutions, and they indicate that there’s no intention to abandon the state,” he says. “But no doubt that the slowest-moving SKUs will be eliminated, meaning less selection. We’re trying to stay on top of sales and supply issues and then report back to the state legislature about it.” Large brewers that CSP contacted for this story about their 3.2% beer planning did not respond as of press time.

The state of Utah controls all liquor stores. That said, they account for only 2 million gallons a year in beer sales, while c-stores and grocery stores’ 3,000 locations sell 32 million gallons a year, Davis says.

Bump Williams, principal with Shelton, Conn.-based The BWC Co., which advises beer, wine and spirits producers on brand sales, marketing and analysis, is not aware of any brewers planning to cease production of 3.2% beer, “although it makes a lot of sense to do so if only two states are going to be left selling it,” Williams says.

“To be honest, I’m not sure who would want to brew it, distribute it, sell it or buy it,” he says. “It makes all financial and logistical sense to stop producing this beer and simply focus on the big-volume states that represent the largest volume opportunities.”

Many consumers today are also less interested in lower-alcohol options.

“We’ve seen people leave the beer category in search of other options, such as flavored malts, that provide greater ABV. People want higher alcohol but not necessarily higher flavor,” says Tom Pirko, managing director for Buellton, Calif.-based Bevmark, a food and beverage consulting firm. “The higher alcohol is part of their identity.”

‘Seeking a New Category’

In Minnesota, c-stores have a minor stake in 3.2% beer sales; estimates put it at less than 4% nationwide supply. Retailers, however, are still scrambling to offset sales losses from a state law that opened up Sunday beer sales to liquor stores in 2017. Prior to the law, c-stores were the go-to place for 3.2% beer on Sunday. Convenience retailers are seeing 60% to 80% declines in Sunday beer sales, says Lance Klatt, executive director of the Minnesota Service Station and Convenience Store Association (MSSA).

Meanwhile, tobacco is under pressure from a new state law that has raised the purchase age to 21, and bans on menthol products are in effect in five cities. This has MSSA “seeking a new category” to fill the void, Klatt says.

The association plans to introduce a proposal to the 2019 General Assembly to allow convenience stores to sell full-strength beer, but it would omit wine or spirits, which have been included in past proposals. Klatt says this would reduce liquor stores’ resistance to the proposal.

“We’re not looking to get greedy or to hurt liquor stores,” he says. “We need to have a category restored” due to what’s been lost.

Only 10% of Minnesota c-store companies sell 3.2% beer, and a portion of those sales come from independent chains that regard beer as a vital category, Klatt says. If a full-strength law were to go into effect, 85% to 90% of c-store companies would begin to sell beer, barring local restrictions.

Minnesota retailers hope to ramp up full-strength beer merchandising to replace lost business if MSSA’s legislative proposal makes it into law next year. Josh Lund, owner of Beaudry Express, a single Shell-branded c-store in Elk River, Minn., will be ready with small satellite coolers to fill with canned or bottled beer if cooler space isn’t set aside yet. To this point, selling 3.2% brews doesn’t cut it for the retailer.

“Absolutely—we would be selling [full-strength] beer right away if a regulation allowed us to,” Lund says.

Full Strength Ahead

For retailers in states that will soon allow sales of full-strength beer, they must plan months in advance to integrate the new product into their sets, Vonder Haar of iSee Store Innovations says. “This market share is all new—it’s not just new business, but it’s new share.”

He offers the following tips to put retailers in a solid position to succeed:

  • Plan for success rather than for beer “availability.” Establish a game plan for walk-in cooler space, remote cold merchandising and other areas of the store, including floor space and beer troughs. “Look to add coolers while avoiding knocking down walls. Take advantage of underutilized cold space,” he says.
  • Become proficient at suggestive selling. Rather than having a customer walk back to the cold vault to buy beer, establish “positive  interruption points” with display and awareness.
  • Capitalize on singles and the gross-profit advantage that comes with it. “C-stores own the single beer (and other beverage category) business—it’s part of their customers’ daily routine.”
  • Create a tactical, well-thought-out game plan for transitioning to full-strength while being mindful of out-of-stocks and oversupply.
  • Inform customers about the new beer offerings—and do it without losing 3.2% beer sales in the days and weeks prior to the change.

With the new full-strength-beer opportunity next spring in Kansas comes a tricky SKU rationalization effort to prune other cold-vault beverage categories, including bottled water, energy drinks and isotonics, says Miller of Haag Oil. “We’re having conversations with distributors of these categories to inform them of potential cutbacks,” he says.

For instance, one energy-drink brand that Haag Oil carries accounts for 53% of brand sales. “You have to do the math and realize some SKUs will go away to make room for beer,” he says.

While Miller and other retailers are excited to be part of the full-strength-beer business, Lund of Beaudry Express hopes the state of Minnesota will allow him the same opportunity in 2019. It also means he can retire what has been a routine at his store for some time.

“If someone comes in and asks where my beer is I usually say, ‘You must not be from Minnesota,’ ” Lund says.

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