Covid Brings America’s Beer-vs.-Liquor Rivalry to a Head

Covid-19 has brought America’s long-running beer-vs.-liquor rivalry to a head. Brewers are struggling to retain their dwindling edge, while spirits makers see a chance to further their ascension by burnishing liquor’s reputation and using canned cocktails as a new beer rival, while pushing to loosen restrictions.

“If they succeed in changing state regulations,” Mr. Koch wrote, “the beer industry, brewers and wholesalers alike, would face virtually permanent declines in volume, revenue, and profits while liquor volume and profits would soar.”

Beer was long America’s undisputed booze king. But liquor makers for over two decades have been taking market share from brewers, helped by young drinkers preoccupied with their waistlines and thirsty for new flavors. The pandemic has accelerated that trend, as homebound Americans splash out on pricier booze, and lawmakers in several states have handed restaurants the right to sell cocktails to go, similar to what’s allowed for beer in those states, ending decades-old restrictions.

Canned cocktails have done particularly well, as drinkers look for a convenient way to re-create a bar experience at home or just on the go. In 2020, distillers reported their best sales in four decades—including ready-to-drink cocktails—while beer sales dropped.

Spirits makers have mounted an organized lobbying and marketing campaign to further their gains. They have seen success in expanding distribution and in lowering taxes on canned cocktails in Michigan and Nebraska and have other states in their sights.

“People understand these cocktails,” said Ann Mukherjee, North America head of Pernod Ricard SA, which launched 12-ounce cans of Piña Colada and Strawberry Daiquiri under its Malibu rum brand. “Now I have a convenient, lower-alcohol version, and it’s ‘bring it on.’ ”

Since Mr. Koch’s spring missive, multinational and craft brewers have begun working together to defeat bills that would benefit canned cocktails and to counter the liquor industry’s efforts.

“They have a very effective lobbying organization,” said Mr. Koch, whom many brewers and beer lovers consider the father of the American craft-beer movement. “I wanted to bring this debate out in public and get it out of the lobbying and backrooms where the liquor guys have been very successful.”

At the fight’s core is an age-old question: Is beer qualitatively different from spirits? Historically, the answer has been yes, resulting in higher federal and state taxes—and stricter distribution rules—on spirits than on beer.

The federal excise-tax rate calculation is a complicated mix of factors such as alcohol content, how the product is formulated and the volume of production—making comparisons difficult. The main liquor trade body, Distilled Spirits Council of the U.S., or Discus, calculates that the base federal excise tax rate is 12.7 cents on a 1.5-ounce shot of spirits and 5.4 cents on a 12-ounce beer. The average state excise tax, according to the group, is 8.4 cents on the shot and 3.2 cents on the beer.

The Brewers Association’s calculations yield slightly different figures, which the beer trade body said is likely down to the two organizations using different average alcohol strengths and population weights for states. Its calculations also show beer taxes on both a federal and state level are substantially lower than those for spirits, but the group notes that including credits and subsidies in some states could yield a far lower real tax rate for spirits.

Liquor makers say that “alcohol is alcohol,” that the distinction isn’t fair and that regulation based on it should be dropped.

Beer makers insist that the distinction is valid and that laws should continue to reflect it. “It doesn’t matter in this case what the alcohol level at the end is, because one is a spirit the other one is beer,” said Michel Doukeris, chief executive of Anheuser-Busch InBev SA. “That’s why they are taxed and distributed differently.”

Winemakers have largely stayed out of the fray. The American wine market is more fractured, with fewer big brands, while some of the industry’s biggest winemakers also have sizable businesses selling spirits or beer, and their market share through the years has held relatively steady.

Liquor makers see lower-alcohol premixed offerings as a way to change perceptions, and they are targeting drinkers on the beach, in the park and in other places beer dominates. Jim Beam owner Beam Suntory Inc. and Bacardi Ltd. have begun selling premixed cocktails. Diageo PLC has rolled out ready-to-drink products under its Crown Royal whisky and Ketel One vodka brands and is investing $80 million in two new canning lines in Plainfield, Ill., to meet demand.

In the March webinar Mr. Koch saw on video, the liquor-industry executive urged fellow distillers to seize “a new golden opportunity” of canned cocktails. The presenter estimated spirits makers could grab 10% of the beer industry’s roughly $88 billion U.S. market. Mr. Koch described the figures he saw as a “smoking gun,” propelling him to act.

In 2020, spirits’ share of the U.S. alcohol market by value increased to 39% from 28% in 1999, according to data from Discus, the liquor trade body. Wine edged up to 17% from 16%, the data show, while beer’s market share declined to 44% from 56%. Brewers trade groups don’t dispute the figures.

Last year, 39% of U.S. drinkers said beer was the alcoholic drink they drank most often, down from 46% in 2001, according to Gallup; 27% said liquor was theirs, up from 18%.

Beer has become relatively more expensive as brewers raise prices to offset declining volumes and as pricier craft brews take more of the market. Beer prices rose 58% between January 2000 and October 2021, versus a 28% rise for spirits, according to a Brewers Association analysis of Bureau of Labor Statistics data.

After pandemic bar closures, brewers struggled with millions of gallons of beer stuck in stadiums, concert halls, restaurants and bars after venues closed. Meanwhile, liquor makers averted a setback when most states deemed liquor stores essential businesses; many states allow liquor sales only at liquor stores while allowing beer sales at grocery stores.

And spirits have helped dampen one hope for brewers. Sales were promising for malt-based hard seltzers such as Boston Beer’s Truly and AB InBev’s Bud Light seltzer, which typically have fewer calories than beer. But such products are under pressure, partly from the popularity of liquor-based canned cocktails. Industry tracker IWSR estimates that U.S. volumes of spirit-based premixed drinks grew 53% last year from a year earlier, double the rate of malt-based hard seltzers.

New identity

Leading the spirits makers’ campaign against beer is Discus, the liquor-trade group. When Chris Swonger took the group’s reins in 2018, the spirits industry had already for years been working to shed liquor’s image as the stuff of irresponsible hard partying and to instead foster an identity as crafters of drinks friends and family could appreciate in moderation.

Mr. Swonger’s strategy was to go one step further, pulling distillers, industry executives, servers and consumers into a movement to advocate for laws benefiting liquor, including equal taxation and distribution with beer and wine. Discus created Spirits United, a website and database to help quickly galvanize individuals to call on lawmakers—national, state and local—to vote in favor of pro-liquor bills.

In a Spirits United YouTube promotional video, friends huddle around a dinner table cheering with cocktails, a couple canoodles at a bar, and wheat fields sway in the wind—accompanied by relaxing acoustic-guitar music. A voice-over intones: “It’s up to us to educate lawmakers on the best policies for the spirits industry.”

Spirits United’s database now includes about 48,000 people in the liquor industry signed up to advocate for causes, said Mr. Swonger. He said the Spirits United platform helped press North Carolina to enact a bill in September letting people buy spirits from local distilleries on Sundays for the first time since Prohibition—something they could already do with beer from local brewers.

Discus is seeking to end Sunday sales restrictions in seven other states that allow Sunday beer sales, and in at least six states is working to lower taxes or expand distribution for canned cocktails so liquor makers can compete better with beer.

Discus said higher taxes on spirits are based on outdated notions that some alcohol is harder, even though there is the same amount in a typical 12-ounce beer, 5-ounce glass of wine or 1.5-ounce shot of 80-proof spirits.

Jeff Wuslich, co-founder of Cardinal Spirits craft distillery in Bloomington, Ind., makes canned cocktails but said he doesn’t sell them in some states because taxes are too high. “It’s always acceptable to have a beer with your dad after you cut the grass,” he said, “but for some reason spirits have got a bad rap, and it’s unfair.”

Mr. Koch, Boston Beer’s chairman, has called for unity in an industry often beset by infighting, and brewers say his April letter became a rallying cry to band together.

In recent years, brewers tried to work together on a brand-agnostic campaign—a beer version of “Got Milk?” The effort fizzled before fruition after Budweiser brewer AB InBev attacked Molson Coors Beverage Co. ’s use of corn syrup in February 2019 Super Bowl television commercials. Molson Coors hit back with full-page newspaper ads to the “Beer Drinkers of America,” defending corn syrup as part of brewing.

‘No equivalence’

Brewers point back to 1791, when the U.S. government levied its first tax on a domestic product, distilled spirits, sparking the Whiskey Rebellion. Among reasons Treasury Secretary Alexander Hamilton gave for taxing spirits only, according to the Accounting Historians Journal: Those consuming liquor—a luxury item—could afford to pay a tax, demand was inelastic and distilled spirits had become a public-health threat. The tax was repealed in 1802.

Brewers’ message to lawmakers is that the traditional taxation approach is the correct one. “There’s no equivalence between hard liquor and a beer when you saddle up to a bar, and there shouldn’t be any equivalency written into the tax credit either,” Molson Coors CEO Gavin Hattersley told brewers at September conference. Molson Coors declined to make him available for comment.

“Vodka is vodka, beer is beer, wine is wine,” said Mr. Doukeris, AB InBev’s CEO. Asked to explain the distinction, he said: “It’s so obvious and logical that I don’t understand the arguments.”

Canned cocktails are a “gateway” to full-strength liquor and should therefore be taxed at a higher rate, said Bob Pease, head of the Brewers Association.

Les Fugate, head of state and local public affairs at Brown-Forman Corp., maker of Jack Daniel’s whiskey, counters: “That’s like saying one can of beer is a gateway to 30 cans.”

Brewers are losing the argument in places like Michigan, where Democratic Gov. Gretchen Whitmer in May signed a law cutting taxes on canned cocktails under 13.5% alcohol by volume to 30 cents a liter from 48 cents; the beer tax is 5.4 cents a liter. Two days later, Nebraska Gov. Pete Ricketts, a Republican, signed a bill reducing its tax on canned cocktails of under 12.5% alcohol to 95 cents a gallon from $3.75; the beer tax is 31 cents a gallon. Their offices didn’t respond to requests for comment.

Lawmakers have proposed bills to reduce taxes on canned cocktails to something closer to levies on beer in New Jersey, Vermont, Washington, Hawaii and North Carolina, and brewers expect more.

The New Jersey bill calls for the state to cut taxes on canned cocktails with 9.9% alcohol or lower to 12 cents a gallon from $5.50, matching beer’s rate. Brewers opposing it noted in a letter to lawmakers that the state’s breweries directly employ nearly four times the number of people distilleries do.

John Granata, president of New Jersey Distillers Guild, was at the statehouse in May when he overheard an AB InBev lobbyist testifying against the tax-cut bill, claiming beer was more expensive to make than spirits and hence deserving of its lower tax rate. Mr. Granata, there for a different hearing, interjected that the claim wasn’t true, explaining that liquor makers must create a beer-like liquid to concentrate into spirits.

“There is no way on earth,” he told the committee, “that distilled spirits cost less to make than beer.” AB InBev declined to comment on the exchange.

Discus has sent a “myth versus fact” memo to New Jersey lawmakers saying there isn’t a scientific basis for treating drinks with the same alcohol content differently. It quotes from federal dietary guidelines and the state’s driving manual, which indicate that standard measures of beer, wine and spirits have equal amounts of alcohol. While two Senate committees have voted in favor of the bill, its sponsor subsequently lost his senate seat. Discus said it will look for new sponsors to reintroduce the bill this year if it doesn’t pass before the New Jersey legislative session ends this month.

“We didn’t intend to rile up the beer guys,” said Discus’s Mr. Swonger. “We’re on the side of the consumers and fairness.”

Write to Saabira Chaudhuri at saabira.chaudhuri+1@wsj.com