Tariffs and trade wars have Virginia’s craft industry wrestling with uncertainty.
By Ben Swenson
The craft beverage industry is caught in a political crossfire and it’s still unclear what tariffs and an escalating international trade war will mean for the commonwealth.
The administration of President Donald Trump imposed tariffs
on a slate of foreign-made goods, including steel (an additional
25 percent duty) and aluminum (taxed an additional 10 percent). The effects of that decision on the economy have only begun to unfold, but industry analysts say that tit-for-tat escalation from international trading partners will have consequences for the craft industry – breweries and distilleries – that may ultimately reach the wallets of customers.
But creating frustration for those trying to gauge its effects is the on-again, off-again rollout of tariff policy, according to Bart Watson, chief economist for the Brewers Association, a national lobbying group for craft beer manufacturers. People in the industry are watching tariffs closely, but “it’s hard to form a singular opinion when things are changing so rapidly,” he said.
Earlier this year U.S. trade officials proposed tariffs on a long list of industrial and manufacturing goods, including brewing equipment and kegs. Those items were later removed from the $50 billion in goods hit with a 25 percent tariff.
The steel and aluminum tariffs nevertheless remain, causing concern among craft beverage employees. The equipment found in brew houses are a mash-up of components sourced both domestically and overseas. Even though brewers generally buy gear infrequently, the steel tariff will figure in to initial and replacement costs.
And then there are aluminum cans, which have gained favor in the beverage community. Last year about 28 percent of packaged craft beer went into cans, nearly double the amount in 2012. Brewers buy their cans either through a broker or directly from a couple major American manufacturers. Unfortunately the raw material is now subject to the tariff because it has often been sourced in a foreign country. Two-thirds of new aluminum used to make cans comes from Canada, according to the Brewers Association.
Big beer manufacturers are taking an especially hard hit. Brewing giant MillerCoors buys 500 million pounds of aluminum every year. Craft brewers are hardly at that level, although they are still buying cans in significant amounts, said Chris Smith, co-founder of The Virginia Beer Company in Williamsburg.
The minimum order for buying pre-printed cans without paying a premium is about 200,000 cans, which costs $25,000. There are other options, Smith said, including sleeved cans and so-called brite cans, which are suitable for pre-printed stickers. But the cost for that option can be higher.
Smith said that in June the price of a single 16-ounce brite went up from 13 cents to 17.5 cents – an increase of more than 25 percent. He is cautious about attributing that to the aluminum tariff. But Bob Pease, the Brewers Association CEO, said an increase of just a penny a can be a significant hit to a craft brewer. It’s not uncommon for larger craft breweries to order a million cans at a time, which at a penny a can would increase costs by $10,000.
Newer craft breweries are more vulnerable, Watson said. While many veteran brewers, such as Legend Brewing Company, Alewerks Brewing Company, and O’Connor Brewing Company, favor bottling, the newer breweries are opting for cans.
And Virginia’s distilleries are not being spared the hardship. In response to the tariff policies, officials with both the European Union as well as the Canadian, Mexican, Turkish, and Chinese governments imposed retaliatory tariffs on specific American goods, among them whiskey.
Catoctin Creek Distilling Company in Loudoun County is one of six Virginia craft distilleries that export products overseas. The retaliatory tariffs are directly affecting its bottom line, according to co-owner and general manager Scott Harris. The problem, according to Harris, is that a distillery with an ambitious growth strategy overseas can’t simply replace lost European Union business in the United States. The domestic market “is extremely competitive,” Harris said.
For the more than 50 other Virginia craft distilleries whose products remain stateside, the tariffs are causing uncertainty. Distilled spirits are the fastest growing segment of the craft beverage renaissance. Distillers have been ramping up production to meet demand. The speed bump in foreign markets complicates matters.
Harris said Catoctin Creek management was planning a $500,000 expansion, including increasing capacity at the distillery. While planning the expansion, the price for materials increased, causing them to reconsider. They now need to decide whether to go back to the drawing board or eat the increased costs.
So what will be the impact of these policies on the consumer? It’s still too early to tell, said Watson, because analysts are still not sure how they are affecting beverage manufacturers as a whole. “It could be impacting the bottom line, but it depends on the particular business model,” he said.
David Cuttino, co-owner of Richmond’s Reservoir Distillery, which also exports whiskey, echoes Watson’s sentiment. “The survival of my company is not based on the U.K. market nor whether I get another fermenter,” he said. “If you are operating a proper business, you will figure out a way through this.”
Still, Cuttino characterizes the tariffs as a needless distraction in the thriving craft beverage business. “This is playground politics that has a lot of collateral damage.”