A fraction of the hundreds of thousands of dollars worth of kegs owned by Freetail Brewing Co.
So here I am again, about to embark on a long-winded blog post about a topic that may in fact be bad for my own well-being in the long-run. It won’t be the first time, hopefully it won’t be the last.
If you haven’t heard by now, a handful of Houston-area bars have agreed to boycott beer from Silver Eagle Distributors over a recent increase in keg deposit fees. Some of the breweries that Silver Eagle distributes: Saint Arnold, Karbach, Firestone Walker, Sierra Nevada, 8th Wonder, Rahr, Six Point, Anheuser-Busch, Modelo, and… you guessed it, San Antonio’s own Freetail Brewing Co.
I’ll start this out by saying that I’m well aware the opinion that follows may result in my beer never again being sold at any of these bars engaged in the boycott, and I’m willing to accept that. I’m willing to accept that perhaps my opinion even means that I can’t sustain distribution in Houston at all. I accept that too, because this is a sword I’m willing to fall on for the industry I love. I’ve always prided Freetail in our transparency and honesty to our suppliers, business customers, peers, and fellow beer drinkers. That’s disclaimer #1.
Disclaimer #2. I understand and I can sympathize with the perspective all parties involved. I’ve paid deposits for other breweries’ beer, and I’ve collected deposits from wholesalers, retailers and consumers alike. I’ve been a part of each side of the transaction. I get it.
I first heard of this story as it was relayed to me by our salesman on the ground hearing a rumor that I confirmed directly with one of the retailers, confirmed with Silver Eagle, and confirmed with a fellow brewer in the Silver Eagle portfolio. My initial reaction was to be concerned from a business perspective. Our new production brewery, and especially our Houston distribution, is so young that hiccups like these have major impacts on our financial well-being and viability. Putting those concerns aside, I thought to myself: “I get it… and I don’t think anyone is really wrong here.”
But I’ve come to change my opinion, and while I have a lot of respect for folks like Ben Fullelove (Petrol Station) and Kevin Floyd (Hay Merchant) and what they’ve done for craft beer in Houston, I respectfully disagree with them on this issue.
Disclaimer #3: if this dispute were just about advance notice of deposit increases, I would concede that point and agree with those with the complaint. But that isn’t the crux of the debate, the debate is over the fact that keg deposit fees are increasing, and may increase in the future. Bars don’t like it because it’s an additional upfront cash outlay, and that cash is best suited elsewhere. I can understand this perspective, but it doesn’t make it the only viewpoint and it doesn’t make it the correct one.
Disclaimer #4: this dispute actually has nothing to do with me other than the fact that my beer isn’t purchased anymore. I didn’t raise my deposit amount that I charge to my wholesalers, so I’m not the reason the deposits went up. However, I’m one of the brewers most impacted by this because as one of Silver Eagle Houston’s smallest supplier’s, most of my volume is at the same craft-centric accounts involved in this boycott. Maybe that’s why I don’t have an issue falling on this sword: I’m already shut out of all these places for a reason that has nothing to do with me anyway, so what’s to lose?
A keg deposit, is just that: a deposit. Just like any other deposit, when you return the item in the condition it was received (or, in the case of kegs, covered in beer and other miscellaneous things), you get your deposit back. The reason we have keg deposits is because kegs are extremely expensive, and keg loss is a major issue in the beer industry that costs small, independent craft brewers MILLIONS OF DOLLARS every year. (The Brewers Association, which full disclosure, I am a current Board Member of, has estimated that lost and stolen kegs cost craft brewers between $5.3 and $15.8 million annually.) The truth of the matter is that in almost all cases, the cost of a keg deposit is significantly less than the replacement value of the keg. The last order of kegs I made, the total cost of which was as much as a brand new Mercedes-Benz (and not an entry level model), came out to $131.62/keg after accounting for production, embossing, screen printing, palletizing and shipping. To really eliminate keg loss/theft, the market really should be charging a deposit fee significantly higher than the replacement cost of the keg to incentivize the retailer/individual to return it. So long as you are only paying a $50 deposit for something worth $131.62, why would you ever return it? (I know the answer to this question: they get returned because most bars are run by trustworthy people who see more value in selling more beer than owning stolen kegs).
But we don’t charge deposits that ensure maximum returns. The market charges a rate that is less than replacement cost off the contract of trust that has been established between the brewer, the wholesaler, the retailer and consumers in cases where they can buy kegs. The amount of the deposit is set by the brewer at a level that reflects the level of risk the brewer is willing to accept that his kegs might get lost. As losses mount, some brewers may feel compelled to increase that deposit amount to cover those losses. Remember: this costs breweries millions of dollars a year, from the global giants to the smallest breweries.
Some people have asked: why not just punish the bars who are losing the kegs instead of everyone? Well… they are. Only bars that don’t return kegs end up losing their deposit. Bars that return kegs, get their deposit back. If they have another order, that deposit can be applied to the next purchase. I’ve had instances where only paid $5 for a keg of beer because we had four shells to return and we were only buying one keg. In other instances, we were buying more than normal, so we had to put down new deposits. Some people have said “you only get your deposit back when you decide not to sell anymore beer.” But that’s how all deposits work. If you rent an apartment, you only get your deposit back when you move out.
Others have asked, why not only charge the higher deposit amount for the kegs with higher deposits? That would be one way to do things, but in my opinion it creates an accounting quagmire that isn’t worth the trouble. If Scott’s bar is carrying Saint Arnold and wants to buy a keg of Freetail next week, the bar doesn’t have to worry about if there is a difference in the deposit – they get credit for the same deposit amount. This makes things nice and simple for both the wholesaler and the retailer. In my time buying beer from other breweries, the toughest part about managing my outstanding keg deposits was keeping track which ones were are various price levels. Having them all the same price made things a lot easier for me.
Lastly, many have said this is about greed from Silver Eagle. The reality is that Silver Eagle pays keg deposits too. Every week when they come pick beer up from me, I charge them a deposit on kegs and give them credit for returns. If they never return a keg, they lose their deposit. The system of deposits rolling downhill keeps accountability on the person who last “rented” the keg. If Specs, for example, sells a keg to Joe Blow, they are going to collect a deposit. If you don’t return the keg, you don’t get the deposit back. Specs is free to charge whatever price for the deposit they want, since they are responsible for getting that keg back to the wholesaler or they will lose their deposit. If Joe Blow loses it, he is on the hook. If Specs loses it, they are on the hook. If Silver Eagle loses it, they are on the hook to me. When anyone loses it, the brewery is on the hook because the deposit didn’t cover the cost of the keg.
[Note, not discussed here is the topic of bars that hold kegs to age, sometimes for years. This has a real cost to breweries to. We expect a keg to turn over 10-12 times a year, so a keg out of commission for years at a time means it needs to be replaced. I'm not saying this practice needs to stop, but it is something to be aware of]
In the end, this is a nuanced situation that doesn’t have easy answers that boil down to “damn the man!”. In this case, “damn the man” is actually hurting Freetail, Saint Arnold, Karbach, Rahr, 8th Wonder, etc., because we are the ones who rely on these bars to sell our beer and keep us in business.
I won’t be responding to comments to this post because our blog has major spam problems right now and comments get lost. I will, however, respond to any comments posted in the Beer Advocate Southwest Forum in this thread. I’m committed to transparent business practices and am more than happy to engage in a discussion on the topic. I invite any retailers who disagree to engage with me too. Some of you have my cell number, reach out, or let’s talk on the BA forum. There may be something I am missing and my mind is always open to new perspectives.